UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

                                                       

	(Mark One)   x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the quarterly period ended March 31, 2017   or
	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

 

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AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
		March 31,				December 31,
		2017				2016
Assets		(Unaudited)
Current Assets
Cash and cash equivalents		$	14,884			$	5,788
Accounts receivable - net of allowances for doubtful accounts of $699 and $661			15,078				16,794
Prepaid expenses			1,418				1,555
Other current assets			14,347				14,232
Total current assets			45,727				38,369
Property, plant and equipment			319,108				319,648
Less: accumulated depreciation and amortization			(193,816	)			(194,749	)
Property, Plant and Equipment – Net			125,292				124,899
Goodwill			105,593				105,207
Licenses			94,617				94,176
Customer Lists and Relationships – Net			13,366				14,243
Other Intangible Assets – Net			8,295				8,441
Investments in Equity Affiliates			1,551				1,674
Other Assets			17,462				16,812
Total Assets		$	411,903			$	403,821
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year		$	12,681			$	9,832
Accounts payable and accrued liabilities			27,120				31,138
Advanced billing and customer deposits			4,493				4,519
Accrued taxes			3,384				2,079
Dividends payable			3,012				3,008
Total current liabilities			50,690				50,576
Long-Term Debt			120,568				113,681
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes			61,100				60,128
Postemployment benefit obligation			33,404				33,578
Other noncurrent liabilities			21,160				21,748
Total deferred credits and other noncurrent liabilities			115,664				115,454
Stockholders' Equity
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2017 and
December 31, 2016: issued 6,495,231,088 at March 31, 2017 and December 31, 2016)			6,495				6,495
Additional paid-in capital			89,411				89,604
Retained earnings			35,175				34,734
Treasury stock (347,741,277 at March 31, 2017 and 356,237,141
at December 31, 2016, at cost)			(12,400	)			(12,659	)
Accumulated other comprehensive income			5,160				4,961
Noncontrolling interest			1,140				975
Total stockholders' equity			124,981				124,110
Total Liabilities and Stockholders' Equity		$	411,903			$	403,821
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
		Three months ended
		March 31,
		2017				2016
Operating Activities
Net income		$	3,574			$	3,885
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			6,127				6,563
Undistributed loss (earnings) from investments in equity affiliates			182				(13	)
Provision for uncollectible accounts			393				374
Deferred income tax expense			480				1,346
Net loss (gain) from sale of investments, net of impairments			61				(44	)
Changes in operating assets and liabilities:
Accounts receivable			445				43
Other current assets			228				1,319
Accounts payable and other accrued liabilities			(1,778	)			(3,990	)
Equipment installment receivables and related sales			579				454
Deferred fulfillment costs			(436	)			(542	)
Retirement benefit funding			(140	)			(140	)
Other - net			(497	)			(1,355	)
Total adjustments			5,644				4,015
Net Cash Provided by Operating Activities			9,218				7,900
Investing Activities
Capital expenditures:
Purchase of property and equipment			(5,784	)			(4,451	)
Interest during construction			(231	)			(218	)
Acquisitions, net of cash acquired			(162	)			(165	)
Dispositions			6				81
Sale of securities, net			-				445
Net Cash Used in Investing Activities			(6,171	)			(4,308	)
Financing Activities
Net change in short-term borrowings with original maturities of three months or less			(1	)			-
Issuance of long-term debt			12,440				5,978
Repayment of long-term debt			(3,053	)			(2,296	)
Purchase of treasury stock			(177	)			-
Issuance of treasury stock			21				89
Dividends paid			(3,009	)			(2,947	)
Other			(172	)			471
Net Cash Provided by Financing Activities			6,049				1,295
Net increase in cash and cash equivalents			9,096				4,887
Cash and cash equivalents beginning of year			5,788				5,121
Cash and Cash Equivalents End of Period		$	14,884			$	10,008
Cash paid (received) during the three months ended March 31 for:
Interest		$	1,643			$	1,459
Income taxes, net of refunds		$	(160	)		$	477
See Notes to Consolidated Financial Statements.

 

AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
		March 31, 2017
		Shares				Amount
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						$	89,604
Issuance of treasury stock							4
Share-based payments							(197	)
Balance at end of period						$	89,411
Retained Earnings
Balance at beginning of year						$	34,734
Net income attributable to AT&T ($0.56 per diluted share)							3,469
Dividends to stockholders ($0.49 per share)							(3,030	)
Other							2
Balance at end of period						$	35,175
Treasury Stock
Balance at beginning of year			(356	)		$	(12,659	)
Repurchase and acquisition of common stock			(5	)			(200	)
Issuance of treasury stock			13				459
Balance at end of period			(348	)		$	(12,400	)
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
Balance at beginning of year						$	4,961
Other comprehensive income attributable to AT&T							199
Balance at end of period						$	5,160
Noncontrolling Interest
Balance at beginning of year						$	975
Net income attributable to noncontrolling interest							105
Distributions							(77	)
Acquisition of noncontrolling interest							131
Translation adjustments attributable to noncontrolling interest, net of taxes							6
Balance at end of period						$	1,140
Total Stockholders' Equity at beginning of year						$	124,110
Total Stockholders' Equity at end of period						$	124,981
See Notes to Consolidated Financial Statements.

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Dollars in millions except per share amounts

Basis of Presentation  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 consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates.

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 quarter of our period end. We also record our proportionate share of our equity method investees' other comprehensive income (OCI) items, including cumulative translation adjustments.

 

New Accounting Standards

Pension and Other Postretirement Benefits  In March 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-07, "Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" (ASU 2017-07), which changes the presentation of periodic benefit cost components. Under ASU 2017-07, we will continue to present service costs within our operating expenses but present amortization of prior service credits and other components of our net periodic benefit cost in "other income (expense)" in our consolidated statements of income. ASU 2017-07 is effective for annual reporting periods beginning after December 15, 2017. See Note 5 for our components of net periodic benefit cost.

Revenue Recognition  In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASC 606), and has modified the standard thereafter. This standard replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASC 606, as amended, becomes effective for annual reporting periods beginning after December 15, 2017, at which point we plan to adopt the standard using the "modified retrospective method." Under that method, we will apply the rules to all contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous accounting standards.
 

 

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, 2017 and 2016, is shown in the table below:

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Dollars in millions except per share amounts

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.

 

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Dollars in millions except per share amounts

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Dollars in millions except per share amounts

 

 

 

The following table is a reconciliation of Segment Contribution to "Income Before Income Taxes" reported on our consolidated statements of income.
		First Quarter
		2017				2016
Business Solutions		$	4,360			$	4,299
Entertainment Group			1,597				1,595
Consumer Mobility			2,339				2,494
International			(100	)			(184	)
Segment Contribution			8,196				8,204
Reconciling Items:
Corporate and Other			(27	)			(121	)
Merger and integration charges			(207	)			(295	)
Amortization of intangibles acquired			(1,202	)			(1,351	)
Employee separation costs			-				(25	)
Gain on wireless spectrum transactions			118				736
Segment equity in net (income) loss of affiliates			(14	)			(17	)
AT&T Operating Income			6,864				7,131
Interest expense			1,293				1,207
Equity in net income (loss) of affiliates			(173	)			13
Other income (expense) - net			(20	)			70
Income Before Income Taxes		$	5,378			$	6,007

 

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

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

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $8,426 at March 31, 2017. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly by AT&T Mobility II LLC to the trust, in equal amounts and accounted for as contributions. We distributed $140 to the trust during the three months ended March 31, 2017. So long as we make the distributions, we will have no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan's separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation.

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Dollars in millions except per share amounts

The decrease in the combined net pension and postretirement costs in the first quarter reflects higher amortization of prior service credits due to plan changes, including changes to future costs for continued retiree healthcare coverage. The reduction also reflects decreasing corporate bond rates, which contributed to lower interest costs.

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the first quarter ended 2017 and 2016, net supplemental pension benefits costs not included in the table above were $22 and $23.

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Dollars in millions except per share amounts

Following is the fair value leveling for available-for-sale securities and derivatives as of March 31, 2017 and December 31, 2016:

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Dollars in millions except per share amounts

Investment Securities

Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in "Other income (expense) – net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in "Other income (expense) – net" with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $236 have maturities of less than one year, $58 within one to three years, $47 within three to five years and $160 for five or more years.

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

Derivative Financial Instruments

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

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the three months ended March 31, 2017 and March 31, 2016, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.

 

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

 

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as "Other income (expense) – net" in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the three months ended March 31, 2017 and March 31, 2016, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) – net" in the consolidated statements of income. Over the next 12 months, we expect to reclassify $59 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) – net" in the consolidated statements of income. In the three months ended March 31, 2017 and March 31, 2016, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.

Collateral and Credit-Risk Contingency  We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At March 31, 2017, we had posted collateral of $2,846 (a deposit asset) and held no collateral. 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 $123. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- (S&P), we would have been required to post additional collateral of $246. At December 31, 2016, we had posted collateral of $3,242 (a deposit asset) and held no collateral. We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

Following are the notional amounts of our outstanding derivative positions:

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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.

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Subsequent and Pending Acquisitions

Time Warner Inc.  On October 22, 2016, we entered into and announced a merger agreement (Merger Agreement) to acquire Time Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately $85,400 at the date of the announcement (Merger). Combined with Time Warner's net debt at December 31, 2016, the total transaction value is approximately $108,200. Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a number of shares of AT&T common stock equal to the exchange ratio. If the average stock price (as defined in the Merger Agreement) at the time of closing the Merger is between (or equal to) $37.411 and $41.349 per share, the exchange ratio will be the quotient of $53.75 divided by the average stock price. If the average stock price is greater than $41.349, the exchange ratio will be 1.300. If the average stock price is less than $37.411, the exchange ratio will be 1.437. Post-transaction, Time Warner shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding. The cash portion of the purchase price will be financed with new debt and cash.

Time Warner is a global leader in media and entertainment whose major businesses encompass an array of some of the most respected and successful media brands. The deal combines Time Warner's vast library of content and ability to create new premium content for audiences around the world with our extensive customer relationships and distribution, one of the world's largest pay-TV subscriber bases and leading scale in TV, mobile and broadband distribution.

The Merger Agreement was approved by Time Warner shareholders on February 15, 2017 and remains subject to review by the U.S. Department of Justice. The Federal Communications Commission (FCC) has stated that it does not believe it will need to review the deal as no licenses are involved. It is also a condition to closing that necessary consents from foreign governmental entities must be obtained. The transaction is expected to close before year-end 2017. If the Merger is terminated as a result of reaching the termination date (and at that time one or more of the conditions relating to certain regulatory approvals have not been satisfied) or there is a final, non-appealable order preventing the transaction relating to antitrust laws, communications laws, utilities laws or foreign regulatory laws, then under certain circumstances, we would be obligated to pay Time Warner $500.

 

 

Auction 1000 On April 13, 2017, the FCC announced that we were the successful bidder for $910 of spectrum in 18 markets. We provided the FCC an initial deposit of $2,348 in July 2016 and received a refund of $1,438 in April 2017.

Other Events

 

NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES

We offer our customers the option to purchase certain wireless devices in installments over a period of up to 30 months and, in many cases, they have the right to trade in the original equipment for a new device within a set period and have the remaining unpaid balance satisfied. As of March 31, 2017 and December 31, 2016, gross equipment installment receivables of $4,119 and $5,665 were included on our consolidated balance sheets, of which $2,346 and $3,425 are notes receivable that are included in "Accounts receivable - net."

In 2014, we entered into an uncommitted agreement pertaining to the sale of equipment installment receivables and related security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under this agreement, we transferred certain receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. Since inception, cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $3,740.

The following table sets forth a summary of equipment installment receivables sold during the three months ended March 31, 2017 and 2016:

The deferred purchase price is initially recorded at estimated fair value, which is based on remaining installment payments expected to be collected, adjusted by the expected timing and value of device trade-ins, and subsequently carried at the lower of cost or net realizable value. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).
 

AT&T INC.

MARCH 31, 2017

 

At March 31, 2017 and December 31, 2016, our deferred purchase price receivable was $3,813 and $3,090, respectively, of which $2,049 and $1,606 are included in "Other current assets" on our consolidated balance sheets, with the remainder in "Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the amount of our deferred purchase price at any point in time.

The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate risk.

Derecognized Installment Receivables

The following table sets forth a summary of equipment installment receivables that were sold to Purchasers and are no longer considered our assets.

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Dollars in millions except per share and per subscriber amounts

AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements.

Consolidated Results  Our financial results in the first quarter of 2017 and 2016 are summarized as follows:

Overview

Operating revenues decreased $1,170, or 2.9%, in the first quarter of 2017.

Service revenues decreased $645, or 1.7%, in the first quarter of 2017. The decrease was primarily due to continued declines in legacy wireline voice and data products and lower wireless service revenues reflecting adoption of unlimited and Mobile Share plans. These were partially offset by increased revenues from video and strategic business services.

Equipment revenues decreased $525, or 15.3%, in the first quarter of 2017. The decrease was primarily due to lower wireless handset sales, driven by a low rate of customer device upgrades and strong Bring Your Own Device (BYOD) participation. Equipment revenue is becoming increasingly unpredictable as customers are choosing to upgrade devices less frequently or bring their own.

Operating expenses decreased $903, or 2.7%, in the first quarter of 2017.

Equipment expenses decreased $527, or 12.0%, in the first quarter of 2017. The decrease was driven by a decline in devices sold reflecting a change in customer buying habits.

Broadcast, programming and operations expenses increased $345, or 7.5%, in the first quarter of 2017, reflecting annual content cost increases.

 

 

Other cost of services expenses decreased $331, or 3.5%, in the first quarter of 2017. The decrease reflects our continued cost structure management and utilizing automation and digitalization where appropriate. Federal Universal Service Fund (USF) rates and fees were also lower when compared to the prior year. These expense declines were partially offset by higher handset insurance costs.

Selling, general and administrative expenses increased $46, or 0.5%, in the first quarter of 2017. Expenses include an increase of approximately $618 resulting from lower gains on wireless spectrum transactions in the first quarter of 2017 than in the comparable period of 2016. Offsetting this increase were lower advertising costs, decreased expenses for merger and integration-related activities and reductions from our disciplined cost management.

Depreciation and amortization expense decreased $436, or 6.6%, in the first quarter of 2017. Depreciation expense decreased $288, or 5.5%, in the first quarter. The decrease was primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage values of certain assets associated with our transition to an IP-based network, which accounted for $327 of the decrease. This decrease was partially offset by increases resulting from ongoing capital spending for upgrades and expansion.

Amortization expense decreased $148, or 11.0%, in the first quarter of 2017 due to lower amortization of intangibles for the customer lists associated with acquisitions.

Operating income decreased $267, or 3.7%, for the first quarter of 2017. Our operating income margin in the first quarter decreased from 17.6% in 2016 to 17.4% in 2017.

Interest expense increased $86, or 7.1%, in the first quarter of 2017. The increases were primarily due to higher average rates and debt balances when compared to the prior year.

Equity in net income of affiliates decreased $186 in the first quarter of 2017, predominantly from losses from our legacy publishing business, partially offset by income from our investments in video-related businesses.

Other income (expense) – net We had other expense of $20 in the first quarter of 2017 and other income of $70 in the first quarter of 2016. Results in the first quarter of 2017 included net losses on the sale of non-strategic assets and investments of $61 and interest and dividend income of $30.

Other income (expense) in the first quarter of 2016 included net gains on the sale of non-strategic assets and investments of $44 and interest and dividend income of $29.

Income taxes decreased $318, or 15.0%, in the first quarter of 2017. Our effective tax rate was 33.5% for the first quarter of 2017, as compared to 35.3% for the first quarter of 2016. The decrease in income tax expense and our effective tax rate for the first quarter of 2017 was primarily due to lower income before income taxes in 2017 and the recognition of tax benefits related to the restructuring of a portion of our wireless business.

 

Dollars in millions except per share and per subscriber amounts

¹ Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At December 31, 2016, SKY Mexico had 8.0 million subscribers.

² Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders' equity) and do not consider cash available to pay down debt. See our "Liquidity and Capital Resources" section for discussion.

³ Net debt ratios are calculated by deriving total debt (debt maturing within one year plus long-term debt) less cash available by total capital (total debt plus total stockholders' equity).

⁴ See Exhibit 12.

Segment Results

 

The Business Solutions segment provides services to business customers, including multinational companies; governmental and wholesale 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, collectively referred to as fixed strategic services; as well as traditional data and voice products. We utilize our wireless and wired networks to provide a complete integrated communications solution to our business customers.

 

The Entertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the United States or in U.S. territories. We utilize our copper and IP-based wired network and/or our satellite technology.

The Consumer Mobility segment provides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our networks to provide voice and data services, including high-speed internet, video and home monitoring services over wireless devices.

The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.

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Dollars in millions except per share and per subscriber amounts

Operating Revenues decreased $761, or 4.3%, in the first quarter of 2017. Revenue declines reflect technological shifts away from legacy products, as well as decreasing wireless equipment revenues resulting from changes in customer buying habits. Our second-quarter 2016 sale of certain hosting operations also negatively impacted revenue comparability. These decreases were partially offset by continued growth in wireless services and fixed strategic services, which represent 40% of non-wireless revenues.

Wireless service revenues increased $74, or 0.9%, in the first quarter of 2017. The revenue increase is primarily due to the migration of customers from our Consumer Mobility segment.

At March 31, 2017, we served 82.4 million subscribers, an increase of 8.7% from the prior year. Postpaid subscribers increased 4.1% from the prior year reflecting the addition of new customers as well as migrations from our Consumer Mobility segment, partially offset by continuing competitive pressures in the industry. Connected devices, which have lower average revenue per average subscriber (ARPU) and churn, increased 17.0% from the prior year reflecting growth in our connected car business and other data centric devices that utilize the network to connect and control physical devices using embedded computing systems and/or software, commonly called the Internet of Things (IoT).

 

 

The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. In the first quarter, business wireless postpaid churn increased to 1.07% in 2017 from 1.02% in 2016.

Fixed strategic services revenues increased $223, or 8.1%, in the first quarter of 2017. Our revenues increased in the first quarter of 2017 primarily due to: Ethernet of $73; Dedicated Internet services of $59; IP Broadband, Voice, and Video of $44; and VoIP of $43.

Legacy wired voice and data service revenues decreased $743, or 17.0%, in the first quarter of 2017. Legacy voice billings in the first quarter of 2017 decreased $402 and traditional data billings decreased $341. The decreases were primarily due to lower demand, as customers continue to shift to our more advanced IP-based offerings or to competitors, and the sale of certain hosting operations in 2016.

Wireless equipment revenues decreased $273, or 15.4%, in the first quarter of 2017. The decrease in the first quarter was primarily due to decreases in handset upgrades.

Operations and support expenses decreased $626, or 5.8%, in the first quarter of 2017. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.

Decreased operations and support expenses in the first quarter were primarily due to lower wireless equipment sales and upgrade transactions, which decreased equipment costs $248, and efforts to automate and digitize our support activities, which improved results approximately $170. Expense reductions also reflect lower USF rates, contributing to a $77 reduction in USF fees, and fewer traffic compensation and wireless interconnect costs, resulting in a $51 decline in access and interconnect costs.

Depreciation expense decreased $196, or 7.8%, in the first quarter of 2017. The decreases were primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain network assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated, partially offset by ongoing capital spending for network upgrades and expansion.

Operating income increased $61, or 1.4%, in the first quarter of 2017. Our Business Solutions segment operating income margin in the first quarter increased from 24.4% in 2016 to 25.9% in 2017. Our Business Solutions EBITDA margin in the first quarter increased from 38.7% in 2016 to 39.6% in 2017.