UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 
(Mark One)
  
   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2019
 
or
 
 
 
 
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 

For the transition period from   to

Commission File Number 1-8610

AT&T INC.

Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883

208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210) 821-4105




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
                                                                                                                                                                           Yes [X]    No [  ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
                                                                                                                                                                 Yes [X]   No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definition of “accelerated filer,” “large accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
[X]
 
Accelerated filer
[   ]
Non-accelerated filer
[   ]
 
Smaller reporting company
[   ]
     
Emerging growth company
[   ]

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
                                                                                                                                                                              Yes [   ]   No [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
                                                                                                                                                                              Yes [   ]   No [X]




Securities registered pursuant to Section 12(b) of the Act

   
Name of each exchange
Title of each class
Trading Symbol(s)
on which registered
Common Shares (Par Value $1.00 Per Share)
T
New York Stock Exchange
     
Floating Rate AT&T Inc.
T 19B
New York Stock Exchange
  Global Notes due June 4, 2019
   
     
Floating Rate AT&T Inc.
T 20C
New York Stock Exchange
  Global Notes due August 3, 2020
   
     
1.875% AT&T Inc.
T 20
New York Stock Exchange
  Global Notes due December 4, 2020
   
     
2.65% AT&T Inc.
T 21B
New York Stock Exchange
  Global Notes due December 17, 2021
   
     
1.45% AT&T Inc.
T 22B
New York Stock Exchange
  Global Notes due June 1, 2022
   
     
2.50% AT&T Inc.
T 23
New York Stock Exchange
  Global Notes due March 15, 2023
   
     
Floating Rate AT&T Inc.
T23 D
New York Stock Exchange
  Global Notes due September 5, 2023
   
     
1.05% AT&T Inc.
T 23E
New York Stock Exchange
  Global Notes due September 5, 2023
   
     
1.30% AT&T Inc.
T 23A
New York Stock Exchange
  Global Notes due September 5, 2023
   
     
2.75% AT&T Inc.
T 23C
New York Stock Exchange
   Global Notes due May 19, 2023
   
     
2.40% AT&T Inc.
T 24A
New York Stock Exchange
  Global Notes due March 15, 2024
   
     
3.50% AT&T Inc.
T 25
New York Stock Exchange
  Global Notes due December 17, 2025
   
     
1.80% AT&T Inc.
T 26D
New York Stock Exchange
  Global Notes due September 5, 2026
   



   
Name of each exchange
Title of each class
Trading Symbol(s)
on which registered
 2.90% AT&T Inc.
 T 26A
  New York Stock Exchange
  Global Notes due December 4, 2026
   
     
2.35% AT&T Inc.
T 29D
New York Stock Exchange
  Global Notes due September 5, 2029
   
     
4.375% AT&T Inc.
T 29B
New York Stock Exchange
   Global Notes due September 14, 2029
   
     
2.60% AT&T Inc.
T 29A
New York Stock Exchange
  Global Notes due December 17, 2029
   
     
3.55% AT&T Inc.
T 32
New York Stock Exchange
  Global Notes due December 17, 2032
   
     
5.20% AT&T Inc.
T 33
New York Stock Exchange
   Global Notes due November 18, 2033
   
     
3.375% AT&T Inc.
T 34
New York Stock Exchange
  Global Notes due March 15, 2034
   
     
2.45% AT&T Inc.
T 35
New York Stock Exchange
  Global Notes due March 15, 2035
   
     
3.15% AT&T Inc.
T 36A
New York Stock Exchange
  Global Notes due September 4, 2036
   
     
7.00% AT&T Inc.
T 40
New York Stock Exchange
  Global Notes due April 30, 2040
   
     
4.25% AT&T Inc.
T 43
New York Stock Exchange
  Global Notes due June 1, 2043
   
     
4.875% AT&T Inc.
T 44
New York Stock Exchange
  Global Notes due June 1, 2044
   
     
5.35% AT&T Inc.
TBB
New York Stock Exchange
  Global Notes due November 1, 2066
   
     
5.625% AT&T Inc.
TBC
New York Stock Exchange
  Global Notes due August 1, 2067
   


At April 30, 2019, there were 7,298 million common shares outstanding.


PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements

AT&T INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
   
Three months ended
   
March 31,
   
2019
   
2018
Operating Revenues
         
Service
$
40,684
 
$
33,646
Equipment
 
4,143
   
4,392
Total operating revenues
 
44,827
   
38,038
           
Operating Expenses
         
Cost of revenues
         
   Equipment
 
4,502
   
4,848
   Broadcast, programming and operations
 
7,652
   
5,166
   Other cost of revenues (exclusive of depreciation and
         amortization shown separately below)
 
8,585
   
7,932
Selling, general and administrative
 
9,649
   
7,897
Depreciation and amortization
 
7,206
   
5,994
Total operating expenses
 
37,594
   
31,837
Operating Income
 
7,233
   
6,201
Other Income (Expense)
         
Interest expense
 
(2,141)
   
(1,771)
Equity in net income (loss) of affiliates
 
(7)
   
9
Other income (expense) – net
 
286
   
1,702
Total other income (expense)
 
(1,862)
   
(60)
Income Before Income Taxes
 
5,371
   
6,141
Income tax expense
 
1,023
   
1,382
Net Income
 
4,348
   
4,759
Less: Net Income Attributable to Noncontrolling Interest
 
(252)
   
(97)
Net Income Attributable to AT&T
$
4,096
 
$
4,662
Basic Earnings Per Share Attributable to AT&T
$
0.56
 
$
0.75
Diluted Earnings Per Share Attributable to AT&T
$
0.56
 
$
0.75
Weighted Average Number of Common Shares
   Outstanding – Basic (in millions)
 
7,313
   
6,161
Weighted Average Number of Common Shares
   Outstanding with Dilution (in millions)
 
7,342
   
6,180
See Notes to Consolidated Financial Statements.
         

5


AT&T INC.
         
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
         
Dollars in millions
         
(Unaudited)
         
 
Three months ended
 
March 31,
 
2019
 
2018
Net income
 $
4,348
 
 $
4,759
Other comprehensive income (loss), net of tax:
         
    Foreign currency:
         
        Translation adjustment (includes $0 and $2 attributable to noncontrolling interest),
           net of taxes of $49 and $175
 
288
   
108
     Securities:
         
        Net unrealized gains (losses), net of taxes of $5 and $(4)
 
16
   
(12)
     Derivative instruments:
         
        Net unrealized gains, net of taxes of $34 and $180
 
127
   
674
        Reclassification adjustment included in net income, net of taxes of $2 and $3
 
11
   
12
     Defined benefit postretirement plans:
         
        Net prior service (cost) credit arising during period, net of taxes of $0 and $185
 
-
   
567
        Amortization of net prior service credit included in net income, net of taxes of $(113)
           and $(105)
 
(346)
   
(323)
Other comprehensive income (loss)
 
96
   
1,026
Total comprehensive income
 
4,444
   
5,785
Less: Total comprehensive income attributable to noncontrolling interest
 
(252)
   
(99)
Total Comprehensive Income Attributable to AT&T
$
4,192
 
$
5,686
See Notes to Consolidated Financial Statements.
         

6

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
 
March 31,
 
December 31,
 
2019
 
2018
Assets
(Unaudited)
   
Current Assets
         
Cash and cash equivalents
$
6,516
 
$
5,204
Accounts receivable - net of allowances for doubtful accounts of $905 and $907
 
23,863
   
26,472
Prepaid expenses
 
1,518
   
2,047
Other current assets
 
14,575
   
17,704
Total current assets
 
46,472
   
51,427
Noncurrent Inventories and Theatrical Film and Television Production Costs
 
10,270
   
7,713
Property, plant and equipment
 
332,517
   
330,690
   Less: accumulated depreciation and amortization
 
(200,466)
   
(199,217)
Property, Plant and Equipment – Net
 
132,051
   
131,473
Goodwill
 
146,434
   
146,370
Licenses – Net
 
97,001
   
96,144
Trademarks and Trade Names – Net
 
24,218
   
24,345
Distribution Networks – Net
 
16,623
   
17,069
Other Intangible Assets – Net
 
24,732
   
26,269
Investments in and Advances to Equity Affiliates
 
6,230
   
6,245
Operating Lease Right-of-Use Assets
 
20,235
   
-
Other Assets
 
24,118
   
24,809
Total Assets
$
548,384
 
$
531,864
           
Liabilities and Stockholders’ Equity
         
Current Liabilities
         
Debt maturing within one year
$
11,538
 
$
10,255
Accounts payable and accrued liabilities
 
42,306
   
43,184
Advanced billings and customer deposits
 
5,956
   
5,948
Accrued taxes
 
1,130
   
1,179
Dividends payable
 
3,722
   
3,854
Total current liabilities
 
64,652
   
64,420
Long-Term Debt
 
163,942
   
166,250
Deferred Credits and Other Noncurrent Liabilities
         
Deferred income taxes
 
59,207
   
57,859
Postemployment benefit obligation
 
19,664
   
19,218
Operating lease liabilities
 
18,253
   
-
Other noncurrent liabilities
 
27,715
   
30,233
Total deferred credits and other noncurrent liabilities
 
124,839
   
107,310
           
Stockholders’ Equity
         
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2019 and
   December 31, 2018: issued 7,620,748,598 at March 31, 2019 and December 31, 2018)
 
7,621
   
7,621
Additional paid-in capital
 
125,174
   
125,525
Retained earnings
 
59,424
   
58,753
Treasury stock (323,523,763 at March 31, 2019 and 339,120,073
         
   at December 31, 2018, at cost)
 
(11,452)
   
(12,059)
Accumulated other comprehensive income
 
4,345
   
4,249
Noncontrolling interest
 
9,839
   
9,795
Total stockholders’ equity
 
194,951
   
193,884
Total Liabilities and Stockholders’ Equity
$
548,384
 
$
531,864
See Notes to Consolidated Financial Statements.
         

7


AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
     
 
Three months ended
 
March 31,
 
2019
 
2018
         
Operating Activities
         
Net income
$
4,348
 
$
4,759
Adjustments to reconcile net income to net cash provided by operating activities:
         
   Depreciation and amortization
 
7,206
   
5,994
   Amortization of television and film costs
 
2,497
   
-
   Undistributed earnings from investments in equity affiliates
 
112
   
(2)
   Provision for uncollectible accounts
 
592
   
438
   Deferred income tax expense
 
1,069
   
1,222
   Net (gain) loss from investments, net of impairments
 
(175)
   
2
   Actuarial (gain) loss on pension and postretirement benefits
 
432
   
(930)
Changes in operating assets and liabilities:
         
   Accounts receivable
 
1,894
   
(439)
   Other current assets, inventories and theatrical film and television production costs
 
(2,510)
   
614
   Accounts payable and other accrued liabilities
 
(3,686)
   
(1,962)
   Equipment installment receivables and related sales
 
652
   
505
   Deferred customer contract acquisition and fulfillment costs
 
(375)
   
(826)
Retirement benefit funding
 
-
   
(140)
Other - net
 
(1,004)
   
(288)
Total adjustments
 
6,704
   
4,188
Net Cash Provided by Operating Activities
 
11,052
   
8,947
           
Investing Activities
         
Capital expenditures:
         
   Purchase of property and equipment
 
(5,121)
   
(5,957)
   Interest during construction
 
(61)
   
(161)
Acquisitions, net of cash acquired
 
(117)
   
(234)
Dispositions
 
10
   
56
(Purchases) sales of securities, net
 
(1)
   
(116)
Advances to and investments in equity affiliates, net
 
(111)
   
(1,007)
Cash collections of deferred purchase price
 
-
   
267
Net Cash Used in Investing Activities
 
(5,401)
   
(7,152)
           
Financing Activities
         
Net change in short-term borrowings with original maturities of three months or less
 
(256)
   
-
Issuance of other short-term borrowings
 
296
   
-
Repayment of other short-term borrowings
 
(176)
   
-
Issuance of long-term debt
 
9,182
   
2,565
Repayment of long-term debt
 
(9,840)
   
(4,911)
Purchase of treasury stock
 
(189)
   
(145)
Issuance of treasury stock
 
167
   
11
Dividends paid
 
(3,714)
   
(3,070)
Other
 
109
   
2,048
Net Cash Used in Financing Activities
 
(4,421)
   
(3,502)
Net increase (decrease) in cash and cash equivalents and restricted cash
 
1,230
   
(1,707)
Cash and cash equivalents and restricted cash beginning of year
 
5,400
   
50,932
Cash and Cash Equivalents and Restricted Cash End of Period
$
6,630
 
$
49,225
See Notes to Consolidated Financial Statements.

8


AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
                 
 
March 31, 2019
 
March 31, 2018
 
Shares
 
Amount
 
Shares
 
Amount
Common Stock
                 
Balance at beginning of year
7,621
 
$
7,621
 
6,495
 
$
6,495
Issuance of stock
-
   
-
 
-
   
-
Balance at end of period
7,621
 
$
7,621
 
6,495
 
$
6,495
                   
Additional Paid-In Capital
                 
Balance at beginning of year
   
$
125,525
     
$
89,563
Issuance of treasury stock
     
(77)
       
(4)
Share-based payments
     
(274)
       
(155)
Balance at end of period
   
$
125,174
     
$
89,404
                   
Retained Earnings
                 
Balance at beginning of year
   
$
58,753
     
$
50,500
Net income attributable to AT&T ($0.56 and $0.75
   per diluted share)
     
4,096
       
4,662
Dividends to stockholders ($0.51 and $0.50 per share)
     
(3,741)
       
(3,092)
Cumulative effect of accounting changes
     
316
       
2,997
Balance at end of period
   
$
59,424
     
$
55,067
                   
Treasury Stock
                 
Balance at beginning of year
(339)
 
$
(12,059)
 
(356)
 
$
(12,714)
Repurchase and acquisition of common stock
(7)
   
(208)
 
(4)
   
(164)
Issuance of treasury stock
22
   
815
 
12
   
446
Balance at end of period
(324)
 
$
(11,452)
 
(348)
 
$
(12,432)
                   
Accumulated Other Comprehensive Income
   Attributable to AT&T, net of tax
                 
Balance at beginning of year
   
$
4,249
     
$
7,017
Other comprehensive income attributable to AT&T
     
96
       
1,024
Amounts reclassified to retained earnings
     
-
       
(655)
Balance at end of period
   
$
4,345
     
$
7,386
                   
Noncontrolling Interest
                 
Balance at beginning of year
   
$
9,795
     
$
1,146
Net income attributable to noncontrolling interest
     
252
       
97
Interest acquired by noncontrolling owners
     
9
       
-
Distributions
     
(246)
       
(124)
Translation adjustments attributable to noncontrolling
   interest, net of taxes
     
-
       
2
Cumulative effect of accounting changes
     
29
       
35
Balance at end of period
   
 $
9,839
     
 $
1,156
                   
Total Stockholders’ Equity at beginning of year
   
 $
193,884
     
 $
142,007
Total Stockholders’ Equity at end of period
   
$
194,951
     
$
147,076
See Notes to Consolidated Financial Statements.
     

9

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts


NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

Basis of Presentation  Throughout this document, AT&T Inc. is referred to as “we,” “AT&T” or the “Company.” The consolidated financial statements include the accounts of the Company and subsidiaries and affiliates which we control, including the operating results of Warner Media, LLC (formerly Time Warner Inc. and referred to as “Time Warner” or “WarnerMedia”), which was acquired on June 14, 2018 (see Note 8). AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018. The results for the interim periods are not necessarily indicative of those for the full year.   These consolidated financial statements include all adjustments that are necessary to present fairly the results for the presented interim periods, consisting of normal recurring accruals and other items.

All significant intercompany transactions are eliminated in the consolidation process. Investments in subsidiaries and partnerships which we do not control but have significant influence are accounted for under the equity method. Earnings from certain investments accounted for using the equity method are included for periods ended within up to one quarter of our period end. We also record our proportionate share of our equity method investees’ other comprehensive income (OCI) items.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. Certain prior period amounts have been conformed to the current period’s presentation.

In the tables throughout this document, percentage increases and decreases that are not considered meaningful are denoted with a dash.

Adopted Accounting Standards and Other Changes

Leases   As of January 1, 2019, we adopted, with modified retrospective application, Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842),” as modified (ASC 842), which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements (see Note 10). ASC 842 requires lessees to recognize most leases on their balance sheets as liabilities, with corresponding “right-of-use” assets. For income statement recognition purposes, leases are classified as either a finance or an operating lease without relying upon bright-line tests.

The key change upon adoption of the standard was balance sheet recognition, given that the recognition of lease expense on our income statement is similar to our current accounting. Using the modified retrospective transition method of adoption, we did not adjust the balance sheet for comparative periods but recorded a cumulative effect adjustment to retained earnings on January 1, 2019. We elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to carry forward our historical lease classification. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements that were not accounted for as leases. We excluded all the leases with original terms of one year or less. Additionally, we elected to not separate lease and non-lease components for certain classes of assets in arrangements where we are the lessee and for certain classes of assets where we are the lessor. Our accounting for finance leases did not change from our prior accounting for capital leases.

The adoption of ASC 842 resulted in the recognition of an operating lease liability of $22,121 and an operating right-of-use asset of the same amount. Existing prepaid and deferred rent accruals were recorded as an offset to the right-of-use asset, resulting in a net asset of $20,960. The cumulative effect of the adoption to retained earnings was an increase of $316 reflecting the reclassification of deferred gains related to sale/leaseback transactions. We do not believe the standard will materially impact our future income statements or have a notable impact on our liquidity. The standard will have no impact on our debt-covenant compliance under our current agreements.

10

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts


Deferral of Episodic Television and Film Costs   In March 2019, the FASB issued ASU No. 2019-02, Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials” (ASU 2019-02), which we early adopted as of January 1, 2019, with prospective application. The standard eliminates certain revenue-related constraints on capitalization of inventory costs for episodic television that existed under prior guidance. In addition, the balance sheet classification requirements that existed in prior guidance for film production costs and programming inventory were eliminated. As of January 1, 2019, we reclassified $2,274 of our programming inventory costs from “Other current assets” to “Other Assets” in accordance with the guidance. This change in accounting does not materially impact our income statement.

Spectrum Licenses in Mexico   During the first quarter of 2019, in conjunction with the renewal process of certain spectrum licenses in Mexico, we reassessed the estimated economic lives and renewal assumptions for these licenses. As a result, we have changed the life of these licenses from indefinite to finite-lived. On January 1, 2019, we began amortizing our spectrum licenses in Mexico over their average remaining economic life of 25 years. This change in accounting does not materially impact our income statement.

NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months ended March 31, 2019 and 2018, is shown in the table below:

 
Three months ended
 
March 31,
 
2019
 
2018
Numerators
         
Numerator for basic earnings per share:
         
   Net Income
$
4,348
 
$
4,759
   Less: Net income attributable to noncontrolling interest
 
(252)
   
(97)
   Net Income attributable to AT&T
 
4,096
   
4,662
   Dilutive potential common shares:
         
      Share-based payment
 
6
   
5
Numerator for diluted earnings per share
$
4,102
 
$
4,667
Denominators (000,000)
         
Denominator for basic earnings per share:
         
   Weighted average number of common shares outstanding
 
7,313
   
6,161
   Dilutive potential common shares:
         
      Share-based payment (in shares)
 
29
   
19
Denominator for diluted earnings per share
 
7,342
   
6,180
Basic earnings per share attributable to AT&T
$
0.56
 
$
0.75
Diluted earnings per share attributable to AT&T
$
0.56
 
$
0.75

11

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts
 

NOTE 3. OTHER COMPREHENSIVE INCOME

Changes in the balances of each component included in accumulated OCI are presented below. All amounts are net of tax and exclude noncontrolling interest.

   
Foreign Currency Translation Adjustment
 
Net Unrealized Gains (Losses) on Securities
 
Net Unrealized Gains (Losses) on Derivative Instruments
 
Defined Benefit Postretirement Plans
 
Accumulated Other Comprehensive Income
Balance as of December 31, 2018
$
(3,084)
 
$
(2)
 
$
818
 
$
6,517
 
$
4,249
Other comprehensive income
   (loss) before reclassifications
 
288
   
16
   
127
   
-
   
431
Amounts reclassified
   from accumulated OCI
 
-
   
-
   
11
1
 
(346)
2
 
(335)
Net other comprehensive
   income (loss)
 
288
   
16
   
138
   
(346)
   
96
Balance as of March 31, 2019
$
(2,796)
 
$
14
 
$
956
 
$
6,171
 
$
4,345
                               
   
Foreign Currency Translation Adjustment
 
Net Unrealized Gains (Losses) on Securities
 
Net Unrealized Gains (Losses) on Derivative Instruments
 
Defined Benefit Postretirement Plans
 
Accumulated Other Comprehensive Income
Balance as of December 31, 2017
$
(2,054)
 
$
660
 
$
1,402
 
$
7,009
 
$
7,017
Other comprehensive income
   (loss) before reclassifications
 
106
   
(12)
   
674
   
567
   
1,335
Amounts reclassified
   from accumulated OCI
 
-
   
-
   
12
1
 
(323)
2
 
(311)
Net other comprehensive
   income (loss)
 
106
   
(12)
   
686
   
244
   
1,024
Amounts reclassified to
   retained earnings
 
-
   
(655)
3
 
-
   
-
   
(655)
Balance as of March 31, 2018
$
(1,948)
 
$
(7)
 
$
2,088
 
$
7,253
 
$
7,386
 1
(Gains) losses are included in Interest expense in the consolidated statements of income (see Note 7).
 2
The amortization of prior service credits associated with postretirement benefits are included in Other income (expense) in the
 
consolidated statements of income (see Note 6).
 3
With the adoption of ASU 2016-01, the unrealized (gains) losses on our equity investments are reclassified to retained earnings.

12

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts
 

NOTE 4. SEGMENT INFORMATION

Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. We analyze our segments based on segment operating contribution, which consists of operating income, excluding acquisition-related costs and other significant items (as discussed below), and equity in net income (loss) of affiliates for investments managed within each segment. We have four reportable segments: (1) Communications, (2) WarnerMedia, (3) Latin America, and (4) Xandr.

We also evaluate segment and business unit performance based on EBITDA and/or EBITDA margin, which is defined as operating contribution excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.

The Communications segment provides wireless and wireline telecom, video and broadband services to consumers located in the U.S. or in U.S. territories and businesses globally. This segment contains the following business units:
Mobility provides nationwide wireless service and equipment.
Entertainment Group provides video, including over-the-top (OTT) services, broadband and voice communications services primarily to residential customers. This segment also sells advertising on DIRECTV and U-verse distribution platforms.
Business Wireline provides advanced IP-based services, as well as traditional voice and data services to business customers.

The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content in various physical and digital formats globally. Historical financial results from AT&T’s Regional Sports Networks (RSNs) and equity investments (predominantly Game Show Network and Otter Media), previously included in Entertainment Group, have been reclassified into the WarnerMedia segment and are combined with the Time Warner operations for the period subsequent to our acquisition on June 14, 2018. This segment contains the following business units:
Turner is comprised of the historic Turner division as well as the financial results of our RSNs. This business unit primarily operates multichannel basic television networks and digital properties. Turner also sells advertising on its networks and digital properties.
Home Box Office consists of premium pay television and OTT services domestically and premium pay, basic tier television and OTT services internationally, as well as content licensing and home entertainment.
Warner Bros. consists of the production, distribution and licensing of television programming and feature films, the distribution of home entertainment products and the production and distribution of games.

The Latin America segment provides entertainment and wireless services outside of the U.S. This segment contains the following business units:
Vrio provides video services primarily to residential customers using satellite technology in Latin America and the Caribbean.
Mexico provides wireless service and equipment to customers in Mexico.

The Xandr segment  provides advertising services and includes AppNexus, an advertising technology company we acquired in August 2018. Xander services utilize data insights to develop and deliver targeted advertising across video and digital platforms. Certain revenues in this segment are also reported by the Communications segment and are eliminated upon consolidation.

13

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts
 

Corporate and Other reconcile our segment results to consolidated operating income and income before income taxes, and include:
Corporate , which consists of: (1) businesses no longer integral to our operations or which we no longer actively market, (2) corporate support functions, (3) impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, (4) the reclassification of the amortization of prior service credits, which we continue to report with segment operating expenses, to consolidated other income (expense)-net and (5) the recharacterization of $150 of programming intangible asset amortization, for released programming acquired in the Time Warner acquisition, which we continue to report within WarnerMedia segment operating expense, to consolidated amortization expense.
Acquisition-related items which consists of items associated with the merger and integration of acquired businesses, including amortization of intangible assets.
Certain significant items includes (1) employee separation charges associated with voluntary and/or strategic offers, (2) losses resulting from abandonment or impairment of assets and (3) other items for which the segments are not being evaluated.
Eliminations and consolidations , which (1) removes transactions involving dealings between our segments, including content licensing between WarnerMedia and Communications, and (2) includes adjustments for our reporting of the advertising business.

Interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results.

For the three months ended March 31, 2019
   
Revenues
   
Operations
and Support
Expenses
   
EBITDA
   
Depreciation
and
Amortization
   
Operating
Income (Loss)
   
Equity in Net
Income (Loss) of
Affiliates
   
Segment
Contribution
Communications
                                       
  Mobility
$
17,567
 
$
10,181
 
$
7,386
 
$
2,035
 
$
5,351
 
$
-
 
$
5,351
  Entertainment Group
 
11,328
   
8,527
   
2,801
   
1,323
   
1,478
   
-
   
1,478
  Business Wireline
 
6,498
   
4,040
   
2,458
   
1,235
   
1,223
   
-
   
1,223
Total Communications
 
35,393
   
22,748
   
12,645
   
4,593
   
8,052
   
-
   
8,052
WarnerMedia
                                       
  Turner
 
3,443
   
2,136
   
1,307
   
60
   
1,247
   
25
   
1,272
  Home Box Office
 
1,510
   
921
   
589
   
22
   
567
   
15
   
582
  Warner Bros.
 
3,518
   
2,919
   
599
   
52
   
547
   
6
   
553
  Other
 
(92)
   
17
   
(109)
   
9
   
(118)
   
21
   
(97)
Total WarnerMedia
 
8,379
   
5,993
   
2,386
   
143
   
2,243
   
67
   
2,310
Latin America
                                       
  Vrio
 
1,067
   
866
   
201
   
169
   
32
   
-
   
32
  Mexico
 
651
   
725
   
(74)
   
131
   
(205)
   
-
   
(205)
Total Latin America
 
1,718
   
1,591
   
127
   
300
   
(173)
   
-
   
(173)
Xandr
 
426
   
160
   
266
   
13
   
253
   
-
   
253
Segment Total
 
45,916
   
30,492
   
15,424
   
5,049
   
10,375
 
$
67
 
$
10,442
Corporate and Other
                                       
  Corporate
 
209
   
513
   
(304)
   
169
   
(473)
           
  Acquisition-related items
 
(42)
   
73
   
(115)
   
1,988
   
(2,103)
           
  Certain significant items
 
-
   
248
   
(248)
   
-
   
(248)
           
Eliminations and consolidations
 
(1,256)
   
(938)
   
(318)
   
-
   
(318)
           
AT&T Inc.
$
44,827
 
$
30,388
 
$
14,439
 
$
7,206
 
$
7,233
           

14

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts


For the three months ended March 31, 2018
   
Revenues
   
Operations
and Support
Expenses
   
EBITDA
   
Depreciation
and
Amortization
   
Operating
Income (Loss)
   
Equity in Net
Income (Loss) of
Affiliates
   
Segment
Contribution
Communications
                                       
  Mobility
$
17,355
 
 $
10,102
 
$
7,253
 
$
2,095
 
$
5,158
 
$
-
 
$
5,158
  Entertainment Group
 
11,431
   
8,811
   
2,620
   
1,310
   
1,310
   
(1)
   
1,309
  Business Wireline
 
6,747
   
4,016
   
2,731
   
1,170
   
1,561
   
(1)
   
1,560
Total Communications
 
35,533
   
22,929
   
12,604
   
4,575
   
8,029
   
(2)
   
8,027
WarnerMedia
                                       
  Turner
 
112
   
74
   
38
   
1
   
37
   
27
   
64
  Home Box Office
 
-
   
-
   
-
   
-
   
-
   
-
   
-
  Warner Bros.
 
-
   
-
   
-
   
-
   
-
   
-
   
-
  Other
 
-
   
8
   
(8)
   
-
   
(8)
   
(17)
   
(25)
Total WarnerMedia
 
112
   
82
   
30
   
1
   
29
   
10
   
39
Latin America
                                       
  Vrio
 
1,354
   
1,001
   
353
   
205
   
148
   
-
   
148
  Mexico
 
671
   
803
   
(132)
   
127
   
(259)
   
-
   
(259)
Total Latin America
 
2,025
   
1,804
   
221
   
332
   
(111)
   
-
   
(111)
Xandr
 
337
   
50
   
287
   
1
   
286
   
-
   
286
Segment Total
 
38,007
   
24,865
   
13,142
   
4,909
   
8,233
 
$
8
 
$
8,241
Corporate and Other
                                       
  Corporate
 
333
   
735
   
(402)
   
23
   
(425)
           
  Acquisition-related items
 
-
   
67
   
(67)
   
1,062
   
(1,129)
           
  Certain significant items
 
-
   
180
   
(180)
   
-
   
(180)
           
  Eliminations and consolidations
 
(302)
   
(4)
   
(298)
   
-
   
(298)
           
AT&T Inc.
$
38,038
 
$
25,843
 
$
12,195
 
$
5,994
 
$
6,201
           

15

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts


The following table is a reconciliation of Segment Contributions to “Income Before Income Taxes” reported on our consolidated statements of income.

   
Three months ended
March 31,
   
2019
   
2018
Communications
$
8,052
 
$
8,027
WarnerMedia
 
2,310
   
39
Latin America
 
(173)
   
(111)
Xandr
 
253
   
286
Segment Contribution
 
10,442
   
8,241
Reconciling Items:
         
   Corporate and Other
 
(473)
   
(425)
   Merger and integration items
 
(115)
   
(67)
   Amortization of intangibles acquired
 
(1,988)
   
(1,062)
   Employee separation charges
 
(248)
   
(51)
   Natural disaster items
 
-
   
(104)
   Foreign currency devaluation
 
-
   
(25)
   Segment equity in net income of affiliates
 
(67)
   
(8)
   Eliminations and consolidations
 
(318)
   
(298)
AT&T Operating Income
 
7,233
   
6,201
Interest Expense
 
2,141
   
1,771
Equity in net income (loss) of affiliates
 
(7)
   
9
Other income (expense) - net
 
286
   
1,702
Income Before Income Taxes
$
5,371
 
$
6,141

The following table presents intersegment revenues by segment.


Intersegment Reconciliation
         
 
Three months ended
March 31,
 
2019
 
2018
Intersegment revenues
         
Communications
$
-
 
$
-
WarnerMedia
 
858
   
31
Latin America
 
-
   
-
Xandr
 
-
   
-
Total Intersegment Revenues
 
858
   
31
Consolidations
 
398
   
271
Eliminations and consolidations
$
1,256
 
$
302

16

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts


NOTE 5. REVENUE RECOGNITION

Revenue Categories
The following tables set forth reported revenue by category:
                                                     
For the three months ended March 31, 2019
 
Service Revenues
           
   
Wireless
   
Advanced Data
   
Legacy Voice & Data
   
Subscription
   
Content
   
Advertising
   
Other
   
Equipment
   
Total
Communications
                                                   
   Mobility
 $
13,725
 
 $
-
 
 $
-
 
 $
-
 
 $
-
 
 $
67
 
 $
-
 
 $
3,775
 
 $
17,567
   Entertainment Group
 
-
   
2,070
   
683
   
7,724
   
-
   
350
   
501
   
-
   
11,328
   Business Wireline
 
-
   
3,186
   
2,404
   
-
   
-
   
-
   
749
   
159
   
6,498
WarnerMedia
                                                   
   Turner
 
-
   
-
   
-
   
1,965
   
135
   
1,261
   
82
   
-
   
3,443
   Home Box Office
 
-
   
-
   
-
   
1,334
   
173
   
-
   
3
   
-
   
1,510
   Warner Bros.
 
-
   
-
   
-
   
21
   
3,332
   
10
   
155
   
-
   
3,518
   Eliminations and Other
 
-
   
-
   
-
   
49
   
(152)
   
8
   
3
   
-
   
(92)
Latin America
                                                   
   Vrio
 
-
   
-
   
-
   
1,067
   
-
   
-
   
-
   
-
   
1,067
   Mexico
 
442
   
-
   
-
   
-
   
-
   
-
   
-
   
209
   
651
Xandr
 
-
   
-
   
-
   
-
   
-
   
426
   
-
   
-
   
426
Corporate and Other
 
-
   
-
   
-
   
-
   
-
   
-
   
167
   
-
   
167
Eliminations and
   consolidations
 
-
   
-
   
-
   
-
   
(837)
   
(350)
   
(69)
   
-
   
(1,256)
Total Operating Revenues
 $
14,167
 
 $
5,256
 
 $
3,087
 
 $
12,160
 
 $
2,651
 
 $
1,772
 
 $
1,591
 
 $
4,143
 
 $
44,827

For the three months ended March 31, 2018
 
Service Revenues
           
   
Wireless
   
Advanced Data
   
Legacy Voice & Data
   
Subscription
   
Content
   
Advertising
   
Other
   
Equipment
   
Total
Communications
                                                   
   Mobility
 $
13,362
 
 $
-
 
 $
-
 
 $
-
 
 $
-
 
 $
41
 
 $
-
 
 $
3,952
 
 $
17,355
   Entertainment Group
 
-
   
1,878
   
806
   
7,891
   
-
   
334
   
519
   
3
   
11,431
   Business Wireline
 
-
   
3,043
   
2,865
   
-
   
-
   
-
   
669
   
170
   
6,747
WarnerMedia
                                                   
   Turner
 
-
   
-
   
-
   
98
   
-
   
14
   
-
   
-
   
112
   Home Box Office
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   Warner Bros.
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   Eliminations and Other
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
Latin America
                                                   
   Vrio
 
-
   
-
   
-
   
1,354
   
-
   
-
   
-
   
-
   
1,354
   Mexico
 
404
   
-
   
-
   
-
   
-
   
-
   
-
   
267
   
671
Xandr
 
-
   
-
   
-
   
-
   
-
   
337
   
-
   
-
   
337
Corporate and Other
 
-
   
-
   
-
   
-
   
-
   
-
   
333
   
-
   
333
Eliminations and
   consolidations
 
-
   
-
   
-
   
-
   
-
   
(334)
   
32
   
-
   
(302)
Total Operating Revenues
 $
13,766
 
 $
4,921
 
 $
3,671
 
 $
9,343
 
 $
-
 
 $
392
 
 $
1,553
 
 $
4,392
 
 $
38,038

17

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts


Deferred Customer Contract Acquisition and Fulfillment Costs
Costs to acquire customer contracts, including commissions on service activations, for our wireless, business wireline and video entertainment services, are deferred and amortized over the contract period or expected customer relationship life, which typically ranges from two to five years. Costs to fulfill customer contracts are deferred and amortized over periods ranging generally from four to five years, reflecting the estimated economic lives of the respective customer relationships, subject to an assessment of the recoverability of such costs. For contracts with an estimated amortization period of less than one year, we expense incremental costs immediately.

Our deferred customer contract acquisition costs and deferred customer contract fulfillment costs balances were $4,297 and $11,592 as of March 31, 2019, respectively, of which $2,143 and $4,214 were included in Other current assets on our consolidated balance sheets. For the three months ended March 31, 2019, we amortized $547 and $1,098 of these costs, respectively.

Our deferred customer contract acquisition costs and deferred customer contract fulfillment costs balances were $3,974 and $11,540 as of December 31, 2018, respectively, of which $1,901 and $4,090 were included in Other current assets on our consolidated balance sheets. For the three months ended March 31, 2018, we amortized $263 and $1,047 of these costs, respectively.


Contract Assets and Liabilities
A contract asset is recorded when revenue is recognized in advance of our right to bill and receive consideration (i.e., we must perform additional services or satisfy another performance obligation in order to bill and receive consideration). The contract asset will decrease as services are provided and billed. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Reductions in the contract liability will be recorded as we satisfy the performance obligations.

The following table presents contract assets and liabilities at March 31, 2019 and December 31, 2018:
     
March 31,
   
December 31,
     
2019
   
2018
             
Contract asset
 
$
2,198
 
$
1,896
Contract liability
   
6,899
   
6,856

Our beginning of period contract liability recorded as customer contract revenue during 2019 was $4,379.

Our consolidated balance sheets at March 31, 2019 and December 31, 2018 included approximately $1,462 and $1,244, respectively, for the current portion of our contract asset in “Other current assets” and $5,715 and $5,752, respectively, for the current portion of our contract liability in “Advanced billings and customer deposits.”

Remaining Performance Obligations
Remaining performance obligations represent services we are required to provide to customers under bundled or discounted arrangements, which are satisfied as services are provided over the contract term. In determining the transaction price allocated, we do not include non-recurring charges and estimates for usage, nor do we consider arrangements with an original expected duration of less than one year, which are primarily prepaid wireless, video and residential internet agreements.

Remaining performance obligations associated with business contracts reflect recurring charges billed, adjusted to reflect estimates for sales incentives and revenue adjustments. Performance obligations associated with wireless contracts are estimated using a portfolio approach in which we review all relevant promotional activities, calculating the remaining performance obligation using the average service component for the portfolio and the average device price. As of March 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $39,627 of which we expect to recognize approximately 80% by the end of 2020, with the balance recognized thereafter.

18

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts


NOTE 6. PENSION AND POSTRETIREMENT BENEFITS

Many of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental, life insurance and death benefits to certain retired employees under various plans and accrue actuarially determined postretirement benefit costs. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits described in the plans to employees upon their retirement.

During the quarter, for certain management participants in our pension plan who terminated employment before April 1, 2019, we offered the option of more favorable 2018 interest rates and mortality basis for determining lump-sum distributions. For the quarter ended March 31, 2019 we recorded special termination benefits of $93 associated with this offer in “Other income (expense) – net.” During the first quarter, we also committed to a plan to offer certain terminated vested pension plan participants the opportunity to receive their benefit in a lump-sum amount.

We recognize actuarial gains and losses on pension and postretirement plan assets in our consolidated results as a component of other income (expense) – net at our annual measurement date of December 31, unless earlier remeasurements are required. We anticipate total distributions from the pension plan will exceed the threshold of service and interest costs for 2019, requiring us to follow settlement accounting. We have remeasured our pension benefit obligations at March 31, 2019, and will remeasure our pension benefit obligation at each quarter-end of 2019 as we expect settlements to occur during each quarter.

As part of our first-quarter 2019 remeasurement, we decreased the weighted-average discount rate used to measure our pension benefit obligation from 4.50% to 4.10%. The discount rate in effect for determining pension service and interest costs after remeasurement is 4.30% and 3.70%, respectively. The remeasurement reflects an actual return on plan assets of 5.80% (quarterly rate) relative to our expected long-term rate of 7.00% (annual rate).

The following table details pension and postretirement benefit costs included in the accompanying consolidated statements of income. The service cost component of net periodic pension cost (benefit) is recorded in operating expenses in the consolidated statements of income while the remaining components are recorded in “Other income (expense) – net.”

 
Three months ended
 
March 31,
 
2019
 
2018
Pension cost:
         
   Service cost – benefits earned during the period
 $
240
 
$
291
   Interest cost on projected benefit obligation
 
549
   
487
   Expected return on assets
 
(851)
   
(760)
   Amortization of prior service credit
 
(33)
   
(30)
   Actuarial (gain) loss
 
432
   
-
   Net pension (credit) cost
$
337
 
$
(12)
           
Postretirement cost:
         
   Service cost – benefits earned during the period
 $
18
 
$
29
   Interest cost on accumulated postretirement benefit obligation
 
186
   
191
   Expected return on assets
 
(56)
   
(77)
   Amortization of prior service credit
 
(426)
   
(397)
   Actuarial (gain) loss
 
-
   
(930)
   Net postretirement (credit) cost
$
(278)
 
$
(1,184)
           
   Combined net pension and postretirement (credit) cost
$
59
 
$
(1,196)

19

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts


We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the first quarter ended 2019 and 2018, net supplemental pension benefits costs not included in the table above were $25 and $21.

NOTE 7. FAIR VALUE MEASUREMENTS AND DISCLOSURE

The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs.

The 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, 2018.

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, 2019
 
December 31, 2018
   
Carrying
 
Fair
 
Carrying
 
Fair
   
Amount
 
Value
 
Amount
 
Value
Notes and debentures 1
$
170,532
 
$
179,576
 
$
171,529
 
$
172,287
Commercial paper
 
2,957
   
2,957
   
3,048
   
3,048
Bank borrowings
 
4
   
4
   
4
   
4
Investment securities 2
 
3,606
   
3,606
   
3,409
   
3,409
1
Includes credit agreement borrowings.
2
Excludes investments accounted for under the equity method.

The carrying amount of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.

20

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts


Following is the fair value leveling for investment securities that are measured at fair value and derivatives as of March 31, 2019 and December 31, 2018. Derivatives designated as hedging instruments are reflected as “Other assets,” “Other noncurrent liabilities” and, for a portion of interest rate swaps, “Other current assets” on our consolidated balance sheets.

   
March 31, 2019
   
Level 1
 
Level 2
 
Level 3
 
Total
Equity Securities
                     
   Domestic equities
$
1,092
 
$
-
 
$
-
 
$
1,092
   International equities
 
263
   
-
   
-
   
263
   Fixed income equities
 
208
   
-
   
-
   
208
Available-for-Sale Debt Securities
 
-
   
989
   
-
   
989
Asset Derivatives
                     
   Interest rate swaps
 
-
   
2
   
-
   
2
   Cross-currency swaps
 
-
   
427
   
-
   
427
   Foreign exchange contracts
 
-
   
87
   
-
   
87
Liability Derivatives
                     
   Interest rate swaps
 
-
   
(13)
   
-
   
(13)
   Cross-currency swaps
 
-
   
(2,697)
   
-
   
(2,697)
   Foreign exchange contracts
 
-
   
(6)
   
-
   
(6)

   
December 31, 2018
   
Level 1
 
Level 2
 
Level 3
 
Total
Equity Securities
                     
   Domestic equities
$
1,061
 
$
-
 
$
-
 
$
1,061
   International equities
 
256
   
-
   
-
   
256
   Fixed income equities
 
172
   
-
   
-
   
172
Available-for-Sale Debt Securities
 
-
   
870
   
-
   
870
Asset Derivatives
                     
   Cross-currency swaps
 
-
   
472
   
-
   
472
   Foreign exchange contracts
 
-
   
87
   
-
   
87
Liability Derivatives
                     
   Interest rate swaps
 
-
   
(39)
   
-
   
(39)
   Cross-currency swaps
 
-
   
(2,563)
   
-
   
(2,563)
   Foreign exchange contracts
 
-
   
(2)
   
-
   
(2)

Investment Securities
Our investment securities include both equity and debt securities that are measured at fair value, as well as equity securities without readily determinable fair values. A substantial portion of the fair values of our investment securities are estimated based on quoted market prices. Investments in equity securities not traded on a national securities exchange are valued at cost, less any impairment, and adjusted for changes resulting from observable, orderly transactions for identical or similar securities. Investments in debt securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

21

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts


The components comprising total gains and losses on equity securities are as follows:

 
Three months ended
 
March 31,
 
2019
 
2018
Total gains (losses) recognized on equity securities
$
160
 
$
(13)
Gains (Losses) recognized on equity securities sold
 
86
   
52
Unrealized gains (losses) recognized on equity securities held at end of period
 
74
   
(65)

At March 31, 2019, available-for-sale debt securities totaling $989 have maturities as follows - less than one year: $46; one to three years: $178; three to five years: $98; for five or more years: $667.

Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and nonrefundable customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments and nonrefundable customer deposits are recorded in “Other current assets” and our investment securities are recorded in “Other Assets” on the consolidated balance sheets.

Derivative Financial Instruments
We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount.

We also designate some of our foreign exchange contracts as fair value hedges. The purpose of these contracts is to hedge currency risk associated with foreign-currency-denominated operating assets and liabilities.

Accrued and realized gains or losses from fair value hedges impact the same category on the consolidated statements of income as the item being hedged. Unrealized gains on fair value hedges are recorded at fair market value as assets, and unrealized losses are recorded at fair market value as liabilities. Changes in the fair value of derivative instruments designated as fair value hedges are offset against the change in fair value of the hedged assets or liabilities through earnings. In the three months ended March 31, 2019 and 2018, no ineffectiveness was measured on fair value hedges .

Cash Flow Hedging   We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our foreign-denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency denominated amounts to fixed U.S. dollar denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign currency-denominated interest rate to a fixed U.S. dollar denominated interest rate.

We also designate some of our foreign exchange contracts as cash flow hedges. The purpose of these contracts is to hedge currency risk associated with variability in anticipated foreign-currency-denominated cash flows, such as unremitted or forecasted royalty and license fees owed to WarnerMedia’s domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad or cash flows for certain film production costs denominated in a foreign currency.

22

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts

 
Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into the consolidated statements of income in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as “Other income (expense) – net” in the consolidated statements of income in each period. We evaluate the effectiveness of our cash flow hedges each quarter. In the three months ended March 31, 2019 and 2018, no ineffectiveness was measured on cash flow hedges.

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses 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 $63 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

Net Investment Hedging   We have designated €700 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of WarnerMedia. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within accumulated other comprehensive income, net on the consolidated balance sheet.

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, 2019, we had posted collateral of $334 (a deposit asset) and held collateral of $166 (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 March, we would have been required to post additional collateral of $175. If AT&T’s credit rating had been downgraded four ratings levels by Fitch Ratings, two levels by S&P, and two levels by Moody’s, we would have been required to post additional collateral of $1,360. If DIRECTV Holdings LLC’s credit rating had been downgraded below BBB- by S&P, we would have been required to post additional collateral of $258. At December 31, 2018, we had posted collateral of $1,675 (a deposit asset) and held collateral of $103 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

Following are the notional amounts of our outstanding derivative positions:

 
March 31,
 
December 31,
2019
 
2018
Interest rate swaps
$
1,633
 
$
3,483
Cross-currency swaps
 
42,192
   
42,192
Foreign exchange contracts
 
1,238
   
2,094
Total
$
45,063
 
$
47,769

Following are the related hedged items affecting our financial position and performance:

Effect of Derivatives on the Consolidated Statements of Income
         
 
Three months ended
 
March 31,
Fair Value Hedging Relationships
2019
 
2018
Interest rate swaps (Interest expense):
         
     Gain (Loss) on interest rate swaps
$
24
 
$
(53)
     Gain (Loss) on long-term debt
 
(24)
   
53

23

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts

 
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
2019
 
2018
Cross-currency swaps:
         
     Gain (Loss) recognized in accumulated OCI
$
168
 
$
854
Foreign exchange contracts:
         
     Gain (Loss) recognized in accumulated OCI
 
(7)
   
-
     Other income (expense) - net reclassified from
        accumulated OCI into income
 
3
   
-
Interest rate locks:
         
     Interest income (expense) reclassified from
         accumulated OCI into income
 
(16)
   
(15)

NOTE 8. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions

Time Warner  On June 14, 2018, we completed our acquisition of Time Warner, a leader in media and entertainment whose major businesses encompass an array of some of the most respected media brands. 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 scale in TV, mobile and broadband distribution. We expect that the transaction will advance our direct-to-consumer efforts and provide us with the ability to develop innovative new offerings.

In July 2018, the U.S. Department of Justice (DOJ) appealed the U.S. District Court’s decision permitting the merger. On February 26, 2019, the D.C. Circuit unanimously affirmed our win. AT&T’s representations to the DOJ regarding its operation of Turner expired on February 28, 2019. The DOJ did not ask the D.C. Circuit to rehear its appeal before the applicable April 12, 2019 deadline , and it stated publicly on February 26, 2018 that “[t]he department has no plans to seek further review” of the D.C. Circuit’s decision. The DOJ’s deadline to file a petition for writ of certiorari with the United States Supreme Court is May 28, 2019.

We paid Time Warner shareholders $36,599 in AT&T stock and $42,100 in cash. Total consideration, including share-based payment arrangements and other adjustments totaled $79,358, excluding Time Warner’s net debt at acquisition. The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, “Fair Value Measurement,” other than cash and long-term debt acquired in the acquisition. The income approach was primarily used to value the intangible assets, consisting primarily of distribution network, released TV and film content, in-place advertising network, trade names, and franchises. The income approach estimates fair value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for plant, property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation.

24

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts

 
The following table summarizes the preliminary estimated fair values of the Time Warner assets acquired and liabilities assumed and related deferred income taxes as of the acquisition date:

Assets acquired
     
   Cash
 
$
1,889
   Accounts receivable
   
9,052
   All other current assets
   
2,913
   Noncurrent inventory and theatrical film and television production costs
   
5,591
   Property, plant and equipment
   
4,785
   Intangible assets subject to amortization
     
      Distribution network
   
18,040
      Released television and film content
   
10,806
      Trademarks and trade names
   
18,081
      Other
   
10,300
   Investments and other assets
   
9,449
   Goodwill
   
38,569
Total assets acquired
   
129,475
       
Liabilities assumed
     
   Current liabilities, excluding current portion of long-term debt
   
8,303
   Debt maturing within one year
   
4,471
   Long-term debt
   
18,394
   Other noncurrent liabilities
   
18,948
Total liabilities assumed
   
50,116
Net assets acquired
   
79,359
Noncontrolling interest
   
(1)
Aggregate value of consideration paid
 
$
79,358

These estimates are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments will be finalized within one year from the date of acquisition. Substantially all the receivables acquired are expected to be collectible. We have not identified any material unrecorded pre-acquisition contingencies where the related asset or liability, or an impairment is probable and the amount can be reasonably estimated. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that unknown events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change goodwill. Purchased goodwill is not expected to be deductible for tax purposes. As we finalize the valuation of assets acquired and liabilities assumed, we will determine to which reporting units within the WarnerMedia segment any changes in goodwill should be recorded.

25

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts

 
NOTE 9. SALES OF RECEIVABLES

As described further below, we have agreements with various third-party financial institutions pertaining to the sale of certain types of our accounts receivable. The most significant of these programs are discussed in detail below and generally consist of (1) receivables arising from equipment installment plans, which are sold for cash and a deferred purchase price, and (2) receivables related to licensed programming and advertising. Under these programs, we transfer receivables to purchasers in exchange for cash and additional consideration upon settlement of the receivables, where applicable. Under the terms of our agreements for these programs, we continue to bill and collect the payments from our customers on behalf of the financial institutions.

As of March 31, 2019 and December 31, 2018, gross receivables included on our consolidated balance sheets, related to these programs, are $6,611 and $5,994, respectively, of which $3,072 and $3,457 are notes receivable that are included in “Accounts receivable - net.”

The outstanding portfolio of receivables derecognized from our consolidated balance sheets, but which we continue to service, was $10,863 and $9,065 at March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, total cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $8,387.

The following table sets forth a summary of receivables sold during the three months ended March 31, 2019 and 2018:

   
Three months ended
   
March 31,
   
2019
 
2018
Gross receivables sold
$
4,101
 
$
3,010
Net receivables sold 1
 
3,909
   
2,795
Cash proceeds received
 
3,675
   
2,395
Deferred purchase price recorded
 
309
   
519
Guarantee obligation recorded
 
138
   
123
1
Receivables net of allowance, imputed interest and trade-in right guarantees.

The sales of receivables did not have a material impact on our consolidated statements of income or to “Total Assets” reported on our consolidated balance sheets. We reflect cash receipts on sold receivables as cash flows from operations in our consolidated statements of cash flows. Cash receipts on the deferred purchase price are classified as cash flows from investing activities.

Equipment Installment Receivables
We offer our customers the option to purchase certain wireless devices in installments over a specified period of time and, in many cases, once certain conditions are met, they may be eligible to trade in the original equipment for a new device and have the remaining unpaid balance paid or settled.

We maintain a program, under which we transfer a portion of these receivables in exchange for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. In the event a customer trades in a device prior to the end of the installment contract period, we agree to make a payment to the financial institutions equal to any outstanding remaining installment receivable balance. Accordingly, we record a guarantee obligation for this estimated amount at the time the receivables are transferred.

The deferred purchase price and guarantee obligation are initially recorded at estimated fair value and subsequently carried at the lower of cost or net realizable value. The estimation of their fair values is based on remaining installment payments expected to be collected and the expected timing and value of device trade-ins. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used for the deferred purchase price and the guarantee obligation are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 7).

26

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts

 
The following table shows the previously transferred equipment installment receivables, which we repurchased in exchange for the associated deferred purchase price and cash during the three months ended March 31, 2019 and 2018:

   
Three months ended
   
March 31,
   
2019
 
2018
Fair value of repurchased receivables
$
423
 
$
-
Carrying value of deferred purchase price
 
407
   
-
Gain (loss) on repurchases 1
$
16
 
$
-
1
These gains (losses) are included in “Selling, general and administrative” in the consolidated statements of income.

At March 31, 2019 and December 31, 2018, our deferred purchase price receivable was $2,240 and $2,370, respectively, of which $1,418 and $1,448 are included in “Other current assets” on our consolidated balance sheets, with the remainder in “Other Assets.” The guarantee obligation at March 31, 2019 and December 31, 2018 was $430 and $439, respectively, of which $160 and $196 are included in “Accounts payable and accrued liabilities” on our consolidated balance sheets, with the remainder in “Other noncurrent liabilities.” Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the total amount of our deferred purchase price and guarantee obligation.

Programming and Advertising Receivables
In March 2019, we entered into a revolving agreement to transfer certain receivables from our WarnerMedia business to various financial institutions in exchange for cash. These receivables originate from the sale of licensed programming and advertising. Upon sale, we reclassify the allowance against these receivables to a guarantee liability. We have fully guaranteed the repayment of the transferred receivables and have also pledged, as collateral under this agreement, additional receivables in the amount of $1,402. Our maximum exposure to loss related to selling these receivables is limited to the outstanding $1,400 of sold receivables.

NOTE 10. LEASES
We have operating and finance leases for certain facilities and equipment used in operations. Our leases have remaining lease terms of 1 year to 13 years. Some of our real estate operating leases contain renewal options that may be exercised, and some of our leases include options to terminate the leases within one year.
We have recognized a right-of-use asset for both operating and finance leases, and an operating lease liability that represents the present value of our obligation to make payments over the lease term. The present value of the lease payments is calculated using the incremental borrowing rate for operating and finance leases, which was determined using a portfolio approach based on the rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. We use the unsecured borrowing rate and risk-adjust that rate to approximate a collateralized rate in the currency of the lease, which will be updated on a quarterly basis for measurement of new lease liabilities.
The components of lease expense were as follows:

 
Three months ended
 
March 31, 2019
Operating lease cost
$
1,242
     
Finance lease cost:
   
   Amortization of right-of-use assets
$
66
   Interest on lease obligation
 
42
Total finance lease cost
$
108

27

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts

 
Supplemental balance sheet information related to leases is as follows:

At March 31, 2019
 
   
Operating Leases
     
   Operating lease right-of-use assets
$
20,235
 
       
   Accounts payable and accrued liabilities
$
3,072
 
   Operating lease obligation
 
18,253
 
Total operating lease obligation
$
21,325
 
       
Finance Leases
     
   Property, plant and equipment, at cost
$
3,377
 
   Accumulated depreciation and amortization
 
(1,173)
 
Property, plant and equipment, net
$
2,204
 
       
   Current portion of long-term debt
$
135
 
   Long-term debt
 
1,852
 
Total finance lease obligation
$
1,987
 
       
Weighted-Average Remaining Lease Term
     
   Operating leases
 
7.9
 yrs
   Finance leases
 
10.9
 yrs
       
Weighted-Average Discount Rate
     
   Operating leases
 
4.7
%
   Finance leases
 
8.6
%

Future minimum maturities of lease liabilities are as follows:

At March 31, 2019
Operating
 
Finance
 
Leases
 
Leases
Remainder of 2019
$
3,201
 
$
246
2020
 
3,981
   
290
2021
 
3,533
   
279
2022
 
3,231
   
263
2023
 
2,893
   
254
Thereafter
 
9,633
   
1,828
Total lease payments
 
26,472
   
3,160
Less imputed interest
 
(5,147)
   
(1,173)
Total
$
21,325
 
$
1,987

28

AT&T INC.
MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued
Dollars in millions except per share amounts

 
NOTE 11. ADDITIONAL FINANCIAL INFORMATION

Cash and Cash Flows
We typically maintain our restricted cash balances for purchases and sales of certain investment securities and funding of certain deferred compensation benefit payments.

   
March 31,
 
December 31,
Cash and Cash Equivalents and Restricted Cash
   
2019
   
2018
   
2018
   
2017
   Cash and cash equivalents
 
$
6,516
 
$
48,872
 
$
5,204
 
$
50,498
   Restricted cash in Other current assets
   
20
   
8
   
61
   
6
   Restricted cash in Other Assets
   
94
   
345
   
135
   
428
   Cash and cash equivalents and restricted cash
 
$
6,630
 
$
49,225
 
$
5,400
 
$
50,932

 
Three months ended
 
March 31,
Cash Paid for Amounts Included in the Measurement of Lease Liabilities:
2019
 
2018
   Operating cash flows from operating leases
$
1,332
 
$
1,207

   
Three months ended
   
March 31,
Cash Paid (Received) During the Period for:
   
2019
   
2018
   Interest
 
$
2,507
 
$
2,408
   Income taxes, net of refunds
   
(379)
   
(1,089)

29

AT&T INC.
MARCH 31, 2019

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
Dollars, subscribers and connections in millions, except per share and per subscriber amounts


OVERVIEW
AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes (Notes). We completed the acquisition of Time Warner Inc. (Time Warner) on June 14, 2018, and have included its results after that date. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from Time Warner prior to the acquisition are excluded.

We have four reportable segments: (1) Communications, (2) WarnerMedia, (3) Latin America and (4) Xandr. Our segment results presented in Note 4 and discussed below follow our internal management reporting. We analyze our segments based on segment operating contribution, which consists of operating income, excluding acquisition-related costs and other significant items, and equity in net income (loss) of affiliates for investments managed within each segment. Percentage increases and decreases that are not considered meaningful are denoted with a dash.

 
First Quarter
 
           
Percent
 
 
2019
 
2018
Change
 
Operating Revenues
             
   Communications
$
35,393
 
$
35,533
(0.4)
%
   WarnerMedia
 
8,379
   
112
-
 
   Latin America
 
1,718
   
2,025
(15.2)
 
   Xandr
 
426
   
337
26.4
 
   Corporate and other
 
167
   
333
(49.8)
 
   Eliminations and consolidation
 
(1,256)
   
(302)
-
 
AT&T Operating Revenues
 
44,827
   
38,038
17.8
 
               
Operating Contribution
             
   Communications
 
8,052
   
8,027
0.3
 
   WarnerMedia
 
2,310
   
39
-
 
   Latin America
 
(173)
   
(111)
(55.9)
 
   Xandr
 
253
   
286
(11.5)
 
Segment Operating Contribution
$
10,442
 
$
8,241
26.7
%

The Communications segment provides services to businesses and consumers located in the U.S. or in U.S. territories and businesses globally. Our business strategies reflect bundled product offerings that cut across product lines and utilize shared assets. This segment contains the following business units:

Mobility provides nationwide wireless service and equipment.

Entertainment Group provides video, including over-the-top (OTT) services, broadband and voice communications services primarily to residential customers. This segment also sells advertising on DIRECTV and U-verse distribution platforms.

Business Wireline provides advanced IP-based services, as well as traditional voice and data services to business customers.

30

AT&T INC.
MARCH 31, 2019

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts


The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content over various physical and digital formats. This segment contains the following business units:

Turner is comprised of the historic Turner division as well as the financial results of our AT&T's Regional Sports Networks (RSNs). This business unit primarily operates multichannel basic television networks and digital properties. Turner also sells advertising on its networks and digital properties.

Home Box Office consists of premium pay television and OTT services domestically and premium pay, basic tier television and OTT services internationally, as well as content licensing and home entertainment.

Warner Bros. consists of the production, distribution and licensing of television programming and feature films, the distribution of home entertainment products and the production and distribution of games.

The Latin America segment provides entertainment and wireless services outside of the U.S. This segment contains the following business units:

Vrio provides video services primarily to residential customers using satellite technology in Latin America and the Caribbean.

Mexico provides wireless service and equipment to customers in Mexico.

The Xandr   segment provides advertising services and includes our recently acquired AppNexus. These services utilize data insights to develop and deliver targeted advertising across video and digital platforms.


RESULTS OF OPERATIONS

Consolidated Results  Our financial results are summarized in the following discussions. Additional analysis is discussed in our “Segment Results” section. Percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain prior period amounts have been reclassified to conform to the current period’s presentation.

 
First Quarter
 
           
Percent
 
 
2019
 
2018
Change
 
Operating Revenues
             
   Service
$
40,684
 
$
33,646
20.9
%
   Equipment
 
4,143
   
4,392
(5.7)
 
Total Operating Revenues
 
44,827
   
38,038
17.8
 
               
Operating expenses
             
   Operations and support
 
30,388
   
25,843
17.6
 
   Depreciation and amortization
 
7,206
   
5,994
20.2
 
Total Operating Expenses
 
37,594
   
31,837
18.1
 
Operating Income
 
7,233
   
6,201
16.6
 
Interest expense
 
2,141
   
1,771
20.9
 
Equity in net income (loss)
   of affiliates
 
(7)
   
9
-
 
Other income (expense) – net
 
286
   
1,702
(83.2)
 
Income Before Income Taxes
 
5,371
   
6,141
(12.5)
 
Net Income
 
4,348
   
4,759
(8.6)
 
Net Income Attributable to AT&T
$
4,096
 
$
4,662
(12.1)
%

Operating revenues increased in the first quarter of 2019. The increase was primarily due to our 2018 acquisition of Time Warner. Partially offsetting these increases in revenues were declines in our Latin America segment and Communications segment, driven by lower legacy services, video and wireless equipment revenues. Revenues were also negatively impacted by foreign exchange pressure.

31

AT&T INC.
MARCH 31, 2019

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts


Operations and support   expenses increased in the first quarter of 2019. The increase was primarily due to our 2018 acquisition of Time Warner, partially offset by lower equipment costs in our Communications and Latin America segments and lower expenses due to our continued focus on cost management.

Depreciation and amortization expense increased in the first quarter of 2019. Depreciation expense increased $285, or 5.8%, primarily due to the Time Warner acquisition as well as ongoing capital spending for network upgrades and expansion.

Amortization expense increased $927 in 2019 primarily due to the amortization of intangibles associated with WarnerMedia.

Operating   income increased in the first quarter of 2019. Our operating income margin in the first quarter decreased from 16.3% in 2018 to 16.1% in 2019.

Interest expense increased in the first quarter of 2019. The increase was primarily due to higher debt balances related to our acquisition of Time Warner, including interest expense on Time Warner notes.

Equity in net income of affiliates decreased in the first quarter of 2019, primarily due to basis amortization of Time Warner investments, which were acquired in the second quarter of 2018.

Other income (expense) – net decreased in the first quarter of 2019. The decrease was primarily due to actuarial losses of $432 in 2019 compared to an actuarial gain of $930 in the comparable prior year. First-quarter 2019 also includes $45 of debt redemption expenses.

Income taxes decreased in the first quarter of 2019. Our effective tax rate was 19.0% for the first quarter of 2019, versus 22.5% for the comparable year prior. The decrease in income tax expense was primarily due to lower income before income taxes and the impacts of tax settlements in the first quarter of 2019. The decrease in our effective tax rate was primarily due to the impacts of tax settlements.

COMMUNICATIONS SEGMENT
First Quarter