Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
or
|
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||
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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[X]
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Accelerated filer
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[ ]
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Non-accelerated filer
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[ ]
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(Do not check if a smaller reporting company)
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Smaller reporting company
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[ ]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
At October 31, 2015, there were 6,152 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
|
Nine months ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2015
|
2014
|
2015
|
2014
|
|||||||||||||
As Adjusted
|
As Adjusted
|
|||||||||||||||
Operating Revenues
|
||||||||||||||||
Service
|
$
|
35,625
|
$
|
29,790
|
$
|
94,128
|
$
|
89,122
|
||||||||
Equipment
|
3,466
|
3,167
|
10,554
|
8,886
|
||||||||||||
Total operating revenues
|
39,091
|
32,957
|
104,682
|
98,008
|
||||||||||||
Operating Expenses
|
||||||||||||||||
Cost of services and sales
|
||||||||||||||||
Equipment
|
4,501
|
4,432
|
13,400
|
12,503
|
||||||||||||
Broadcast, programming and operations
|
4,081
|
1,038
|
6,351
|
3,019
|
||||||||||||
Other cost of services (exclusive of depreciation and
amortization shown separately below)
|
9,214
|
8,866
|
27,604
|
26,167
|
||||||||||||
Selling, general and administrative
|
9,107
|
8,475
|
24,535
|
24,932
|
||||||||||||
Depreciation and amortization
|
6,265
|
4,539
|
15,539
|
13,706
|
||||||||||||
Total operating expenses
|
33,168
|
27,350
|
87,429
|
80,327
|
||||||||||||
Operating Income
|
5,923
|
5,607
|
17,253
|
17,681
|
||||||||||||
Other Income (Expense)
|
||||||||||||||||
Interest expense
|
(1,146
|
)
|
(1,016
|
)
|
(2,977
|
)
|
(2,757
|
)
|
||||||||
Equity in net income (loss) of affiliates
|
15
|
(2
|
)
|
48
|
188
|
|||||||||||
Other (expense) income – net
|
(57
|
)
|
42
|
61
|
1,456
|
|||||||||||
Total other income (expense)
|
(1,188
|
)
|
(976
|
)
|
(2,868
|
)
|
(1,113
|
)
|
||||||||
Income Before Income Taxes
|
4,735
|
4,631
|
14,385
|
16,568
|
||||||||||||
Income tax expense
|
1,657
|
1,444
|
4,784
|
5,914
|
||||||||||||
Net Income
|
3,078
|
3,187
|
9,601
|
10,654
|
||||||||||||
Less: Net Income Attributable to Noncontrolling Interest
|
(84
|
)
|
(57
|
)
|
(262
|
)
|
(213
|
)
|
||||||||
Net Income Attributable to AT&T
|
$
|
2,994
|
$
|
3,130
|
$
|
9,339
|
$
|
10,441
|
||||||||
Basic Earnings Per Share Attributable to AT&T
|
$
|
0.50
|
$
|
0.60
|
$
|
1.71
|
$
|
2.00
|
||||||||
Diluted Earnings Per Share Attributable to AT&T
|
$
|
0.50
|
$
|
0.60
|
$
|
1.71
|
$
|
2.00
|
||||||||
Weighted Average Number of Common Shares
|
||||||||||||||||
Outstanding – Basic (in millions)
|
5,924
|
5,198
|
5,447
|
5,208
|
||||||||||||
Weighted Average Number of Common Shares
|
||||||||||||||||
Outstanding – with Dilution (in millions)
|
5,943
|
5,214
|
5,463
|
5,224
|
||||||||||||
Dividends Declared Per Common Share
|
$
|
0.47
|
$
|
0.46
|
$
|
1.41
|
$
|
1.38
|
||||||||
See Notes to Consolidated Financial Statements.
|
2
AT&T INC.
|
||||||||||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
||||||||||||||||
Dollars in millions
|
||||||||||||||||
(Unaudited)
|
||||||||||||||||
Three months ended
|
Nine months ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2015
|
2014
|
2015
|
2014
|
|||||||||||||
As Adjusted
|
As Adjusted
|
|||||||||||||||
Net income
|
$
|
3,078
|
$
|
3,187
|
$
|
9,601
|
$
|
10,654
|
||||||||
Other comprehensive income (loss), net of tax:
|
||||||||||||||||
Foreign Currency:
|
||||||||||||||||
Translation adjustment (includes $(20), $(1), $(20) and $0
attributable to noncontrolling interest), net of taxes of
$(535), $(22), $(638) and $(17)
|
(1,039
|
)
|
(35
|
)
|
(1,224
|
)
|
(29
|
)
|
||||||||
Reclassification adjustment included in net income,
net of taxes of $0, $0, $0 and $224
|
-
|
-
|
-
|
416
|
||||||||||||
Available-for-sale securities:
|
||||||||||||||||
Net unrealized gains (losses), net of taxes of $(49), $(15), $(30)
and $19
|
(85
|
)
|
(29
|
)
|
(51
|
)
|
30
|
|||||||||
Reclassification adjustment included in net income, net of
taxes of $2, $(1), $(3) and $(9)
|
3
|
(1
|
)
|
(6
|
)
|
(15
|
)
|
|||||||||
Cash flow hedges:
|
||||||||||||||||
Net unrealized gains (losses), net of taxes of $(237), $201,
$(479) and $148
|
(441
|
)
|
370
|
(890
|
)
|
272
|
||||||||||
Reclassification adjustment included in net income,
net of taxes of $6, $3, $15 and $14
|
11
|
8
|
28
|
29
|
||||||||||||
Defined benefit postretirement plans:
|
||||||||||||||||
Amortization of net prior service credit included in
net income, net of taxes of $(131), $(146), $(393)
and $(435)
|
(215
|
)
|
(239
|
)
|
(644
|
)
|
(718
|
)
|
||||||||
Reclassification adjustment included in net income, net of
taxes $0, $0, $0 and $33
|
-
|
-
|
-
|
61
|
||||||||||||
Other comprehensive income (loss)
|
(1,766
|
)
|
74
|
(2,787
|
)
|
46
|
||||||||||
Total comprehensive income
|
1,312
|
3,261
|
6,814
|
10,700
|
||||||||||||
Less: Total comprehensive income attributable to
noncontrolling interest
|
(64
|
)
|
(56
|
)
|
(242
|
)
|
(213
|
)
|
||||||||
Total Comprehensive Income Attributable to AT&T
|
$
|
1,248
|
$
|
3,205
|
$
|
6,572
|
$
|
10,487
|
||||||||
See Notes to Consolidated Financial Statements.
|
3
AT&T INC.
|
||||||||
CONSOLIDATED BALANCE SHEETS
|
||||||||
Dollars in millions except per share amounts
|
||||||||
September 30,
|
December 31,
|
|||||||
2015
|
2014
|
|||||||
Assets
|
(Unaudited)
|
As Adjusted
|
||||||
Current Assets
|
||||||||
Cash and cash equivalents
|
$
|
6,202
|
$
|
8,603
|
||||
Accounts receivable - net of allowances for doubtful accounts of $656 and $454
|
16,329
|
14,527
|
||||||
Prepaid expenses
|
1,166
|
831
|
||||||
Other current assets
|
11,254
|
9,802
|
||||||
Total current assets
|
34,951
|
33,763
|
||||||
Property, plant and equipment
|
302,194
|
282,295
|
||||||
Less: accumulated depreciation and amortization
|
(179,358
|
)
|
(169,397
|
)
|
||||
Property, Plant and Equipment – Net
|
122,836
|
112,898
|
||||||
Goodwill
|
105,966
|
69,692
|
||||||
Licenses
|
93,063
|
60,824
|
||||||
Customer Lists and Relationships - Net
|
19,608
|
812
|
||||||
Other Intangible Assets – Net
|
8,236
|
5,327
|
||||||
Investments in Equity Affiliates
|
1,744
|
250
|
||||||
Other Assets
|
13,585
|
13,659
|
||||||
Total Assets
|
$
|
399,989
|
$
|
297,225
|
||||
Liabilities and Stockholders' Equity
|
||||||||
Current Liabilities
|
||||||||
Debt maturing within one year
|
$
|
7,535
|
$
|
6,056
|
||||
Accounts payable and accrued liabilities
|
28,280
|
23,592
|
||||||
Advanced billing and customer deposits
|
4,640
|
4,105
|
||||||
Accrued taxes
|
4,591
|
1,136
|
||||||
Dividends payable
|
2,892
|
2,438
|
||||||
Total current liabilities
|
47,938
|
37,327
|
||||||
Long-Term Debt
|
119,395
|
76,011
|
||||||
Deferred Credits and Other Noncurrent Liabilities
|
||||||||
Deferred income taxes
|
53,044
|
38,549
|
||||||
Postemployment benefit obligation
|
36,396
|
37,079
|
||||||
Other noncurrent liabilities
|
20,427
|
17,989
|
||||||
Total deferred credits and other noncurrent liabilities
|
109,867
|
93,617
|
||||||
Stockholders' Equity
|
||||||||
Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2015 and
|
||||||||
December 31, 2014: issued 6,495,231,088 at September 30, 2015 and December 31, 2014)
|
6,495
|
6,495
|
||||||
Additional paid-in capital
|
89,717
|
91,108
|
||||||
Retained earnings
|
32,627
|
31,081
|
||||||
Treasury stock (342,990,428 at September 30, 2015 and 1,308,318,131
|
||||||||
at December 31, 2014, at cost)
|
(12,309
|
)
|
(47,029
|
)
|
||||
Accumulated other comprehensive income
|
5,294
|
8,061
|
||||||
Noncontrolling interest
|
965
|
554
|
||||||
Total stockholders' equity
|
122,789
|
90,270
|
||||||
Total Liabilities and Stockholders' Equity
|
$
|
399,989
|
$
|
297,225
|
||||
See Notes to Consolidated Financial Statements.
|
4
AT&T INC.
|
||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
Dollars in millions
|
||||||||
(Unaudited)
|
||||||||
Nine months ended
|
||||||||
September 30,
|
||||||||
2015
|
2014
|
|||||||
Operating Activities
|
As Adjusted
|
|||||||
Net income
|
$
|
9,601
|
$
|
10,654
|
||||
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
Depreciation and amortization
|
15,539
|
13,706
|
||||||
Undistributed earnings from investments in equity affiliates
|
(36
|
)
|
(45
|
)
|
||||
Provision for uncollectible accounts
|
895
|
692
|
||||||
Deferred income tax expense
|
1,539
|
1,450
|
||||||
Net gain from sale of investments, net of impairments
|
(46
|
)
|
(1,374
|
)
|
||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable
|
453
|
(1,269
|
)
|
|||||
Other current assets
|
350
|
(840
|
)
|
|||||
Accounts payable and accrued liabilities
|
1,279
|
4,790
|
||||||
Retirement benefit funding
|
(595
|
)
|
(420
|
)
|
||||
Other - net
|
(2,284
|
)
|
(1,751
|
)
|
||||
Total adjustments
|
17,094
|
14,939
|
||||||
Net Cash Provided by Operating Activities
|
26,695
|
25,593
|
||||||
Investing Activities
|
||||||||
Construction and capital expenditures:
|
||||||||
Capital expenditures
|
(13,356
|
)
|
(16,829
|
)
|
||||
Interest during construction
|
(566
|
)
|
(178
|
)
|
||||
Acquisitions, net of cash acquired
|
(30,694
|
)
|
(2,053
|
)
|
||||
Dispositions
|
79
|
6,074
|
||||||
Sales (purchases) of securities, net
|
1,490
|
(1,996
|
)
|
|||||
Return of advances to and investments in equity affiliates
|
-
|
3
|
||||||
Other
|
-
|
(1
|
)
|
|||||
Net Cash Used in Investing Activities
|
(43,047
|
)
|
(14,980
|
)
|
||||
Financing Activities
|
||||||||
Net change in short-term borrowings with original maturities of three months or less
|
(1
|
)
|
(16
|
)
|
||||
Issuance of long-term debt
|
33,967
|
8,564
|
||||||
Repayment of long-term debt
|
(9,962
|
)
|
(10,376
|
)
|
||||
Purchase of treasury stock
|
-
|
(1,617
|
)
|
|||||
Issuance of treasury stock (excluding acquisition of DIRECTV)
|
133
|
34
|
||||||
Dividends paid
|
(7,311
|
)
|
(7,170
|
)
|
||||
Other
|
(2,875
|
)
|
(913
|
)
|
||||
Net Cash Provided by (Used in) Financing Activities
|
13,951
|
(11,494
|
)
|
|||||
Net decrease in cash and cash equivalents
|
(2,401
|
)
|
(881
|
)
|
||||
Cash and cash equivalents beginning of year
|
8,603
|
3,339
|
||||||
Cash and Cash Equivalents End of Period
|
$
|
6,202
|
$
|
2,458
|
||||
Cash paid during the nine months ended September 30 for:
|
||||||||
Interest
|
$
|
3,462
|
$
|
3,351
|
||||
Income taxes, net of refunds
|
$
|
873
|
$
|
1,337
|
||||
See Notes to Consolidated Financial Statements.
|
5
AT&T INC.
|
||||||||
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
|
||||||||
Dollars and shares in millions except per share amounts
|
||||||||
(Unaudited)
|
||||||||
September 30, 2015
|
||||||||
Shares
|
Amount
|
|||||||
As Adjusted
|
||||||||
Common Stock
|
||||||||
Balance at beginning of year
|
6,495
|
$
|
6,495
|
|||||
Issuance of stock
|
-
|
-
|
||||||
Balance at end of period
|
6,495
|
$
|
6,495
|
|||||
Additional Paid-In Capital
|
||||||||
Balance at beginning of year
|
$
|
91,108
|
||||||
Issuance of treasury stock
|
(1,593
|
)
|
||||||
Share-based payments
|
202
|
|||||||
Balance at end of period
|
$
|
89,717
|
||||||
Retained Earnings
|
||||||||
Balance at beginning of year
|
$
|
31,081
|
||||||
Net income attributable to AT&T ($1.71 per diluted share)
|
9,339
|
|||||||
Dividends to stockholders ($1.41 per share)
|
(7,793
|
)
|
||||||
Balance at end of period
|
$
|
32,627
|
||||||
Treasury Stock
|
||||||||
Balance at beginning of year
|
(1,308
|
)
|
$
|
(47,029
|
)
|
|||
Repurchase of common stock
|
(1
|
)
|
(10
|
)
|
||||
Issuance of treasury stock
|
967
|
34,730
|
||||||
Balance at end of period
|
(342
|
)
|
$
|
(12,309
|
)
|
|||
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
|
||||||||
Balance at beginning of year
|
$
|
8,061
|
||||||
Other comprehensive loss attributable to AT&T
|
(2,767
|
)
|
||||||
Balance at end of period
|
$
|
5,294
|
||||||
Noncontrolling Interest
|
||||||||
Balance at beginning of year
|
$
|
554
|
||||||
Net income attributable to noncontrolling interest
|
262
|
|||||||
Distributions
|
(214
|
)
|
||||||
Acquisition of noncontrolling interests
|
383
|
|||||||
Translation adjustments attributable to noncontrolling interest, net of taxes
|
(20
|
)
|
||||||
Balance at end of period
|
$
|
965
|
||||||
Total Stockholders' Equity at beginning of year
|
$
|
90,270
|
||||||
Total Stockholders' Equity at end of period
|
$
|
122,789
|
||||||
See Notes to Consolidated Financial Statements.
|
6
AT&T INC.
SEPTEMBER 30, 2015
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 "AT&T," "we" or the "Company." 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. The results for the interim periods are not necessarily indicative of those for the full year. 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, 2014.
The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates, including the results of DIRECTV for the 68-day period ended September 30, 2015. Our subsidiaries and affiliates operate in the communications and digital entertainment services industry, providing services and equipment that deliver voice, video and broadband services domestically and internationally.
All significant intercompany transactions are eliminated in the consolidation process. Investments in less than majority-owned subsidiaries and partnerships where we 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 month of our period end. We also recorded our proportionate share of our equity method investees' other comprehensive income (OCI) items, including actuarial gains and losses on pension and other postretirement benefit obligations and cumulative translation adjustments.
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 amounts have been reclassified to conform to the current period's presentation, including our presentation of "Equipment" and "Broadcast, programming and operations" expenses separately from other cost of services in the consolidated statements of income.
Due to recent organizational changes and our July 24, 2015 acquisition of DIRECTV, effective for the quarter ended September 30, 2015, we are revising our operating segments to align with the new management structure and organizational responsibilities. We have revised our prior-period presentation to conform to our current reporting. (See Note 4)
Customer Fulfillment Costs In August 2015, with our acquisition of DIRECTV, we announced a change in accounting for customer set-up and installation costs. Historically we have followed an accounting policy of deferring customer set-up and installation costs only to the extent of deferred revenues recorded for upfront fees (e.g., activation charges), and to expense any costs that exceed deferred revenues. After discussing this change with the Securities and Exchange Commission, we changed our accounting to a preferable method of capitalizing these costs and amortizing them over the expected economic life of the customer relationship of approximately four years, subject to an assessment of the recoverability of such costs. This change in accounting principle impacts video, broadband Internet and wireline voice services and is considered preferable in that it provides an accurate reflection of assets (i.e., the contractual customer relationship obtained through the set-up and installation) generated by those specific business activities. Our new accounting method is more comparable with the accounting method used in the cable entertainment industry. With our acquisition of DIRECTV, changing to this accounting method will enhance comparability to other companies in the industry. This change in accounting does not have an impact on our wireless results, due to the absence of these types of expenses in those business activities.
The cumulative effect of the change on Retained Earnings as of January 1, 2014, was an increase of approximately $3,128 on our consolidated balance sheets. This change did not have an impact on cash provided by or used in operations for any period presented.
7
AT&T INC.
SEPTEMBER 30, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The following tables present our results under our historical method and as adjusted to reflect the accounting change:
Historical
Accounting
Method
|
As
Adjusted
|
Effect of
Change
|
||||||||||
For the three months ended September 30, 2015
|
||||||||||||
Other cost of services
|
$
|
9,290
|
$
|
9,214
|
$
|
(76
|
)
|
|||||
Income tax expense
|
1,628
|
1,657
|
29
|
|||||||||
Net Income
|
3,031
|
3,078
|
47
|
|||||||||
Net Income Attributable to AT&T
|
2,947
|
2,994
|
47
|
|||||||||
Basic Earnings per Share Attributable to AT&T
|
$
|
0.50
|
$
|
0.50
|
$
|
-
|
||||||
Diluted Earnings per Share Attributable to AT&T
|
0.50
|
0.50
|
-
|
|||||||||
At September 30, 2015 or for the nine months ended
|
||||||||||||
Other cost of services
|
$
|
27,842
|
$
|
27,604
|
$
|
(238
|
)
|
|||||
Income tax expense
|
4,694
|
4,784
|
90
|
|||||||||
Net Income
|
9,453
|
9,601
|
148
|
|||||||||
Net Income Attributable to AT&T
|
9,191
|
9,339
|
148
|
|||||||||
Basic Earnings per Share Attributable to AT&T
|
$
|
1.68
|
$
|
1.71
|
$
|
0.03
|
||||||
Diluted Earnings per Share Attributable to AT&T
|
1.68
|
1.71
|
0.03
|
|||||||||
Other current assets
|
$
|
9,579
|
$
|
11,254
|
$
|
1,675
|
||||||
Other Assets
|
10,671
|
13,585
|
2,914
|
|||||||||
Deferred income taxes
|
51,949
|
53,044
|
1,095
|
|||||||||
Retained earnings
|
29,133
|
32,627
|
3,494
|
Historical
Accounting
Method
|
As
Adjusted
|
Effect of
Change
|
||||||||||
For the three months ended September 30, 2014
|
||||||||||||
Other cost of services
|
$
|
9,071
|
$
|
8,866
|
$
|
(205
|
)
|
|||||
Income tax expense
|
1,367
|
1,444
|
77
|
|||||||||
Net Income
|
3,059
|
3,187
|
128
|
|||||||||
Net Income Attributable to AT&T
|
3,002
|
3,130
|
128
|
|||||||||
Basic Earnings per Share Attributable to AT&T
|
$
|
0.58
|
$
|
0.60
|
$
|
0.02
|
||||||
Diluted Earnings per Share Attributable to AT&T
|
0.58
|
0.60
|
0.02
|
|||||||||
For the nine months ended September 30, 2014
|
||||||||||||
Other cost of services
|
$
|
26,552
|
$
|
26,167
|
$
|
(385
|
)
|
|||||
Income tax expense
|
5,769
|
5,914
|
145
|
|||||||||
Net Income
|
10,414
|
10,654
|
240
|
|||||||||
Net Income Attributable to AT&T
|
10,201
|
10,441
|
240
|
|||||||||
Basic Earnings per Share Attributable to AT&T
|
$
|
1.96
|
$
|
2.00
|
$
|
0.04
|
||||||
Diluted Earnings per Share Attributable to AT&T
|
1.95
|
2.00
|
0.05
|
8
AT&T INC.
SEPTEMBER 30, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Historical
Accounting
Method
|
As
Adjusted
|
Effect of
Change
|
||||||||||
At December 31, 2014
|
||||||||||||
Other current assets
|
$
|
8,067
|
$
|
9,802
|
$
|
1,735
|
||||||
Other Assets
|
10,998
|
13,659
|
2,661
|
|||||||||
Accrued taxes
|
1,091
|
1,136
|
45
|
|||||||||
Deferred income taxes
|
37,544
|
38,549
|
1,005
|
|||||||||
Retained earnings
|
27,736
|
31,081
|
3,345
|
New Accounting Standards
Revenue Recognition In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09), which replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASU 2014-09 becomes effective for annual reporting periods beginning after December 15, 2017, following the July 2015 approval of a one-year deferral of the effective date by the FASB. While we continue to evaluate the impact of the new standard on revenue and costs of acquisition as well as available adoption methods, the requirement to defer costs is not expected to have a significant impact on our operating results as a result of our policy change on fulfillment costs.
Long-Term Debt and Debt Issuance Costs In April 2015, the FASB issued ASU No. 2015-03, "Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03), which will result in the reclassification of debt issuance costs from "Other Assets" to inclusion as a reduction of our reportable "Long-Term Debt" balance on our consolidated balance sheets. Since ASU 2015-03 does not address deferred issuance costs for line-of-credit arrangements, the FASB issued ASU No. 2015-15, "Interest—Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements" (ASU 2015-15), in August 2015. ASU 2015-15 allows a company to defer debt issuance costs associated with line-of-credit arrangements, including arrangements with no outstanding borrowings, classify them as an asset, and amortize them over the term of the arrangements. ASU 2015-03 becomes effective January 1, 2016, subject to early adoption, and will require full retrospective application. We do not expect these new standards to have a material impact on our consolidated balance sheets.
Business Combinations In September 2015, the FASB issued ASU No 2015-16, "Business Combinations—Simplifying the Accounting for Measurement-Period Adjustments" (ASU 2015-16), which will result in the ability to recognize, in current-period earnings, any changes in provisional amounts during the measurement period after the closing of an acquisition, instead of retroactively accounting for these changes. ASU 2015-16 becomes effective January 1, 2016, subject to early adoption, and will require prospective application to adjustments to provisional amounts that occur after the effective date of ASU 2015-16. We are evaluating the impact of the new standard on our operating results.
9
AT&T INC.
SEPTEMBER 30, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three and nine months ended September 30, 2015 and 2014, is shown in the table below:
Three months ended
|
Nine months ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2015
|
2014
|
2015
|
2014
|
|||||||||||||
Numerators
|
||||||||||||||||
Numerator for basic earnings per share:
|
||||||||||||||||
Net Income
|
$
|
3,078
|
$
|
3,187
|
$
|
9,601
|
$
|
10,654
|
||||||||
Less: Net income attributable to noncontrolling interest
|
(84
|
)
|
(57
|
)
|
(262
|
)
|
(213
|
)
|
||||||||
Net Income attributable to AT&T
|
2,994
|
3,130
|
9,339
|
10,441
|
||||||||||||
Dilutive potential common shares:
|
||||||||||||||||
Share-based payment
|
3
|
2
|
9
|
9
|
||||||||||||
Numerator for diluted earnings per share
|
$
|
2,997
|
$
|
3,132
|
$
|
9,348
|
$
|
10,450
|
||||||||
Denominators (000,000)
|
||||||||||||||||
Denominator for basic earnings per share:
|
||||||||||||||||
Weighted average number of common shares outstanding
|
5,924
|
5,198
|
5,447
|
5,208
|
||||||||||||
Dilutive potential common shares:
|
||||||||||||||||
Share-based payment (in shares)
|
19
|
16
|
16
|
16
|
||||||||||||
Denominator for diluted earnings per share
|
5,943
|
5,214
|
5,463
|
5,224
|
||||||||||||
Basic earnings per share attributable to AT&T
|
$
|
0.50
|
$
|
0.60
|
$
|
1.71
|
$
|
2.00
|
||||||||
Diluted earnings per share attributable to AT&T
|
$
|
0.50
|
$
|
0.60
|
$
|
1.71
|
$
|
2.00
|
10
AT&T INC.
SEPTEMBER 30, 2015
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 other comprehensive income (accumulated OCI) are presented below. All amounts are net of tax and exclude noncontrolling interest.
At September 30, 2015 and for the period ended:
|
|
|
|
|
|||||||||||
Foreign
Currency
Translation
Adjustment
|
|
Net Unrealized
Gains (Losses)
on Available-
for-Sale
Securities
|
|
Net Unrealized
Gains (Losses)
on Cash Flow
Hedges
|
|
Defined Benefit
Postretirement
Plans
|
|
Accumulated
Other
Comprehensive
Income
|
|||||||
Balance as of December 31, 2014
|
$
|
(26)
|
|
$
|
499
|
|
$
|
741
|
|
$
|
6,847
|
|
$
|
8,061
|
|
Other comprehensive income
(loss) before reclassifications
|
(1,204)
|
|
(51)
|
|
(890)
|
|
-
|
|
(2,145)
|
||||||
Amounts reclassified
from accumulated OCI
|
-
|
1
|
(6)
|
2
|
28
|
3
|
(644)
|
4
|
(622)
|
||||||
Net other comprehensive
income (loss)
|
(1,204)
|
|
(57)
|
|
(862)
|
|
(644)
|
|
(2,767)
|
||||||
Balance as of September 30,
2015
|
$
|
(1,230)
|
|
$
|
442
|
|
$
|
(121)
|
|
$
|
6,203
|
|
$
|
5,294
|
|
|
|||||||||||||||
At September 30, 2014 and for the period ended:
|
|
|
|
|
|||||||||||
Foreign
Currency
Translation
Adjustment
|
|
Net Unrealized
Gains (Losses)
on Available-
for-Sale
Securities
|
|
Net Unrealized
Gains (Losses)
on Cash Flow
Hedges
|
|
Defined Benefit
Postretirement
Plans
|
|
Accumulated
Other
Comprehensive
Income
|
|||||||
Balance as of December 31, 2013
|
$
|
(367)
|
|
$
|
450
|
|
$
|
445
|
|
$
|
7,352
|
|
$
|
7,880
|
|
Other comprehensive income
(loss) before reclassifications
|
(29)
|
|
30
|
|
272
|
|
-
|
|
273
|
||||||
Amounts reclassified
from accumulated OCI
|
416
|
1
|
(15)
|
2
|
29
|
3
|
(657)
|
4
|
(227)
|
||||||
Net other comprehensive
income (loss)
|
387
|
|
15
|
|
301
|
|
(657)
|
|
46
|
||||||
Balance as of September 30,
2014
|
$
|
20
|
|
$
|
465
|
|
$
|
746
|
|
$
|
6,695
|
|
$
|
7,926
|
|
1 Translation (gain) loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
|
|||||||||||||||
2 (Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
|
|||||||||||||||
3 (Gains) losses are included in Interest expense in the consolidated statements of income. See Note 6 for additional information.
|
|||||||||||||||
4 The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Other cost of services and Selling, general and administrative in the consolidated statements of income (see Note 5). Actuarial loss
|
|||||||||||||||
reclassifications related to our equity method investees are included in Other income (expense) - net in the consolidated statements of income.
|
11
AT&T INC.
SEPTEMBER 30, 2015
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. Due to recent organizational changes and our July 24, 2015 acquisition of DIRECTV, effective for the quarter ended September 30, 2015, we are revising our operating segments to align with our new management structure and organizational responsibilities. We analyze our operating segments based on segment contribution, which consists of operating income, excluding acquisition-related costs and other significant items (as discussed below), and equity in net income of affiliates for investments managed within each operating segment. We have four reportable segments: (1) Business Solutions, (2) Entertainment and Internet Services, (3) Consumer Mobility and (4) International. We have revised our prior-period presentation to conform to our current reporting.
We also evaluate segment performance based on segment operating income before depreciation and amortization, which we refer to as EBITDA and/or EBITDA margin. For AT&T, EBITDA is defined as operating income before 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 segment 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.
The Business Solutions segment provides both wireless and wireline services to business customers and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN), Ethernet-related products and broadband (strategic business services) as well as traditional data and voice products. Services in this segment utilize our wireless and wired network and are marketed to provide a complete communications solution to our business customers.
The Entertainment and Internet Services segment provides video, Internet and voice communication services to residential customers located in the U.S. or in U.S. territories. Services utilize our copper and IP-based wired network and/or our satellite technology to provide video, high speed Internet and voice services.
The Consumer Mobility segment provides nationwide wireless service to consumers, wholesale and resale subscribers located in the U.S. or in U.S. territories. Services utilize our U.S. wireless network to provide voice and data services, including high-speed Internet, video entertainment and home monitoring services.
The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided primarily to residential customers using satellite technology. Wireless services utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries transact in their local currency and operating results are converted to U.S. dollars using official exchange rates. The exchange rate used to report net monetary assets and operating results of our Venezuelan subsidiary is the Sistema Marginal de Divisas (SIMADI), which was 199.65 and 199.42 Venezuelan bolivars per U.S. dollar at July 24, 2015 and September 30, 2015, respectively. Our International segment is subject to foreign currency fluctuations.
In reconciling items to consolidated operating income, Corporate and Other includes: (1) operations that are not considered reportable segments and that are no longer integral to our operations or which we no longer actively market, and (2) impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.
Certain operating items are not allocated to our business segments:
·
|
Acquisition-related items include (1) operations and support items associated with the merger and integration of newly acquired businesses, and (2) the noncash amortization of intangible assets acquired in acquisitions.
|
·
|
Certain significant items include (1) noncash actuarial gains and losses from pension and other postretirement benefits, (2) employee separation charges associated with voluntary and/or strategic offers, (3) abandonment or impairments of assets and (4) other items for which the segments are not being evaluated.
|
12
AT&T INC.
SEPTEMBER 30, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are also not included in each segment's reportable results.
Our operating assets are shared by multiple segments and consist of our wireless and wired networks as well as an international satellite fleet. We manage our assets on a total company basis, not by operating segment, and therefore asset information and capital expenditures by operating segment are not presented. Depreciation is allocated based on network usage or asset utilization by segment.
13
AT&T INC.
SEPTEMBER 30, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
For the three months ended September 30, 2015
|
||||||||||||||||||||||||||||
Revenue
|
Operations
and Support
Expenses
|
EBITDA
|
Depreciation
and
Amortization
|
Operating
Income (Loss)
|
Equity in Net
Income (Loss) of
Affiliates
|
Segment
Contribution
|
||||||||||||||||||||||
Business Solutions
|
$
|
17,692
|
$
|
10,921
|
$
|
6,771
|
$
|
2,474
|
$
|
4,297
|
$
|
-
|
$
|
4,297
|
||||||||||||||
Entertainment and Internet Services
|
10,858
|
8,450
|
2,408
|
1,389
|
1,019
|
2
|
1,021
|
|||||||||||||||||||||
Consumer Mobility
|
8,784
|
5,065
|
3,719
|
976
|
2,743
|
-
|
2,743
|
|||||||||||||||||||||
International
|
1,526
|
1,384
|
142
|
225
|
(83
|
)
|
(4
|
)
|
(87
|
)
|
||||||||||||||||||
Segment Total
|
38,860
|
25,820
|
13,040
|
5,064
|
7,976
|
(2
|
)
|
7,974
|
||||||||||||||||||||
Corporate and Other
|
316
|
315
|
1
|
3
|
(2
|
)
|
||||||||||||||||||||||
Acquisition-related items
|
(85
|
)
|
611
|
(696
|
)
|
1,198
|
(1,894
|
)
|
||||||||||||||||||||
Certain significant items
|
-
|
157
|
(157
|
)
|
-
|
(157
|
)
|
|||||||||||||||||||||
AT&T Inc.
|
$
|
39,091
|
$
|
26,903
|
$
|
12,188
|
$
|
6,265
|
$
|
5,923
|
||||||||||||||||||
For the nine months ended September 30, 2015
|
||||||||||||||||||||||||||||
Revenue
|
Operations
and Support
Expenses
|
EBITDA
|
Depreciation
and
Amortization
|
Operating
Income (Loss)
|
Equity in Net
Income (Loss) of
Affiliates
|
Segment
Contribution
|
||||||||||||||||||||||
Business Solutions
|
$
|
52,913
|
$
|
32,966
|
$
|
19,947
|
$
|
7,276
|
$
|
12,671
|
$
|
-
|
$
|
12,671
|
||||||||||||||
Entertainment and Internet Services
|
22,300
|
18,222
|
4,078
|
3,519
|
559
|
(16
|
)
|
543
|
||||||||||||||||||||
Consumer Mobility
|
26,317
|
15,808
|
10,509
|
2,912
|
7,597
|
-
|
7,597
|
|||||||||||||||||||||
International
|
2,253
|
2,131
|
122
|
346
|
(224
|
)
|
(4
|
)
|
(228
|
)
|
||||||||||||||||||
Segment Total
|
103,783
|
69,127
|
34,656
|
14,053
|
20,603
|
(20
|
)
|
20,583
|
||||||||||||||||||||
Corporate and Other
|
984
|
785
|
199
|
47
|
152
|
|||||||||||||||||||||||
Acquisition-related items
|
(85
|
)
|
1,604
|
(1,689
|
)
|
1,439
|
(3,128
|
)
|
||||||||||||||||||||
Certain significant items
|
-
|
374
|
(374
|
)
|
-
|
(374
|
)
|
|||||||||||||||||||||
AT&T Inc.
|
$
|
104,682
|
$
|
71,890
|
$
|
32,792
|
$
|
15,539
|
$
|
17,253
|
14
AT&T INC.
SEPTEMBER 30, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
For the three months ended September 30, 2014
|
||||||||||||||||||||||||||||
Revenue
|
Operations
and Support
Expenses
|
EBITDA
|
Depreciation
and
Amortization
|
Operating
Income (Loss)
|
Equity in Net
Income (Loss) of
Affiliates
|
Segment
Contribution
|
||||||||||||||||||||||
Business Solutions
|
$
|
17,487
|
$
|
11,295
|
$
|
6,192
|
$
|
2,331
|
$
|
3,861
|
$
|
-
|
$
|
3,861
|
||||||||||||||
Entertainment and Internet Services
|
5,553
|
4,781
|
772
|
1,109
|
(337
|
)
|
-
|
(337
|
)
|
|||||||||||||||||||
Consumer Mobility
|
9,208
|
5,731
|
3,477
|
950
|
2,527
|
(1
|
)
|
2,526
|
||||||||||||||||||||
International
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
Segment Total
|
32,248
|
21,807
|
10,441
|
4,390
|
6,051
|
(1
|
)
|
6,050
|
||||||||||||||||||||
Corporate and Other
|
709
|
791
|
(82
|
)
|
24
|
(106
|
)
|
|||||||||||||||||||||
Acquisition-related items
|
-
|
213
|
(213
|
)
|
125
|
(338
|
)
|
|||||||||||||||||||||
Certain significant items
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||
AT&T Inc.
|
$
|
32,957
|
$
|
22,811
|
$
|
10,146
|
$
|
4,539
|
$
|
5,607
|
||||||||||||||||||
For the nine months ended September 30, 2014
|
||||||||||||||||||||||||||||
Revenue
|
Operations
and Support
Expenses
|
EBITDA
|
Depreciation
and
Amortization
|
Operating
Income (Loss)
|
Equity in Net
Income (Loss) of
Affiliates
|
Segment
Contribution
|
||||||||||||||||||||||
Business Solutions
|
$
|
51,877
|
$
|
32,836
|
$
|
19,041
|
$
|
7,009
|
$
|
12,032
|
$
|
-
|
$
|
12,032
|
||||||||||||||
Entertainment and Internet Services
|
16,640
|
14,182
|
2,458
|
3,396
|
(938
|
)
|
-
|
(938
|
)
|
|||||||||||||||||||
Consumer Mobility
|
27,247
|
17,173
|
10,074
|
2,846
|
7,228
|
(1
|
)
|
7,227
|
||||||||||||||||||||
International
|
-
|
-
|
-
|
-
|
-
|
153
|
153
|
|||||||||||||||||||||
Segment Total
|
95,764
|
64,191
|
31,573
|
13,251
|
18,322
|
152
|
18,474
|
|||||||||||||||||||||
Corporate and Other
|
2,244
|
2,027
|
217
|
77
|
140
|
|||||||||||||||||||||||
Acquisition-related items
|
-
|
403
|
(403
|
)
|
378
|
(781
|
)
|
|||||||||||||||||||||
Certain significant items
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||
AT&T Inc.
|
$
|
98,008
|
$
|
66,621
|
$
|
31,387
|
$
|
13,706
|
$
|
17,681
|
15
AT&T INC.
SEPTEMBER 30, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The following table is a reconciliation of operating income (loss) to "Income Before Income Taxes" reported on our consolidated statements of income.
|
||||||||||||||||
Third Quarter
|
Nine-Month Period
|
|||||||||||||||
2015
|
2014
|
2015
|
2014
|
|||||||||||||
Business Solutions
|
$
|
4,297
|
$
|
3,861
|
$
|
12,671
|
$
|
12,032
|
||||||||
Entertainment and Internet Services
|
1,021
|
(337
|
)
|
543
|
(938
|
)
|
||||||||||
Consumer Mobility
|
2,743
|
2,526
|
7,597
|
7,227
|
||||||||||||
International
|
(87
|
)
|
-
|
(228
|
)
|
153
|
||||||||||
Segment Contribution
|
7,974
|
6,050
|
20,583
|
18,474
|
||||||||||||
Reconciling Items:
|
||||||||||||||||
Corporate and Other
|
(2
|
)
|
(106
|
)
|
152
|
140
|
||||||||||
Merger and integration charges
|
(696
|
)
|
(213
|
)
|
(1,689
|
)
|
(403
|
)
|
||||||||
Amortization of intangibles acquired
|
(1,198
|
)
|
(125
|
)
|
(1,439
|
)
|
(378
|
)
|
||||||||
Employee separation charges
|
(122
|
)
|
-
|
(339
|
)
|
-
|
||||||||||
Other (expenses) credits
|
(35
|
)
|
-
|
(35
|
)
|
-
|
||||||||||
Less: segment equity in net (income) loss
of affiliates
|
2
|
1
|
20
|
(152
|
)
|
|||||||||||
AT&T Operating Income
|
5,923
|
5,607
|
17,253
|
17,681
|
||||||||||||
Interest Expense
|
1,146
|
1,016
|
2,977
|
2,757
|
||||||||||||
Equity in net income (loss) of affiliates
|
15
|
(2
|
)
|
48
|
188
|
|||||||||||
Other income (expense) - Net
|
(57
|
)
|
42
|
61
|
1,456
|
|||||||||||
Income Before Income Taxes
|
$
|
4,735
|
$
|
4,631
|
$
|
14,385
|
$
|
16,568
|
NOTE 5. PENSION AND POSTRETIREMENT BENEFITS
Substantially all of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental, life insurance, and death benefits to certain retired employees under various plans and accrue actuarially determined postretirement benefit costs. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits described in the plans to employees upon their retirement.
In December 2014, we offered an opportunity for certain management employees who were retirement eligible as of March 31, 2015 to elect an enhanced, full lump sum payment option of their accrued pension if they retired on or before March 31, 2015. The lump sum value totaled approximately $1,200 which was distributed in 2015. We recorded special termination benefits of approximately $150 as a result of this offer.
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 $8,838 at September 30, 2015. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly in equal amounts and accounted for as contributions. We distributed $420 to the trust during the nine months ended September 30, 2015. So long as we make the distributions, we will have no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan's separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation. We also agreed to make a cash contribution to the trust of $175 no later than the due date of our federal income tax return for 2014. This contribution was made in June 2015.
16
AT&T INC.
SEPTEMBER 30, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
We acquired DIRECTV on July 24, 2015. DIRECTV sponsors a noncontributory defined benefit pension plan, which provides benefits to most employees based on either years of service and final average salary, or eligible compensation while employed by DIRECTV. DIRECTV also maintains (1) a postretirement benefit plan for those retirees eligible to participate in health care and life insurance benefits generally until they reach age 65 and (2) an unfunded nonqualified pension plan for certain eligible employees. We have recorded the fair value of the DIRECTV plans using assumptions and accounting policies consistent with those disclosed by AT&T. Upon acquisition, the excess of projected benefit obligation over the plan assets was recognized as a liability and previously existing deferred actuarial gains and losses and unrecognized service costs or benefits were eliminated.
We recognize actuarial gains and losses on pension and postretirement plan assets in our operating results at our annual measurement date of December 31, unless earlier remeasurements are required. The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income; expense credits are denoted with parentheses. A portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded.
Three months ended
|
Nine months ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2015
|
2014
|
2015
|
2014
|
|||||||||||||
Pension cost:
|
||||||||||||||||
Service cost – benefits earned during the period
|
$
|
305
|
$
|
282
|
$
|
904
|
$
|
846
|
||||||||
Interest cost on projected benefit obligation
|
477
|
661
|
1,424
|
1,984
|
||||||||||||
Expected return on assets
|
(832
|
)
|
(849
|
)
|
(2,484
|
)
|
(2,549
|
)
|
||||||||
Amortization of prior service credit
|
(25
|
)
|
(24
|
)
|
(77
|
)
|
(71
|
)
|
||||||||
Net pension (credit) cost
|
$
|
(75
|
)
|
$
|
70
|
$
|
(233
|
)
|
$
|
210
|
||||||
Postretirement cost:
|
||||||||||||||||
Service cost – benefits earned during the period
|
$
|
55
|
$
|
59
|
$
|
166
|
$
|
175
|
||||||||
Interest cost on accumulated postretirement benefit obligation
|
242
|
365
|
725
|
1,094
|
||||||||||||
Expected return on assets
|
(105
|
)
|
(165
|
)
|
(315
|
)
|
(491
|
)
|
||||||||
Amortization of prior service credit
|
(320
|
)
|
(362
|
)
|
(959
|
)
|
(1,086
|
)
|
||||||||
Net postretirement (credit) cost
|
$
|
(128
|
)
|
$
|
(103
|
)
|
$
|
(383
|
)
|
$
|
(308
|
)
|
||||
Combined net pension and postretirement (credit) cost
|
$
|
(203
|
)
|
$
|
(33
|
)
|
$
|
(616
|
)
|
$
|
(98
|
)
|
Our combined net pension and postretirement cost decreased $170 in the third quarter and $518 for the first nine months of 2015. Our combined net pension and postretirement cost decreased $223 in the third quarter and $669 for the first nine months due to the change in the method used to estimate the service and interest components of net periodic benefit cost for pension and other postretirement benefits. While this change, which was made in the fourth quarter of 2014, provides a more precise measurement of interim service and interest costs, it will not affect the measurement of our total benefit obligations as of December 31 or our annual net periodic benefit cost as the change in the service and interest costs is completely offset in the actuarial gain or loss reported. The decrease in cost resulting from this change was partially offset by lower amortization of prior service credits as previous postretirement plan changes have become fully amortized, our lower expected long-term rate of return on our postretirement plan assets and updated assumed mortality rates.
We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. Net supplemental retirement pension benefits cost, which is not included in the table above, was $22 in the third quarter of 2015, of which $20 was interest cost, and $63 for the first nine months, of which $57 was interest cost. In 2014, net supplemental retirement pension benefits cost was $29 in the third quarter, of which $27 was interest cost, and $87 for the first nine months, of which $82 was interest cost.
17
AT&T INC.
SEPTEMBER 30, 2015
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. Valuation techniques used should maximize the use of observable inputs and minimize the use of unobservable inputs.
The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2014.
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities and other financial instruments, are summarized as follows:
September 30, 2015
|
December 31, 2014
|
||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
||||||||||||
Amount
|
Value
|
Amount
|
Value
|
||||||||||||
Notes and debentures
|
$
|
126,042
|
$
|
129,524
|
$
|
81,632
|
$
|
90,367
|
|||||||
Bank borrowings
|
4
|
4
|
5
|
5
|
|||||||||||
Investment securities
|
2,644
|
2,644
|
2,735
|
2,735
|
The carrying value of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.
18
AT&T INC.
SEPTEMBER 30, 2015
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 September 30, 2015 and December 31, 2014:
|
September 30, 2015
|
||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||
Available-for-Sale Securities
|
|||||||||||||||
Domestic equities
|
$
|
1,094
|
$
|
-
|
$
|
-
|
$
|
1,094
|
|||||||
International equities
|
561
|
-
|
-
|
561
|
|||||||||||
Fixed income bonds
|
-
|
737
|
-
|
737
|
|||||||||||
Asset Derivatives1
|
|||||||||||||||
Interest rate swaps
|
-
|
217
|
-
|
217
|
|||||||||||
Cross-currency swaps
|
-
|