Company Announcements

1st Quarter Results 2017

Source: RNS
RNS Number : 0123G
AT & T Inc.
23 May 2017
 

 

 

 

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

 

 

 

       

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," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

[X]

 

Accelerated filer

[   ]

Non-accelerated filer

[   ]

(Do not check if a smaller reporting company)

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]

At April 30, 2017, there were 6,148 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,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

Operating Revenues

 

 

 

 

 

 

Service

 

$

36,456

 

 

$

37,101

 

Equipment

 

 

2,909

 

 

 

3,434

 

Total operating revenues

 

 

39,365

 

 

 

40,535

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

Cost of services and sales

 

 

 

 

 

 

 

 

   Equipment

 

 

3,848

 

 

 

4,375

 

   Broadcast, programming and operations

 

 

4,974

 

 

 

4,629

 

   Other cost of services (exclusive of depreciation and

         amortization shown separately below)

 

 

9,065

 

 

 

9,396

 

Selling, general and administrative

 

 

8,487

 

 

 

8,441

 

Depreciation and amortization

 

 

6,127

 

 

 

6,563

 

Total operating expenses

 

 

32,501

 

 

 

33,404

 

Operating Income

 

 

6,864

 

 

 

7,131

 

Other Income (Expense)

 

 

 

 

 

 

 

 

Interest expense

 

 

(1,293

)

 

 

(1,207

)

Equity in net income (loss) of affiliates

 

 

(173

)

 

 

13

 

Other income (expense) - net

 

 

(20

)

 

 

70

 

Total other income (expense)

 

 

(1,486

)

 

 

(1,124

)

Income Before Income Taxes

 

 

5,378

 

 

 

6,007

 

Income tax expense

 

 

1,804

 

 

 

2,122

 

Net Income

 

 

3,574

 

 

 

3,885

 

Less: Net Income Attributable to Noncontrolling Interest

 

 

(105

)

 

 

(82

)

Net Income Attributable to AT&T

 

$

3,469

 

 

$

3,803

 

Basic Earnings Per Share Attributable to AT&T

 

$

0.56

 

 

$

0.62

 

Diluted Earnings Per Share Attributable to AT&T

 

$

0.56

 

 

$

0.61

 

Weighted Average Number of Common Shares Outstanding - Basic (in millions)

 

 

6,166

 

 

 

6,172

 

Weighted Average Number of Common Shares Outstanding - with Dilution (in millions)

 

 

6,186

 

 

 

6,190

 

Dividends Declared Per Common Share

 

$

0.49

 

 

$

0.48

 

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

AT&T INC.

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

 

 

 

Dollars in millions

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Net income

 

$

3,574

 

 

$

3,885

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

    Foreign currency:

 

 

 

 

 

 

 

 

        Foreign currency translation adjustment (includes $6 and $0 attributable to

            noncontrolling interest), net of taxes of $391 and $(10)

 

 

372

 

 

 

(44

)

    Available-for-sale securities:

 

 

 

 

 

 

 

 

        Net unrealized gains (losses), net of taxes of $15 and $(15)

 

 

33

 

 

 

(26

)

        Reclassification adjustment included in net income, net of taxes of $3, and $(2)

 

 

5

 

 

 

(3

)

     Cash flow hedges:

 

 

 

 

 

 

 

 

        Net unrealized gains, net of taxes of $7 and $67

 

 

13

 

 

 

124

 

        Reclassification adjustment included in net income, net of taxes of $5 and $5

 

 

10

 

 

 

10

 

     Defined benefit postretirement plans:

 

 

 

 

 

 

 

 

        Amortization of net prior service credit included in net income, net of taxes of $(139)

            and $(131)

 

 

(228

)

 

 

(215

)

Other comprehensive income (loss)

 

 

205

 

 

 

(154

)

Total comprehensive income

 

 

3,779

 

 

 

3,731

 

Less: Total comprehensive income attributable to noncontrolling interest

 

 

(111

)

 

 

(82

)

Total Comprehensive Income Attributable to AT&T

 

$

3,668

 

 

$

3,649

 

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

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.

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

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.

 

 

5

 

 

 

 

 

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.

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. 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, 2016. The results for the interim periods are not necessarily indicative of those for the full year.

 

In the tables throughout this document, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period's presentation.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in millions except per share amounts

 

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

 

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.

 

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.

 

Recently Adopted Accounting Standards

Income Taxes  As of January 1, 2017, we adopted Accounting Standards Update (ASU) No. 2016-16, "Income Taxes (Topic 740)" (ASU 2016-16), with modified retrospective application, resulting in our recognition of an immaterial adjustment to retained earnings. Under ASU 2016-16, we recognize the income tax effects of the intercompany sales or transfers of assets other than inventory (e.g., intellectual property or property, plant and equipment) during the period of intercompany sale or transfer instead of the period of either the sale or transfer to a third party or recognition of depreciation or impairment.

 

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.

 

7

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

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 months ended March 31, 2017 and 2016, is shown in the table below:

 

 

Three months ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Numerators

 

 

 

 

 

 

Numerator for basic earnings per share:

 

 

 

 

 

 

   Net Income

 

$

3,574

 

 

$

3,885

 

   Less: Net income attributable to noncontrolling interest

 

 

(105

)

 

 

(82

)

   Net Income attributable to AT&T

 

 

3,469

 

 

 

3,803

 

   Dilutive potential common shares:

 

 

 

 

 

 

 

 

      Share-based payment

 

 

4

 

 

 

4

 

Numerator for diluted earnings per share

 

$

3,473

 

 

$

3,807

 

Denominators (000,000)

 

 

 

 

 

 

 

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

   Weighted average number of common shares outstanding

 

 

6,166

 

 

 

6,172

 

   Dilutive potential common shares:

 

 

 

 

 

 

 

 

      Share-based payment (in shares)

 

 

20

 

 

 

18

 

Denominator for diluted earnings per share

 

 

6,186

 

 

 

6,190

 

Basic earnings per share attributable to AT&T

 

$

0.56

 

 

$

0.62

 

Diluted earnings per share attributable to AT&T

 

$

0.56

 

 

$

0.61

 

 

8

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

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.

 

 

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, 2016

$

(1,995)

 

$

541

 

$

744

 

$

5,671

 

$

4,961

Other comprehensive income

   (loss) before reclassifications

 

366

 

 

33

 

 

13

 

 

-

 

 

412

Amounts reclassified

   from accumulated OCI

 

-

1  

 

5

1  

 

10

2  

 

(228)

3  

 

(213)

Net other comprehensive

   income (loss)

 

366

 

 

38

 

 

23

 

 

(228)

 

 

199

Balance as of March 31, 2017

$

(1,629)

 

$

579

 

$

767

 

$

5,443

 

$

5,160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2015

$

(1,198)

 

$

484

 

$

16

 

$

6,032

 

$

5,334

Other comprehensive income

   (loss) before reclassifications

 

(44)

 

 

(26)

 

 

124

 

 

-

 

 

54

Amounts reclassified

   from accumulated OCI

 

-

1  

 

(3)

1  

 

10

2  

 

(215)

3  

 

(208)

Net other comprehensive

   income (loss)

 

(44)

 

 

(29)

 

 

134

 

 

(215)

 

 

(154)

Balance as of March 31, 2016

$

(1,242)

 

$

455

 

$

150

 

$

5,817

 

$

5,180

 1 

 (Gains) losses are included in Other income (expense) - net in the consolidated statements of income.

 2 

 (Gains) losses are included in Interest expense in the consolidated statements of income. See Note 6 for additional information.

 3 

 The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction

 

 labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income

 

 (see Note 5).

                               

 

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 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) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.

 

We also evaluate segment performance based on EBITDA and/or EBITDA margin, which is defined as Segment 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 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. EBITDA margin is EBITDA divided by total revenues.

 

9

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued

Dollars in millions except per share amounts

 

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 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 network 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.

 

In reconciling items to consolidated operating income and income before income taxes, 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 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, and those include:

·

Acquisition-related items which consists of (1) items associated with the merger and integration of acquired businesses and (2) the noncash amortization of intangible assets acquired in acquisitions.

 

·

Certain significant items which consists of (1) noncash actuarial gains and losses from pension and other postretirement benefits, (2) employee separation charges associated with voluntary and/or strategic offers, (3) losses resulting from abandonment or impairment of assets and (4) other items for which the segments are not being evaluated.

 

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

 

Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as our satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by segment, and, therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment.

 

10

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued

Dollars in millions except per share amounts

 

 

For the three months ended March 31, 2017

 

 

 

Revenues

 

 

Operations

and Support

Expenses

 

 

EBITDA

 

 

Depreciation

and

Amortization

 

 

Operating

Income (Loss)

 

 

Equity in Net

Income (Loss) of

Affiliates

 

 

Segment

Contribution

 

 

Business Solutions

 

$

16,848

 

 

$

10,176

 

 

$

6,672

 

 

$

2,312

 

 

$

4,360

 

 

$

-

 

 

$

4,360

 

 

Entertainment Group

 

 

12,623

 

 

 

9,601

 

 

 

3,022

 

 

 

1,419

 

 

 

1,603

 

 

 

(6

)

 

 

1,597

 

 

Consumer Mobility

 

 

7,740

 

 

 

4,528

 

 

 

3,212

 

 

 

873

 

 

 

2,339

 

 

 

-

 

 

 

2,339

 

 

International

 

 

1,929

 

 

 

1,759

 

 

 

170

 

 

 

290

 

 

 

(120

)

 

 

20

 

 

 

(100

)

 

Segment Total

 

 

39,140

 

 

 

26,064

 

 

 

13,076

 

 

 

4,894

 

 

 

8,182

 

 

$

14

 

 

$

8,196

 

 

Corporate and Other

 

 

225

 

 

 

221

 

 

 

4

 

 

 

31

 

 

 

(27

)

 

 

 

 

 

 

 

 

 

Acquisition-related items

 

 

-

 

 

 

207

 

 

 

(207

)

 

 

1,202

 

 

 

(1,409

)

 

 

 

 

 

 

 

 

 

Certain significant items

 

 

-

 

 

 

(118

)

 

 

118

 

 

 

-

 

 

 

118

 

 

 

 

 

 

 

 

 

 

AT&T Inc.

 

$

39,365

 

 

$

26,374

 

 

$

12,991

 

 

$

6,127

 

 

$

6,864

 

 

 

 

 

 

 

 

 

 

                                                             

 

For the three months ended March 31, 2016

 

 

 

Revenues

 

 

Operations

and Support

Expenses

 

 

EBITDA

 

 

Depreciation

and

Amortization

 

 

Operating

Income (Loss)

 

 

Equity in Net

Income (Loss) of

Affiliates

 

 

Segment

Contribution

 

 

Business Solutions

 

$

17,609

 

 

$

10,802

 

 

$

6,807

 

 

$

2,508

 

 

$

4,299

 

 

$

-

 

 

$

4,299

 

 

Entertainment Group

 

 

12,658

 

 

 

9,578

 

 

 

3,080

 

 

 

1,488

 

 

 

1,592

 

 

 

3

 

 

 

1,595

 

 

Consumer Mobility

 

 

8,328

 

 

 

4,912

 

 

 

3,416

 

 

 

922

 

 

 

2,494

 

 

 

-

 

 

 

2,494

 

 

International

 

 

1,667

 

 

 

1,588

 

 

 

79

 

 

 

277

 

 

 

(198

)

 

 

14

 

 

 

(184

)

 

Segment Total

 

 

40,262

 

 

 

26,880

 

 

 

13,382

 

 

 

5,195

 

 

 

8,187

 

 

$

17

 

 

$

8,204

 

 

Corporate and Other

 

 

273

 

 

 

377

 

 

 

(104

)

 

 

17

 

 

 

(121

)

 

 

 

 

 

 

 

 

 

Acquisition-related items

 

 

-

 

 

 

295

 

 

 

(295

)

 

 

1,351

 

 

 

(1,646

)

 

 

 

 

 

 

 

 

 

Certain significant items

 

 

-

 

 

 

(711

)

 

 

711

 

 

 

-

 

 

 

711

 

 

 

 

 

 

 

 

 

 

AT&T Inc.

 

$

40,535

 

 

$

26,841

 

 

$

13,694

 

 

$

6,563

 

 

$

7,131

 

 

 

 

 

 

 

 

 

 

                                                             

 

11

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued

Dollars in millions except per share amounts

 

The following table is a reconciliation of Segment Contribution to "Income Before Income Taxes" reported on our consolidated statements of income.

 

 

 

 

 

 

 

 

 

 

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.

 

We recognize actuarial gains and losses on pension and postretirement plan assets in our operating results at our annual measurement date of December 31, unless earlier remeasurements are required. The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income. A portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded. Service costs and prior service credits are reported in our segment results while interest costs and expected return on plan assets are included with Corporate and Other (see Note 4).

 

12

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued

Dollars in millions except per share amounts

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Pension cost:

 

 

 

 

 

 

   Service cost - benefits earned during the period

 

$

282

 

 

$

278

 

   Interest cost on projected benefit obligation

 

 

484

 

 

 

495

 

   Expected return on assets

 

 

(783

)

 

 

(778

)

   Amortization of prior service credit

 

 

(31

)

 

 

(26

)

   Net pension (credit) cost

 

$

(48

)

 

$

(31

)

 

 

 

 

 

 

 

 

 

Postretirement cost:

 

 

 

 

 

 

 

 

   Service cost - benefits earned during the period

 

$

41

 

 

$

48

 

   Interest cost on accumulated postretirement benefit obligation

 

 

222

 

 

 

243

 

   Expected return on assets

 

 

(80

)

 

 

(89

)

   Amortization of prior service credit

 

 

(336

)

 

 

(319

)

   Net postretirement (credit) cost

 

$

(153

)

 

$

(117

)

 

 

 

 

 

 

 

 

 

   Combined net pension and postretirement (credit) cost

 

$

(201

)

 

$

(148

)

 

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.

 

NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE

 

The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

Level 1

Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access.

 

 

Level 2

Inputs to the valuation methodology include:

 

·

Quoted prices for similar assets and liabilities in active markets.

 

·

Quoted prices for identical or similar assets or liabilities in inactive markets.

 

·

Inputs other than quoted market prices that are observable for the asset or liability.

 

·

Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

 

Level 3

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

·

Fair value is often based on developed models in which there are few, if any, external observations.

 

The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.

 

13

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued

Dollars in millions except per share amounts

 

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2016.

 

Long-Term Debt and Other Financial Instruments

The carrying amounts and estimated fair values of our long-term debt, including current maturities, and other financial instruments, are summarized as follows:

 

March 31, 2017

 

December 31, 2016

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

Amount

 

Value

 

Amount

 

Value

 

Notes and debentures 1

 

$

132,379

 

 

$

138,944

 

 

$

122,381

 

 

$

128,726

 

Bank borrowings

 

 

3

 

 

 

3

 

 

 

4

 

 

 

4

 

Investment securities

 

 

2,640

 

 

 

2,640

 

 

 

2,587

 

 

 

2,587

 

1 Includes credit agreement borrowings.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

 

March 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Available-for-Sale Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

   Domestic equities

 

$

1,253

 

 

$

-

 

 

$

-

 

 

$

1,253

 

 

   International equities

 

 

639

 

 

 

-

 

 

 

-

 

 

 

639

 

 

   Fixed income bonds

 

 

-

 

 

 

501

 

 

 

-

 

 

 

501

 

 

Asset Derivatives1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Interest rate swaps

 

 

-

 

 

 

62

 

 

 

-

 

 

 

62

 

 

   Cross-currency swaps

 

 

-

 

 

 

235

 

 

 

-

 

 

 

235

 

 

Liability Derivatives1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Interest rate swaps

 

 

-

 

 

 

(20

)

 

 

-

 

 

 

(20

)

 

   Cross-currency swaps

 

 

-

 

 

 

(3,635

)

 

 

-

 

 

 

(3,635

)

 

1 Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.  

 

14

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued

Dollars in millions except per share amounts

 

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Available-for-Sale Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

   Domestic equities

 

$

1,215

 

 

$

-

 

 

$

-

 

 

$

1,215

 

 

   International equities

 

 

594

 

 

 

-

 

 

 

-

 

 

 

594

 

 

   Fixed income bonds

 

 

-

 

 

 

508

 

 

 

-

 

 

 

508

 

 

Asset Derivatives1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Interest rate swaps

 

 

-

 

 

 

79

 

 

 

-

 

 

 

79

 

 

   Cross-currency swaps

 

 

-

 

 

 

89

 

 

 

-

 

 

 

89

 

 

Liability Derivatives1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Interest rate swaps

 

 

-

 

 

 

(14

)

 

 

-

 

 

 

(14

)

 

   Cross-currency swaps

 

 

-

 

 

 

(3,867

)

 

 

-

 

 

 

(3,867

)

 

Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.   

                                     

 

Investment Securities

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

 

15

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued

Dollars in millions except per share amounts

 

Cash Flow Hedging  We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro, British pound sterling, Canadian dollar and Swiss franc denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency 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:

 

March 31,

 

December 31,

 

 

2017

 

2016

 

Interest rate swaps

 

$

10,450

 

 

$

9,650

 

Cross-currency swaps

 

 

29,642

 

 

 

29,642

 

Total

 

$

40,092

 

 

$

39,292

 

 

16

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued

Dollars in millions except per share amounts

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Effect of Derivatives on the Consolidated Statements of Income

 

 

 

 

 

 

 

 

Fair Value Hedging Relationships

Three months ended

 

 

March 31,

 

 

 

2017

 

2016

 

 

 

 

Interest rate swaps (Interest expense):

 

 

 

 

 

 

 

 

 

     Gain (Loss) on interest rate swaps

 

$

(25

)

 

$

66

 

 

 

 

     Gain (Loss) on long-term debt

 

 

25

 

 

 

(66

)

 

 

 

 

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

2017

 

2016

 

Cross-currency swaps:

 

 

 

 

 

 

     Gain (Loss) recognized in accumulated OCI

 

$

20

 

 

$

191

 

Interest rate locks:

 

 

 

 

 

 

 

 

     Interest income (expense) reclassified from accumulated OCI into income

 

 

(15

)

 

 

(15

)

 

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.

 

17

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued

Dollars in millions except per share amounts

 

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

FirstNet  On March 30, 2017, the First Responder Network Authority (FirstNet) announced its selection of AT&T to build and manage the first nationwide broadband network dedicated to America's first responders. FirstNet expects to provide 20 MHz of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states electing to participate in FirstNet. We do not expect FirstNet to materially impact our 2017 results given the timing of the state opt-in process.

 

 

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:

 

Three months ended

 

 

March 31,

 

 

2017

 

2016

 

Gross receivables sold

 

$

2,846

 

 

$

2,482

 

Net receivables sold 1

 

 

2,621

 

 

 

2,256

 

Cash proceeds received

 

 

1,432

 

 

 

1,521

 

Deferred purchase price recorded

 

 

1,189

 

 

 

719

 

1 Receivables net of allowance, imputed interest and trade-in right guarantees. 

 

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

 

18

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued

Dollars in millions except per share amounts

 

The following table shows the equipment installment receivables, previously sold to the Purchasers, which we repurchased in exchange for the associated deferred purchase price during the three months ended March 31, 2017 and 2016:

 

Three months ended

 

 

March 31,

 

 

2017

 

2016

 

Fair value of repurchased receivables

 

$

377

 

 

$

532

 

Carrying value of deferred purchase price

 

 

339

 

 

 

539

 

Gain (loss) on repurchases 1

 

$

38

 

 

$

(7

)

1 These gains (losses) are included in "Selling, general and administrative" in the consolidated statements of income. 

 

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.

 

 

2017

 

Outstanding derecognized receivables at January 1,

 

$

7,232

 

Gross receivables sold

 

 

2,846

 

Collections on cash purchase price

 

 

(1,128

)

Collections on deferred purchase price

 

 

(185

)

Fees

 

 

(23

)

Trade ins and other

 

 

(73

)

Fair value of repurchased receivables

 

 

(377

)

Outstanding derecognized receivables at March 31,

 

$

8,292

 

 

19

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share and per subscriber amounts

 

RESULTS OF OPERATIONS

 

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

 

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

         

 

 

First Quarter

 

 

 

2017

 

 

2016

 

 

Percent Change

 

 

Operating Revenues

 

 

 

 

 

 

 

 

 

   Service

 

$

36,456

 

 

$

37,101

 

 

 

(1.7

)%

   Equipment

 

 

2,909

 

 

 

3,434

 

 

 

(15.3

)

Total Operating Revenues

 

 

39,365

 

 

 

40,535

 

 

 

(2.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

   Cost of services and sales

 

 

 

 

 

 

 

 

 

 

 

 

      Equipment

 

 

3,848

 

 

 

4,375

 

 

 

(12.0

)

      Broadcast, programming and operations

 

 

4,974

 

 

 

4,629

 

 

 

7.5

 

      Other cost of services

 

 

9,065

 

 

 

9,396

 

 

 

(3.5

)

   Selling, general and administrative

 

 

8,487

 

 

 

8,441

 

 

 

0.5

 

   Depreciation and amortization

 

 

6,127

 

 

 

6,563

 

 

 

(6.6

)

Total Operating Expenses

 

 

32,501

 

 

 

33,404

 

 

 

(2.7

)

Operating Income

 

 

6,864

 

 

 

7,131

 

 

 

(3.7

)

Income Before Income Taxes

 

 

5,378

 

 

 

6,007

 

 

 

(10.5

)

Net Income

 

 

3,574

 

 

 

3,885

 

 

 

(8.0

)

Net Income Attributable to AT&T

 

$

3,469

 

 

$

3,803

 

 

 

(8.8

)%

 

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.

 

20

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

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.

 

21

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

 

Selected Financial and Operating Data

 

 

 

 

 

 

 

 

March 31,

 

Subscribers and connections in (000s)

 

2017

 

 

2016

 

Domestic wireless subscribers

 

 

134,218

 

 

 

130,445

 

Mexican wireless subscribers

 

 

12,606

 

 

 

9,213

 

North American wireless subscribers

 

 

146,824

 

 

 

139,658

 

 

 

 

 

 

 

 

 

 

North American branded subscribers

 

 

103,532

 

 

 

98,158

 

North American branded net additions

 

 

738

 

 

 

1,195

 

 

 

 

 

 

 

 

 

 

Domestic satellite video subscribers

 

 

21,012

 

 

 

20,112

 

AT&T U-verse® (U-verse) video subscribers

 

 

4,048

 

 

 

5,260

 

Latin America satellite video subscribers 1

 

 

13,678

 

 

 

12,436

 

Total video subscribers

 

 

38,738

 

 

 

37,808

 

 

 

 

 

 

 

 

 

 

Total domestic broadband connections

 

 

15,695

 

 

 

15,764

 

 

 

 

 

 

 

 

 

 

Network access lines in service

 

 

13,363

 

 

 

15,975

 

U-verse VoIP connections

 

 

5,858

 

 

 

5,484

 

 

 

 

 

 

 

 

 

 

Debt ratio 2

 

 

51.6

%

 

 

51.2

%

Net debt ratio 3

 

 

45.8

%

 

 

47.3

%

Ratio of earnings to fixed charges 4

 

 

3.80

 

 

 

4.22

 

Number of AT&T employees

 

 

264,530

 

 

 

280,870

 

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

 

Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our segments based on Segment 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. We have four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.

 

We also evaluate segment performance based on EBITDA and/or EBITDA margin, which is defined as Segment 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.

 

22

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

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.

 

Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as an international satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by segment, and therefore asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment.

         

Business Solutions

 

 

 

 

 

 

 

 

 

Segment Results

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

 

 

2017

 

 

2016

 

 

Percent Change

 

 

Segment operating revenues

 

 

 

 

 

 

 

 

 

     Wireless service

 

$

7,929

 

 

$

7,855

 

 

 

0.9

%

     Fixed strategic services

 

 

2,974

 

 

 

2,751

 

 

 

8.1

 

     Legacy voice and data services

 

 

3,630

 

 

 

4,373

 

 

 

(17.0

)

     Other service and equipment

 

 

817

 

 

 

859

 

 

 

(4.9

)

     Wireless equipment

 

 

1,498

 

 

 

1,771

 

 

 

(15.4

)

Total Segment Operating Revenues

 

 

16,848

 

 

 

17,609

 

 

 

(4.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

     Operations and support

 

 

10,176

 

 

 

10,802

 

 

 

(5.8

)

     Depreciation and amortization

 

 

2,312

 

 

 

2,508

 

 

 

(7.8

)

Total Segment Operating Expenses

 

 

12,488

 

 

 

13,310

 

 

 

(6.2

)

Segment Operating Income

 

 

4,360

 

 

 

4,299

 

 

 

1.4

 

Equity in Net Income of Affiliates

 

 

-

 

 

 

-

 

 

 

-

 

Segment Contribution

 

$

4,360

 

 

$

4,299

 

 

 

1.4

%

 

23

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

The following tables highlight other key measures of performance for the Business Solutions segment:

 

 

March 31,

 

 

 

 

(in 000s)

 

2017

 

 

2016

 

 

Percent Change

 

Business Wireless Subscribers

 

 

 

 

 

 

 

 

 

   Postpaid/Branded

 

 

50,839

 

 

 

48,844

 

 

 

4.1

%

   Reseller

 

 

76

 

 

 

64

 

 

 

18.8

 

   Connected devices 1

 

 

31,439

 

 

 

26,863

 

 

 

17.0

 

Total Business Wireless Subscribers

 

 

82,354

 

 

 

75,771

 

 

 

8.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business IP Broadband Connections

 

 

980

 

 

 

928

 

 

 

5.6

%

Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets. 

 

      

 

 

First Quarter

 

 

 

 

 

2017

 

 

2016

 

 

 

 

 

(in 000s)

Percent Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business Wireless Net Additions 1, 4

 

 

 

 

 

 

 

 

 

 

 

 

 

   Postpaid/Branded

 

 

(125

)

 

 

133

 

 

 

-

%

 

 

 

 

 

   Reseller

 

 

6

 

 

 

(22

)

 

 

-

 

 

 

 

 

 

   Connected devices 2

 

 

2,553

 

 

 

1,578

 

 

 

61.8

 

 

 

 

 

 

Business Wireless Net Subscriber Additions

 

 

2,434

 

 

 

1,689

 

 

 

44.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business Wireless Postpaid Churn1, 3, 4

 

 

1.07

%

 

 

1.02

%

5 BP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business IP Broadband Net Additions

 

 

4

 

 

 

17

 

 

 

(76.5

)%

 

 

 

 

 

1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period. 

 

 

 

 

2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.

 

 

 

 

 

3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period.  

 

 

 

 

4 2017 excludes the impact of the 2G shutdown, which was reflected in beginning of period subscribers.

 

 

 

 

 

 

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).

 

24

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

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.

25

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

         

Entertainment Group

 

Segment Results

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

 

 

2017

 

 

2016

 

 

Percent Change

 

 

Segment operating revenues

 

 

 

 

 

 

 

 

 

     Video entertainment

 

$

9,020

 

 

$

8,904

 

 

 

1.3

%

     High-speed internet

 

 

1,941

 

 

 

1,803

 

 

 

7.7

 

     Legacy voice and data services

 

 

1,056

 

 

 

1,313

 

 

 

(19.6

)

     Other service and equipment

 

 

606

 

 

 

638

 

 

 

(5.0

)

Total Segment Operating Revenues

 

 

12,623

 

 

 

12,658

 

 

 

(0.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

     Operations and support

 

 

9,601

 

 

 

9,578

 

 

 

0.2

 

     Depreciation and amortization

 

 

1,419

 

 

 

1,488

 

 

 

(4.6

)

Total Segment Operating Expenses

 

 

11,020

 

 

 

11,066

 

 

 

(0.4

)

Segment Operating Income

 

 

1,603

 

 

 

1,592

 

 

 

0.7

 

Equity in Net Income (Loss) of Affiliates

 

 

(6

)

 

 

3

 

 

 

-

 

Segment Contribution

 

$

1,597

 

 

$

1,595

 

 

 

0.1

%

 

The following tables highlight other key measures of performance for the Entertainment Group segment:

 

 

March 31,

 

 

 

 

(in 000s)

 

2017

 

 

2016

 

 

Percent Change

 

Linear Video Connections

 

 

 

 

 

 

 

 

 

   Satellite

 

 

21,012

 

 

 

20,112

 

 

 

4.5

%

   U-verse

 

 

4,020

 

 

 

5,232

 

 

 

(23.2

)

Total Linear Video Connections

 

 

25,032

 

 

 

25,344

 

 

 

(1.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Broadband Connections

 

 

 

 

 

 

 

 

 

 

 

 

   IP

 

 

13,130

 

 

 

12,542

 

 

 

4.7

 

   DSL

 

 

1,164

 

 

 

1,749

 

 

 

(33.4

)

Total Broadband Connections

 

 

14,294

 

 

 

14,291

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Consumer Switched Access Lines

 

 

5,533

 

 

 

6,888

 

 

 

(19.7

)

U-verse Consumer VoIP Connections

 

 

5,470

 

 

 

5,225

 

 

 

4.7

 

Total Retail Consumer Voice Connections

 

 

11,003

 

 

 

12,113

 

 

 

(9.2

)%

 

26

 

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

         

 

 

First Quarter

 

 

 

2017

 

 

2016

 

 

Percent Change

 

(in 000s)

Linear Video Net Additions 1

 

 

 

 

 

 

 

 

 

   Satellite

 

 

-

 

 

 

328

 

 

 

-

%

   U-verse

 

 

(233

)

 

 

(382

)

 

 

39.0

 

Linear Net Video Additions

 

 

(233

)

 

 

(54

)

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Broadband Net Additions

 

 

 

 

 

 

 

 

 

 

 

 

   IP

 

 

242

 

 

 

186

 

 

 

30.1

 

   DSL

 

 

(127

)

 

 

(181

)

 

 

29.8

 

Net Broadband Additions

 

 

115

 

 

 

5

 

 

 

-

%

1 Includes disconnections for customers that migrated to DIRECTV NOW. 

 

Operating revenues decreased $35, or 0.3%, in the first quarter of 2017, largely due to lower revenues from legacy voice and data products, substantially offset by growth in revenues from consumer IP broadband and satellite video services.

 

As consumers continue to demand more mobile access to video, we provide streaming access to our subscribers, including mobile access for existing satellite and U-verse subscribers. In November 2016, we launched DIRECTV NOW, our newest video streaming option that does not require either satellite or U-verse service (commonly called over-the-top video service).

 

Video entertainment revenues increased $116, or 1.3%, in the first quarter of 2017, primarily due to a 1.8% increase in average revenue per linear video connection. Our continued focus on satellite service and the lower marginal content costs associated with those subscribers contributed to increased video revenue. However, this strategy contributed to lower U-verse video revenue and connections. More than 80% of our linear video subscribers are on the DIRECTV platform. Our decline in linear video connections for the first quarter of 2017 reflects, in part, the migration of satellite customers to DIRECTV NOW. Churn rose for subscribers with linear video only service, partially reflecting annual content cost increases.

 

High-speed internet revenues increased $138, or 7.7%, in the first quarter of 2017. When compared to 2016, IP broadband subscribers increased 4.7%, to 13.1 million subscribers at March 31, 2017, reflecting higher IP broadband net additions. Also contributing to higher revenues was a 3.3% increase in average revenue per IP broadband connection.

 

To compete more effectively against other broadband providers, we continued to deploy our all-fiber, high-speed wireline network, which has improved customer retention rates in those areas.

 

Legacy voice and data service revenues decreased $257, or 19.6%, in the first quarter of 2017. For the quarter ended March 31, 2017, legacy voice and data services represented approximately 8% of our total Entertainment Group revenue compared to 10% at March 31, 2016, and reflect decreases of $174 in local voice and long-distance, and $83 in traditional data billings. The decreases reflect the continued migration of customers to our more advanced IP-based offerings or to competitors. At March 31, 2017, approximately 8% of our broadband connections were DSL compared to 12% at March 31, 2016.

 

Operations and support expenses increased $23, or 0.2%, in the first quarter of 2017. Operations and support expenses consist of costs associated with providing video content, and expenses incurred to provide our products and services, which include costs of operating and maintaining our networks, as well as personnel charges for compensation and benefits.

 

Increased operations and support expenses were primarily due to annual content cost increases and the impact of storms and flooding on the West Coast in 2017. Partially offsetting these increases was the impact of our ongoing focus on cost efficiencies and merger synergies, lower employee-related expenses resulting from workforce reductions and lower advertising costs.

27

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

Depreciation expense decreased $69, or 4.6%, in the first quarter of 2017. The decrease was primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated assets. These decreases were offset by ongoing capital spending for network upgrades and expansion.

 

Operating income increased $11, or 0.7%, in the first quarter of 2017. Our Entertainment Group segment operating income margin in the first quarter increased from 12.6% in 2016 to 12.7% in 2017. Our Entertainment Group segment EBITDA margin in the first quarter decreased from 24.3% in 2016 to 23.9% in 2017.

 

         

Consumer Mobility

 

 

 

 

 

 

 

 

 

Segment Results

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

 

 

2017

 

 

2016

 

 

Percent Change

 

 

Segment operating revenues

 

 

 

 

 

 

 

 

 

     Service

 

$

6,609

 

 

$

6,943

 

 

 

(4.8

)%

     Equipment

 

 

1,131

 

 

 

1,385

 

 

 

(18.3

)

Total Segment Operating Revenues

 

 

7,740

 

 

 

8,328

 

 

 

(7.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

     Operations and support

 

 

4,528

 

 

 

4,912

 

 

 

(7.8

)

     Depreciation and amortization

 

 

873

 

 

 

922

 

 

 

(5.3

)

Total Segment Operating Expenses

 

 

5,401

 

 

 

5,834

 

 

 

(7.4

)

Segment Operating Income

 

 

2,339

 

 

 

2,494

 

 

 

(6.2

)

Equity in Net Income of Affiliates

 

 

-

 

 

 

-

 

 

 

-

 

Segment Contribution

 

$

2,339

 

 

$

2,494

 

 

 

(6.2

)%

 

The following tables highlight other key measures of performance for the Consumer Mobility segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

(in 000s)

 

2017

 

 

2016

 

 

Percent Change

 

 

Consumer Mobility Subscribers

 

 

 

 

 

 

 

 

 

 

   Postpaid

 

 

26,510

 

 

 

28,294

 

 

 

(6.3

)%

 

   Prepaid

 

 

13,844

 

 

 

12,171

 

 

 

13.7

 

 

Branded

 

 

40,354

 

 

 

40,465

 

 

 

(0.3

)

 

Reseller

 

 

10,549

 

 

 

13,313

 

 

 

(20.8

)

 

Connected devices 1

 

 

961

 

 

 

896

 

 

 

7.3

 

 

Total Consumer Mobility Subscribers

 

 

51,864

 

 

 

54,674

 

 

 

(5.1

)%

 

1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets. 

 

28

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts  

        

 

 

First Quarter

 

 

 

2017

 

 

2016

 

Percent Change

 

(in 000s)

Consumer Mobility Net Additions 1, 4

 

 

 

 

 

 

 

 

   Postpaid

 

 

(66

)

 

 

(4

)

 

 

-

%

   Prepaid

 

 

282

 

 

 

500

 

 

 

(43.6

)

Branded Net Additions

 

 

216

 

 

 

496

 

 

 

(56.5

)

Reseller

 

 

(588

)

 

 

(378

)

 

 

(55.6

)

Connected devices 2

 

 

19

 

 

 

(26

)

 

 

-

 

Consumer Mobility Net Subscriber Additions

 

 

(353

)

 

 

92

 

 

 

-

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Churn 1, 3, 4

 

 

2.42

%

 

 

2.11

%

31 BP

 

Postpaid Churn 1, 3, 4

 

 

1.22

%

 

 

1.24

%

(2) BP

 

1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.

 

2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.

 

3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate  for each month of that period.

 

4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which were reflected in beginning of period subscribers.

 

 

Operating Revenues decreased $588, or 7.1%, in the first quarter of 2017. Decreased revenues reflect declines in postpaid service revenues due to customers migrating to our Business Solutions segment and choosing unlimited and Mobile Share plans, partially offset by higher prepaid service revenues. Our business wireless offerings allow for individual subscribers to purchase wireless services through employer-sponsored plans for a reduced price. The migration of these subscribers to the Business Solutions segment negatively impacted our consumer postpaid subscriber total and service revenue growth.

 

Service revenue decreased $334, or 4.8%, in the first quarter of 2017. The decrease was largely due to the migration of subscribers to Business Solutions and postpaid customers continuing to shift to discounted monthly service charges under our unlimited and Mobile Share plans. Revenues from postpaid customers declined $507, or 9.9%, in the first quarter of 2017. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 5.4%. The decreases were partially offset by higher prepaid service revenues of $239, or 18.4%, primarily from growth in Cricket subscribers.

 

Equipment revenue decreased $254, or 18.3%, in the first quarter of 2017. The decrease in equipment revenues resulted from lower handset sales and upgrades. As previously discussed, equipment revenue is becoming increasingly unpredictable as customers are choosing to upgrade devices less frequently or bring their own.

 

Operations and support expenses decreased $384, or 7.8%, 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 expenses, such as compensation and benefits.

 

Decreased operations and support expenses were primarily due to lower volumes of wireless equipment sales and upgrades, which decreased equipment costs $257. Also contributing to the declines were increased operational efficiencies and lower marketing and advertising costs resulting from the timing of scheduled ad campaigns and integrated advertising.

 

Depreciation expense decreased $49, or 5.3%, in the first quarter of 2017. The decrease was primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion.

 

Operating income decreased $155, or 6.2%, in the first quarter of 2017. Our Consumer Mobility segment operating income margin in the first quarter increased from 29.9% in 2016 to 30.2% in 2017. Our Consumer Mobility EBITDA margin in the first quarter increased from 41.0% in 2016 to 41.5% in 2017.

 

29

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

International

 

 

 

 

 

 

 

 

 

Segment Results

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

 

 

2017

 

 

2016

 

 

Percent Change

 

Segment operating revenues

 

 

 

 

 

 

 

 

 

     Video entertainment

 

$

1,341

 

 

$

1,130

 

 

 

18.7

%

     Wireless service

 

 

475

 

 

 

455

 

 

 

4.4

 

     Wireless equipment

 

 

113

 

 

 

82

 

 

 

37.8

 

Total Segment Operating Revenues

 

 

1,929

 

 

 

1,667

 

 

 

15.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

     Operations and support

 

 

1,759

 

 

 

1,588

 

 

 

10.8

 

     Depreciation and amortization

 

 

290

 

 

 

277

 

 

 

4.7

 

Total Segment Operating Expenses

 

 

2,049

 

 

 

1,865

 

 

 

9.9

 

Segment Operating Income (Loss)

 

 

(120

)

 

 

(198

)

 

 

39.4

 

Equity in Net Income (Loss) of Affiliates

 

 

20

 

 

 

14

 

 

 

42.9

 

Segment Contribution

 

$

(100

)

 

$

(184

)

 

 

45.7

%

 

The following tables highlight other key measures of performance for the International segment:

(in 000s)

 

First Quarter

 

 

 

2017

 

 

2016

 

 

Percent Change

 

Mexican Wireless Subscribers

 

 

 

 

 

 

 

 

 

   Postpaid

 

 

5,095

 

 

 

4,404

 

 

 

15.7

%

   Prepaid

 

 

7,244

 

 

 

4,445

 

 

 

63.0

 

Branded

 

 

12,339

 

 

 

8,849

 

 

 

39.4

 

Reseller

 

 

267

 

 

 

364

 

 

 

(26.6

)

Total Mexican Wireless Subscribers

 

 

12,606

 

 

 

9,213

 

 

 

36.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Latin America Satellite Subscribers

 

 

 

 

 

 

 

 

 

 

 

 

   PanAmericana

 

 

8,090

 

 

 

7,094

 

 

 

14.0

 

   SKY Brazil 1

 

 

5,588

 

 

 

5,342

 

 

 

4.6

 

Total Latin America Satellite Subscribers

 

 

13,678

 

 

 

12,436

 

 

 

10.0

%

Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. SKY Mexico had 8.0 million subscribers at December 31, 2016 and 7.7 million subscribers at March 31, 2016.  

 

30

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

 

 

First Quarter

 

(in 000s)

 

2017

 

 

2016

 

 

Percent Change

 

Mexican Wireless Net Additions

 

 

 

 

 

 

 

 

 

   Postpaid

 

 

130

 

 

 

116

 

 

 

12.1

%

   Prepaid

 

 

517

 

 

 

450

 

 

 

14.9

 

Branded Net Additions

 

 

647

 

 

 

566

 

 

 

14.3

 

Reseller

 

 

(14

)

 

 

(37

)

 

 

62.2

 

Mexican Wireless Net Subscriber Additions

 

 

633

 

 

 

529

 

 

 

19.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Latin America Satellite Net Additions 1

 

 

 

 

 

 

 

 

 

 

 

 

   PanAmericana

 

 

52

 

 

 

28

 

 

 

85.7

 

   SKY Brazil

 

 

39

 

 

 

(101

)

 

 

-

 

Latin America Satellite Net Subscriber Additions2

 

 

91

 

 

 

(73

)

 

 

-

%

In 2017, we updated the methodology used to account for prepaid video connections. The impact of this change is excluded. 

SKY Mexico had net subscriber additions of 100,000 for the quarter ended December 31, 2016, and 398,000 for the quarter ended March 31, 2016.  

 

Operating Results

Our International segment consists of the Latin American operations acquired with DIRECTV as well as our Mexican wireless operations. Video entertainment services are provided to primarily residential customers using satellite technology. 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.

 

Operating revenues increased $262, or 15.7%, in the first quarter of 2017. The increase in the first quarter includes $211, or 18.7%, from video services in Latin America driven by price increases and favorable foreign currency exchange rates. Mexico wireless revenues increased $51, or 9.5%, in the first quarter of 2017, primarily due to an increase in our subscriber base and higher equipment sales offset by lower ARPU (average revenue per average wireless subscriber) and foreign currency pressure.

 

Operations and support expenses increased $171, or 10.8%, 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 providing video content and personnel expenses, such as compensation and benefits. The increase in expenses is primarily due to higher programming and other operating costs in Latin America, and favorable foreign currency exchange rates.

 

Depreciation expense increased $13, or 4.7%, in the first quarter of 2017. The increase was primarily due to updating the estimated asset lives for video equipment in Latin America.

 

Operating income increased $78, or 39.4%, in the first quarter of 2017. Our International segment operating income margin in the first quarter increased from (11.9)% in 2016 to (6.2)% in 2017. Our International EBITDA margin in the first quarter increased from 4.7% in 2016 to 8.8% in 2017.

 

31

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

Supplemental Operating Information

As a supplemental discussion of our operating results, for comparison purposes, we are providing a view of our combined domestic wireless operations (AT&T Mobility). See "Discussion and Reconciliation of Non-GAAP Measure" for a reconciliation of these supplemental measures to the most directly comparable financial measures calculated and presented in accordance with U.S. generally accepted accounting principles.

         

AT&T Mobility Results

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

 

 

2017

 

 

2016

 

 

Percent Change

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

   Service

 

$

14,538

 

 

$

14,798

 

 

 

(1.8

)%

   Equipment

 

 

2,629

 

 

 

3,156

 

 

 

(16.7

)

Total Operating Revenues

 

 

17,167

 

 

 

17,954

 

 

 

(4.4

)

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

   Operations and support

 

 

9,998

 

 

 

10,624

 

 

 

(5.9

)

EBITDA

 

 

7,169

 

 

 

7,330

 

 

 

(2.2

)

   Depreciation and amortization

 

 

1,997

 

 

 

2,056

 

 

 

(2.9

)

Total Operating Expenses

 

 

11,995

 

 

 

12,680

 

 

 

(5.4

)

Operating Income

 

$

5,172

 

 

$

5,274

 

 

 

(1.9

)%

 

   

The following tables highlight other key measures of performance for AT&T Mobility:

 

 

 

 

 

 

 

First Quarter

 

 

Percent Change

 

 

(in 000s)

 

2017

 

 

2016

 

 

Wireless Subscribers 1

 

 

 

 

 

 

 

 

 

 

   Postpaid smartphones

 

 

59,025

 

 

 

58,258

 

 

 

1.3

%

 

   Postpaid feature phones and data-centric devices

 

 

18,324

 

 

 

18,880

 

 

 

(2.9

)

 

Postpaid

 

 

77,349

 

 

 

77,138

 

 

 

0.3

 

 

Prepaid

 

 

13,844

 

 

 

12,171

 

 

 

13.7

 

 

Branded

 

 

91,193

 

 

 

89,309

 

 

 

2.1

 

 

Reseller

 

 

10,625

 

 

 

13,378

 

 

 

(20.6

)

 

Connected devices 2

 

 

32,400

 

 

 

27,758

 

 

 

16.7

 

 

Total Wireless Subscribers

 

 

134,218

 

 

 

130,445

 

 

 

2.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Branded Smartphones

 

 

71,274

 

 

 

68,271

 

 

 

4.4

 

 

Smartphones under our installment programs at end of period

 

 

31,583

 

 

 

28,548

 

 

 

10.6

%

 

Represents 100% of AT&T Mobility wireless subscribers. 

Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets. 

 

32

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

        

 

 

 

 

 

 

First Quarter

 

 

 

2017

 

 

2016

 

Percent Change

 

(in 000s)

Wireless Net Additions 1, 4

 

 

 

 

 

 

 

 

   Postpaid

 

 

(191

)

 

 

129

 

 

 

-

%

   Prepaid

 

 

282

 

 

 

500

 

 

 

(43.6

)

Branded Net Additions

 

 

91

 

 

 

629

 

 

 

(85.5

)

Reseller

 

 

(582

)

 

 

(400

)

 

 

(45.5

)

Connected devices 2

 

 

2,572

 

 

 

1,552

 

 

 

65.7

 

Wireless Net Subscriber Additions

 

 

2,081

 

 

 

1,781

 

 

 

16.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Smartphones sold under our installment programs during period

 

 

3,501

 

 

 

4,135

 

 

 

(15.3

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Churn 3, 4

 

 

1.46

%

 

 

1.42

%

4 BP

 

Branded Churn 3, 4

 

 

1.71

%

 

 

1.63

%

8 BP

 

Postpaid Churn 3, 4

 

 

1.12

%

 

 

1.10

%

2 BP

 

Postpaid Phone Only Churn 3, 4

 

 

0.90

%

 

 

0.96

%

(6) BP

 

1 Excludes acquisition-related additions during the period.

 

2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.

 

3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for each month of that period.

 

4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which were reflected in beginning of period subscribers.

 

 

Operating income decreased $102, or 1.9%, in the first quarter of 2017. The first-quarter operating income margin of AT&T Mobility increased from 29.4% in 2016 to 30.1% in 2017. AT&T Mobility's first-quarter EBITDA margin increased from 40.8% in 2016 to 41.8% in 2017. AT&T Mobility's first-quarter EBITDA service margin decreased from 49.5% in 2016 to 49.3% in 2017 (EBITDA service margin is operating income before depreciation and amortization, divided by total service revenues.)

 

Subscriber Relationships

As the wireless industry continues to mature, future wireless growth will become increasingly dependent on our ability to offer innovative services, plans and devices and a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. To attract and retain subscribers in a maturing market, we have launched a wide variety of plans, including unlimited and Mobile Share, as well as equipment installment programs. Beginning in the first quarter of 2017, we expanded our unlimited wireless data plans to make them available to customers that do not subscribe to our video services.

 

ARPU

Postpaid phone-only ARPU was $58.09 and postpaid phone-only ARPU plus equipment installment billings was $68.81 for the first quarter of 2017, compared to $59.53 and $69.54 in 2016.

 

Churn

The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total churn and postpaid churn were higher for the first quarter of 2017, reflecting higher tablets churn. Postpaid phone only churn was lower in the first quarter of 2017 despite competitive pressure in the industry.

 

33

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

Branded Subscribers

Branded subscribers decreased 0.1% in the first quarter of 2017 when compared to December 31, 2016 and increased 2.1% when compared to March 31, 2016. The sequential decrease reflects a 0.6% decline in postpaid subscribers partially offset by a 2.3% increase in prepaid subscribers. The year-over-year increase includes increases of 0.3% and 13.7% in postpaid and prepaid subscribers, respectively.

 

At March 31, 2017, 91% of our postpaid phone subscriber base used smartphones, compared to 88% at March 31, 2016. Virtually all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. Device connections on our Mobile Share and unlimited wireless data plans now represent 85% of our postpaid customer base, compared to 81% at March 31, 2016. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers and/or minimize subscriber churn.

 

Our equipment installment purchase programs, including AT&T Next, allow for postpaid subscribers to purchase certain devices in installments over a period of up to 30 months. Additionally, after a specified period of time, AT&T Next subscribers also have the right to trade in the original device for a new device with a new installment plan and have the remaining unpaid balance satisfied. For installment programs, we recognize equipment revenue at the time of the sale for the amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest. A significant percentage of our customers choosing equipment installment programs pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers. At March 31, 2017, about 54% of the postpaid smartphone base is on an equipment installment program compared to 49% at March 31, 2016. Of the postpaid smartphone gross adds and upgrades during the first quarter of 2017, 92% were either equipment installment plans or BYOD, compared to 91% in 2016. While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins.

 

Connected Devices

Connected Devices includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Connected device subscribers increased 2.6% during the first quarter when compared to December 31, 2016 and 16.7% when compared to March 31, 2016. During the first quarter of 2017, we added approximately 1.6 million "connected" cars through agreements with various carmakers, and experienced strong growth in other IoT connections as well. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.

 

OTHER BUSINESS MATTERS

 

Time Warner Inc. Acquisition  In October 2016, we announced an 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). 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. The cash portion of the purchase price will be financed with new debt and cash. The transaction remains subject to review by the U.S. Department of Justice, but is expected to close before year-end 2017. See Note 7 for additional details of the transaction and "Liquidity" for a discussion of our financing arrangements.

 

Straight Path Communications Acquisition  As announced on April 10, 2017, we offered to acquire Straight Path Communications, Inc. (Straight Path), which holds a nationwide portfolio of millimeter wave spectrum, including 39 GHz and 28 GHz licenses. Subsequent to our agreement, Straight Path received a proposal from an unsolicited bidder. The process is ongoing at the time of this filing.

 

FirstNet  On March 30, 2017, the First Responder Network Authority (FirstNet) announced its selection of AT&T to build and manage the first nationwide broadband network dedicated to America's first responders. FirstNet expects to provide 20 MHz of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout. We expect to spend about $40,000 over the life of the 25-year contract to build, deploy, operate and maintain the network. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states electing to participate in FirstNet. We do not expect FirstNet to materially impact our 2017 results given the timing of the state opt-in process.

 

34

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

Litigation Challenging DIRECTV's NFL SUNDAY TICKET  More than two dozen putative class actions were filed in the U.S. District Courts for the Central District of California and the Southern District of New York against DIRECTV and the National Football League (NFL). These cases were brought by residential and commercial DIRECTV subscribers that have purchased NFL SUNDAY TICKET. The plaintiffs allege that (i) the 32 NFL teams have unlawfully agreed not to compete with each other in the market for nationally televised NFL football games and instead have "pooled" their broadcasts and assigned to the NFL the exclusive right to market them; and (ii) the NFL and DIRECTV have entered into an unlawful exclusive distribution agreement that allows DIRECTV to charge "supra-competitive" prices for the NFL SUNDAY TICKET package. The complaints seek unspecified treble damages and attorneys' fees along with injunctive relief. The first complaint, Abrahamian v. National Football League, Inc., et al., was served in June 2015. In December 2015, the Judicial Panel on Multidistrict Litigation transferred the cases outside the Central District of California to that court for consolidation and management of pre-trial proceedings. In June 2016, the plaintiffs filed a consolidated amended complaint. We vigorously dispute the allegations the complaints have asserted. In August 2016, DIRECTV filed a motion to compel arbitration and the NFL defendants filed a motion to dismiss the complaint. The court held a hearing on both motions on February 13, 2017. The court has not yet ruled.

 

SportsNet LA Litigation  On November 2, 2016, the U.S. Department of Justice filed a civil antitrust complaint in federal court (Central District of California) against DIRECTV Group Holdings, LLC and AT&T Inc., as successor in interest to DIRECTV, alleging that DIRECTV, in 2014, unlawfully exchanged strategic information with certain competitors in connection with negotiations with SportsNet LA about carrying the Los Angeles Dodgers games. The complaint alleges that DIRECTV's conduct violated Section 1 of the Sherman Act. The complaint seeks a declaration that DIRECTV's conduct unlawfully restrained trade and seeks an injunction (1) barring DIRECTV and AT&T from engaging in unlawful information sharing in connection with future negotiations for video programming distribution, (2) requiring DIRECTV and AT&T to monitor relevant communications between their executives and competitors and to periodically report to the Department of Justice, and (3) requiring DIRECTV and AT&T to implement training and compliance programs. The complaint asks that the government be awarded its litigation costs. We vigorously dispute these allegations. On March 23, 2017, the parties advised the court that they have finalized a settlement to resolve the case.

 

Federal Trade Commission Litigation Involving DIRECTV In March 2015, the Federal Trade Commission (FTC) filed a civil suit in the U.S. District Court for the Northern District of California against DIRECTV seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act and Section 4 of the Restore Online Shoppers' Confidence Act. The FTC's allegations concern DIRECTV's advertising, marketing and sale of programming packages. The FTC alleges that DIRECTV did not adequately disclose all relevant terms. We vigorously dispute these allegations. On April 4, 2017, we reported to the court that we had reached a written settlement with the FTC Bureau of Consumer Protection. Commission approval is still required. The court scheduled trial to begin on August 14, 2017, if Commission approval has not been secured by that date.

 

Unlimited Data Plan Claims  In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The FTC's allegations concern the application of AT&T's Maximum Bit Rate (MBR) program to customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces in certain instances the download speeds of a small portion of our legacy Unlimited Data Plan customers each month after the customer exceeds a designated amount of data during the customer's billing cycle. MBR is an industry-standard practice that is designed to affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media posts, internet browsing and many other applications are typically unaffected. Contrary to the FTC's allegations, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers. In March 2015, our motion to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court granted our motion to certify its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit subsequently granted our petition to accept the appeal, and on August 29, 2016, issued its decision reversing the district court and finding that the FTC lacked jurisdiction to proceed with the action. The FTC has asked the Court of Appeals to reconsider the decision but the Court has not ruled on that request. In addition to the FTC case, several class actions have been filed also challenging our MBR program. We vigorously dispute the allegations the complaints have asserted.

 

35

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

In June 2015, the FCC issued a Notice of Apparent Liability and Order (NAL) to AT&T Mobility, LLC concerning our MBR policy that applies to Unlimited Data Plan customers described above. The NAL alleges that we violated the FCC's Open Internet Transparency Rule by using the term "unlimited" in connection with the offerings subject to the MBR policy and by failing adequately to disclose the speed reductions that apply once a customer reaches a specified data threshold. The NAL proposes a forfeiture penalty of $100, and further proposes to order us to correct any misleading and inaccurate statements about our unlimited plans, inform customers of the alleged violation, revise our disclosures to address the alleged violation and inform these customers that they may cancel their plans without penalty after reviewing the revised disclosures. In July 2015, we filed our response to the NAL. We believe that the NAL is unlawful and should be withdrawn, because we have fully complied with the Open Internet Transparency Rule and the FCC has no authority to impose the proposed remedies. The matter is currently pending before the FCC.

 

Labor Contracts As of March 31, 2017, we employed approximately 265,000 persons. Approximately 48% of our employees are represented by the Communications Workers of America, the International Brotherhood of Electrical Workers or other unions. After expiration of the agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached. 

 

A summary of labor contract negotiations, by region or employee group, is as follows:

·

Approximately 20,000 traditional wireline employees in the Southwest ratified a new contract in April 2017. The new contract will expire in April 2021.

 

·

Approximately 5,000 traditional wireline employees primarily in the Midwest are covered by a contract that expires in June 2017. In April, we reached a tentative agreement on a new five-year contract that is subject to ratification.

 

·

Approximately 20,000 mobility employees across the country are covered by contracts that expired in early 2017. We continue to negotiate with labor representatives.

 

·

Approximately 15,000 traditional wireline employees in our West region are covered by contracts that expired in April 2016. We continue to negotiate with labor representatives.

 

·

Approximately 11,000 former DIRECTV employees were eligible for and chose union representation. Bargaining has resulted in approximately 80% of these employees now being covered under ratified contracts that expire between 2017 and 2021.

 

 

36

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

COMPETITIVE AND REGULATORY ENVIRONMENT

 

Overview  AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided.

 

In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. Since the Telecom Act was passed, the Federal Communications Commission (FCC) and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. However, based on their public statements and written opinions, we expect the new leadership at the FCC to chart a more predictable and balanced regulatory course that will encourage long-term investment and benefit consumers. In addition, we are pursuing, at both the state and federal levels, additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers, including initiatives to transition services from traditional networks to all IP-based networks. At the same time, we also seek to ensure that legacy regulations are not further extended to broadband or wireless services, which are subject to vigorous competition.

 

In March 2017, the FCC circulated a draft order proposing to significantly reduce regulation of the bulk data connections that telecom companies provide to businesses otherwise known as special access services or business data services. That order, which was adopted on April 20, 2017, maintains light touch pricing regulation of packet-based services, largely eliminates pricing regulation of high-speed TDM transport services, and establishes a competitive market test for granting pricing flexibility for other TDM services. For those services that do not meet the competitive test, the order allows companies to offer volume and term discounts, as well as contract tariffs. The order establishes a period of permissive detariffing with a date certain for mandatory detariffing in all areas that meet the competitive market test.

 

In January 2017, the FCC removed from its list of active proceedings proposed rules on cable set-top boxes.

 

In October 2016, a sharply divided FCC adopted new rules governing the use of customer information by providers of broadband internet access service. Those rules were more restrictive in certain respects than those governing other participants in the internet economy, including so-called "edge" providers such as Google and Facebook. On April 3, 2017, the President signed a resolution passed by Congress repealing the new rules under the Congressional Review Act, which prohibits the issuance of a new rule that is substantially the same as a rule repealed under its provisions, or the reissuance of the repealed rule, unless the new or reissued rule is specifically authorized by a subsequent act of Congress.

 

In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to comprehensive regulation under the Telecom Act. The FCC's decision significantly expanded its existing authority to regulate the provision of fixed and mobile broadband internet access services. On April 26, 2017, the FCC announced that, in May 2017, it will initiate a proceeding to reverse its 2015 decision to classify broadband internet access services as telecommunications services. On a separate track, AT&T and other providers of broadband internet access services challenged the FCC's decision before the U.S. Court of Appeals for the D.C. Circuit. In June 2016, a panel of the Court of Appeals upheld the FCC's rules by a 2-1 vote. In July 2016, AT&T and several of the other parties that challenged the rules filed petitions with the Court of Appeals asking that the case be reheard either by the panel or by the full Court of Appeals. On May 1, 2017, those rehearing petitions were rejected by the D.C. Circuit. Parties now have 90 days from issuance of that decision to determine whether to seek review by the U.S. Supreme Court. The outcome of the April 26, 2017 FCC proceedings could influence the court rulings.

 

We provide satellite video service through our subsidiary DIRECTV, whose satellites are licensed by the FCC. The Communications Act of 1934 and other related acts give the FCC broad authority to regulate the U.S. operations of DIRECTV. In addition, states representing a majority of our local service access lines have adopted legislation that enables us to provide IP-based service through a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or even thousands of municipal-approved franchises) to offer a competitive video product. We also are supporting efforts to update and improve regulatory treatment for our services. Regulatory reform and passage of legislation is uncertain and depends on many factors.

 

37

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

We provide wireless services in robustly competitive markets, but are subject to substantial governmental regulation. Wireless communications providers must obtain licenses from the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of the spectrum. While wireless communications providers' prices and offerings are generally not subject to state regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer protection.

 

The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. government to make more spectrum available. The FCC finished its most recent auction in April 2017 of certain spectrum that is currently used by broadcast television licensees (the "600 MHz Auction").

 

On March 30, 2017, FirstNet announced that it awarded AT&T the contract for constructing and operating the nationwide public safety broadband network. The actual reach of the network will depend on participation by the individual states.

 

In May 2014, the FCC issued an order revising its policies governing mobile spectrum holdings. The FCC rejected the imposition of caps on the amount of spectrum any carrier could acquire, retaining its case-by-case review policy. Moreover, it increased the amount of spectrum that could be acquired before exceeding an aggregation "screen" that would automatically trigger closer scrutiny of a proposed transaction. On the other hand, it indicated that it will separately consider an acquisition of "low band" spectrum that exceeds one-third of the available low band spectrum as presumptively harmful to competition. The spectrum screen (including the low band screen) recently increased by 23 MHz. On balance, the order and the spectrum screen should allow AT&T to obtain additional spectrum to meet our customers' needs.

 

As the wireless industry continues to mature, future wireless growth will become increasingly dependent on our ability to offer innovative video and data services and a wireless network that has sufficient spectrum and capacity to support these innovations. We continue to invest significant capital in expanding our network capacity, as well as to secure and utilize spectrum that meets our long-term needs. To that end, we have:

·

Submitted winning bids for 251 AWS spectrum licenses for a near-nationwide contiguous block of high-quality AWS spectrum in the AWS-3 Auction.

 

·

Redeployed spectrum previously used for basic 2G services to support more advanced mobile internet services on our 3G and 4G networks.

 

·

Secured the FirstNet contract, which provides us with access to a nationwide low band 20 MHz of spectrum, assuming all states opt in.

 

·

Invested in 5G and millimeter-wave technologies with our in-process acquisition of Fiber Tower Corporation, which holds significant amounts of spectrum in the millimeter wave bands (28 GHz and 39 GHz) that the FCC recently reallocated for mobile broadband services. These bands will help to accelerate our entry into 5G services.

 

38

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURE

 

We believe the following measure is relevant and useful information to investors as it is used by management as a method of comparing performance with that of many of our competitors. This supplemental measure should be considered in addition to, but not as a substitute of, our consolidated and segment financial information.

 

Supplemental Operational Measure

We provide a supplemental discussion of our domestic wireless operations that is calculated by combining our Consumer Mobility and Business Solutions segments, and then adjusting to remove non-wireless operations. The following table presents a reconciliation of our supplemental AT&T Mobility results.

Supplemental Operational Measure

 

 

 

Three Months Ended

 

 

 

March 31, 2017

 

 

March 31, 2016

 

 

 

Consumer Mobility

 

 

Business Solutions

 

 

Adjustments1

 

 

AT&T Mobility

 

 

Consumer Mobility

 

 

Business Solutions

 

 

Adjustments1

 

 

AT&T Mobility

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Wireless service

 

$

6,609

 

 

$

7,929

 

 

$

-

 

 

$

14,538

 

 

$

6,943

 

 

$

7,855

 

 

$

-

 

 

$

14,798

 

 

   Fixed strategic services

 

 

-

 

 

 

2,974

 

 

 

(2,974

)

 

 

-

 

 

 

-

 

 

 

2,751

 

 

 

(2,751

)

 

 

-

 

 

   Legacy voice and data services

 

 

-

 

 

 

3,630

 

 

 

(3,630

)

 

 

-

 

 

 

-

 

 

 

4,373

 

 

 

(4,373

)

 

 

-

 

 

   Other service and equipment

 

 

-

 

 

 

817

 

 

 

(817

)

 

 

-

 

 

 

-

 

 

 

859

 

 

 

(859

)

 

 

-

 

 

   Wireless equipment

 

 

1,131

 

 

 

1,498

 

 

 

-

 

 

 

2,629

 

 

 

1,385

 

 

 

1,771

 

 

 

-

 

 

 

3,156

 

 

Total Operating Revenues

 

 

7,740

 

 

 

16,848

 

 

 

(7,421

)

 

 

17,167

 

 

 

8,328

 

 

 

17,609

 

 

 

(7,983

)

 

 

17,954

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Operations and support

 

 

4,528

 

 

 

10,176

 

 

 

(4,706

)

 

 

9,998

 

 

 

4,912

 

 

 

10,802

 

 

 

(5,090

)

 

 

10,624

 

 

EBITDA

 

 

3,212

 

 

 

6,672

 

 

 

(2,715

)

 

 

7,169

 

 

 

3,416

 

 

 

6,807

 

 

 

(2,893

)

 

 

7,330

 

 

   Depreciation and amortization

 

 

873

 

 

 

2,312

 

 

 

(1,188

)

 

 

1,997

 

 

 

922

 

 

 

2,508

 

 

 

(1,374

)

 

 

2,056

 

 

Total Operating Expenses

 

 

5,401

 

 

 

12,488

 

 

 

(5,894

)

 

 

11,995

 

 

 

5,834

 

 

 

13,310

 

 

 

(6,464

)

 

 

12,680

 

 

Operating Income

 

$

2,339

 

 

$

4,360

 

 

$

(1,527

)

 

$

5,172

 

 

$

2,494

 

 

$

4,299

 

 

$

(1,519

)

 

$

5,274

 

 

1 Non-wireless (fixed) operations reported in Business Solutions segment.

 

                                                                     

 

39

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

LIQUIDITY AND CAPITAL RESOURCES

 

We had $14,884 in cash and cash equivalents available at March 31, 2017. Cash and cash equivalents included cash of $3,307 and money market funds and other cash equivalents of $11,577. Approximately $1,303 of our cash and cash equivalents resided in foreign jurisdictions, some of which are subject to restrictions on repatriation.

 

Cash and cash equivalents increased $9,096 since December 31, 2016. In the first three months of 2017, cash inflows were primarily provided by the issuance of long-term debt, and cash receipts from operations, including cash from our sale and transfer of certain wireless equipment installment receivables to third parties. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, funding capital expenditures, debt repayments, dividends to stockholders, and the acquisition of wireless spectrum and other operations. We discuss many of these factors in detail below.

 

Cash Provided by or Used in Operating Activities

During the first three months of 2017, cash provided by operating activities was $9,218, compared to $7,900 for the first three months of 2016. Higher operating cash flows in 2017 were primarily due to lower tax payments and working capital improvements.

 

Cash Used in or Provided by Investing Activities

For the first three months of 2017, cash used in investing activities totaled $6,171 and consisted primarily of $5,784 for capital expenditures, excluding interest during construction, and $162 for the acquisition of business operations and wireless spectrum.

 

The majority of our capital expenditures are spent on our networks, our video services and related support systems. Capital expenditures, excluding interest during construction, increased $1,333 in the first three months. The increase was primarily due to our continued fiber buildout and timing of build schedules in 2017 compared with 2016. Additionally, in connection with capital improvements, we negotiate favorable payment terms (referred to as vendor financing). For the first three months of 2017, vendor financing related to capital investments was $107. We do not report capital expenditures at the segment level.

 

We continue to expect our 2017 capital expenditures to be in the $22,000 range, and we expect our capital expenditures to be in the 15% range of service revenues or lower for each of the years 2017 through 2019. The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. Our capital spending also takes into account existing tax law and does not reflect anticipated tax reform. We are also focused on ensuring DIRECTV merger commitments are met.

 

Cash Provided by or Used in Financing Activities

For the first three months of 2017, cash provided by financing activities totaled $6,049 and included net proceeds of $12,440 primarily from the following long-term debt issuances:

·

 

·

February issuance of $750 of 3.800% global notes due 2024.

 

·

 

·

 

·

 

·

 

·

March issuance of $1,430 of 5.500% global notes due 2047.

 

·

March issuance of $800 floating rate global notes due 2020. The floating rate for the notes is based upon the three-month London Interbank Offered Rate (LIBOR), reset quarterly, plus 65 basis points.

 

·

March draw of $300 on a private financing agreement with Banco Nacional de Mexico, S.A. due March 2019. The agreement contains terms similar to that provided under our syndicated credit arrangements; the interest rate is a market rate.

 

40

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

During the first three months of 2017, we redeemed $3,053 of debt, primarily consisting of the following:

·

$1,142 of 2.400% global notes due 2017.

 

·

$1,000 of 1.600% global notes due 2017.

 

·

$500 of floating rate notes due 2017.

 

The FCC's 600 MHz Auction concluded in April 2017. We submitted winning bids to purchase spectrum licenses in 18 markets for which we paid $910. With our previous deposit made in July 2016, we received a refund from the FCC in the amount of $1,438 on April 19, 2017.

 

Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.3% as of March 31, 2017, compared to 4.2% as of December 31, 2016. We had $132,379 of total notes and debentures outstanding at March 31, 2017, which included Euro, British pound sterling, Swiss franc, Brazilian real, Mexican peso and Canadian dollar denominated debt that totaled approximately $24,941.

 

As of March 31, 2017, we had approximately 396 million shares remaining from 2013 and 2014 authorizations from our Board of Directors to repurchase shares of our common stock. During the first three months of 2017, we did not repurchase any shares under these authorizations. In 2017, we intend to use free cash flow (operating cash flows less construction and capital expenditures) after dividends primarily to pay down debt.

 

We paid dividends of $3,009 during the first three months of 2017, compared with $2,947 for the first three months of 2016, primarily reflecting the increase in the quarterly dividend approved by our Board of Directors in October 2016, partially offset by the impact of the decline in shares outstanding due to repurchases in 2016. Dividends declared by our Board of Directors totaled $0.49 per share in the first three months of 2017 and $0.48 per share for the first three months of 2016. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.

 

At March 31, 2017, we had $12,681 of debt maturing within one year, $12,507 of which was related to long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:

·

$1,000 of annual put reset securities issued by BellSouth that may be put back to us each April until maturity in 2021. No such put was exercised during April 2017.

 

·

An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the zero-coupon note (issued for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,030.

 

Credit Facilities

The following summary of our various credit and loan agreements does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form 10-K.

 

We use credit facilities as a tool in managing our liquidity status. In December 2015, we entered into a five-year $12,000 revolving credit agreement of which no amounts are outstanding as of March 31, 2017. We also have a $9,155 syndicated credit agreement, of which $4,155 remains outstanding as of March 31, 2017 ($2,286 of which is payable March 2018).

 

In connection with our pending Merger with Time Warner, we have also entered into a $30,000 bridge loan credit agreement ("Bridge Loan") and a $10,000 term loan agreement ("Term Loan"). No amounts will be borrowed under either the Bridge Loan or the Term Loan prior to the closing of the Merger. Borrowings under either agreement will be used solely to finance a portion of the cash to be paid in the Merger, the refinancing of debt of Time Warner and its subsidiaries and the payment of related expenses.

 

Each of our credit and loan agreements contains covenants that are customary for an issuer with an investment grade senior debt credit rating as well as a net debt-to-EBITDA financial ratio covenant requiring AT&T to maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.5-to-1. As of March 31, 2017, we were in compliance with the covenants for our credit facilities.

41

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

Collateral Arrangements

During the first three months of 2017, we received $396 of additional cash collateral, on a net basis, from banks and other participants in our derivative arrangements. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 6)

 

Other

Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders' equity. Our capital structure does not include debt issued by our equity method investments. At March 31, 2017, our debt ratio was 51.6%, compared to 51.2% at March 31, 2016, and 49.9% at December 31, 2016. Our net debt ratio was 45.8% at March 31, 2017, compared to 47.3% at March 31, 2016 and 47.5% at December 31, 2016. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments.

 

During the first three months of 2017, we received $1,446 from the monetization of various assets, primarily the sale of certain equipment installment receivables. We plan to continue to explore similar opportunities.

 

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding company for our U.S. wireless operations, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $8,426 as of March 31, 2017, and $8,477 as of December 31, 2016, does not have any voting rights and has a liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly in equal amounts. We distributed $140 to the trust during the first three months of 2017. So long as we make the distributions, the terms of the preferred equity interest will not impose any limitations on our ability to declare a dividend or repurchase shares.

42

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Dollars in millions except per share amounts

 

At March 31, 2017, we had interest rate swaps with a notional value of $10,450 and a fair value of $42.

 

We have fixed-to-fixed and floating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a U.S. dollar notional value of $29,642 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $(3,400) at March 31, 2017.

 

Item 4. Controls and Procedures

 

The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of March 31, 2017. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant's disclosure controls and procedures were effective as of March 31, 2017.

43

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

 

Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the "Risk Factors" section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.

 

The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:

·

Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers' ability to access financial markets at favorable rates and terms.

 

·

Changes in available technology and the effects of such changes, including product substitutions and deployment costs.

 

·

Increases in our benefit plans' costs, including increases due to adverse changes in the United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates; adverse changes in mortality assumptions; adverse medical cost trends; and unfavorable or delayed implementation or repeal of healthcare legislation, regulations or related court decisions.

 

·

The final outcome of FCC and other federal, state or foreign government agency proceedings (including judicial review, if any, of such proceedings) involving issues that are important to our business, including, without limitation, special access and business data services; intercarrier compensation; interconnection obligations; pending Notices of Apparent Liability; the transition from legacy technologies to IP-based infrastructure, including the withdrawal of legacy TDM-based services; universal service; broadband deployment; E911 services; competition policy; privacy; net neutrality, including the FCC's order classifying broadband as Title II services subject to much more comprehensive regulation; unbundled network elements and other wholesale obligations; multi-channel video programming distributor services and equipment; availability of new spectrum, on fair and balanced terms; and wireless and satellite license awards and renewals.

 

·

The final outcome of state and federal legislative efforts involving issues that are important to our business, including deregulation of IP-based services, relief from Carrier of Last Resort obligations and elimination of state commission review of the withdrawal of services.

 

·

Enactment of additional state, local, federal and/or foreign regulatory and tax laws and regulations, or changes to existing standards and actions by tax agencies and judicial authorities including the resolution of disputes with any taxing jurisdictions, pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs.

 

·

Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies or delivery methods (e.g., cable, wireless, VoIP and over-the-top video service), subscriber reluctance to purchase new wireless handsets, and our ability to maintain capital expenditures.

 

·

The extent of competition including from governmental networks and other providers and the resulting pressure on customer and access line totals and segment operating margins.

 

·

Our ability to develop attractive and profitable product/service offerings to offset increasing competition.

 

·

The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and non-regulation of comparable alternative technologies (e.g., VoIP).

 

·

The continued development and delivery of attractive and profitable video offerings through satellite and IP-based networks; the extent to which regulatory and build-out requirements apply to our offerings; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.

 

·

Our continued ability to maintain margins, attract and offer a diverse portfolio of wireless service and devices and device financing plans.

 

·

The availability and cost of additional wireless spectrum and regulations and conditions relating to spectrum use, licensing, obtaining additional spectrum, technical standards and deployment and usage, including network management rules.

 

·

Our ability to manage growth in wireless video and data services, including network quality and acquisition of adequate spectrum at reasonable costs and terms.

 

·

The outcome of pending, threatened or potential litigation (which includes arbitrations), including, without limitation, patent and product safety claims by or against third parties.

 

·

The impact from major equipment failures on our networks, including satellites operated by DIRECTV; the effect of security breaches related to the network or customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers; and in the case of satellites launched, timely provisioning of services from vendors; or severe weather conditions, natural disasters, pandemics, energy shortages, wars or terrorist attacks.

 

·

The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.

 

·

Our ability to integrate our acquisition of DIRECTV.

 

·

Our ability to close our pending acquisition of Time Warner Inc. and successfully integrate its operations.

 

·

Our ability to adequately fund our wireless operations, including payment for additional spectrum, network upgrades and technological advancements.

 

·

Our increased exposure to video competition and foreign economies due to our recent acquisitions of DIRECTV and Mexican wireless properties, including foreign exchange fluctuations as well as regulatory and political uncertainty.

 

·

Changes in our corporate strategies, such as changing network-related requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments.

 

·

The uncertainty surrounding further congressional action to address spending reductions, which may result in a significant decrease in government spending and reluctance of businesses and consumers to spend in general.

 

·

The uncertainty and impact of anticipated regulatory and corporate tax reform, which may impact the overall economy and incentives for business investments.

 

Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.

44

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

PART II - OTHER INFORMATION

Dollars in millions except per share amounts

 

Item 1A. Risk Factors

 

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the first quarter 2017, there were no such material developments.

 

(a)Total Number of Shares (or Units) Purchased  1, 2, 3

 

 

(b) Average Price Paid Per Share (or Unit)

 

(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs  1

 

(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(c) A summary of our repurchases of common stock during the first quarter of 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period 

(a)

 

(b)

 

(c)

 

(d)

 

 

       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2017 -

January 31, 2017

    658,242

 

$

 40.95

 

 -

 

 395,550,000

 

 

 

 

February 1, 2017 -

February 28, 2017

 1,782,268

 

 

 41.86

 

 -

 

 395,550,000

 

 

 

 

March 1, 2017 -

March 31, 2017

 2,346,758

 

 

 41.91

 

 -

 

 395,550,000

 

 

 

 

Total

 4,787,268

 

$

 41.74

 

 -

 

 

 

 

 

 

1   

 

In March 2014, our Board of Directors approved an additional authorization to repurchase up to 300 million shares of our common stock. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock. The authorizations have no expiration date.

 

 

 

2 

Of the shares repurchased, 4,244,764 shares were acquired through the withholding of taxes on the vesting of restricted stock and performance shares or on the exercise price of options.

 

 

 

3 

Of the shares repurchased, 542,504 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit Association (VEBA) trusts.

 

 

 

                                   

 

45

 

 

 

 

 

AT&T INC.

MARCH 31, 2017

 

Item 6. Exhibits

 

Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610.

 

 

10-a

Stock Purchase and Deferral Plan

10-b

Cash Deferral Plan

12

Computation of Ratios of Earnings to Fixed Charges

31

Rule 13a-14(a)/15d-14(a) Certifications

31.1 Certification of Principal Executive Officer

31.2 Certification of Principal Financial Officer

32

Section 1350 Certifications

101

XBRL Instance Document

 

46

 

 

 

 

 

SIGNATURE

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

May 4, 2017 

 

 

AT&T Inc.

 

 

 

/s/ John J. Stephens

John J. Stephens

Senior Executive Vice President

    and Chief Financial Officer

 

 

 

 

 

 

47
 

Exhibit 10-a

 

AT&T INC.

 

STOCK PURCHASE AND DEFERRAL PLAN

 

Adopted November 19, 2004

As amended through March 30, 2017

 

Article 1 - Statement of Purpose

 

The purpose of the Stock Purchase and Deferral Plan ("Plan") is to increase stock ownership by, and to provide savings opportunities to, a select group of management employees of AT&T Inc. ("AT&T") and its Subsidiaries.

 

Article 2 - Definitions

 

For the purpose of this Plan, the following words and phrases shall have the meanings indicated, unless the context indicates otherwise:

 

Annual Bonus.  The award designated the "Annual Bonus" by AT&T (including but not limited to an award that may be paid in more frequent installments than annually), together with any individual discretionary award made in connection therewith, or comparable awards, if any, determined by AT&T to be used in lieu of these awards.

 

Base Compensation.  The following types of cash-based compensation paid by an Employer (but not including payments made by a non-Employer, such as state disability payments), before reduction due to any contribution pursuant to this Plan or reduction pursuant to any deferral plan of an Employer, including but not limited to a plan that includes a qualified cash or deferral arrangement under Section 401(k) of the Code:

 

(a)

base salary;

 

(b)  lump sum payments in lieu of a base salary increase; and

 

(c) Annual Bonus.

 

Payments by an Employer under a disability plan made in lieu of any compensation described above shall be deemed to be a part of the respective form of compensation it replaces for purposes of this definition.  Base Compensation does not include zone allowances or any other geographical differential and shall not include payments made in lieu of unused vacation or other paid days off, and such payments shall not be contributed to this Plan.

 

Determinations by AT&T (the Committee with respect to Officer Level Employees) of the items that make up Base Compensation shall be final.  The Committee may, from time to time, add or subtract types of compensation to or from the definition of "Base Compensation" provided, however, any such addition or subtraction shall be effective only with respect to the next period in which a Participant may make an election to establish a Share Deferral Account.  Base Compensation that was payable in a prior Plan Year but paid in a later Plan Year shall not be used to determine Employee Contributions or Matching Contributions in such later Plan Year.

 

1

 

 

 

 

 

 

Business Day.  Any day during regular business hours that AT&T is open for business.

 

Change in Control.  With respect to AT&T's direct and indirect ownership of an Employer, a "Change in the effective control of a Corporation," as defined in Treasury Regulation Section 1.409A-3(i)(5)(vi)(A)(1), regardless of whether the Employer is a corporation or non corporate entity as permitted by the regulation, and using "50 percent" in lieu of "30 percent" in such regulation.  A Change in Control will not apply to AT&T itself.

 

Chief Executive Officer.  The Chief Executive Officer of AT&T Inc.

 

Code.  References to the Code shall be to provisions of the Internal Revenue Code of 1986, as amended, including regulations promulgated thereunder and successor provisions.  Similarly, references to regulations shall include amendments and successor provisions.

 

Committee.  The Human Resources Committee of the Board of Directors of AT&T Inc.

 

Disability.  Absence of an Employee from work with an Employer under the relevant Employer's disability plan.

 

Eligible Employee.  An Employee who:

(a) is a full or part time, salaried Employee of AT&T or an Employer in which AT&T has a direct or indirect 100% ownership interest and who is on active duty or Leave of Absence (but only while such Employee is deemed by the Employer to be an Employee of such Employer);

 

(b) is, as determined by AT&T, a member of Employer's "select group of management or highly compensated employees" within the meaning of the Employee Retirement Income Security Act of 1974, as amended, and regulations thereunder ("ERISA"), which is deemed to include each Officer Level Employee; and

 

(c) has an employment status which has been approved by AT&T to be eligible to participate in this Plan or is an Officer Level Employee.

 

Notwithstanding the foregoing, AT&T (the Committee with respect to Officer Level Employees) may, from time to time, exclude any Employee or group of Employees from being deemed an "Eligible Employee" under this Plan.

 

In the event a court or other governmental authority determines that an individual was improperly excluded from the class of persons who would be permitted to make Employee Contributions during a particular time for any reason, that individual shall not be permitted to make such contributions for purposes of the Plan for the period of time prior to such determination.

 

Employee.  Any person employed by an Employer and paid on an Employer's payroll system, excluding persons hired for a fixed maximum term and excluding persons who are neither citizens nor permanent residents of the United States, all as determined by AT&T.    For purposes of this Plan, a person on Leave of Absence who otherwise would be an Employee shall be deemed to be an Employee.

 

2

 

 

 

 

 

 

Employee Contributions.  Amounts credited to a Share Deferral Account pursuant to Section 4.1 (Election to Make Contributions) of the Plan.

 

Employer.  AT&T Inc. or any of its Subsidiaries.

 

Exercise Price.  The price per share of Stock purchasable under an Option.

 

Fair Market Value or FMV.  In valuing Stock or any other item subject to valuation under this Plan, the Committee may use such index or measurement as the Committee may reasonably determine from time to time, and such index or measurement shall be the FMV of such Stock or other item, provided that for purposes of determining the Exercise Price of Stock Options, the Committee shall use a value consistent with the requirements of Section 409A.  In the absence of such action by the Committee, FMV means, with respect to Stock, the closing price on the New York Stock Exchange ("NYSE") of the Stock on the relevant date, or if on such date the Stock is not traded on the NYSE, then the closing price on the immediately preceding date such Stock is so traded.

 

Leave of Absence.  Where a person is absent from employment with an Employer on a leave of absence, military leave, sick leave, or Disability where the leave is given in order to prevent a break in the continuity of term of employment, and permission for such leave is granted (and not revoked) in conformity with the rules of the Employer that employs the individual, as adopted from time to time, and the Employee is reasonably expected to return to service.  Except as set forth below, the leave shall not exceed six (6) months for purposes of this Plan, and the Employee shall Terminate Employment upon termination of such leave if the Employee does not return to work prior to or upon expiration of such six (6) month period, unless the individual retains a right to reemployment under law or by contract.  A twenty-nine (29) month limitation shall apply in lieu of such six (6) month limitation if the leave is due to the Employee being "disabled" (within the meaning of Treasury Regulation §1.409A-3(i)(4)).  A Leave of Absence shall not commence or shall be deemed to cease under the Plan where the Employee has incurred a Termination of Employment.

 

Officer Level Employee.  Any executive officer of AT&T, as that term is used under the Securities Exchange Act of 1934, as amended, and any Employee that is an "officer level" Employee for compensation purposes as shown on the records of AT&T.

 

Options or Stock Options.  Options to purchase Stock issued pursuant to this Plan.

 

Participant.  An Employee or former Employee who participates in this Plan.

 

Plan Year.  Each of the following shall be a Plan Year:  the period January 1, 2005, through January 15, 2006; the period January 16, 2006, through December 31, 2006; and, for all later Plan Years, it is defined as the period from January 1 through December 31.

 

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Retirement or Retire.  Termination of Employment on or after the earlier of the following dates, unless otherwise provided by the Committee:  (a) for Officer Level Employees, the date the Participant is at least age 55 and has five (5) years of Net Credited Service; or (b) the date the Participant has attained one of the following combinations of age and Net Credited Service:

Net Credited Service

     Age

10 years or more

65 or older

20 years or more

55 or older

25 years or more

50 or older

30 years or more

Any age

 

For purposes of this Plan only, Net Credited Service shall be calculated in the same manner as "Pension Eligibility Service" under the AT&T Pension Benefit Plan - Nonbargained Program ("Pension Plan"), as amended from time to time, except that service with an Employer shall be counted as though the Employer were a "Participating Company" under the Pension Plan and the Employee was a participant in the Pension Plan.

 

Senior Manager.  Any Employee who is a "senior manager" for compensation purposes as shown on the records of AT&T.

 

Shares or Share Units.  An accounting entry representing the right to receive an equivalent number of shares of Stock.

 

Share Deferral Account or Account.   The Account or Accounts established annually by an election by a Participant to make Employee Contributions to the Plan, with each Account relating to a Plan Year.  For each Plan Year after 2008, there shall be (1) a separate Share Deferral Account for Share Units purchased with Employee Contributions of Base Compensation (excluding Annual Bonus) and related Matching Share Units and (2) a separate Share Deferral Account for Share Units purchased with Employee Contributions of Short Term Incentive Award and/or Annual Bonus and any related Matching Share Units.  Earnings on Share Units and Matching Share Units shall accrue to the respective Share Deferral Accounts where they are earned.

 

Short Term Incentive Award.  A cash award paid by an Employer (and not by a non-Employer, such as state disability payments) under the Short Term Incentive Plan or any successor plan, together with any individual discretionary award made in connection therewith; an award under a similar plan intended by the Committee to be in lieu of an award under such Short Term Incentive Plan, including, but not limited to, Performance Units granted under the 2006 Incentive Plan or any successor plan.  It shall also include any other award that the Committee designates as a Short Term Incentive Award specifically for purposes of this Plan (regardless of the purpose of the award) provided the deferral election is made in accordance with Section 409A.

 

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Specified Employee.  Any Participant who is a "Key Employee" (as defined in Code Section 416(i) without regard to paragraph (5) thereof), as determined by AT&T in accordance with its uniform policy with respect to all arrangements subject to Code Section 409A, based upon the 12-month period ending on each December 31st (such 12-month period is referred to below as the "identification period").  All Participants who are determined to be Key Employees under Code Section 416(i) (without regard to paragraph (5) thereof) during the identification period shall be treated as Key Employees for purposes of the Plan during the 12-month period that begins on the first day of the 4th month following the close of such identification period.

 

Stock.  The common stock of AT&T Inc.

 

Subsidiary.  Any corporation, partnership, venture or other entity or business with which AT&T would be considered a single employer under Sections 414(a) and (c) of the Code, using 50% as the ownership threshold as provided under Section 409A of the Code.

 

Termination of Employment. References herein to "Termination of Employment," "Terminate Employment" or a similar reference, shall mean the event where the Employee has a "separation from service," as defined under Section 409A, with all Employers. For purposes of this Plan, a Termination of Employment with respect to an Employer shall be deemed to also occur when such Employer incurs a Change in Control.

 

 

Article 3 - Administration of the Plan

 

3.1          The Committee.

Except as delegated by this Plan or by the Committee, the Committee shall be the administrator of the Plan and will administer the Plan, interpret, construe and apply its provisions and determine all questions of administration, interpretation and application of the Plan, including, without limitation, questions and determinations of eligibility, entitlement to benefits and payment of benefits, all in its sole and absolute discretion.  The Committee may further establish, adopt or revise such rules and regulations and such additional terms and conditions regarding participation in the Plan as it may deem necessary or advisable for the administration of the Plan.  References in this Plan to determinations or other actions by AT&T, herein, shall mean actions authorized by the Committee, the Chief Executive Officer, the Senior Executive Vice President of AT&T in charge of Human Resources, or their respective successors or duly authorized delegates, in each case in the discretion of such person.  All decisions by the Committee, its delegate or AT&T, as applicable, shall be final and binding.

 

3.2          Authorized Shares of Stock.

(a) Except as provided below, the number of shares of Stock which may be distributed pursuant to the Plan, exclusive of Article 8 - Options, is 46,000,000.  The number of shares of Stock which may be issued pursuant to the exercise of Stock Options is 34,000,000 (together with an equal number of Stock Options).  In determining the number of authorized shares remaining available for issuance, shares withheld for taxes in a distribution shall not be considered issued and shall not reduce the number of authorized shares.  When an Option is exercised, the authorized shares of Stock that may be issued pursuant to an Option exercise shall

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be reduced by the number of Options so exercised.  To the extent an Option issued under this Plan is canceled, terminates, expires, or lapses for any reason, such Option shall again be available for issuance under the Plan.  Conversions of Stock awards into Share Units and their eventual distribution (excluding the effects of any dividends on such Share Units) shall count only against the limits of the plans from which they originated and shall not be applied against the limits in this Plan.  To the extent Share Units are credited through deferrals of Stock or Employee Contributions where the distribution of which would be deductible by AT&T under Section 162(m) of the Code without regard to the size of the distribution, and such deductible Share Units are available for distribution, such Share Units shall be distributed first.

 

(b)  In the event the Committee determines that continuing the issuance of Share Units under the Plan or Stock Options under the Plan may cause the number of shares of Stock that are to be distributed under this Plan or the number of Stock Options (as determined pursuant to subsection (a), above) to exceed the number of authorized shares of Stock, then in lieu of distributing Stock, the Committee may provide after such determination and only with respect to Share Units that have not theretofore been credited to a Share Deferral Account, that such Share Units may be settled in cash equal to the value of the Stock that would otherwise be distributed based on the FMV of the Stock on the date of the distribution of such Share Unit.  The Committee may also provide after such determination and only with respect to Stock Options that have not theretofore been issued that such Stock Options may only be settled on a Net-Settled basis in cash equal to the value of the Stock that would otherwise be distributed based on the FMV of the Stock on the day of exercise.

 

(c) In the event of a merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, stock split, share combination, or other change in the corporate structure of AT&T affecting the shares of Stock (including a conversion of Stock into cash or other property), such adjustment shall be made to the number and class of the shares of Stock which may be delivered under the Plan (including but not limited to individual limits), and in the number and class of and/or price of shares of Stock subject to outstanding Options granted under the Plan, and/or in the number of outstanding Options and Share Units, or such other adjustment determined by the Committee, in each case as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights.

 

3.3           Claims and Appeals.

(a)       Claims.  A person who believes that he or she is being denied a benefit to which he or she is entitled under this Plan (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Executive Compensation Administration Department, setting forth his or her claim. The request must be addressed to the AT&T Executive Compensation Administration Department at its then principal place of business.

(b)       Claim Decision.  Upon receipt of a claim, the AT&T Executive Compensation Administration Department shall review the claim and provide the Claimant with a written notice of its decision within a reasonable period of time, not to exceed ninety (90) days, after the claim is received. If the AT&T Executive Compensation Administration Department determines that special circumstances require an extension of time beyond the initial ninety (90)- day claim review period, the AT&T Executive Compensation Administration Department shall

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notify the Claimant in writing within the initial ninety (90)-day period and explain the special circumstances that require the extension and state the date by which the AT&T Executive Compensation Administration Department expects to render its decision on the claim. If this notice is provided, the AT&T Executive Compensation Administration Department may take up to an additional ninety (90) days (for a total of one hundred eighty (180) days after receipt of the claim) to render its decision on the claim.

If the claim is denied by the AT&T Executive Compensation Administration Department, in whole or in part, the AT&T Executive Compensation Administration Department shall provide a written decision using language calculated to be understood by the Claimant and setting forth:  (i) the specific reason or reasons for such denial; (ii) specific references to pertinent provisions of this Plan on which such denial is based; (iii) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation of why such material or such information is necessary; (iv) a description of the Plan's procedures for review of denied claims and the steps to be taken if the Claimant wishes to submit the claim for review; (v) the time limits for requesting a review of a denied claim under this section and for conducting the review under this section; and (vi)  a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA if the claim is denied following review under this section .

(c)       Request for Review. Within sixty (60) days after the receipt by the Claimant of the written decision on the claim provided for in this section, the Claimant may request in writing that the Committee review the determination of the AT&T Executive Compensation Administration Department.  Such request must be addressed to the Committee at the address for giving notice in this Plan.  To assist the Claimant in deciding whether to request a review of a denied claim or in preparing a request for review of a denied claim, a Claimant shall be provided, upon written request to the Committee and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claim.  The Claimant or his or her duly authorized representative may, but need not, submit a statement of the issues and comments in writing, as well as other documents, records or other information relating to the claim for consideration by the Committee.  If the Claimant does not request a review by the Committee of the AT&T Executive Compensation Administration Department's decision within such sixty (60)-day period, the Claimant shall be barred and stopped from challenging the determination of the AT&T Executive Compensation Administration Department.

(d)       Review of Decision.  Within sixty (60) days after the Committee's receipt of a request for review, the Administrator will review the decision of the AT&T Executive Compensation Administration Department.  If the Committee determines that special circumstances require an extension of time beyond the initial sixty (60)-day review period, the Committee shall notify the Claimant in writing within the initial sixty (60)-day period and explain the special circumstances that require the extension and state the date by which the Committee expects to render its decision on the review of the claim.  If this notice is provided, the Committee may take up to an additional sixty (60) days (for a total of one hundred twenty (120) days after receipt of the request for review) to render its decision on the review of the claim.

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During its review of the claim, the Committee shall:

(1)       Take into account all comments, documents, records, and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial review of the claim conducted pursuant to this section;

(2)       Follow reasonable procedures to verify that its benefit determination is made in accordance with the applicable Plan documents; and

(3)       Follow reasonable procedures to ensure that the applicable Plan provisions are applied to the Participant to whom the claim relates in a manner consistent with how such provisions have been applied to other similarly-situated Participants.

After considering all materials presented by the Claimant, the Committee will render a decision, written in a manner designed to be understood by the Claimant.  If the Committee denies the claim on review, the written decision will include (i) the specific reasons for the decision; (ii) specific references to the pertinent provisions of this Plan on which the decision is based; (iii) a statement that the Claimant is entitled to receive, upon request to the Committee and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claim; and (iv) a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA.

The Committee shall serve as the final review committee under the Plan and shall have sole and complete discretionary authority to administer, interpret, construe and apply the Plan provisions, and determine all questions of administration, interpretation, construction, and application of the Plan, including questions and determinations of eligibility, entitlement to benefits and the type, form and amount of any payment of benefits, all in its sole and absolute discretion.  The Committee shall further have the authority to determine all relevant facts and related issues, and all documents, records and other information relevant to a claim conclusively for all parties, and in accordance with the terms of the documents or instruments governing the Plan.  Decisions by the Committee shall be conclusive and binding on all parties and not subject to further review.

In any case, a Participant or Beneficiary may have further rights under ERISA. The Plan provisions require that Participants or Beneficiary pursue all claim and appeal rights described in this section before they seek any other legal recourse regarding claims for benefits.

 

Article 4 - Contributions

 

4.1           Election to Make Contributions.

(a)  The Committee shall establish dates and other conditions for participation in the Plan and making contributions as it deems appropriate.  Except as otherwise provided by the Committee, each year an Employee who is an Eligible Employee as of September 30 may thereafter make an election on or prior to the last Business Day of the immediately following November (such election shall be cancelled if the Employee is not an Eligible Employee on the

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last day such an election may be made) to contribute on a pre-tax basis, through payroll deductions, any combination of the following:

 

(1)  From 6% to 30% (in whole percentage increments) of the Participant's monthly Base Compensation, other than Annual Bonus, during the calendar year (the Plan Year for such contributions) following the calendar year of such election.  The Employee Contributions shall be used to acquire Share Units to be credited to the Share Deferral Account for that Plan Year.

 

(2)  Up to 95% (in whole percentage increments or limited to the target amount) of a Short Term Incentive Award, or from 6% to 30% (in whole percentage increments) of Annual Bonus, in each case such contributions shall be made during the second calendar year (which is the Plan Year for such contributions) following the year of such election, except that in 2008 a separate election may be made with respect to contributions to be made in 2009. An Employee may make such an election with respect to the type of Award (Short Term Incentive Award or Annual Bonus) that the Employee is under as of the time the Employee's eligibility to make such election is determined.  If because of a promotion or otherwise, the Employee receives a different type of Award instead of, or in partial or full replacement for, the type of Award subject to the Employee's election for the relevant Plan Year, the election will apply to the other Award as well, including but not limited to any individual discretionary award related thereto.

 

(b)  The Committee may permit an Eligible Employee to make an election to purchase Share Units under this Plan with compensation other than Base Compensation or Short Term Incentive Awards on such terms and conditions as such Committee may permit from time to time, provided that any such election is made in accordance with Section 409A of the Code.  In no event shall an acquisition of Share Units pursuant to this paragraph (b) or pursuant to the conversion of a right to receive Stock into Share Units (such as through a distribution of Stock under the 2001 Incentive Plan) result in the crediting of an AT&T Matching Contribution or Options.

 

(c) Notwithstanding anything to the contrary in this Plan, no election shall be effective to the extent it would permit an Employee Contribution or distribution to be made that is not in compliance with Section 409A of the Code.  To the extent such election related to Employee Contributions that complied with such statute and regulations thereunder, that portion of the election shall remain valid, except as otherwise provided under this Plan.

 

(d)  To the extent permitted by Section 409A of the Code, AT&T may refuse or terminate, in whole or in part, any election to purchase Share Units in the Plan at any time; provided, however, that only the Committee may take such action with respect to persons who are Officer Level Employees.

 

(e)  In the event the Participant takes a hardship withdrawal pursuant to Treasury Regulation §1.401(k)-1 from a benefit plan qualified under the Code and sponsored by an Employer, any election to make Employee Contributions by such Participant shall be cancelled on a prospective basis, and the Participant shall not be permitted to make a new election with respect to Employee Contributions that would be contributed during the then current and immediately following calendar year.

 

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4.2 Purchase of Share Units.

     (a)  Employee Contributions (as well as any corresponding AT&T Matching Contributions) shall be made pursuant to a proper election, only during the Participant's lifetime; provided, however, with respect to Employee Contribution elections made prior to 2007, the Employee must remain an Eligible Employee while making any such contributions.  In the event of a Change in Control of an Employer, subsequent compensation from the Employer may not be contributed to the Plan.  The Employer may continue the then current elections of the participants under a subsequent plan in order to comply with applicable tax laws.

 

     (b)  The number of Share Units purchased by a Participant during a calendar month shall be found by dividing the Participant's Employee Contributions during the month by the FMV of a share of Stock on the last day of such month.

 

     (c)  A contribution to the Plan shall be made when the compensation - from which the contribution is to be deducted - is to be paid ("paid," as used in this Plan, includes amounts contributed to the Plan that would have been paid were it not for an election under this Plan), as determined by the relevant Employer.   The Committee may modify or change this paragraph (c) from time to time.

 

4.3 Reinvestment of Dividends.

     In the month containing a record date for a cash dividend on Stock, each Share Deferral Account shall be credited with that number of Share Units equal to the declared dividend per share of Stock, multiplied by the number of Share Units held in such Share Deferral Account as of such record date, and dividing the product by the FMV of a share of Stock on the last day of such month.

 

 

Article 5 - AT&T Matching Contributions

 

5.1 AT&T Match.

(a) Each month AT&T shall credit the Participant's relevant Share Deferral Account with  the number of "Matching Share Units" found by taking eighty percent (80%) of the Participant's Employee Contributions from Base Compensation made to this Plan and to the Cash Deferral Plan during the month with respect to the first six percent (6%) of the Participant's monthly Match Eligible Compensation (as defined below) and dividing the resulting figure by the FMV of the Stock on the last day of such month (such resulting amount shall be the "Matching Contribution").  The monthly "Match Eligible Compensation" shall be the sum of:

 

      (1) the monthly Employee Contributions from Base Compensation to this Plan and the Cash Deferral Plan (in the aggregate, "Deferred BC"), plus

 

     (2) the amount of the Participant's monthly Base Compensation in excess of the Deferred BC ("Non-Deferred BC") but only to the extent such monthly Non-Deferred BC, when aggregated with the Participant's total Non-Deferred BC for prior months in such Plan Year, as determined by the relevant Employer, exceeds the limit in effect under Section 401(a)(17) of the Code applicable with respect to such Plan Year.

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The foregoing formula shall apply regardless of whether or not the Participant makes contributions to a 401(k) plan.

 

A Participant may receive Matching Share Units in a Share Deferral Account for a particular form of compensation only if the Participant is then making contributions to the same Share Deferral Account; provided, however, this condition shall not apply for purposes of determining under Section 5.1(a)(2) whether the limit described therein has been reached.

 

As provided in the definition of Share Deferral Account, Matching Share Units shall be credited to the respective Share Deferral Account that is related to the same form of Employee Contributions (either (1) Base Compensation excluding Annual Bonus or (2) Annual Bonus).

 

(b) In the event the Participant is not eligible to earn pension accruals under a pension plan offered by AT&T or a Subsidiary and either (1) first becomes an Employee on or after January 1, 2015, or (2) the Participant Terminates Employment on or after January 1, 2015, and the Participant is subsequently rehired as an Employee, then the "eighty percent (80%)" reference in section 5.1(a) shall be replaced with "one hundred percent (100%)" for purposes of determining the number of Matching Share Units to which the Participant would be entitled pursuant to contribution elections made after such hiring or rehiring.

 

(c) In the sole discretion of the Committee, in the event the Committee reduces the number of Options that AT&T issues for each Share Unit purchased, the Committee may provide for the contribution of a Bonus Matching Contribution on such terms as the Committee determines.  Such Bonus Matching Contribution may not exceed 20% of the Participant's Employee Contributions for the month.  The Bonus Matching Contribution shall be subject to such terms and conditions as required by the Committee and, unless otherwise provided by the Committee, to the same distribution requirements as Matching Contributions.  Pursuant to the foregoing authority and until otherwise provided by the Committee, effective for Share Accounts created pursuant to Employee Contribution elections where such elections are made after January 1, 2010,  AT&T shall make Bonus Matching Contributions equal to 20% of the Participant's monthly Employee Contributions from each of Base Compensation and Short Term Incentive Award (not to exceed the target amount of such award, which limit shall be pro rated for any partial year award).  Such Bonus Matching Contribution shall be used to purchase that number of Matching Share Units found by dividing the relevant Bonus Matching Contribution for the month by the FMV of the Stock on the last day of such month.

 

5.2          Distribution of Share Units Acquired with Matching Contributions.

A Participant's Matching Share Units shall be distributed in a lump sum, in accordance with the Plan's distribution provisions, in the earlier of: (a) the calendar year following the calendar year of the Termination of Employment of the Participant, or (b) the calendar year in which the Participant reaches age 55, in each case only with respect to Matching Share Units relating to Share Deferral Accounts for Plan Years before such distribution calendar year.

 

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Matching Share Units acquired as part of a Share Deferral Account that commences in or after the calendar year the Employee reaches age 55 or after the calendar year in which the Employee Terminates Employment will be distributed in the same manner and time as other Share Units in such Share Deferral Account.

 

Notwithstanding anything to the contrary in this section, Matching Share Units acquired in 2008 and later shall be distributed at the same time as other Share Units (including those acquired with Employee Contributions) in the same Share Deferral Account.

 

 

Article 6 - Distributions

 

6.1

Distributions of Share Units.

(a)  Initial Election with Respect to a Share Deferral Account.  At the time the Participant makes an election to make Employee Contributions with respect to a Share Deferral Account, the Participant shall also elect the calendar year the Share Deferral Account shall be distributed, which may be from the first through fifth calendar years after the Plan Year the Account commenced (except as otherwise provided in this Plan with respect to Matching Share Units).  For example, if an Account commenced in 2005, the Participant may elect to commence the distribution in any calendar year from and including 2006 to and including 2010.  If no timely distribution election is made by the Participant, then the Participant will be deemed to have made an election to have the Share Deferral Account distributed in a single installment in the first calendar year after the calendar year the Account commenced.

 

(b)  Election to Delay a Scheduled Distribution.  A Participant may elect to defer a scheduled distribution of a Share Deferral Account for five (5) additional calendar years beyond that previously elected (except as otherwise provided in this Plan with respect to Matching Share Units).  Unless otherwise provided by the Committee, the election to defer the distribution must be made on or after October 1, and on or before the last Business Day of the next following December, of the calendar year that is the second calendar year preceding the calendar year of the relevant scheduled distribution.  To make this election, the Participant must be an Eligible Employee both on the September 30 immediately preceding such election and on the last day such an election may be made.  For example, an election to defer a scheduled distribution in 2010 must be made during the period from October 1, 2008, through the last business day of December 2008, and the Participant must be an Eligible Employee both on September 30, 2008, and the last business day of December 2008.  An election to defer the distribution of a Share Deferral Account may not be made in the same calendar year that the election to establish the Share Deferral Account is made.  Notwithstanding anything to the contrary in this Plan, (1) an election to defer the distribution of a Share Deferral Account must be made at least 12 months prior to the date of the first scheduled payment under the prior distribution election and (2) the election shall not take effect until at least 12 months after the date on which the election is made.

 

(c)  A Participant's Share Deferral Account shall be distributed to the Participant on March 10 (or as soon thereafter as administratively practicable as determined by AT&T) of the calendar year elected by the Participant for that Account.  In the event the distribution is to be made to a "Specified Employee" as a result of the Participant's Termination of Employment

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(other than as a result of a Change in Control), the distribution shall not occur until the later of such March 10 or six (6) months after the Termination of Employment, except it shall be distributed upon the Participant's earlier death in accordance with this Plan.

 

6.2          Death of the Participant.

In the event of the death of a Participant, notwithstanding anything to the contrary in this Plan, all undistributed Share Deferral Accounts shall be distributed to the Participant's beneficiary in accordance with the AT&T Rules for Employee Beneficiary Designations, as the same may be amended from time to time, within the later of 90 days following such determination or the end of the calendar year in which determination was made.

 

6.3          Unforeseeable Emergency Distribution.

If a Participant experiences an "Unforeseeable Emergency," the Participant may submit a written petition to AT&T (the Committee in the case of Officer Level Employees), to receive a partial or full distribution of his Share Deferral Account(s).  In the event that AT&T (the Committee in the case of Officer Level Employees), upon review of the written petition of the Participant, determines in its sole discretion that the Participant has suffered an "Unforeseeable Emergency," AT&T shall make a distribution to the Participant from the Participant's Share Deferral Accounts (other than Matching Share Units), on a pro-rata basis, within the later of 90 days following such determination or the end of the calendar year in which determination was made, subject to the following:

 

(a)     "Unforeseeable Emergency" shall mean a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant's legal spouse, the Participant's beneficiary, or the Participant's dependent (as defined in Code Section 152, without regard to Code Section 152(b)(1), (b)(2), and (d)(1)(B)); loss of the Participant's property due to casualty; or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee.  Whether a Participant is faced with an Unforeseeable Emergency permitting a distribution is to be determined based on the relevant facts and circumstances of each case, but, in any case, a distribution on account of Unforeseeable Emergency shall not be made to the extent that such emergency is or may be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the Participant's assets, to the extent the liquidation of such assets would not cause severe financial hardship, or by cessation of deferrals under the Plan.

 

(b)     The amount of a distribution to be made because of an Unforeseeable Emergency shall not exceed the lesser of (i) the FMV of the Participant's vested Share Deferral Account, calculated as the date on which the amount becomes payable, as determined by AT&T (the Committee in the case of Officer Level Employees) in its sole discretion, and (ii) the amount reasonably necessary, as determined by the AT&T (the Committee in the case of Officer Level Employees) in its sole discretion, to satisfy the emergency need (which may include amounts necessary to pay any Federal, state, local, or foreign income taxes or penalties reasonably anticipated to result from the distribution).  Determinations of the amount reasonably necessary to satisfy the emergency need shall take into account any additional compensation that is available if the plan provides for cancellation of a deferral election upon a payment due to an

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Unforeseeable Emergency.  The determination of amounts reasonably necessary to satisfy the Unforeseeable Emergency need is not required to, but may, take into account any additional compensation that, due to the Unforeseeable Emergency, is available under another nonqualified deferred compensation plan but has not actually been paid, or that is available due to the Unforeseeable Emergency under another plan that would provide for deferred compensation except due to the application of the effective date provisions under Treasury Regulation §1.409A-6.

 

(c)      Upon such distribution on account of an Unforeseeable Emergency under this Plan, any election to make Employee Contributions by such Participant shall be immediately cancelled, and the Participant shall not be permitted to make a new election with respect to Employee Contributions that would be contributed during the then current and immediately following calendar year.

 

6.4          Ineligible Participant.

Notwithstanding any other provisions of this Plan to the contrary, if AT&T receives an opinion from counsel selected by AT&T, or a final determination is made by a Federal, state or local government or agency, acting within its scope of authority, to the effect that an individual's continued participation in the Plan would violate applicable law, then such person shall not make further contributions to the Plan to the extent permitted by Section 409A of the Code.

 

6.5          Conflict of Interest Distribution.

AT&T may in its sole discretion accelerate a distribution(s) to the Participant, provided he or she is no longer actively employed by AT&T: (a) to the extent necessary for any Federal officer or employee in the executive branch to comply with an ethics agreement with the Federal government or (b) to the extent reasonably necessary to avoid the violation of an applicable Federal, state, local, or foreign ethics law or conflicts of interest law (including where such payment is reasonably necessary to permit the service provider to participate in activities in the normal course of his or her position in which the service provider would otherwise not be able to participate under an applicable rule).  Any such distribution may only be made in accordance with Section 409A of the Code and the regulations thereunder.

 

6.6

Distribution Process.

A Share Deferral Account shall be distributed under this Plan by taking the number of Share Units comprising the Account to be distributed and converting them into an equal number of shares of Stock.  (Once distributed, a Share Unit shall be canceled.)

 

 

Article 7 - Transition Provisions

 

7.1

Stockholder Approval

The Plan was approved by Stockholders at the 2005 Annual Meeting of Stockholders.

 

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7.2          2005 Share Deferral Accounts.

Notwithstanding Article 4 to the contrary, if an Employee is an Eligible Employee on September 30, 2004, the Employee may make an election under Article 4 on or prior to December 15, 2004, with respect to the establishment of a Share Deferral Account for the (i) contribution of Base Compensation and/or Short Term Incentive Awards paid during the period from January 1, 2005, through January 15, 2006, which shall be the Plan Year for such Share Deferral Account; and/or (ii) the conversion of a distribution of Stock that would be made during the same Plan Year pursuant to the 2001 Incentive Plan into an equal number of Share Units, so long as such conversion would not cause the recognition of income for Federal income tax purposes in respect of such distribution of Stock prior to distribution of Share Units under this Plan.

 

7.3          2007 Amendments.

(a) Amendments made to the Plan on November 15, 2007, shall be effective January 1, 2008. except for amendments to this Article 7, which shall be effective upon adoption.  Any Participants electing prior to November 15, 2007, to make Employee Contributions in 2008 shall have their elections canceled if they do not consent by December 14, 2007, to all prior amendments to this Plan and to the Cash Deferral Plan.  Subject to the foregoing consent requirements, all Employee Contribution elections made prior to 2008, including but not limited to elections to contribute Stock that would be distributed under the 2001 Incentive Plan or a successor plan, shall remain in force, subject to all other terms of the amended Plan. In addition, all unvested but not forfeited Matching Share Units shall vest on November 15, 2007.  Matching Shares that have been forfeited shall not be reinstated, and no amendment to this Plan shall be interpreted as reinstating such forfeitures.

 

(b) Not withstanding anything to the contrary in this Plan, a Participant who as of December 29, 2006, was eligible for an additional payment pursuant to Section 4A of the BellSouth Corporation Executive Incentive Award Deferral Plan shall not, with respect to the 2008 Plan Year, receive Matching Share Units on Base Compensation that exceeds $230,000.

 

7.4          2008 Amendments.

For Plan Years prior to 2009, Participants who, at the time of the determination of their eligibility to participate in an Account, are paid through a "sales plan" involving the use of commissions may elect to contribute up to 40% of Base Compensation.  For the 2008 Plan Year, only Salary and Short Term Incentive Awards paid after Termination of Employment may be contributed to the Plan.

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Article 8 - Options

 

8.1          Grants.

Options may be issued in definitive form or recorded on the books and records of AT&T for the account of the Participant, at the discretion of AT&T.  If AT&T elects not to issue the Options in definitive form, they shall be deemed issued, and the Participants shall have all rights incident thereto as if they were issued on the dates provided herein, without further action on the part of AT&T or the Participant.  In addition to the terms herein, all Options shall be subject to such additional provisions and limitations as provided in any Administrative Procedures adopted by the Committee prior to the issuance of such Options.  The number of Options issued to a Participant shall be reflected on the Participant's annual statement of account.

 

8.2          Term of Options.

The Options may only be exercised:  (a) after the earlier of (i) the expiration of one (1) year from date of issue or (ii) the Participant's Termination of Employment, and (b) no later than the tenth (10 th ) anniversary of their issue; and Options shall be subject to earlier termination as provided herein.

 

8.3          Exercise Price.

The Exercise Price of an Option shall be the FMV of the Stock on the date of issuance of the Option, and an Option may not be repriced.

 

8.4          Issuance of Options.

 

(a) For each Share Deferral Account established by a Participant pursuant to an Employee Contribution election where such election was made prior to January 1, 2010:

 

(1)  on June 15 of the Plan Year for the Share Deferral Account, the Participant shall receive two (2) Options for each Share Unit acquired by the Participant as part of such Share Deferral Account during the immediately preceding January through May period with Employee Contributions of Base Compensation and/or Short Term Incentive Award.  A fractional number of Options shall be rounded up to the next whole number.

 

(2)  on the February 15 immediately following the Plan Year for the Share Deferral Account, a Participant shall receive:

 

(i)

two (2) Options for each Share Unit acquired by the Participant as part of such Share Deferral Account during the immediately preceding June through the remainder of the relevant Plan Year with Employee Contributions of Base Compensation and/or Short Term Incentive Award; and

 

(ii) two (2) Options for each Share Unit acquired prior to such date by the Participant with dividend equivalents that were derived, directly or indirectly (such as dividend equivalents paid on Share Units acquired with dividend equivalents), from Share Units acquired with Employee Contributions as part of such Share Deferral Account.

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(b) A fractional number of Options shall be rounded up to the next whole number.

 

(c) If Stock is not traded on the NYSE on any of the foregoing Option issuance dates, then the Options shall not be issued until the next such day on which Stock is so traded.

 

(d) If a Participant Terminates Employment other than (i) while Retirement eligible or (ii) because of death or Disability, no further Options shall be issued to or with respect to such Participant.  In the event of re-Employment following a Termination of Employment, the preceding sentence shall not apply to those Options resulting from participation in the Plan after such re-Employment until a subsequent Termination of Employment.

 

(e) No more than 400,000 Options shall be issued to any individual under this Plan during a calendar year.  No Share Unit may be counted more than once for the issuance of Options.

 

(f) The Committee may, in its sole discretion, at any time, increase or lower the number of Options that are to be issued for each Share Unit acquired, not to exceed two (2) Options per Share Unit purchased.  However, if the Committee lowers the number of Options, then such change shall only be effective with respect to the next Share Deferral Account a Participant may elect to establish.

 

(g) The Committee may also, at any time and in any manner, limit the number of Options which may be acquired as a result of the Short Term Incentive Award being contributed to the Plan.  Further, except as otherwise provided by the Committee, in determining the number of Options to be issued to a Participant with respect to a Participant's contribution of a Short Term Incentive Award to the Plan and subsequent crediting of Share Units, Options may be issued only with respect to an amount which does not exceed the target amount of such award (or such other portion of the award as may be determined by the Committee).  Where a Participant's election to contribute a Short Term Incentive Award to the Plan becomes applicable to Annual Bonus, the above limitation on options shall apply to the contribution of Annual Bonus as though it were a Short Term Incentive Award.

 

(h) No options shall be issued to or in respect of a Participant for a particular issuance, unless at least ten (10) Options will be issued to that Participant.

 

8.5          Exercise and Payment of Options.

Options shall be exercised by providing notice to the designated agent selected by AT&T (if no such agent has been designated, then to AT&T), in the manner and form determined by AT&T, which notice shall be irrevocable, setting forth the exact number of shares of Stock with respect to which the Option is being exercised and including with such notice payment of the Exercise Price.  When Options have been transferred, AT&T or its designated agent may require appropriate documentation that the person or persons exercising the Option, if other than the Participant, has the right to exercise the Option.  No Option may be exercised with respect to a fraction of a share of Stock.

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Exercises of Options may be effected only on days and during the hours that the New York Stock Exchange is open for regular trading or as otherwise provided or limited by AT&T.  If an Option expires on a day or at a time when exercises are not permitted, then the Options may be exercised no later than the immediately preceding date and time that the Options were exercisable.

 

The Exercise Price shall be paid in full at the time of exercise.  No Stock shall be issued or transferred until full payment has been received therefore.

 

Payment may be made:

 

(a) in cash, or

 

(b) unless otherwise provided by the Committee at any time, and subject to such additional terms and conditions and/or modifications as AT&T may impose from time to time, and further subject to suspension or termination of this provision by AT&T at any time, by:

 

(i) electing a Stock-Settled Exercise on or after February 1, 2013.  Upon exercise of Options through a Stock-Settled Exercise, the Participant shall receive that number of shares of Stock found by (1) subtracting the Exercise Price of an Option being exercised (on a per share basis) from the FMV of the Stock as of the immediately preceding day that the Stock was traded on the NYSE, (2) multiplying the difference by the number of Options being exercised, and (3) dividing the result by the same FMV.  For example, a Participant exercises 1,000 Options with an Exercise Price of $30 (exercises may only occur on a day when the NYSE is open for regular trading) and the FMV for the immediately preceding trading day was $40.  In that case, the Participant would receive his $10,000 profit in the form of 250 shares of Stock, subject to tax withholding and any other costs provided under this Plan.

 

or;

 

(ii) if AT&T has designated a stockbroker to act as AT&T's agent to process Option exercises, issuance of an exercise notice to such stockbroker together with instructions irrevocably instructing the stockbroker:  (A) to immediately sell (which shall include an exercise notice that becomes effective upon execution of a sell order) a sufficient portion of the Stock to pay the Exercise Price of the Options being exercised and the required tax withholding, and (B) to deliver on the settlement date the portion of the proceeds of the sale equal to the Exercise Price and tax withholding to AT&T.  In the event the stockbroker sells any Stock on behalf of a Participant, the stockbroker shall be acting solely as the agent of the Participant, and AT&T disclaims any responsibility for the actions of the stockbroker in making any such sales.  No Stock shall be issued until the settlement date and until the proceeds (equal to the Exercise Price and tax withholding) are paid to AT&T.

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8.6          Restrictions on Exercise and Transfer.

No Option shall be transferable except: (a) upon the death of a Participant in accordance with AT&T's Rules for Employee Beneficiary Designations, as the same may be amended from time to time; and (b) in the case of any holder after the Participant's death, only by will or by the laws of descent and distribution.  During the Participant's lifetime, the Participant's Options shall be exercisable only by the Participant or by the Participant's guardian or legal representative.  After the death of the Participant, an Option shall only be exercised by the holder thereof (including but not limited to an executor or administrator of a decedent's estate) or his or her guardian or legal representative.  In each such case the Option holder shall be considered a Participant for the limited purpose of exercising such Options.

 

8.7          Termination of Employment.

(a)  Not Retirement Eligible.  Unless otherwise provided by the Committee, if a Participant Terminates Employment while not Retirement eligible, a Participant's Options may be exercised, to the extent then exercisable:

 

(i) if such Termination of Employment is by reason of death or Disability, then for a period of three (3) years from the date of such Termination of Employment or until the expiration of the stated term of such Option, whichever period is shorter; or

 

(ii) if such Termination of Employment is for any other reason, then for a period of one (1) year from the date of such Termination of Employment or until the expiration of the stated term of such Option, whichever period is shorter.

 

(b)  Retirement Eligible.  Unless otherwise provided by the Committee, if a Participant Terminates Employment while Retirement eligible, the Participant's Option may be exercised, to the extent then exercisable:  (i) for a period of five (5) years from the date of Retirement or (ii) until the expiration of the stated term of such Option, whichever period is shorter.

 

(c) Re-Employment of a Participant after a Termination of Employment shall have no effect on the periods during which Options resulting from the prior Employment may be exercised.  For example, if the Option exercise period has been shortened because of the prior Termination of Employment, it shall not be extended because of the re-Employment.

 

(d)  Notwithstanding any other definition of Termination of Employment under this Plan, for purposes of this Article 8 - Options only, a Termination of Employment shall mean the cessation of the Employee being employed by any corporation, partnership, venture or other entity in which AT&T holds, directly or indirectly, a 50% or greater ownership interest, including but not limited to where AT&T ceases to hold such interest in the employing company.  In addition, the definition of Retirement for purposes of this Article 8 shall use the immediately foregoing definition of Termination of Employment in  lieu of any other definition.

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Article 9 - Discontinuation, Termination, Amendment.

 

9.1          AT&T's Right to Discontinue Offering Share Units.

The Committee may at any time discontinue offerings of Share Units under the Plan.  Any such discontinuance shall have no effect upon existing Share Units or the terms or provisions of this Plan as applicable to such Share Units.

 

9.2          AT&T's Right to Terminate Plan.

The Committee may terminate the Plan at any time.  Upon termination of the Plan, contributions shall no longer be made under the Plan.

 

After termination of the Plan, Participants shall continue to earn dividend equivalents in the form of Share Units on undistributed Share Units and shall continue to receive all distributions under this Plan at such time as provided in and pursuant to the terms and conditions of Participant's elections and this Plan.  Notwithstanding the foregoing, the termination of the Plan shall be made solely in accordance with Section 409A of the Code and in no event shall cause the accelerated distribution of any Account unless such termination is effected in accordance with Section 409A of the Code.

 

9.3

Amendment.

The Committee may at any time amend the Plan in whole or in part including but not limited to changing the formulas for determining the amount of AT&T Matching Contributions under Article 5 or decreasing the number of Options to be issued under Article 8; provided, however, that no amendment, including but not limited to an amendment to this section, shall be effective, without the consent of a Participant, to alter, to the material detriment of such Participant, a Share Deferral Account of the Participant, other than as provided elsewhere in this section.   For purposes of this section, an alteration to the material detriment of a Participant shall include, but not be limited to, a material reduction in the period of time over which Stock may be distributed to a Participant, any reduction in the Participant's number of vested Share Units or Options, or an increase in the Exercise Price or decrease in the term of an Option.   Any such consent may be in a writing, telecopy, or e-mail or in another electronic format. An election to acquire Share Units with Employee Contributions shall be conclusively deemed to be the consent of the Participant to any and all amendments to the Plan prior to such election, and such consent shall be a condition to making any election with respect to Employee Contributions.

 

Notwithstanding anything to the contrary contained in this section of the Plan, the Committee may modify this Plan with respect to any person subject to the provisions of Section 16 of the Securities Exchange Act of 1934, as amended ("Exchange Act") to place additional restrictions on the exercise of any Option or the transfer of any Stock not yet issued under the Plan.

 

The Plan is established in order to provide deferred compensation to a select group of management and highly compensated employees with in the meaning of Sections 201(2) and 301(a)(3) of ERISA. To the extent legally required, the Code and ERISA shall govern the Plan, and if any provision hereof is in violation of an applicable requirement thereof, the Company reserves the right to retroactively amend the Plan to comply therewith to the extent permitted

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under the Code and ERISA.  The Company also reserves the right to make such other changes as may facilitate implementation of Section 409A of the Code.  Provided, however, that in no event shall any such ame