TIDM58KN
RNS Number : 3835Y
AT & T Inc.
16 May 2016
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
QUARTERLY REPORT PURSUANT
x TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period
ended March 31, 2016
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" and "smaller reporting company"
in Rule 12b-2 of the Exchange Act.
Large accelerated [X] Accelerated filer [ ]
filer
Non-accelerated [ ] (Do not check if a smaller Smaller reporting [ ]
filer reporting company) company
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, 2016, there were 6,156 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,
2016 2015
------------------------------------------------ ------- -------
Operating Revenues
Service $37,101 $28,962
Equipment 3,434 3,614
------------------------------------------------- ------ ------
Total operating revenues 40,535 32,576
------------------------------------------------- ------ ------
Operating Expenses
Cost of services and sales
Equipment 4,375 4,546
Broadcast, programming and operations 4,629 1,122
Other cost of services (exclusive of
depreciation
and amortization shown separately below) 9,396 8,812
Selling, general and administrative 8,441 7,961
Depreciation and amortization 6,563 4,578
------------------------------------------------- ------ ------
Total operating expenses 33,404 27,019
------------------------------------------------- ------ ------
Operating Income 7,131 5,557
------------------------------------------------- ------ ------
Other Income (Expense)
Interest expense (1,207) (899)
Equity in net income of affiliates 13 -
Other income (expense) - net 70 70
------------------------------------------------- ------ ------
Total other income (expense) (1,124) (829)
------------------------------------------------- ------ ------
Income Before Income Taxes 6,007 4,728
Income tax expense 2,122 1,389
------------------------------------------------- ------ ------
Net Income 3,885 3,339
------------------------------------------------- ------ ------
Less: Net Income Attributable to Noncontrolling
Interest (82) (76)
------------------------------------------------- ------ ------
Net Income Attributable to AT&T $ 3,803 $ 3,263
================================================= ====== ======
Basic Earnings Per Share Attributable
to AT&T $ 0.62 $ 0.63
Diluted Earnings Per Share Attributable
to AT&T $ 0.61 $ 0.63
------------------------------------------------- ------ ------
Weighted Average Number of Common Shares
Outstanding - Basic (in millions) 6,172 5,203
Weighted Average Number of Common Shares
Outstanding - with Dilution (in millions) 6,190 5,219
Dividends Declared Per Common Share $ 0.48 $ 0.47
================================================= ====== ======
See Notes to Consolidated Financial Statements.
2
AT&T INC.
--------------------------------------------------- ------ ------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
Dollars in millions
(Unaudited)
--------------------------------------------------- ------ ------
Three months
ended
March 31,
2016 2015
--------------------------------------------------- ------ ------
Net income $3,885 $3,339
Other comprehensive income, net of tax:
Foreign currency:
Foreign currency translation adjustment,
net of taxes of $(10) and $(104) (44) (186)
Available-for-sale securities:
Net unrealized gains (losses), net of
taxes of $(15) and $19 (26) 33
Reclassification adjustment included in
net income, net of taxes of $(2) and $(3) (3) (5)
Cash flow hedges:
Net unrealized gains (losses), net of
taxes of $67 and $(190) 124 (354)
Reclassification adjustment included in
net income, net of taxes of $5 and $4 10 7
Defined benefit postretirement plans:
Amortization of net prior service credit
included in net income, net of taxes of
$(131)
and $(131) (215) (215)
---------------------------------------------------- ----- -----
Other comprehensive income (loss) (154) (720)
---------------------------------------------------- ----- -----
Total comprehensive income 3,731 2,619
Less: Total comprehensive income attributable
to noncontrolling interest (82) (76)
---------------------------------------------------- ----- -----
Total Comprehensive Income Attributable
to AT&T $3,649 $2,543
==================================================== ===== =====
See Notes to Consolidated Financial Statements.
3
AT&T INC.
-------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
-------------------------------------------------------------------------
December
March 31, 31,
2016 2015
--------------------------------------------- ------------- ---------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 10,008 $ 5,121
Accounts receivable - net of allowances
for doubtful accounts of $697 and $704 16,070 16,532
Prepaid expenses 1,378 1,072
Other current assets 10,545 13,267
---------------------------------------------- --------- --------
Total current assets 38,001 35,992
---------------------------------------------- --------- --------
Property, plant and equipment 309,380 306,227
Less: accumulated depreciation and
amortization (185,926) (181,777)
---------------------------------------------- --------- --------
Property, Plant and Equipment - Net 123,454 124,450
---------------------------------------------- --------- --------
Goodwill 104,651 104,568
Licenses 94,130 93,093
Customer Lists and Relationships - Net 17,197 18,208
Other Intangible Assets - Net 9,108 9,409
Investments in Equity Affiliates 1,594 1,606
Other Assets 15,503 15,346
---------------------------------------------- --------- --------
Total Assets $ 403,638 $ 402,672
============================================== ========= ========
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year $ 8,399 $ 7,636
Accounts payable and accrued liabilities 26,169 30,372
Advanced billing and customer deposits 4,550 4,682
Accrued taxes 2,455 2,176
Dividends payable 2,955 2,950
---------------------------------------------- --------- --------
Total current liabilities 44,528 47,816
---------------------------------------------- --------- --------
Long-Term Debt 122,104 118,515
---------------------------------------------- --------- --------
Deferred Credits and Other Noncurrent
Liabilities
Deferred income taxes 57,489 56,181
Postemployment benefit obligation 34,114 34,262
Other noncurrent liabilities 20,998 22,258
---------------------------------------------- --------- --------
Total deferred credits and other noncurrent
liabilities 112,601 112,701
---------------------------------------------- --------- --------
Stockholders' Equity
Common stock ($1 par value, 14,000,000,000
authorized at March 31, 2016 and
December 31, 2015: issued 6,495,231,088
at March 31, 2016 and December 31, 2015) 6,495 6,495
Additional paid-in capital 89,414 89,763
Retained earnings 34,506 33,671
Treasury stock (339,006,986 at March
31, 2016 and 350,291,239
at December 31, 2015, at cost) (12,163) (12,592)
Accumulated other comprehensive income 5,180 5,334
Noncontrolling interest 973 969
---------------------------------------------- --------- --------
Total stockholders' equity 124,405 123,640
---------------------------------------------- --------- --------
Total Liabilities and Stockholders'
Equity $ 403,638 $ 402,672
============================================== ========= ========
See Notes to Consolidated Financial
Statements.
4
AT&T INC.
---------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
---------------------------------------------------------------------
Three months
ended
March 31,
2016 2015
------------------------------------------------ ------- --------
Operating Activities
Net income $ 3,885 $ 3,339
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,563 4,578
Undistributed earnings from investments
in equity affiliates (13) -
Provision for uncollectible accounts 374 285
Deferred income tax expense 1,346 252
Net gain from sale of investments, net
of impairments (44) (33)
Changes in operating assets and liabilities:
Accounts receivable 627 739
Other current assets 612 408
Accounts payable and accrued liabilities (4,006) (1,817)
Retirement benefit funding (140) (140)
Other - net (1,304) (873)
------------------------------------------------- ------ -------
Total adjustments 4,015 3,399
------------------------------------------------- ------ -------
Net Cash Provided by Operating Activities 7,900 6,738
------------------------------------------------- ------ -------
Investing Activities
Construction and capital expenditures:
Capital expenditures (4,451) (3,848)
Interest during construction (218) (123)
Acquisitions, net of cash acquired (165) (19,514)
Dispositions 81 8
Sale of securities, net 445 1,890
------------------------------------------------- ------ -------
Net Cash Used in Investing Activities (4,308) (21,587)
------------------------------------------------- ------ -------
Financing Activities
Issuance of long-term debt 5,978 16,572
Repayment of long-term debt (2,296) (596)
Issuance of treasury stock 89 8
Dividends paid (2,947) (2,434)
Other 471 (2,860)
------------------------------------------------- ------ -------
Net Cash Provided by Financing Activities 1,295 10,690
------------------------------------------------- ------ -------
Net increase (decrease) in cash and cash
equivalents 4,887 (4,159)
Cash and cash equivalents beginning of
year 5,121 8,603
------------------------------------------------- ------ -------
Cash and Cash Equivalents End of Period $10,008 $ 4,444
================================================= ====== =======
Cash paid (received) during the three
months ended March 31 for:
Interest $ 1,459 $ 1,021
Income taxes, net of refunds $ 477 $ (247)
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, 2016
---------------------
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 $ 89,763
Issuance of treasury stock (41)
Share-based payments (308)
-------------------------------------------------- ------ -------
Balance at end of period $ 89,414
================================================== ====== =======
Retained Earnings
Balance at beginning of year $ 33,671
Net income attributable to AT&T ($0.61
per diluted share) 3,803
Dividends to stockholders ($0.48 per
share) (2,968)
-------------------------------------------------- ------ -------
Balance at end of period $ 34,506
================================================== ====== =======
Treasury Stock
Balance at beginning of year (350) $(12,592)
Issuance of treasury stock 11 429
-------------------------------------------------- ------ -------
Balance at end of period (339) $(12,163)
================================================== ====== =======
Accumulated Other Comprehensive Income
Attributable to AT&T, net of tax
Balance at beginning of year $ 5,334
Other comprehensive loss attributable
to AT&T (154)
-------------------------------------------------- ------ -------
Balance at end of period $ 5,180
================================================== ====== =======
Noncontrolling Interest
Balance at beginning of year $ 969
Net income attributable to noncontrolling
interest 82
Distributions (78)
-------------------------------------------------- ------ -------
Balance at end of period $ 973
================================================== ====== =======
Total Stockholders' Equity at beginning
of year $123,640
================================================== ====== =======
Total Stockholders' Equity at end of
period $124,405
================================================== ====== =======
See Notes to Consolidated Financial Statements.
6
AT&T INC.
MARCH 31, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS
Basis of Presentation Throughout this document, AT&T Inc. is
referred to as "AT&T," "we" or the "Company." These
consolidated financial statements include all adjustments that are
necessary to present fairly the results for the presented interim
periods, consisting of normal recurring accruals and other items.
The results for the interim periods are not necessarily indicative
of those for the full year. You should read this document in
conjunction with the consolidated financial statements and
accompanying notes included in our Annual Report on Form 10-K for
the year ended December 31, 2015.
The consolidated financial statements include the accounts of
the Company and our majority-owned subsidiaries and affiliates,
including the results of DIRECTV and wireless properties in Mexico
for the period from acquisition to the reporting date. Our
subsidiaries and affiliates operate in the communications and
digital entertainment services industry, providing services and
equipment that deliver voice, video and broadband services
domestically and internationally.
All significant intercompany transactions are eliminated in the
consolidation process. Investments in less than majority-owned
subsidiaries and partnerships where we have significant influence
are accounted for under the equity method. Earnings from certain
investments accounted for using the equity method are included for
periods ended within up to one 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 conformed to
the current period's presentation, including our change in
accounting to capitalize customer set-up and installations costs
and amortize them over the expected economic life of the customer
relationship. The consolidated statements of income also include
revisions to present "Equipment" and "Broadcast, programming and
operations" costs separately from "Other cost of services."
New Accounting Standards
Leases In February 2016, the Financial Accounting Standards
Board (FASB) issued ASU No. 2016-02, "Leases (Topic 842)" (ASU
2016-02), which replaces existing leasing rules with a
comprehensive lease measurement and recognition standard and
expanded disclosure requirements. ASU 2016-02 will require lessees
to recognize most leases on their balance sheets as liabilities,
with corresponding "right-of-use" assets. Leases will be classified
as either a finance or an operating lease without relying upon the
bright-line tests under current GAAP.
Upon initial evaluation, we believe the key change upon adoption
will be the balance sheet recognition. The income statement
recognition appears similar to our current methodology.
ASU 2016-02 becomes effective for annual reporting periods
beginning after December 15, 2018, subject to early adoption. We
have just begun our evaluation of the impact on our financial
statements, as well as available adoption methods, but we believe
our implementation of the revenue recognition standard discussed
below could influence the timing of our adoption of ASU
2016-02.
Revenue Recognition In May 2014, the FASB issued ASU No.
2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU
2014-09) and has since modified the standard with ASU 2015-14,
"Deferral of the Effective Date," ASU 2016-08, "Revenue from
Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net)," and ASU
2016-10, "Revenue from Contracts with Customers (Topic 606):
Identifying Performance Obligations and Licensing." These standards
replace existing revenue recognition rules with a comprehensive
revenue measurement and recognition standard and expanded
disclosure requirements. ASU 2014-09, as amended, becomes effective
for annual reporting periods beginning after December 15, 2017, at
which point we plan to adopt the standard.
7
AT&T INC.
MARCH 31, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-Continued
Dollars in millions except per share amounts
The FASB allows two adoption methods under ASU 2014-09. Under
one method, a company will apply the rules to contracts in all
reporting periods presented, subject to certain allowable
exceptions. Under the other method, a company 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 rules ("modified retrospective method"). We
continue to evaluate the impact of the new standard and available
adoption methods.
Upon initial evaluation, we believe the key changes in the
standard that impact our revenue recognition relate to the
allocation of contract revenues between various services and
equipment, and the timing of when those revenues are recognized. We
are still in the process of evaluating these impacts. As a result
of our accounting policy change for customer set-up and
installation costs in 2015, we believe under the new standard that
the requirement to defer such costs will not result in a
significant change to our results. However, the requirement to
defer incremental contract acquisition costs and recognize them
over the contract period or expected customer life will result in
the recognition of a deferred charge on our balance sheets. We
cannot currently estimate the impact of this change upon adoption,
as the industry continues to undergo changes in how devices and
services are sold to customers.
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic
earnings per share and diluted earnings per share for the three
months ended March 31, 2016 and 2015, is shown in the table
below:
Three months
ended
March 31,
2016 2015
--------------------------------------------------- ------ ------
Numerators
Numerator for basic earnings per share:
Net income $3,885 $3,339
Less: Net income attributable to noncontrolling
interest (82) (76)
---------------------------------------------------- ----- -----
Net income attributable to AT&T 3,803 3,263
Dilutive potential common shares:
Share-based payment 4 4
---------------------------------------------------- ----- -----
Numerator for diluted earnings per share $3,807 $3,267
==================================================== ===== =====
Denominators (000,000)
Denominator for basic earnings per share:
Weighted-average number of common shares
outstanding 6,172 5,203
Dilutive potential common shares:
Share-based payment (in shares) 18 16
---------------------------------------------------- ----- -----
Denominator for diluted earnings per share 6,190 5,219
==================================================== ===== =====
Basic earnings per share attributable to
AT&T $ 0.62 $ 0.63
Diluted earnings per share attributable
to AT&T $ 0.61 $ 0.63
==================================================== ===== =====
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.
Following our 2015 acquisitions of DIRECTV and wireless
businesses in Mexico, we have additional foreign operations that
are exposed to fluctuations in the exchange rates used to convert
operations, assets and liabilities into U.S. dollars. Since
December 31, 2015, when compared to the U.S. dollar, the Brazilian
real exchange rate has appreciated 9.3%, the Argentine peso
exchange rate has depreciated 13.7% and the Mexican peso exchange
rate has depreciated 0.4%.
8
AT&T INC.
MARCH 31, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-Continued
Dollars in millions except per share amounts
At March 31, 2016, and
for the period ended:
Net
Unrealized
Gains Net Unrealized
(Losses) Gains
Foreign on (Losses) Defined Accumulated
Currency Available- on Cash Benefit Other
Translation for-Sale Flow Postretirement Comprehensive
Adjustment Securities Hedges Plans 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) (2) 10 (3) (215) (4) (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
At March 31, 2015, and
for the period ended:
Net
Unrealized
Gains Net Unrealized
(Losses) Gains
Foreign on (Losses) Defined Accumulated
Currency Available- on Cash Benefit Other
Translation for-Sale Flow Postretirement Comprehensive
Adjustment Securities Hedges Plans Income
Balance as of
December
31, 2014 $ (26) $ 499 $ 741 $ 6,847 $ 8,061
Other comprehensive
income
(loss) before
reclassifications (186) 33 (354) - (507)
Amounts
reclassified
from accumulated
OCI - (1) (5) (2) 7 (3) (215) (4) (213)
------------------- --------- ----- ---------- ---- ---------- ---- ------------- ---- ------------
Net other
comprehensive
income (loss) (186) 28 (347) (215) (720)
Balance as of March
31, 2015 $ (212) $ 527 $ 394 $ 6,632 $ 7,341
Translation (gain) loss reclassifications are included
in Other income (expense) - net in the consolidated
(1) statements of income.
(Gains) losses are included in Other income (expense)
(2) - net in the consolidated statements of income.
(Gains) losses are included in interest expense in
the consolidated statements of income. See Note 6
(3) for additional information.
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
(4) 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. Due to recent organizational changes and our July 24,
2015, acquisition of DIRECTV, effective for the quarter ended
September 30, 2015, we revised our operating segments to align with
our new management structure and organizational responsibilities.
We analyze our operating segments based on segment contribution,
which consists of operating income, excluding acquisition-related
costs and other significant items (as discussed below), and equity
in net income of affiliates for investments managed within each
operating segment. We have four reportable segments: (1) Business
Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4)
International.
9
AT&T INC.
MARCH 31, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-Continued
Dollars in millions except per share amounts
We also evaluate segment performance based on segment operating
income before depreciation and amortization, which we refer to as
EBITDA and/or EBITDA margin. We believe EBITDA to be a relevant and
useful measurement to our investors as it is part of our internal
management reporting and planning processes and it is an important
metric that management uses to evaluate segment operating
performance. EBITDA does not give effect to cash used for debt
service requirements and thus does not reflect available funds for
distributions, reinvestment or other discretionary uses.
The Business Solutions segment provides services to business,
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 strategic business services; as well as traditional data and
voice products. We utilize our wireless and wired networks
(referred to as "wired" or "wireline") 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 U.S. 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 and wireless wholesale and resale subscribers
located in the U.S. or in U.S. territories. We utilize our U.S.
wireless network to provide voice and data services, including
high-speed Internet, video, and home monitoring services.
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 operating segments are not being evaluated, including
interest costs and expected return on plan assets for our pension
and postretirement benefit plans.
Certain operating items are not allocated to our business
segments:
-- Acquisition-related items include (1) operations
and support items associated with the merger and
integration of newly acquired businesses, and (2)
the noncash amortization of intangible assets acquired
in acquisitions.
-- Certain significant items include (1) noncash actuarial
gains and losses from pension and other postretirement
benefits, (2) employee separation charges associated
with voluntary and/or strategic offers, (3) 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. Therefore, these items are also not
included in each segment's reportable results.
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 operating segment, and therefore asset
information and capital expenditures by segment are not presented.
Depreciation is allocated based on network usage or asset
utilization by segment.
10
AT&T INC.
MARCH 31, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-Continued
Dollars in millions except per share amounts
For the three months ended March 31, 2016
--------------------------------------------------------------------------------------------------------------
Equity
in
Net
Operations Income
and Depreciation Operating (Loss)
Support and Income of Segment
Revenue Expenses EBITDA Amortization (Loss) Affiliates 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
For the three months ended March 31, 2015
--------------------------------------------------------------------------------------------------------------
Equity
in
Net
Operations Income
and Depreciation Operating (Loss)
Support and Income of Segment
Revenue Expenses EBITDA Amortization (Loss) Affiliates Contribution
-------------------- ------- ---------- ------- ------------ --------- ---------- ------------
Business Solutions $ 17,557 $ 11,073 $ 6,484 $ 2,342 $ 4,142 $ - $ 4,142
Entertainment
Group 5,660 4,859 801 1,065 (264) (6) (270)
Consumer Mobility 8,778 5,541 3,237 1,002 2,235 - 2,235
International 236 218 18 28 (10) - (10)
-------------------- ------- ---------- ------- ------------ --------- ---------- ------------
Segment Total 32,231 21,691 10,540 4,437 6,103 $ (6) $ 6,097
-------------------- ------- ---------- ------- ------------ --------- ---------- ------------
Corporate
and Other 345 234 111 20 91
Acquisition-related
items - 299 (299) 121 (420)
Certain significant
items - 217 (217) - (217)
-------------------- ------- ---------- ------- ------------ ---------
AT&T Inc. $ 32,576 $ 22,441 $ 10,135 $ 4,578 $ 5,557
==================== ======= ========== ======= ============ =========
11
AT&T INC.
MARCH 31, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-Continued
Dollars in millions except per share amounts
The following table is a reconciliation of operating
contribution to "Income Before Income Taxes" reported
on our consolidated statements of income.
First Quarter
----------------
2016 2015
------------------------------------------ ------- ------
Business Solutions $ 4,299 $4,142
Entertainment Group 1,595 (270)
Consumer Mobility 2,494 2,235
International (184) (10)
Segment Operating Contribution 8,204 6,097
------------------------------------------- ------ -----
Reconciling Items:
Corporate and Other (121) 91
Merger and integration charges (295) (299)
Amortization of intangibles acquired (1,351) (121)
Employee separation charges (25) (217)
Gain on wireless spectrum transactions 736 -
Segment equity in net (income) loss
of affiliates (17) 6
AT&T Operating Income 7,131 5,557
------------------------------------------- ------ -----
Interest Expense 1,207 899
Equity in net income (loss) of affiliates 13 -
Other income (expense) - Net 70 70
------------------------------------------- ------ -----
Income Before Income Taxes $ 6,007 $4,728
=========================================== ====== =====
NOTE 5. PENSION AND POSTRETIREMENT BENEFITS
Substantially all of our employees are covered by one of our
noncontributory pension plans. We also provide certain medical,
dental, life insurance and death benefits to certain retired
employees under various plans and accrue actuarially determined
postretirement benefit costs. Our objective in funding these plans,
in combination with the standards of the Employee Retirement Income
Security Act of 1974, as amended (ERISA), is to accumulate assets
sufficient to provide benefits described in the plans to employees
upon their retirement.
In 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 fair value of $8,787 at March 31, 2016. The
trust is entitled to receive cumulative cash distributions of $560
per annum, which will be distributed quarterly in equal amounts and
will be accounted for as contributions. We distributed $140 to the
trust during the three months ended March 31, 2016. 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 have also agreed to make a cash contribution
to the trust of $175 no later than the due date of our federal
income tax return for 2015.
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.
12
AT&T INC.
MARCH 31, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-Continued
Dollars in millions except per share amounts
Three months
ended
March 31,
2016 2015
------------------------------------------------- -------- -----
Pension cost:
Service cost - benefits earned during the
period $ 278 $ 299
Interest cost on projected benefit obligation 495 474
Expected return on assets (778) (826)
Amortization of prior service credit (26) (26)
-------------------------------------------------- ---- ----
Net pension (credit) cost $ (31) $ (79)
================================================== ==== ====
Postretirement cost:
Service cost - benefits earned during the
period $ 48 $ 55
Interest cost on accumulated postretirement
benefit obligation 243 242
Expected return on assets (89) (105)
Amortization of prior service credit (319) (320)
-------------------------------------------------- ---- ----
Net postretirement (credit) cost $ (117) $(128)
================================================== ==== ====
Combined net pension and postretirement
(credit) cost $ (148) $(207)
================================================== ==== ====
The increase of $59 in the first quarter of 2016 is primarily
due to a lower expected return on assets resulting from a decrease
in the value in the plan assets.
We also provide senior- and middle-management employees with
nonqualified, unfunded supplemental retirement and savings plans.
For the first quarter ended 2016 and 2015, net supplemental
retirement pension benefits costs not included in the table above,
were $23 and $20, respectively.
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 Inputs to the valuation methodology are unadjusted
1 quoted prices for identical assets or liabilities
in active markets that we have the ability to access.
Level Inputs to the valuation methodology include:
2
-- 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 Inputs to the valuation methodology are unobservable
3 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, 2016
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, 2015.
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, 2016 December 31, 2015
------------------ ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------- -------- -------- ----------- --------
Notes and debentures(1) $129,229 $137,865 $ 124,847 $128,993
Bank borrowings 4 4 4 4
Investment securities 2,592 2,592 2,704 2,704
=============================== ======= ======= ======= =======
(1) Includes credit agreement
borrowings.
The carrying value of debt with an original maturity of less
than one year approximates market value. The fair value
measurements used for notes and debentures are considered Level 2
and are determined using various methods, including quoted prices
for identical or similar securities in both active and inactive
markets. The carrying and fair values included above reflect our
March 2016 debt exchange of $16,049 of DIRECTV notes for AT&T
global notes with matching terms.
Following is the fair value leveling for available-for-sale
securities and derivatives as of March 31, 2016, and December 31,
2015:
March 31, 2016
---------------------------------------
Level Level Level
1 2 3 Total
------------------------------------ --------- -------- ------- --------
Available-for-Sale Securities
Domestic equities $ 1,111 $ - $ - $ 1,111
International equities 541 - - 541
Fixed income bonds - 676 - 676
Asset Derivatives(1)
Interest rate swaps - 197 - 197
Cross-currency swaps - 519 - 519
Liability Derivatives(1)
Cross-currency swaps - (2,582) - (2,582 )
===================================== ===== ======= === =======
(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, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-Continued
Dollars in millions except per share amounts
December 31, 2015
---------------------------------------
Level Level Level
1 2 3 Total
------------------------------------ --------- -------- ------- --------
Available-for-Sale Securities
Domestic equities $ 1,132 $ - $ - $ 1,132
International equities 569 - - 569
Fixed income bonds - 680 - 680
Asset Derivatives(1)
Interest rate swaps - 136 - 136
Cross-currency swaps - 556 - 556
Foreign exchange contracts - 3 - 3
Liability Derivatives(1)
Cross-currency swaps - (3,466) - (3,466 )
===================================== ===== ======= === =======
(1) Derivatives designated as hedging instruments are
reflected as "Other assets," "Other noncurrent liabilities"
and, for a portion of interest rate swaps, "Other current
assets" in our consolidated balance sheets.
Investment Securities
Our investment securities include equities, fixed income bonds
and other securities. A substantial portion of the fair values of
our available-for-sale securities was estimated based on quoted
market prices. Investments in securities not traded on a national
securities exchange are valued using pricing models, quoted prices
of securities with similar characteristics or discounted cash
flows. Realized gains and losses on securities are included in
"Other income (expense) - net" in the consolidated statements of
income using the specific identification method. Unrealized gains
and losses, net of tax, on available-for-sale securities are
recorded in accumulated OCI. Unrealized losses that are considered
other than temporary are recorded in "Other income (expense) - net"
with the corresponding reduction to the carrying basis of the
investment. Fixed income investments of $99 have maturities of less
than one year, $308 within one to three years, $65 within three to
five years, and $204 for five or more years.
Our cash equivalents (money market securities), short-term
investments (certificate and time deposits) and customer deposits
are recorded at amortized cost, and the respective carrying amounts
approximate fair values. Short-term investments and 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, 2016, and
March 31, 2015, no ineffectiveness was measured on interest rate
swaps designated as fair value hedges.
15
AT&T INC.
MARCH 31, 2016
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
denominations 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, 2016, and March
31, 2015, 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, 2016, and
March 31, 2015, 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, 2016, we had posted collateral of
$1,743 (a deposit asset) and held collateral of $111 (a receipt
liability). Under the agreements, if our 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 $130. If DIRECTV Holdings LLC's credit
rating had been downgraded below BBB- (S&P) and below Baa3
(Moody's), we would owe an additional $195. At December 31, 2015,
we had posted collateral of $2,343 (a deposit asset) and held
collateral of $124 (a receipt liability). We do not offset the fair
value of collateral, whether the right to reclaim cash collateral
(a receivable) or the obligation to return cash collateral (a
payable) exists, against the fair value of the derivative
instruments.
Following is the notional amount of our outstanding derivative
positions:
March December
31, 31,
2016 2015
--------------------------- ------- ----------
Interest rate swaps $ 7,050 $ 7,050
Cross-currency swaps 29,642 29,642
Foreign exchange contracts 3 100
---------------------------- ------ ------
Total $36,695 $ 36,792
============================ ====== ======
16
AT&T INC.
MARCH 31, 2016
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
-------------------------------------------- --------- -------
Three months
ended
-------------------------------------------- -------------------
March March
31, 31,
Fair Value Hedging Relationships 2016 2015
-------------------------------------------- --------- -------
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ 66 $ 41
Gain (Loss) on long-term debt (66) (41)
============================================ === ==== ===
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 March
31, 31,
Cash Flow Hedging Relationships 2016 2015
Cross-currency swaps:
Gain (Loss) recognized in accumulated
OCI $ 191 $(228)
Interest rate locks:
Gain (Loss) recognized in accumulated
OCI - (316)
Interest income (expense) reclassified
from accumulated OCI into income (15) (11)
=========================================== === === ====
NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
DIRECTV In July 2015, we completed our acquisition of DIRECTV, a
leading provider of digital television entertainment services in
both the United States and Latin America. For accounting purposes,
the transaction was valued at $47,409. Our operating results
include the results of DIRECTV following the acquisition date.
The fair values of the assets acquired and liabilities assumed
were preliminarily determined using the income, cost and market
approaches. The fair value measurements were primarily based on
significant inputs that are not observable in the market and are
considered Level 3 under the Fair Value Measurement and Disclosure
framework, other than long-term debt assumed in the acquisition
(see Note 6). The income approach was primarily used to value the
intangible assets, consisting of acquired customer relationships,
orbital slots and trade names. The income approach estimates fair
value for an asset based on the present value of cash flows
projected to be generated by the asset. Projected cash flows are
discounted at a required rate of return that reflects the relative
risk of achieving the cash flows and the time value of money. The
cost approach, which estimates value by determining the current
cost of replacing an asset with another of equivalent economic
utility, was used primarily for property, plant and equipment. The
cost to replace a given asset reflects the estimated reproduction
or replacement cost for the property, less an allowance for loss in
value due to depreciation.
The fair value estimates are preliminary in nature and subject
to adjustments, which could be material. Any necessary adjustments
will be finalized within one year from the date of acquisition.
Substantially all the receivables acquired are expected to be
collectable. We have not identified any material unrecorded
pre-acquisition contingencies where the related asset, liability or
impairment is probable and the amount can be reasonably estimated.
Goodwill is calculated as the difference between the acquisition
date fair value of the consideration transferred and the fair value
of the net assets acquired, and represents the future economic
benefits that we expect to achieve as a result of acquisition.
Prior to the finalization of the purchase price allocation, if
information becomes available that would indicate it is probable
that such events had occurred and the amounts can be reasonably
estimated, such items will be included in the final purchase price
allocation and may change goodwill.
17
AT&T INC.
MARCH 31, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-Continued
Dollars in millions except per share amounts
The following table summarizes the preliminary estimated fair
values of the DIRECTV assets acquired and liabilities assumed and
related deferred income taxes that existed as of the acquisition
date.
Assets acquired
Cash $ 4,797
Accounts receivable 2,026
All other current assets 1,535
Property, plant and equipment 9,331
Intangible assets not subject to amortization
Orbital slots 11,946
Trade name 1,371
Intangible assets subject to amortization
Customer lists and relationships 19,508
Trade name 2,915
Other 457
Investments and other assets 2,388
Goodwill 34,449
Total assets acquired 90,723
------------------------------------------------ ------
Liabilities assumed
Current liabilities, excluding current portion
of long-term debt 5,733
Long-term debt 20,585
Other noncurrent liabilities 16,642
------------------------------------------------ ------
Total liabilities assumed 42,960
------------------------------------------------ ------
Net assets acquired 47,763
------------------------------------------------ ------
Noncontrolling interest (354)
------------------------------------------------ ------
Aggregate value of consideration paid $47,409
================================================ ======
Purchased goodwill is not expected to be deductible for tax
purposes. The goodwill was allocated to our Entertainment Group and
International segments.
Nextel Mexico In April 2015, we completed our acquisition of the
subsidiaries of NII Holdings Inc., operating its wireless business
in Mexico, for $1,875, including approximately $427 of net debt and
other adjustments. The subsidiaries offered service under the name
Nextel Mexico.
The purchase price allocation of assets acquired was: $376 in
licenses, $1,167 in property, plant and equipment, $128 in customer
lists and $193 of goodwill. The goodwill was allocated to our
International segment.
GSF Telecom In January 2015, we acquired Mexican wireless
company GSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom) for
$2,500, including net debt of approximately $700. GSF Telecom
offered service under both the Iusacell and Unefon brand names in
Mexico.
The purchase price allocation of assets acquired was: $735 in
licenses, $658 in property, plant and equipment, $378 in customer
lists, $26 in trade names and $956 of goodwill. The goodwill was
allocated to our International segment.
AWS-3 Auction In January 2015, we submitted winning bids of
$18,189 in the Advanced Wireless Service (AWS)-3 Auction (FCC
Auction 97) a portion of which represented spectrum clearing and
First Responder Network Authority funding. We provided the Federal
Communications Commission (FCC) an initial down payment of $921 in
October 2014 and paid the remaining $17,268 in the first quarter of
2015.
18
AT&T INC.
MARCH 31, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-Continued
Dollars in millions except per share amounts
NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES
We offer our customers the option to purchase certain wireless
devices in installments over a period of up to 30 months, with 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, 2016, and December 31, 2015, gross equipment installment
receivables of $5,079 and $5,719 were included on our consolidated
balance sheets, of which $3,007 and $3,239 are notes receivable
that are included in "Accounts receivable - net."
In 2014, we entered into the first of a series of uncommitted
agreements pertaining to the sale of equipment installment
receivables and related security with Citibank and various other
relationship banks as purchasers (collectively, the Purchasers).
Under these agreements, we transferred the 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 arrangements, we continue to bill and collect on
behalf of our customers for the receivables sold.
The following table sets forth a summary of equipment
installment receivables sold during the three months ended March
31, 2016 and 2015:
Three months
ended
March 31,
2016 2015
------------------------------------------ -------- -------
Gross receivables sold $ 2,482 $ 2,635
Net receivables sold(1) 2,256 2,381
Cash proceeds received 1,521 1,524
Deferred purchase price recorded 719 858
=========================================== ====== ======
(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).
During the first quarter of 2016, we repurchased installment
receivables previously sold to the Purchasers, with a fair value of
$532. These transactions reduced our current deferred purchase
price receivable by $539, resulting in a loss of $7 during the
quarter. This loss is included in "Selling, general and
administrative" in the consolidated statements of income.
At March 31, 2016, and December 31, 2015, our deferred purchase
price receivable was $2,975 and $2,961, respectively, of which
$1,469 and $1,772 is 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.
19
AT&T INC.
MARCH 31, 2016
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
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.
During 2015, we completed our acquisitions of DIRECTV and wireless
properties in Mexico, and the following discussion of changes in
our operating revenues and expenses is affected by the timing of
these acquisitions. In accordance with U.S. generally accepted
accounting principles (GAAP), operating results from acquired
businesses prior to acquisition are excluded. 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. In the tables throughout this section, 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.
Consolidated Results Our financial results in the first quarter
of 2016 and 2015 are summarized as follows:
First Quarter
-------------------------
Percent
2016 2015 Change
------------------------------------------- ------- ------- -------
Operating Revenues
Service $37,101 $28,962 28.1%
Equipment 3,434 3,614 (5.0)
-------------------------------------------- ------ ------
Total Operating Revenues 40,535 32,576 24.4
-------------------------------------------- ------ ------
Operating expenses
Cost of services and sales
Equipment 4,375 4,546 (3.8)
Broadcast, programming and operations 4,629 1,122 -
Other cost of services 9,396 8,812 6.6
Selling, general and administrative 8,441 7,961 6.0
Depreciation and amortization 6,563 4,578 43.4
-------------------------------------------- ------ ------
Total Operating Expenses 33,404 27,019 23.6
-------------------------------------------- ------ ------
Operating Income 7,131 5,557 28.3
Income Before Income Taxes 6,007 4,728 27.1
Net Income 3,885 3,339 16.4
Net Income Attributable to AT&T $ 3,803 $ 3,263 16.5%
============================================ ====== ====== =======
Overview
Operating revenues increased $7,959, or 24.4%, in the first
quarter of 2016.
Service revenues increased $8,139, or 28.1%, in the first
quarter of 2016. The increase was primarily due to our 2015
acquisitions of DIRECTV and wireless operations in Mexico and gains
in IP broadband and fixed strategic business services. These were
partially offset by continued declines in our legacy wireline voice
and data products as well as from customers choosing to purchase
devices through installment payment agreements, which entitle them
to a lower monthly service rate under our wireless Mobile Share
plans.
Equipment revenues decreased $180, or 5.0%, in the first quarter
of 2016. This decline reflects fewer wireless handset sales,
additional promotional activities during 2016 and lower revenue
related to customer premises equipment. Revenue declines were
partially offset by the continuing trend of our wireless customers
to purchase higher priced devices and an increase in customers
choosing to purchase devices on installment when compared to the
prior year.
20
AT&T INC.
MARCH 31, 2016
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
Operating expenses increased $6,385, or 23.6%, in the first
quarter of 2016.
Equipment expenses decreased $171, or 3.8%, in the first quarter
of 2016. The decrease was primarily due to the decline in devices
sold to postpaid subscribers, who tend to buy more expensive
devices. The decrease was partially offset by increased sales
volumes to our prepaid subscribers.
Broadcast, programming and operations expenses increased $3,507
in the first quarter of 2016. Broadcast costs increased due to our
acquisition of DIRECTV, slightly offset by fewer AT&T
U-verse(R) (U-verse) subscribers.
Other cost of services expenses increased $584, or 6.6%, in the
first quarter of 2016. The increase was primarily due to our
acquisitions of DIRECTV and Mexican wireless properties. Also
contributing to higher expenses was an increase in noncash
financing-related costs associated with our pension and
postretirement benefits. These increases were partially offset by
lower network and access charges.
Selling, general and administrative expenses increased $480, or
6.0%, in the first quarter of 2016. The increase was primarily due
to our acquisitions in 2015 and increased advertising activity in
2016. The increases were largely offset by a $736 noncash gain on
wireless spectrum transactions, lower wireless commission expenses
and lower employee separation charges.
Depreciation and amortization expense increased $1,985, or
43.4%, in the first quarter of 2016. Amortization expense increased
$1,228 due to the amortization of intangibles from recent
acquisitions. Depreciation expense increased $757 primarily due to
the previously mentioned acquisitions and ongoing capital spending
for network upgrades.
Operating income increased $1,574, or 28.3%, in the first
quarter of 2016. Our operating income margin in the first quarter
increased from 17.1% in 2015 to 17.6% in 2016.
Interest expense increased $308, or 34.3%, in the first quarter
of 2016. The increase was primarily due to higher average debt
balances, including debt issued and debt acquired in connection
with our acquisition of DIRECTV. The increases were partially
offset by higher capitalized interest resulting from spectrum
acquired in the Advanced Wireless Service (AWS)-3 Auction (see Note
7).
Equity in net income of affiliates increased $13 in the first
quarter of 2016. This increase primarily resulted from earnings
from investments acquired in our purchase of DIRECTV in the third
quarter of 2015, partially offset by lower earnings from Otter
Media Holdings and YP Holdings LLC.
Other income (expense) - net We had other income of $70 in the
first quarter of both 2016 and 2015. Results in the first quarter
of 2016 and 2015 included a net gain on the sale of investments of
$44 and $33 and interest and dividend income of $29 and $19,
respectively.
Income taxes increased $733, or 52.8%, in the first quarter of
2016. Our effective tax rate was 35.3% for the first quarter of
2016, compared to 29.4% for first quarter of 2015. The increase in
income tax expense for the first quarter of 2016 was primarily due
to higher income before income taxes in 2016. In 2015, we
recognized tax benefits related to the restructuring of a portion
of our Business Solutions segment, which contributed to lower
income tax expense and the effective tax rate in the first quarter
of 2015.
21
AT&T INC.
MARCH 31, 2016
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) 2016 2015
--------------------------------------------- -------- -------
Domestic wireless subscribers 130,445 121,772
Mexican wireless subscribers 9,213 5,728
----------------------------------------------- ------- -------
North American wireless subscribers 139,658 127,500
=============================================== ======= =======
North American branded subscribers 98,158 91,448
North American branded net additions 1,195 539
Domestic satellite video subscribers 20,112 -
U-verse video subscribers 5,260 5,993
Latin America satellite video subscribers(1) 12,436 -
----------------------------------------------- ------- -------
Total video subscribers 37,808 5,993
=============================================== ======= =======
Total domestic broadband connections 15,764 16,097
Network access lines in service 15,975 18,949
U-Verse VoIP connections 5,484 5,200
Debt ratio(2) 51.2% 51.5%
Net Debt Ratio(3) 47.3% 49.1%
Ratio of earnings to fixed charges(4) 4.22 4.30
Number of AT&T employees 280,870 250,790
=============================================== ======= =======
(1) Excludes subscribers of our International segment equity
investments in SKY Mexico.
(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 operating
segment results presented in Note 4 and discussed below for each
segment follow our internal management reporting. We analyze our
operating segments based on segment contribution, which consists of
operating income, excluding acquisition-related costs and other
significant items, and equity in net income of affiliate for
investments managed within each operating 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 segment operating
income before depreciation and amortization, which we refer to as
EBITDA and/or EBITDA margin. 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 operating income before depreciation and amortization,
divided by total revenues.
The Business Solutions segment provides services to business,
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 strategic business services; as well as traditional data and
voice products. We utilize our wireless and wired networks
(referred to as "wired" or "wireline") to provide a complete
communications solution to our business customers.
22
AT&T INC.
MARCH 31, 2016
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 Entertainment Group segment provides video, Internet, voice
communication and interactive and targeted advertising services to
customers located in the U.S. 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 and wireless wholesale and resale subscribers
located in the U.S. or in U.S. territories. We utilize our U.S.
wireless network to provide voice and data services, including
high-speed Internet, video, and home monitoring services.
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 operating segment, and therefore asset
information and capital expenditures by operating segment are not
presented. Depreciation is allocated based on network usage or
asset utilization by segment.
We discuss capital expenditures in "Liquidity and Capital
Resources."
Business Solutions
Segment Results
------------------------------------ ------- ------- -------
First Quarter
-------------------------
Percent
2016 2015 Change
Segment operating revenues
Wireless service $ 7,855 $ 7,515 4.5%
Fixed strategic services 2,786 2,549 9.3
Legacy voice and data services 4,338 4,754 (8.8)
Other service and equipment 859 846 1.5
Wireless equipment 1,771 1,893 (6.4)
------------------------------------- ------ ------
Total Segment Operating Revenues 17,609 17,557 0.3
------------------------------------- ------ ------
Segment operating expenses
Operations and support 10,802 11,073 (2.4)
Depreciation and amortization 2,508 2,342 7.1
Total Segment Operating Expenses 13,310 13,415 (0.8)
------------------------------------- ------ ------
Segment Operating Income 4,299 4,142 3.8
Equity in Net Income (Loss)
of Affiliates - - -
------------------------------------ ------ ------
Segment Contribution $ 4,299 $ 4,142 3.8%
===================================== ====== ====== =======
23
AT&T INC.
MARCH 31, 2016
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 table highlights other key measures of
performance for the Business Solutions segment:
First Quarter
----------------------------- -----
Percent
(in 000s) 2016 2015 Change
------------------------------------------ -------- ------ ------- ---
Business Wireless Subscribers
Postpaid 48,844 45,959 6.3 %
Reseller 64 14 -
Connected devices (1) 26,863 20,972 28.1
Total Business Wireless Subscribers 75,771 66,945 13.2
============================================ ======= ======
Business Wireless Net Additions
(2)
Postpaid 133 297 (55.2)
Reseller (22) 3 -
Connected devices (1) 1,578 1,024 54.1
-------------------------------------------- ------- ------
Business Wireless Net Subscriber
Additions 1,689 1,324 27.6
============================================ ======= ======
Business Wireless Postpaid
Churn (2, 3) 1.02% 0.90% 12 BP
============================================ ======= ======
Business IP Broadband Connections 928 849 9.3
)
Business IP Broadband Net Additions 17 27 (37.0 %
============================================ ======= ====== ======= ===
(1) Includes data-centric devices such as session-based
tablets, monitoring devices and automobile systems.
Excludes postpaid tablets.
(2) Excludes migrations between AT&T segments and/or
subscriber categories and acquisition-related additions
during the period.
(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.
Operating revenues increased $52, or 0.3%, in the first quarter
of 2016. Revenue growth was driven by wireless service revenues and
increased fixed strategic business services. Revenue increases were
partially offset by continued declines in our legacy voice and data
products, lower equipment revenue and foreign exchange
pressures.
Wireless service revenues increased $340, or 4.5%, in the first
quarter of 2016. The revenue increase is primarily due to customer
migrations from our Consumer Mobility segment and reflects
smartphone and tablet gains.
At March 31, 2016, we served 75.8 million subscribers, an
increase of 13.2% from the prior year. Postpaid subscribers
increased 6.3% 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 28.1% from the prior
year reflecting growth in business customers using tracking,
monitoring and other sensor-embedded devices on their
equipment.
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 1.02% in 2016 from 0.90% in 2015.
Fixed strategic services revenues increased $237, or 9.3%, in
the first quarter of 2016. Our revenues, which were negatively
impacted by foreign exchange rates, increased in the first quarter
of 2016 due to increases in: Ethernet of $65, AT&T Dedicated
Internet (formally known as Ethernet access to Managed Internet
Services) of $54, U-verse services of $50, and VPN of $26.
24
AT&T INC.
MARCH 31, 2016
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
Legacy wired voice and data service revenues decreased $416, or
8.8%, in the first quarter of 2016. Traditional data revenues in
the first quarter of 2016 decreased $229 and long-distance and
local voice revenues decreased $183. The decreases were primarily
due to lower demand as customers continue to shift to our more
advanced IP-based offerings or our competitors.
Other service and equipment revenues increased $13, or 1.5%, in
the first quarter of 2016. Other service revenues include
project-based revenue, which is nonrecurring in nature, as well as
revenues from other managed services, outsourcing, government
professional service and customer premises equipment.
Wireless equipment revenues decreased $122, or 6.4%, in the
first quarter of 2016. The decrease in equipment revenues resulted
from a decrease in handsets sold to postpaid customers and
increased promotional activities during the quarter. The decreases
were partially offset by an increase in purchases of devices on
installment payment agreements rather than the device subsidy
model.
Operations and support expenses decreased $271, or 2.4%, in the
first quarter of 2016. 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.
The first quarter decrease was primarily due to declines of $170
in wireless equipment and $161 in wireless commissions costs,
reflecting a decrease in sale volumes and upgrade transactions, as
well as lower average commission rates. Access costs also declined
$59, resulting from lower interconnect and roaming costs. Partially
offsetting these decreases were higher advertising expenses,
wireless handset insurance claims and bad debt
expense driven by a higher AT&T Next (SM) (AT&T Next) subscriber base.
Depreciation expense increased $166, or 7.1%, in first quarter
of 2016. The increases were primarily due to ongoing capital
spending for network upgrades and expansion, partially offset by
fully depreciated assets.
Operating income increased $157, or 3.8%, in the first quarter
of 2016. Our Business Solutions segment operating income margin in
the first quarter increased from 23.6% in 2015 to 24.4% in 2016.
Our Business Solutions EBITDA margin in the first quarter increased
from 36.9% in 2015 to 38.7% in 2016.
Entertainment Group
Segment Results
------------------------------------------ ------- ------ -------
First Quarter
------------------------
Percent
2016 2015 Change
------------------------------------------ ------- ------ -------
Segment operating revenues
Video entertainment $ 8,904 $1,871 -
High-speed Internet 1,803 1,553 16.1
Legacy voice and data services 1,313 1,612 (18.5)
Other service and equipment 638 624 2.2
Total Segment Operating Revenues 12,658 5,660 -
------------------------------------------- ------ -----
Segment operating expenses
Operations and support 9,578 4,859 97.1
Depreciation and amortization 1,488 1,065 39.7
Total Segment Operating Expenses 11,066 5,924 86.8
------------------------------------------- ------ -----
Segment Operating Income (Loss) 1,592 (264) -
Equity in Net Income (Loss) of Affiliates 3 (6) -
------------------------------------------- ------ -----
Segment Contribution $ 1,595 $(270) -
=========================================== ====== ===== =======
25
AT&T INC.
MARCH 31, 2016
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 table highlights other key measures of performance
for the Entertainment Group segment:
First Quarter
--------------------------
Percent
(in 000s) 2016 2015 Change
---------------------------------- ------- ------ -------
Video Connections
Satellite 20,112 - -
U-verse 5,232 5,969 (12.3)
Total Video Connections 25,344 5,969 -
==================================== ====== ======
Video Net Additions
Satellite 328 - -
U-verse (382) 49 -
Net Video Additions (54) 49 -
==================================== ====== ======
Broadband Connections
IP 12,542 11,796 6.3
DSL 1,749 2,741 (36.2)
Total Broadband Connections 14,291 14,537 (1.7)
==================================== ====== ======
Broadband Net Additions
IP 186 413 (55.0)
DSL (181) (320) 43.4
Net Broadband Additions 5 93 (94.6)
==================================== ====== ======
Retail Consumer Switched Access
Lines 6,888 8,660 (20.5)
U-verse Consumer VoIP Connections 5,225 5,009 4.3
------------------------------------ ------ ------
Total Retail Consumer Voice )
Connections 12,113 13,669 (11.4 %
==================================== ====== ====== =======
Operating revenues increased $6,998 in the first quarter of
2016, largely due to our acquisition of DIRECTV in the third
quarter of 2015. Also contributing to the increase was continued
strong growth in consumer IP broadband, which more than offset
lower revenues from legacy voice and data products.
Video entertainment revenues increased $7,033 in the first
quarter of 2016. The first quarter increase was primarily related
to our acquisition of DIRECTV. We are now focusing our sales
efforts on satellite service as there are lower content costs for
satellite subscribers. U-verse video revenue was flat in the first
quarter of 2016, primarily due to a 12.3% decrease in U-verse video
connections, when compared to 2015.
High-speed Internet revenues increased $250, or 16.1%, in the
first quarter of 2016. When compared to 2015, IP broadband
connections increased 6.3%, to 12.5 million connections at March
31, 2016; however, first quarter net additions were lower due to
fewer U-verse sales promotions in the year. The churn of video
customers also contributed to lower net additions as a portion of
those video subscribers also choose to disconnect their IP
broadband service.
Legacy voice and data service revenues decreased $299, or 18.5%,
in the first quarter of 2016. At March 31, 2016, legacy voice and
data services represented approximately 10% of our total
Entertainment Group revenue, and reflect a decrease of $179 in
long-distance and local voice revenues, and $120 in traditional
data revenues. The decreases reflect our continued migration of
customers to our more advanced IP-based offerings or to
competitors. At March 31, 2016, approximately 12% of our broadband
connections were DSL compared to nearly 19% at March 31, 2015.
26
AT&T INC.
MARCH 31, 2016
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
Operations and support expenses increased $4,719, or 97.1%, in
the first quarter of 2016. 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, as well as personnel charges for compensation and
benefits.
The first quarter increase was primarily due to our acquisition
of DIRECTV in the third quarter of 2015, which increased our first
quarter Entertainment Group expenses by $4,823. The DIRECTV related
increases were primarily due to the recognition of additional
content costs for satellite subscribers, customer support and
service related charges and advertising expenses.
Partially offsetting the increased expenses were lower employee
charges resulting from ongoing workforce reductions and our focus
on cost initiatives.
Depreciation expense increased $423, or 39.7%, in the first
quarter of 2016. The increase was primarily due to our acquisition
of DIRECTV and ongoing capital spending for network upgrades and
expansion, partially offset by fully depreciated assets.
Operating income increased $1,856 in the first quarter of 2016.
Our Entertainment Group segment operating income margin increased
from (4.7)% in 2015 to 12.6% in 2016. Our Entertainment Group
segment EBITDA margin in the first quarter increased from 14.2% in
2015 to 24.3% in 2016.
Consumer Mobility
Segment Results
----------------------------------- ------ ------ ------- ---
First Quarter
----------------------- ---
Percent
2016 2015 Change
----------------------------------- ------ ------ ------- ---
Segment operating revenues
)
Service $6,943 $7,297 (4.9 %
Equipment 1,385 1,481 (6.5)
Total Segment Operating Revenues 8,328 8,778 (5.1)
------------------------------------ ----- -----
Segment operating expenses
Operations and support 4,912 5,541 (11.4)
Depreciation and amortization 922 1,002 (8.0)
Total Segment Operating Expenses 5,834 6,543 (10.8)
------------------------------------ ----- -----
Segment Operating Income 2,494 2,235 11.6
Equity in Net Income (Loss) of
Affiliates - - -
----------------------------------- ----- -----
Segment Contribution $2,494 $2,235 11.6 %
==================================== ===== ===== ======= ===
27
AT&T INC.
MARCH 31, 2016
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 table highlights other key measures of
performance for the Consumer Mobility segment:
First Quarter
---------------------------
Percent
(in 000s) 2016 2015 Change
------------------------------------------ --------- ------- -------
Consumer Mobility Subscribers
)
Postpaid 28,294 30,216 (6.4 %
Prepaid 12,171 10,037 21.3
-------------------------------------------- -------- -------
Branded 40,465 40,253 0.5
Reseller 13,313 13,581 (2.0)
Connected devices (1) 896 993 (9.8)
Total Consumer Mobility Subscribers 54,674 54,827 (0.3)
============================================ ======== =======
Consumer Mobility Net Additions
(2)
Postpaid (4) 144 -
Prepaid 500 98 -
-------------------------------------------- -------- -------
Branded Net Additions 496 242 -
Reseller (378) (269) (40.5)
Connected devices (1) (26) (79) 67.1
-------------------------------------------- -------- -------
Consumer Mobility Net Subscriber
Additions 92 (106) -
============================================ ======== =======
Total Churn (2, 3) 2.11% 2.04% 7 BP
Postpaid Churn (2, 3) 1.24% 1.20% 4 BP
============================================ ======== ======= =======
(1) Includes data-centric devices such as session-based
tablets, monitoring devices and automobile systems. Excludes
postpaid tablets.
(2) Excludes migrations between AT&T segments and/or subscriber
categories and acquisition-related additions during the
period.
(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.
Operating Revenues decreased $450, or 5.1%, in the first quarter
of 2016. Decreased revenues reflect declines in postpaid service
revenues due to customers choosing Mobile Share plans and migrating
to our Business Solutions segment, 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 $354, or 4.9%, in the first quarter of
2016. The decrease was largely due to a $516 decline from postpaid
customers continuing to shift to no-device-subsidy plans, which
allow for discounted monthly service charges under our Mobile Share
plans and the migration of subscribers to Business Solutions.
Without the migration of customers to Business Solutions, postpaid
wireless revenues would have decreased approximately 4.2%. The
decrease was partially offset by a $204 increase in prepaid service
revenues, which includes services sold under the Cricket brand.
Equipment revenue decreased $96, or 6.5%, in the first quarter
of 2016. The decrease in equipment revenues resulted from a
decrease in handsets sold to postpaid customers and increased
promotional activities, partially offset by an increase in handsets
sold to prepaid customers and devices purchased on installment
payment agreements rather than the device subsidy model.
Operations and support expenses decreased $629, or 11.4%, in the
first quarter of 2016. 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.
28
AT&T INC.
MARCH 31, 2016
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
Decreased operations and support expenses in the first quarter
were primarily due to the following:
-- Selling and commission expenses decreased $205 primarily
due to lower sales volumes and lower average commission
rates, including those paid under the AT&T Next
program, combined with fewer upgrade transactions.
-- Equipment costs decreased $120 primarily due to
a decrease in postpaid handset volumes partially
offset by the sale of more devices to prepaid subscribers.
-- Network costs decreased $115 primarily due to lower
interconnect costs resulting from our ongoing network
transition to more efficient Ethernet/IP-based technologies.
-- Other administrative expenses decreased $73 primarily
due to lower technology and development costs.
Depreciation expense decreased $80, or 8.0%, in the first
quarter of 2016. The decrease was primarily due to fully
depreciated assets, partially offset by the ongoing capital
spending for network upgrades and expansion.
Operating income increased $259, or 11.6%, in the first quarter
of 2016. Our Consumer Mobility segment operating income margin
increased from 25.5% in 2015 to 29.9% in 2016. Our Consumer
Mobility EBITDA margin increased from 36.9% in 2015 to 41.0% in
2016.
International
Segment Results
----------------------------------- --------- ----- -------
First Quarter
-------------------------
Percent
2016 2015 Change
----------------------------------- ---------
Segment operating revenues
Video entertainment $ 1,130 $ - -
Wireless 455 215 -
Equipment 82 21 -
Total Segment Operating Revenues 1,667 236 -
Segment operating expenses
Operations and support 1,588 218 -
Depreciation and amortization 277 28 -
Total Segment Operating Expenses 1,865 246 -
Segment Operating Income (Loss) (198) (10) -
Equity in Net Income of Affiliates 14 - -
Segment Contribution $ (184) $(10) -
29
AT&T INC.
MARCH 31, 2016
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 table highlights other key measures of performance
for the International segment:
First Quarter
Percent
(in 000s) 2016 2015 Change
Mexican Wireless Subscribers
Postpaid 4,405 1,646 -
Prepaid 4,445 3,590 23.8
Branded 8,850 5,236 69.0
Reseller 363 492 (26.2)
Total Mexican Wireless Subscribers 9,213 5,728 60.8
Mexican Wireless Net Additions
Postpaid 116 - -
Prepaid 450 - -
Branded Net Additions 566 - -
Reseller (37) - -
Mexican Wireless Net Subscriber Additions 529 - -
Latin America Satellite Subscribers
PanAmericana 7,094 - -
SKY Brazil 5,342 - -
Total Latin America Satellite Subscribers 12,436 - -
Latin America Satellite Net Additions
PanAmericana 28 - -
SKY Brazil (101) - -
Latin America Satellite Net Subscriber Additions (73) - -
Operating Results
Our International segment consists of the Latin American
operations acquired in our July 2015 acquisition of DIRECTV as well
as the Mexican wireless operations acquired earlier in 2015 (see
Note 7). 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 $1,431, with $1,130 in video
services in Latin America and $301 attributable to additional
wireless revenues in Mexico.
Operations and support expenses increased $1,370 and consist of
costs incurred to provide our products and services, including
costs of operating and maintaining our networks and providing video
content, as well as personnel expenses, such as compensation and
benefits.
Depreciation expense increased $249 in 2016. The increase was
primarily due to the acquisition of DIRECTV and the Nextel Mexico
wireless property.
Operating income decreased $188. Our International segment
operating income margin in the first quarter was (11.9)% for 2016,
compared to (4.2)% for 2015. Our International EBITDA margin in the
first quarter was 4.7% for 2016 and 7.6% for 2015.
30
AT&T INC.
MARCH 31, 2016
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).
AT&T Mobility Results
---
First Quarter
---
Percent
2016 2015 Change
---
Operating revenues
)
Service $14,798 $14,812 (0.1 %
Equipment 3,156 3,374 (6.5)
Total Operating Revenues 17,954 18,186 (1.3)
Operating expenses
Operations and support 10,624 11,472 (7.4)
EBITDA 7,330 6,714 9.2
Depreciation and amortization 2,056 2,005 2.5
Total Operating Expenses 12,680 13,477 (5.9)
Operating Income $ 5,274 $ 4,709 12.0 %
===
31
AT&T INC.
MARCH 31, 2016
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 table highlights other key measures of performance for AT&T Mobility:
First Quarter
Percent
(in 000s) 2016 2015 Change
Wireless Subscribers (1)
Postpaid smartphones 58,258 57,157 1.9 %
Postpaid feature phones and data-centric devices 18,880 19,018 (0.7)
--------- --------
Postpaid 77,138 76,175 1.3
Prepaid 12,171 10,037 21.3
--------- --------
Branded 89,309 86,212 3.6
Reseller 13,378 13,595 (1.6)
Connected devices (2) 27,758 21,965 26.4
--------- --------
Total Wireless Subscribers 130,445 121,772 7.1
========= ========
Net Additions (3)
Postpaid 129 441 (70.7)
Prepaid 500 98 -
--------- --------
Branded Net Additions 629 539 16.7
Reseller (400) (266) (50.4)
Connected devices (2) 1,552 945 64.2
--------- --------
Net Subscriber Additions 1,781 1,218 46.2
========= ========
Branded Smartphones 68,271 64,047 6.6
Mobile Share connections 59,372 55,581 6.8
Smartphones under our installment program at end of period 28,548 18,540 54.0
Smartphones sold under our installment program during period 4,135 4,065 1.7 %
Total Churn (4) 1.42% 1.40% 2 BP
Branded Churn (4) 1.63% 1.59% 4 BP
Postpaid Churn (4) 1.10% 1.02% 8 BP
========= ========
(1) Represents 100% of AT&T Mobility wireless subscribers.
(2) Includes data-centric devices such as session-based tablets, monitoring devices and automobile
systems. Excludes postpaid tablets.
(3) Excludes acquisition-related additions during the period.
(4) 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.
Operating income increased $565, or 12.0%, in the first quarter
of 2016. The operating income margin of AT&T Mobility increased
from 25.9% in 2015 to 29.4% in 2016. AT&T Mobility's EBITDA
margin increased from 36.9% in 2015 to 40.8% in 2016. AT&T
Mobility's EBITDA service margin increased from 45.3% in 2015 to
49.5% in 2016. (EBITDA service margin is operating income before
depreciation and amortization, divided by total service
revenues.)
Subscriber Relationships
As the wireless industry continues to mature, we believe that
future wireless growth will increasingly depend 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 Mobile Share and AT&T Next.
Additionally, in the first quarter of 2016, we introduced an
integrated offer that allows for unlimited wireless data when
combined with our video services, ending the quarter with more than
3.0 million subscribers on these packages.
32
AT&T INC.
MARCH 31, 2016
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
ARPU
Postpaid phone-only ARPU (average revenue per average wireless
subscriber) was $59.53 at March 31, 2016 and $59.98 at March 31,
2015. Postpaid phone-only ARPU plus AT&T Next subscriber
installment billings increased 5.1% in the first quarter of 2016
due to the continuing growth of the AT&T Next program.
Churn
The effective management of subscriber churn is critical to our
ability to maximize revenue growth and to maintain and improve
margins. Total churn was slightly higher in the first quarter of
2016. Postpaid churn was also higher reflecting continuing
competitive pressure in the industry.
Branded Subscribers
Branded subscribers increased 3.6% in the first quarter of 2016,
which included a 21.3% increase in prepaid subscribers and a 1.3%
increase in postpaid subscribers. At March 31, 2016, 88% of our
postpaid phone subscriber base used smartphones, compared to 84% at
March 31, 2015. 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. About half of our Mobile Share
accounts have chosen data plans with 10 gigabytes or higher and 38%
have chosen plans with 15 gigabytes or higher. Device connections
on our Mobile Share plans now represent 77% of our postpaid
customer base. Such offerings are intended to encourage existing
subscribers to upgrade their current services and/or add connected
devices, attract subscribers from other providers and minimize
subscriber churn.
During the first quarter of 2016, we discontinued offering
subsidized smartphones to most of our customers. Under this
no-subsidy model, subscribers must purchase a device on
installments under the AT&T Next program or choose to bring
their own device, with no annual service contract. Over 90% of
postpaid smartphone gross adds and upgrades during the first
quarter of 2016 were either AT&T Next or BYOD. While BYOD
customers do not generate equipment revenue or expense, the service
revenue helps improve our margins.
Our AT&T Next program allows for postpaid subscribers to
purchase certain devices in installments over a period of up to 30
months. Additionally, after a specified period of time, they 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 on the AT&T
Next program pay a lower monthly service charge, which results in
lower service revenue recorded for these subscribers.
Connected Devices
Connected Devices includes data-centric devices such as
session-based tablets, monitoring devices and automobile systems.
Connected device subscribers increased 26.4% in the first quarter
of 2016. During the first quarter of 2016, we added approximately
1.2 million "connected" cars through agreements with various
carmakers. We believe that these connected car agreements give us
the opportunity to create future retail relationships with the car
owners.
OTHER BUSINESS MATTERS
Litigation Challenging DIRECTV's NFL Sunday Ticket More than two
dozen putative class actions have been 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. We vigorously dispute the allegations the
complaints have asserted.
33
AT&T INC.
MARCH 31, 2016
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
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 are disputing these
allegations vigorously.
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, which we vigorously dispute, 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 the appeal is now pending before that Court while
limited discovery proceeds in the District Court. Oral argument on
the appeal is presently set for June 17, 2016. 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.
In June 2015, the Federal Communications Commission (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.
South Coast Air Quality On January 15, 2016, AT&T Mobility
received an offer to enter into an administrative settlement with
California's South Coast Air Quality Management District associated
with a Notice of Violation (NOV) received in 2015. The 2015 NOV
alleged violations of local environmental air permitting and
emissions rules issued by the District in connection with operation
of a back-up power generator system at one AT&T Mobility
facility. After conclusion of its investigation and discussion, the
parties resolved the alleged violations set forth in the NOV
without admission of fault by AT&T Mobility for a payment of
civil penalties in an amount less than one hundred thousand
dollars.
Labor Contracts A contract covering approximately 9,000 mobility
employees in the Southwest region, which expired in February 2016,
was ratified on April 14, 2016. A contract covering nearly 16,000
traditional wireline employees in our West region expired in April
2016 and employees are working under the terms of the prior
contract, including benefits, while negotiations continue. After
expiration of the current agreements, work stoppages or labor
disruptions may occur in the absence of new contracts or other
agreements being reached. A separate contract covering only
benefits with approximately 40,000 employees in our mobility
business expires in 2016, though there is a no strike/no lock-out
clause. Contracts covering wages and other non-benefit working
terms for these mobility employees are structured on a regional
basis.
34
AT&T INC.
MARCH 31, 2016
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.
However, since the Telecom Act was passed, the 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. 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 February 2015, the FCC released an order reclassifying 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 expands the
FCC's existing authority to regulate the provision of fixed and
mobile broadband Internet access services. AT&T and other
providers of broadband Internet access services have challenged the
FCC's decision before the U.S. Court of Appeals for the D.C.
Circuit. We expect a decision on AT&T's appeal in the first
half of 2016.
Though early in the rulemaking process, the FCC is considering a
number of regulatory changes that could restrict our commercial
flexibility in the provision of video, special access, business,
and advertising services.
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
U-verse 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 retail services. Regulatory reform and
passage of legislation is uncertain and depends on many
factors.
We provide wireless services in robustly competitive markets,
but are subject to substantial and increasing 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. In February 2012,
Congress set forth specific spectrum blocks to be auctioned and
licensed by February 2015 (the "AWS-3 Auction") and also authorized
the FCC to conduct an "incentive auction," to make available for
wireless broadband use certain spectrum that is currently used by
broadcast television licensees (the "600 MHz Auction"). We
participated in the AWS-3 Auction. The 600 MHz Auction (Auction
1000) began on March 29, 2016, and the multiple phases of Auction
1000 are expected to progress over the next several months.
In May 2014, in a separate proceeding, 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. In addition, the FCC imposed limits on certain bidders
in the 600 MHz Auction, including AT&T, restricting them from
bidding on up to 40 percent of the available spectrum in markets
that cover as much as 70-80 percent of the U.S. population. On
balance, the order and the new spectrum screen should allow
AT&T to obtain additional spectrum to meet our customers'
needs, but because AT&T uses more "low band" spectrum in its
network than some other national carriers, the separate
consideration of low band spectrum acquisitions might affect
AT&T's ability to expand capacity in these bands (low band
spectrum has better propagation characteristics than "high band"
spectrum). We seek to ensure that we have the opportunity, through
the auction process and otherwise, to obtain the spectrum we need
to provide our customers with high-quality service in the
future.
35
AT&T INC.
MARCH 31, 2016
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
As the wireless industry continues to mature, we believe that
future wireless growth will increasingly depend 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 face spectrum and capacity constraints
on our wireless network in certain markets. We expect such
constraints to increase and expand to additional markets in the
coming years. While we are continuing to invest significant capital
in expanding our network capacity, our capacity constraints could
affect the quality of existing voice and data services and our
ability to launch new, advanced wireless broadband services, unless
we are able to obtain more spectrum. Any long-term spectrum
solution will require that the FCC make additional spectrum
available to the wireless industry to meet the expanding needs of
our subscribers. We will continue to attempt to address spectrum
and capacity constraints on a market-by-market basis.
LIQUIDITY AND CAPITAL RESOURCES
We had $10,008 in cash and cash equivalents available at March
31, 2016. Cash and cash equivalents included cash of $2,114 and
money market funds and other cash equivalents of $7,894.
Approximately $939 of our cash and cash equivalents resided in
foreign jurisdictions, some of which is subject to restrictions on
repatriation. Cash and cash equivalents increased $4,887 since
December 31, 2015. In the first three months of 2016, cash inflows
were primarily provided by cash receipts from operations, including
cash from our sale and transfer of certain equipment installment
receivables to third parties, and long-term debt issuances. 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. We discuss
many of these factors in detail below.
Cash Provided by or Used in Operating Activities
During the first three months of 2016, cash provided by
operating activities was $7,900, compared to $6,738 for the first
three months of 2015. Higher operating cash flows in 2016 were
primarily due to our acquisition of DIRECTV and partially offset by
the timing of working capital payments.
Cash Used in or Provided by Investing Activities
For the first three months of 2016, cash used in investing
activities totaled $4,308 and consisted primarily of $4,451 for
capital expenditures, excluding interest during construction, and
$165 for the acquisition of wireless spectrum and other operations.
These expenditures were partially offset by net cash receipts of
$445 from the sale of securities.
Virtually all of our capital expenditures are spent on our
communications networks and our video services and support systems
for our digital entertainment services. Capital expenditures,
excluding interest during construction, increased $603 in the first
three months. The increase was primarily due to our wireless
network expansion in Mexico, DIRECTV operations and fiber buildout.
In connection with capital improvements to our wireless network in
Mexico, we also negotiated favorable payment terms (referred to as
vendor financing). For the first three months of 2016, we deferred
$43 of vendor financing related to capital additions to future
periods. We do not report capital expenditures at the segment
level.
We continue to expect our 2016 capital investment, which
includes our capital expenditures plus vendor financing payments
related to our Mexico network, for our existing businesses to be in
the $22,000 range, and we expect our capital investment to be in
the 15 percent range of service revenues or lower for each of the
years 2016 through 2018. The amount of capital investment is
influenced by demand for services and products, capacity needs and
network enhancements. We are also focused on ensuring merger
commitments are met.
36
AT&T INC.
MARCH 31, 2016
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
Cash Provided by or Used in Financing Activities
For the first three months of 2016, cash provided by financing
activities totaled $1,295 and included net proceeds of $5,978 from
the following long-term debt issuances:
-- February issuance of $1,250 of 2.800% global notes due 2021.
-- February issuance of $1,500 of 3.600% global notes due 2023.
-- February issuance of $1,750 of 4.125% global notes due 2026.
-- February issuance of $1,500 of 5.650% global notes due 2047.
During the first three months of 2016, we redeemed $2,296 of
debt, consisting primarily of the following:
-- February redemption of $1,250 of AT&T Floating Rate Notes due 2016.
-- March prepayment of the remaining $1,000 of the
outstanding advances under the $2,000 18-month credit
agreement (the "18-month Credit Agreement") by and
between AT&T and Mizuho. (See "Credit Facilities"
below).
In March 2016, we completed a debt exchange covering $16,049 of
notes of various series issued by DIRECTV with stated rates of
1.75% to 6.375% for $16,049 in new AT&T Inc. global notes with
stated rates of 1.75% to 6.375% plus a $16 cash payment.
On May 3, 2016, we agreed to sell the following debt
amounts:
-- $750 of 2.300% global notes due 2019.
-- $750 of 2.800% global notes due 2021.
-- $1,100 of 3.600% global notes due 2023.
-- $900 of 4.125% global notes due 2026.
-- $500 of 4.800% global notes due 2044.
These notes will be reopening of existing series of notes. The
transactions are expected to close on May 12, 2016, and proceeds
will be used to pay down amounts outstanding under our $9,155
Syndicated Credit Agreement (discussed below).
Our weighted average interest rate of our entire long-term debt
portfolio, including the impact of derivatives, was approximately
4.1% as of March 31, 2016, and 4.0% as of December 31, 2015. We had
$129,229 of total notes and debentures outstanding at March 31,
2016, which included Euro, British pound sterling, Swiss Franc,
Brazilian real and Canadian dollar denominated debt of
approximately $26,852.
As of March 31, 2016, we had approximately 407 million shares
remaining from 2013 and 2014 authorizations from our Board of
Directors to repurchase shares of our common stock. In 2016, our
priority will be to use free cash flow (operating cash flows less
construction and capital expenditures) after dividends to pay down
debt.
We paid dividends of $2,947 during the first three months of
2016, compared with $2,434 for the first three months of 2015,
primarily reflecting the increase in shares outstanding resulting
from our acquisition of DIRECTV. Dividends declared by our Board of
Directors totaled $0.48 per share in the first quarter of 2016 and
$0.47 per share for the first three months of 2015. 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, 2016, we had $8,399 of debt maturing within one
year, $7,874 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 2016.
-- An accreting zero-coupon note 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.
37
AT&T INC.
MARCH 31, 2016
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
Credit Facilities
On December 11, 2015, we entered into a five-year, $12,000
credit agreement (the "Revolving Credit Agreement") with Citibank,
N.A. (Citibank), as administrative agent, replacing our $5,000
credit agreement that would have expired in December 2018. At the
same time, AT&T and the lenders terminated their obligations
under the existing revolving $3,000 credit agreement with Citibank
that would have expired in December 2017.
In January 2015, we entered into a $9,155 credit agreement (the
"Syndicated Credit Agreement") containing (i) a $6,286 term loan
facility (the "Tranche A Facility") and (ii) a $2,869 term loan
facility (the "Tranche B Facility"), with certain investment and
commercial banks and Mizuho Bank, Ltd. ("Mizuho"), as
administrative agent. We also entered into the 18 Month Credit
Agreement with Mizuho as initial lender and agent. The 18-Month
Credit Agreement was repaid and terminated in March 2016.
Revolving Credit Agreement
In the event advances are made under the Revolving Credit
Agreement, those advances would be used for general corporate
purposes. Advances are not conditioned on the absence of a material
adverse change. All advances must be repaid no later than the date
on which lenders are no longer obligated to make any advances under
the agreement. We can terminate, in whole or in part, amounts
committed by the lenders in excess of any outstanding advances;
however, we cannot reinstate any such terminated commitments. We
also may request that the total amount of the lender's commitments
be increased by an integral multiple of $25 effective on a date
that is at least 90 days prior to the scheduled termination date
then in effect, provided that no event of default has occurred and
in no event shall the total amount of the lender's commitments at
any time exceed $14,000. At March 31, 2016, we had no advances
outstanding under the Revolving Credit Agreement and we have
complied with all covenants.
The obligations of the lenders to provide advances will
terminate on December 11, 2020, unless prior to that date either:
(i) AT&T reduces to $0 the commitments of the lenders, or (ii)
certain events of default occur. We and lenders representing more
than 50% of the facility amount may agree to extend their
commitments for two one-year periods beyond the December 11, 2020,
termination date, under certain circumstances.
Advances under the Revolving Credit Agreement would bear
interest, at AT&T's option, either:
-- at a variable annual rate equal to (i) the highest of: (a) the base rate of the bank affiliate
of Citibank, N.A. which is serving as administrative agent under the Agreement, (b) 0.50%
per annum above the Federal Funds Rate, and (c) the LIBOR applicable to U.S. dollars for a
period of one month plus 1.00% per annum, plus (ii) an applicable margin, as set forth in
the Revolving Credit Agreement ("Applicable Margin for Base Advances"); or
-- at a rate equal to: (i) LIBOR for a period of one, two, three or six months, as applicable,
plus (ii) the Applicable Margin ("Applicable Margin for Eurocurrency Rate Advances").
The Applicable Margin for Eurocurrency Rate Advances will equal
0.680%, 0.910%, 1.025%, or 1.125% per annum, depending on
AT&T's credit rating. The Applicable Margin for Base Rate
Advances will be equal to the greater of 0.00% and the relevant
Applicable Margin for Eurocurrency Rate Advances minus 1.00% per
annum depending on AT&T's credit rating.
We will pay a facility fee of 0.070%, 0.090%, 0.100% or 0.125%
per annum, depending on AT&T's credit rating, of the amount of
lender commitments.
The Revolving Credit Agreement contains covenants that are
customary for an issuer with an investment grade senior debt credit
rating, as well as a net debt-to-EBITDA (earnings before interest,
taxes, depreciation and amortization, and other modifications
described in the Revolving Credit Agreement) financial ratio
covenant that AT&T will maintain, as of the last day of each
fiscal quarter of not more than 3.5-to-1.
The events of default contained in the Revolving Credit
Agreement are customary for an agreement of this type and such
events would result in the acceleration or permit the lenders to
accelerate, as applicable, required payments and would increase the
Applicable Margin by 2.00% per annum.
38
AT&T INC.
MARCH 31, 2016
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 Syndicated Credit Agreement
In March 2015, AT&T borrowed all amounts available under the
Tranche A Facility and the Tranche B Facility. Amounts borrowed
under the Tranche A Facility will be due on March 2, 2018. Amounts
borrowed under the Tranche B Facility will be subject to
amortization from March 2, 2018, with 25 percent of the aggregate
principal amount thereof being payable prior to March 2, 2020, and
all remaining principal amount due on March 2, 2020.
Advances bear interest at a rate equal to: (i) the LIBOR for
deposits in dollars (adjusted upwards to reflect any bank reserve
costs) for a period of three or six months, as applicable, plus
(ii) the Applicable Margin (each such Advance, a Eurodollar Rate
Advance). The Applicable Margin under the Tranche A Facility will
equal 1.000%, 1.125% or 1.250% per annum depending on AT&T's
credit rating. The Applicable Margin under the Tranche B Facility
will equal 1.125%, 1.250% or 1.375% per annum, depending on
AT&T's credit rating.
The Syndicated Credit Agreement contains covenants that are
customary for an issuer with an investment grade senior debt credit
rating, as well as a net debt-to-EBITDA (earnings before interest,
taxes, depreciation and amortization, and other modifications
described in the Syndicated Credit Agreement) financial ratio
covenant that AT&T will maintain, as of the last day of each
fiscal quarter of not more than 3.5-to-1.
The events of default contained in the Syndicated Credit
Agreement are customary for an agreement of this type and such
events would result in the acceleration or permit the lenders to
accelerate, as applicable, required payments and would increase the
Applicable Margin by 2.00% per annum.
Collateral Arrangements
During the first three months of 2016, we received $587 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 foreign currency exchange
rates, interest rates, 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, 2016, our debt ratio was 51.2%, compared
to 51.5% at March 31, 2015, and 50.5% at December 31, 2015. Our net
debt ratio was 47.3% at March 31, 2016, compared to 49.1% at March
31, 2015, and 48.5% at December 31, 2015. The debt ratio is
affected by the same factors that affect total capital, and
reflects our recent debt issuances and repayments.
During 2016, we received $1,610 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 wireless business, to the trust used to pay pension
benefits under our qualified pension plans. The preferred equity
interest had a value of $8,787 as of March 31, 2016, and $8,714 as
of December 31, 2015, 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 will be
distributed quarterly in equal amounts. We distributed $140 to the
trust during the first quarter of 2016. 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. At the time of the contribution of the preferred
equity interest, we agreed to annual cash contributions to the
trust of $175 no later than the due date for our federal income tax
return for each of 2015 and 2016.
39
AT&T INC.
MARCH 31, 2016
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Dollars in millions except per share amounts
At March 31, 2016, we had interest rate swaps with a notional
value of $7,050 and a fair value of $197.
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 $(2,063) at March 31, 2016.
We also have foreign exchange contracts with a notional value of
$3 and a fair value of $0.
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, 2016. 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,
2016.
40
AT&T INC.
MARCH 31, 2016
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 of healthcare legislation, regulations or related
court decisions.
-- The final outcome of FCC and other federal or state agency proceedings (including judicial
review, if any, of such proceedings) involving issues that are important to our business,
including, without limitation, 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; net neutrality; including the FCC's order reclassifying
broadband as Title II services subject to much more fulsome regulation; unbundled network
elements and other wholesale obligations; multi-channel video programming distributor services
and equipment; availability of new spectrum from the FCC 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) 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 nonregulation of comparable alternative
technologies (e.g., VoIP).
-- The continued development and delivery of attractive and profitable video offerings through
satellite and U-verse; 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 data services, including network quality and acquisition
of adequate spectrum at reasonable costs and terms.
-- The outcome of pending, threatened or potential litigation, 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 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 in Latin America.
-- Changes in our corporate strategies, such as changing network 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.
Readers are cautioned that other factors discussed in this
report, although not enumerated here, also could materially affect
our future earnings.
41
AT&T INC.
MARCH 31, 2016
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 2016, there were no such
material developments.
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 2016 is as follows:
(d)
(c)
Maximum Number (or
(a) (b) Approximate Dollar
Total Number of Value) of Shares
Shares (or Units) (or
Purchased as Part Units) That May
of Yet Be
Total Number of Publicly Announced Purchased Under
Shares (or Units) Average Price Paid Plans or The
Period Purchased(1,2) Per Share (or Unit) Programs(1) Plans or Programs
January 1, 2016 -
January 31, 2016 541,982 $ - - 406,550,000
February 1, 2016 -
February 29, 2016 448 - - 406,550,000
March 1, 2016 -
March 31, 2016 9,074 - - 406,550,000
Total 551,504 $ - -
(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 300 million shares of our common stock. The authorizations
have no
expiration date.
(2) All repurchased shares were acquired through the withholding of taxes on the vesting
of restricted
stock or through the payment in stock of taxes on the exercise price of options.
42
AT&T INC.
MARCH 31, 2016
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 2016 Incentive 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
43
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.
AT&T Inc.
May 5, 2016 /s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
44
AT&T INC.
2016 Incentive Plan
Article 1. Establishment and Purpose.
1.01 Establishment of the Plan. AT&T Inc., a Delaware corporation (the "Company" or "AT&T"), hereby
establishes an incentive compensation plan (the "Plan"), as set forth in this document.
1.02 Purpose of the Plan. The purpose of the Plan is to promote the success and enhance the value
of the Company by linking the personal interests of Participants to those of the Company's
shareowners, and by providing Participants with an incentive for outstanding performance.
1.03 Effective Date of the Plan. The Plan is effective on May 1, 2016.
Article 2. Definitions.
2.01 Whenever used in the Plan, the following terms shall have the meanings set forth below and,
when the meaning is intended, the initial letter of the word is capitalized:
(a) "Applicable Law" means the legal requirements relating to the administration of options
and
share-based or performance-based awards under any applicable laws of the United States,
any
other country, and any provincial, state, or local subdivision, any applicable stock
exchange
or automated quotation system rules or regulations, as such laws, rules, regulations
and requirements
shall be in place from time to time.
(b) "Award" means, individually or collectively, a grant or award under this Plan of Stock
Options,
Restricted Stock (including unrestricted Stock), Restricted Stock Units, Performance
Units,
or Performance Shares.
(c) "Award Agreement" means an agreement which may be entered into by each Participant and
the
Company, setting forth the terms and provisions applicable to Awards granted to
Participants
under this Plan.
(d) "Board" or "Board of Directors" means the AT&T Board of Directors.
(e) "Cause" means willful and gross misconduct on the part of an Employee that is
materially and
demonstrably detrimental to the Company or any Subsidiary as determined by the
Committee in
its sole discretion.
(f) "Change in Control" shall be deemed to have occurred if (1) any "person" (as such term
is
used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other
fiduciary
holding securities under an employee benefit plan of the Company or a corporation owned
directly
or indirectly by the shareowners of the Company in substantially the same proportions
as their
ownership of stock of the Company, becomes the "beneficial owner" (as defined in Rule
13d-3
under said Act), directly or indirectly, of securities of the Company representing
twenty
percent (20%) or more of the total voting power represented by the Company's then
outstanding
voting securities; or (2) during any period of two (2) consecutive years, individuals
who
at the beginning of such period constitute the Board of Directors of the Company and
any new
Director whose election by the Board of Directors or nomination for election by the
Company's
shareowners was approved by a vote of at least two-thirds (2/3) of the Directors then
still
in office who either were Directors at the beginning of the period or whose election or
nomination
for election was previously so approved, cease for any reason to constitute a majority
thereof;
or (3) the consummation of a merger or consolidation of the Company with any other
corporation,
other than a merger or consolidation which would result in the voting securities of the
Company
outstanding immediately prior thereto continuing to represent (either by remaining
outstanding
or by being converted into voting securities of the surviving entity) at least fifty
percent
(50%) of the total voting power represented by the voting securities of the Company or
such
surviving entity outstanding immediately after such merger or consolidation, or the
shareowners
of the Company approve a plan of complete liquidation of the Company or an agreement
for the
sale or disposition by the Company of all or substantially all the Company's assets.
(g) "Code" means the Internal Revenue Code of 1986, as amended from time to time.
(h) "Committee" means the committee or committees of the Board of Directors given authority
to
administer the Plan as provided in Article 3.
(i) "Director" means any individual who is a member of the AT&T Board of Directors.
(j) "Disability" means, absence of an Employee from work under the relevant Company or
Subsidiary
long term disability plan.
(k) "Employee" means any employee of the Company or of one of the Company's Subsidiaries.
"Employment"
means the employment of an Employee by the Company or one of its Subsidiaries.
Directors who
are not otherwise employed by the Company shall not be considered Employees under this
Plan.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time,
or
any successor Act thereto.
(m) "Exercise Price" means the price at which a Share may be purchased by a Participant
pursuant
to an Option, as determined by the Committee.
(n) "Fair Market Value" means the closing price on the NYSE for a Share on the relevant
date,
or if such date was not a trading day, the next preceding trading date, all as
determined
by the Company. A trading day is any day that the Shares are traded on the NYSE. In
lieu of
the foregoing, the Committee may, from time to time, select any other index or
measurement
to determine the Fair Market Value of Shares under the Plan, including but not limited
to
an average determined over a period of trading days.
(o) "Insider" means an Employee who is, on the relevant date, an officer, director, or ten
percent
(10%) beneficial owner of the Company, as those terms are defined under Section 16 of
the
Exchange Act.
(p) "NYSE" or "New York Stock Exchange." If the New York Stock Exchange is no longer the
principal
exchange on which the stock is listed, then NYSE shall refer to such principal exchange
unless
otherwise provided by the Disinterested Committee.
(q) "Officer Level Employee" means a Participant who is an officer level Employee for
compensation
purposes as indicated on the records of AT&T. References to records of AT&T shall
include
the records of its Subsidiaries.
(r) "Option" means an option to purchase Shares from AT&T.
(s) "Participant" means an Employee or former Employee who holds an outstanding Award
granted
under the Plan.
(t) "Performance Unit" and "Performance Share" each mean an Award granted to an Employee
pursuant
to Article 8 herein.
(u) "Retirement" or to "Retire" means the Participant's Termination of Employment for any
reason
other than death, Disability, or for Cause, on or after the earlier of the following
dates,
or as otherwise provided by the Committee: (1) for Officer Level Employees, the date
the Participant
is at least age fifty-five (55) and has completed a 5 year Term of Employment;
provided, however,
that individuals who are designated as an Officer on or after October 1, 2015, must
have completed
a 10-year Term of Employment; or (2) the date the Participant has attained one of the
following
combinations of age and service, except as otherwise indicated below:
Term of Employment 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, Term of Employment shall have
the same meaning as in the AT&T Pension Benefit Plan -
Nonbargained Program ("Pension Plan"), as that may be amended from
time to time, except that service with a Participant's 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.
(v) "Senior Manager" means a Participant who is a senior manager for compensation purposes
as
indicated on the records of AT&T.
(w) "Severance Termination of Employment" means a Termination of Employment where the Participant
receives a cash severance payment under a severance plan of the Participant's employer or
pursuant to an individually negotiated severance agreement.
(x) "Shares" or "Stock" means the shares of common stock of the Company.
(y) "Subsidiary" means any corporation, partnership, venture or other entity in which AT&T holds,
directly or indirectly, a fifty percent (50%) or greater ownership interest.
(z) "Surplus Termination of Employment" means a Termination of Employment as a result of force
surplus, technological, operational, organizational and/or structural changes affecting the
relevant employer without an offer for comparable employment, or an Employment Termination
that occurs as a result of declining a Company initiated or offered job relocation to a work
location that is more than fifty (50) miles from the employee's work location and that increases
the employee's work commute.
(aa) "Termination of Employment" or a similar reference means the event where the Employee is no
longer an Employee of the Company or of any Subsidiary, including but not limited to where
the employing company ceases to be a Subsidiary. With respect to any Award that provides "nonqualified
deferred compensation" within the meaning of Section 409A of the Code, "Termination of Employment"
shall mean a "separation from service" as defined under Section 409A of the Code.
Article 3. Administration.
3.01 The Committee. Administration of the Plan shall be as follows:
(a) With respect to Insiders, the Plan and Awards hereunder shall be administered by the
Human
Resources Committee of the Board or such other committee as may be appointed by the
Board
for this purpose (each of the Human Resources Committee and such other committee is the
"Disinterested
Committee"), where each Director on such Disinterested Committee is a "Non-Employee
Director,"
as that term is used in Rule 16b-3 under the Exchange Act (or any successor designation
for
determining the committee that may administer plans, transactions or awards exempt
under Section
16(b) of the Exchange Act), as that rule may be modified from time to time.
(b) With respect to persons who are not Insiders, the Plan and Awards hereunder shall be
administered
by each of the Disinterested Committee and such other committee, if any, to which the
Board
may delegate such authority (such other Committee shall be the "Non-Insider
Committee"), and
each such Committee shall have full authority to administer the Plan and all Awards
hereunder,
except as otherwise provided herein or by the Board. The Disinterested Committee may,
from
time to time, limit the authority of the Non-Insider Committee in any way. Any
Committee may
be replaced by the Board at any time.
(c) Except as otherwise indicated from the context, references to the "Committee" in this
Plan
shall be to either of the Disinterested Committee or the Non-Insider Committee.
3.02 Authority of the Committee. The Committee shall have complete control over the administration
of the Plan and shall have the authority in its sole discretion to exercise all of the powers
granted to it under the Plan, which shall include but not be limited to the authority to:
(a) construe, interpret and implement the Plan, grant terms and grant notices, and all
Award Agreements;
(b) prescribe, amend and rescind rules and regulations relating to the Plan, including
rules governing
its own operations;
(c) make all determinations necessary or advisable in administering the Plan or any Award
thereunder;
(d) correct any defect, supply any omission and reconcile any inconsistency in the Plan;
and
(e) with respect to Awards:
(i) grant Awards,
(ii) determine who shall receive Awards,
(iii) determine when Awards shall be granted
(iv) determine the terms and conditions of Awards, including,
but not limited to, conditioning the exercise, vesting, payout or
other terms or conditions of an Award on the achievement of
Performance Goals (defined in Article 8), and
(v) determine whether and to the extent the terms and conditions of
Awards have been achieved
or satisfied.
3.03 No Award may be made under the Plan after April 30, 2026.
3.04 References to determinations or other actions by AT&T or the Company, herein, shall mean actions
authorized by the Committee, the Chairman of the Board of AT&T, 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, provided, however, only the Disinterested
Committee may take action with respect to Insiders with regard to granting or determining
the terms of Awards or other matters that would require the Disinterested Committee to act
in order to comply with Rule 16b-3 promulgated under the Exchange Act.
3.05 All determinations and decisions made by AT&T pursuant to the provisions of the Plan and all
related orders or resolutions of the Board shall be final, conclusive, and binding on all
persons, including but not limited to the Company, its stockholders, Employees, Participants,
and their estates and beneficiaries.
Article 4. Shares Subject to the Plan.
4.01 Number of Shares. Subject to adjustment as provided in Section 4.03 herein, the number of
Shares available for issuance under the Plan shall not exceed ninety (90) million Shares.
The Shares granted under this Plan may be either authorized but unissued or reacquired Shares.
The Disinterested Committee shall have full discretion to determine the manner in which Shares
available for grant are counted in this Plan.
4.02 Share Accounting. Without limiting the discretion of the Committee under this section, unless
otherwise provided by the Disinterested Committee, the following rules will apply for purposes
of the determination of the number of Shares available for grant under the Plan or compliance
with the foregoing limits:
(a) If an outstanding Award for any reason expires or is terminated or canceled without
having
been exercised or settled in full, or if Shares acquired pursuant to an Award subject
to forfeiture
are forfeited under the terms of the Plan or the relevant Award, the Shares allocable
to the
terminated portion of such Award or such forfeited Shares shall again be available for
issuance
under the Plan.
(b) Shares shall not be deemed to have been issued pursuant to the Plan with respect to any
portion
of an Award that is settled in cash, other than an Option.
(c) When an Option is exercised (including but not limited to a Stock-Settled exercise),
the number
of shares available for issuance under the Plan shall be reduced by the gross number of
shares
for which the Option is exercised.
4.03 Adjustments in Authorized Plan Shares and Outstanding Awards. In the event of any merger,
reorganization, consolidation, recapitalization, separation, split-up, liquidation, Share
combination, Stock split, Stock dividend, or other change in the corporate structure of the
Company affecting the Shares, an adjustment shall be made in the number and class of Shares
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 subject to outstanding Awards granted under
the Plan, and/or the number of outstanding Options, Shares of Restricted Stock, and Performance
Shares (and Performance Units and other Awards whose value is based on a number of Shares)
constituting outstanding Awards, as may be determined to be appropriate and equitable by the
Disinterested Committee, in its sole discretion, to prevent dilution or enlargement of rights.
Article 5. Eligibility and Participation.
5.01 Eligibility. All management Employees are eligible to receive Awards under this Plan.
5.02 Actual Participation. Subject to the provisions of the Plan, the Committee may, from time
to time, select from all eligible Employees, those to whom Awards shall be granted and shall
determine the nature and amount of each Award. No Employee is entitled to receive an Award
unless selected by the Committee.
Article 6. Stock Options.
6.01 Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted
to eligible Employees at any time and from time to time, and under such terms and conditions,
as shall be determined by the Committee. In addition, the Committee may, from time to time,
provide for the payment of dividend equivalents on Options, prospectively and/or retroactively,
on such terms and conditions as the Committee may require. The Committee shall have discretion
in determining the number of Shares subject to Options granted to each Employee; provided,
however, that no single Employee may receive Options under this Plan for more than one percent
(1%) of the Shares approved for issuance under this Plan during any calendar year. The Committee
may not grant Incentive Stock Options, as described in Section 422 of the Code, under this
Plan.
6.02 Form of Issuance. The Committee may require, as a condition to receiving an Option Award,
that the Participant enter into an Option Award Agreement, setting forth the terms and conditions
of the Award. In lieu of an Option Award Agreement, the Committee may provide the terms and
conditions of an Option Award in a notice to the Participant, in the resolution approving
the Award, or in such other manner as it deems appropriate. Such terms and conditions shall
include the Exercise Price, the duration of the Option, the number of Shares to which an Option
pertains (unless otherwise provided by the Committee, each Option may be exercised to purchase
one Share), and such other provisions as the Committee shall determine.
6.03 Exercise Price. Unless a greater Exercise Price is determined by the Committee, the Exercise
Price for each Option Awarded under this Plan shall be equal to one hundred percent (100%)
of the Fair Market Value of a Share on the date the Option is granted. Subject to adjustment
as provided in Section 4.03 herein or as otherwise provided herein, the terms of an Option
may not be amended to reduce the exercise price nor may Options be cancelled or exchanged
for cash, other awards or Options with an exercise price that is less than the exercise price
of the original Options.
6.04 Duration of Options. Each Option shall expire at such time as the Committee shall determine
at the time of grant (which duration may be extended by the Committee); provided, however,
that no Option shall be exercisable later than the tenth (10th) anniversary date of its grant.
In the event the Committee does not specify the expiration date of an Option, then such Option
will expire on the tenth (10th) anniversary date of its grant, except as otherwise provided
herein.
6.05 Vesting of Options. A grant of Options shall vest at such times and under such terms and conditions
as determined by the Committee; provided, however, unless another vesting period is provided
by the Committee at or before the grant of an Option, one-third of the Options will vest on
each of the first three anniversaries of the grant; if one Option remains after equally dividing
the grant by three, it will vest on the first anniversary of the grant, if two Options remain,
then one will vest on each of the first two anniversaries. The Committee shall have the right
to accelerate the vesting of any Option; however, the Chairman of the Board or the Senior
Executive Vice President-Human Resources, or their respective successors, or such other persons
designated by the Committee, shall have the authority to accelerate the vesting of Options
for any Participant who is not an Insider.
6.06 Exercise of Options.
(a) An Option shall be exercised by providing notice to the designated agent selected by
the Company
(if no such agent has been designated, then to the Company), in the manner and form
determined
by the Company, which notice shall be irrevocable, setting forth the exact number of
Shares
with respect to which the Option is being exercised and including with such notice
payment
of the Exercise Price, as applicable. When an Option has been transferred, the Company
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.
(b) Options granted under the Plan shall be exercisable at such times and be subject to
such restrictions
and conditions as the Committee shall in each instance approve, which need not be the
same
for each grant or for each Participant. Unless otherwise provided by the Committee,
exercises
of Options may be effected only on days and during the hours that the NYSE is open for
regular
trading. The Company may change or limit the times or days Options may be exercised. 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.
6.07 Payment of the Exercise Price.
(a) Unless otherwise determined by the Committee, the Exercise Price shall be paid in full
at
the time of exercise. No Shares shall be issued or transferred until full payment has
been
received or the next business day thereafter, as determined by AT&T.
(b) The Committee may, from time to time, determine, modify, or limit the method or methods
of
exercising Options or the manner in which the Exercise Price is to be paid. Unless
otherwise
provided by the Committee in full or in part:
(i) Payment may be made in cash.
(ii) An Option may be "stock settled," which shall mean upon exercise
of an Option, the Company
shall deliver that number of shares of Stock found by taking the
difference between (A) the
Fair Market Value of the Stock as of the first day that the Stock
was traded on the NYSE immediately
preceding the exercise date, multiplied by the number of Options
being exercised and (B) the
total Exercise Price of the Options being exercised, and dividing
such difference by the Fair
Market Value of the Stock as of the first day that the Stock was
traded on the NYSE immediately
preceding the exercise date.
(iii) If the Company has designated an agent to process Option
exercises, an Option may be exercised
by issuing an exercise notice together with instructions to such
agent irrevocably instructing
the agent (which shall include any broker-dealer engaged by the
agent): (A) to immediately
sell (which shall include an exercise notice that becomes
effective upon execution of a sale
order) a sufficient portion of the Shares to be received from the
Option exercise 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 the Company. In the event the agent
sells any Shares on behalf
of a Participant, the agent shall be acting solely as the agent
of the Participant, and the
Company disclaims any responsibility for the actions of the agent
in making any such sales.
No Shares shall be issued until the settlement date and until the
proceeds (equal to the Exercise
Price and tax withholding) are paid to the Company.
6.08 Termination of Employment. Unless otherwise provided by the Committee, the following limitations
on exercise of Options shall apply upon Termination of Employment:
(a) Termination by Death or Disability. In the event of the Participant's Termination of
Employment
by reason of death or Disability, all outstanding Options granted to that Participant
shall
immediately vest as of the date of Termination of Employment and may be exercised, if
at all,
no more than five (5) years from the date of the Termination of Employment, unless the
Options,
by their terms, expire earlier.
(b) Termination for Cause. In the event of the Participant's Termination of Employment for
Cause,
then the Committee may, in its sole discretion, forfeit all outstanding Options held by
the
Participant to the Company and no additional exercise period shall be allowed,
regardless
of the vested status of the Options.
(c) Retirement or Other Termination of Employment. In the event of the Participant's
Termination
of Employment for any reason other than the reasons set forth in (a) or (b), above:
(i) If upon the Participant's Termination of Employment, the
Participant is eligible to Retire,
then all outstanding unvested Options granted to that Participant
shall immediately vest as
of the date of the Participant's Termination of Employment;
(ii) All outstanding Options which are vested as of the effective date
of Termination of Employment
may be exercised, if at all, no more than five (5) years from the
date of Termination of Employment
if the Participant is eligible to Retire, or three (3) months from
the date of the Termination
of Employment if the Participant is not eligible to Retire, as the
case may be, unless in
either case the Options, by their terms, expire earlier; and
(iii) In the event of the death of the Participant after Termination of
Employment, this paragraph
(c) shall still apply and not paragraph (a), above.
(d) Options not Vested at Termination. Except as provided in paragraphs (a) and (c)(i),
above,
all Options held by the Participant which are not vested on or before the effective
date of
Termination of Employment shall immediately be forfeited to the Company (and the Shares
subject
to such forfeited Options shall once again become available for issuance under the
Plan).
(e) Other Terms and Conditions. Notwithstanding the foregoing, the Committee may, in its
sole
discretion, establish different, or waive, terms and conditions pertaining to the
effect of
Termination of Employment on Options, whether or not the Options are outstanding, but
no such
modification shall shorten the terms of Options issued prior to such modification or
otherwise
be materially adverse to the Participant.
6.09 Restrictions on Exercise and Transfer of Options. Unless otherwise provided by the Committee:
(a) 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, except as otherwise provided by AT&T's Rules for Employee
Beneficiary
Designations, 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.
(b) No Option shall be transferable except: (i) in the case of the Participant, only upon
the
Participant's death and in accordance with the AT&T Rules for Employee Beneficiary
Designations;
and (ii) in the case of any holder after the Participant's death, only by will or by
the laws
of descent and distribution.
Article 7. Restricted Stock.
7.01 Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Committee,
at any time and from time to time, may grant Shares of Restricted Stock to eligible Employees
in such amounts and upon such terms and conditions as the Committee shall determine. In addition
to any other terms and conditions imposed by the Committee, vesting of Restricted Stock may
be conditioned upon the achievement of Performance Goals in the same manner as provided in
Section 8.04, herein, with respect to Performance Shares. No Employee may be awarded, in any
calendar year, a number of Shares in the form of Restricted Stock (or Restricted Stock Units)
exceeding one percent (1%) of the Shares approved for issuance under this Plan.
7.02 Restricted Stock Agreement. The Committee may require, as a condition to receiving a Restricted
Stock Award, that the Participant enter into a Restricted Stock Award Agreement, setting forth
the terms and conditions of the Award. In lieu of a Restricted Stock Award Agreement, the
Committee may provide the terms and conditions of an Award in a notice to the Participant
of the Award, on the Stock certificate representing the Restricted Stock, in the resolution
approving the Award, or in such other manner as it deems appropriate.
7.03 Transferability. Except as otherwise provided in this Article 7, and subject to any additional
terms in the grant thereof, Shares of Restricted Stock granted herein may not be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated until fully vested.
7.04 Restrictions.
(a) The Restricted Stock shall be subject to such vesting terms, including the achievement
of
Performance Goals (as described in Section 8.04), as may be determined by the
Committee. Unless
otherwise provided by the Committee, to the extent Restricted Stock is subject to any
condition
to vesting, if such condition or conditions are not satisfied by the time the period
for achieving
such condition has expired, such Restricted Stock shall be forfeited. The Committee may
impose
such other conditions and/or restrictions on any Shares of Restricted Stock granted
pursuant
to the Plan as it may deem advisable including but not limited to a requirement that
Participants
pay a stipulated purchase price for each Share of Restricted Stock and/or restrictions
under
applicable Federal or state securities laws; and may legend the certificates
representing
Restricted Stock to give appropriate notice of such restrictions. The Committee may
also grant
Restricted Stock without any terms or conditions in the form of vested Stock Awards.
(b) The Company shall have the right to retain the certificates representing Shares of
Restricted
Stock in the Company's possession until such time as the Shares are fully vested and
all conditions
and/or restrictions applicable to such Shares have been satisfied.
7.05 Removal of Restrictions. Except as otherwise provided in this Article 7 or otherwise provided
in the grant terms, Shares of Restricted Stock covered by each Restricted Stock grant made
under the Plan shall become freely transferable by the Participant after completion of all
conditions to vesting, if any. However, the Committee, in its sole discretion, shall have
the right to immediately vest the shares and waive all or part of the restrictions and conditions
with regard to all or part of the Shares held by any Participant at any time.
7.06 Voting Rights, Dividends and Other Distributions. Participants holding Shares of Restricted
Stock granted hereunder may exercise full voting rights and, unless otherwise provided in
the grant terms, shall receive all dividends and distributions paid with respect to such Shares.
The Committee may require that dividends and other distributions, other than regular cash
dividends, paid to Participants with respect to Shares of Restricted Stock be subject to the
same restrictions and conditions as the Shares of Restricted Stock with respect to which they
were paid. If any such dividends or distributions are paid in Shares, the Shares shall
automatically
be subject to the same restrictions and conditions as the Shares of Restricted Stock with
respect to which they were paid.
7.07 Termination of Employment Due to Death or Disability. In the event of the Participant's Termination
of Employment by reason of death or Disability, all restrictions imposed on outstanding Shares
of Restricted Stock held by the Participant shall immediately lapse and the Restricted Stock
shall immediately become fully vested as of the date of Termination of Employment.
7.08 Termination of Employment for Other Reasons. Unless otherwise provided by the Committee, in
the event of the Participant's Termination of Employment for any reason other than due to
Death, Disability, or Surplus Termination of Employment, all Shares of Restricted Stock held
by the Participant which are not vested as of the effective date of Termination of Employment
immediately shall be forfeited and returned to the Company.
7.09 Restricted Stock Units.
(a) In lieu of or in addition to Restricted Stock, the Committee
may grant Restricted Stock Units under such terms and conditions as
shall be determined by the Committee. Restricted Stock Units shall
be subject to the same terms and conditions under this Plan as
Restricted Stock except as otherwise provided in this section 7.09
or as otherwise provided by the Committee. Except as otherwise
provided by the Committee, the award shall be settled and pay out
promptly upon vesting (to the extent permitted by Section 409A of
the Code), and the Participant holding such Restricted Stock Units
shall receive, as determined by the Committee, Shares (or cash
equal to the Fair Market Value of the number of Shares as of the
date the award becomes payable) equal to the number of such
Restricted Stock Units. Restricted Stock Units shall not be
transferable, shall have no voting rights, and shall not receive
dividends, but shall, unless otherwise provided by the Committee,
receive dividend equivalents at the time and at the same rate as
dividends are paid on Shares with the same record and pay
dates.
(b) Except as otherwise provided by the Committee, upon a
Participant's Termination of Employment due to Death or Disability
or upon becoming or being Retirement eligible, his or her
Restricted Stock Units will vest, and in the case of Death, will
pay out promptly, and in other cases, will pay out at the scheduled
distribution date. If the Participant dies after Termination of
Employment, vested Restricted Stock Units will be promptly paid
out.
7.10 Surplus Termination of Employment. Except as otherwise provided by the Committee, in the event
of a Surplus Termination of Employment that occurs prior to the vesting date of a grant of
Restricted Stock or Restricted Stock Units, the Participant shall receive a pro-rata distribution
as follows: the number of the Participant's unvested Restricted Stock or Restricted Stock
Units shall be prorated by multiplying the number of unvested Restricted Stock or Restricted
Stock Units by the number of months in the restriction period during which the Participant
worked at least one day divided by the total number of months in the restriction period, and
such prorated amount shall be vested but shall not be payable until the scheduled distribution
date, or as otherwise provided in the Plan.
Article 8. Performance Units and Performance Shares.
8.01 Grants of Performance Units and Performance Shares. Subject to the terms of the Plan, Performance
Shares and Performance Units may be granted to eligible Employees at any time and from time
to time, as determined by the Committee. The Committee shall have complete discretion in
determining
the number of Performance Units and/or Performance Shares Awarded to each Participant and
the terms and conditions of each such Award.
8.02 Value of Performance Shares and Units.
(a) A Performance Share is equivalent in value to a Share. In any calendar year, no
individual
may be awarded Performance Shares having a potential payout of Shares exceeding one
percent
(1%) of the Shares approved for issuance under this Plan.
(b) A Performance Unit shall be equal in value to a fixed dollar amount determined by the
Committee.
In any calendar year, no individual may be Awarded Performance Units having a potential
payout
equivalent exceeding the Fair Market Value, as of the date of granting the Award, of
one percent
(1%) of the Shares approved for issuance under this Plan. The number of Shares
equivalent
to the potential payout of a Performance Unit shall be determined by dividing the
maximum
cash payout of the Award by the Fair Market Value per Share on the effective date of
the grant.
The Committee may denominate a Performance Unit Award in dollars instead of Performance
Units.
A Performance Unit Award may be referred to as a "Key Executive Officer Short Term
Award."
8.03 Performance Period. The Performance Period for Performance Shares and Performance Units is
the period over which the Performance Goals are measured. The Performance Period is set by
the Committee for each Award; however, in no event shall an Award have a Performance Period
of less than one year.
8.04 Performance Goals.
(a) For each Award of Performance Shares or Performance Units, the Committee shall
establish (and
may establish for other Awards) performance objectives ("Performance Goals") for the
Company,
its Subsidiaries, and/or divisions of any of foregoing, using the criteria and other
factors
set forth in (b) and (c), below. It may also use other criteria or factors in
establishing
Performance Goals in addition to or in lieu of the foregoing. A Performance Goal may be
stated
as an absolute value or as a value determined relative to an index, budget, prior
period,
similar measures of a peer group of other companies or other standard selected by the
Committee.
Performance Goals shall include payout tables, formulas or other standards to be used
in determining
the extent to which the Performance Goals are met, and, if met, the number of
Performance
Shares and/or Performance Units which would be converted into Stock and/or cash (or the
rate
of such conversion) and distributed to Participants in accordance with Section 8.6.
Unless
previously canceled or reduced, Performance Shares and Performance Units which may not
be
converted because of failure in whole or in part to satisfy the relevant Performance
Goals
or for any other reason shall be canceled at the time they would otherwise be
distributable.
When the Committee desires an Award of Performance Shares, Performance Units,
Restricted Stock
or Restricted Stock Units to qualify under Section 162(m) of the Code, as amended, the
Committee
shall establish or modify the Performance Goals for the respective Award prior to or
within
90 days of the beginning of the Performance Period relating to such Performance Goal,
and
not later than after twenty-five percent (25%) of such period has elapsed. For all
other Awards,
the Performance Goals must be established or modified before the end of the respective
Performance
Period.
(b) In establishing Performance Goals, Committee is authorized to use, in its sole
discretion,
any of the following criteria or any combination thereof, including but not limited to
the
offset against each other of any combination of the following criteria:
(i) Financial performance of the Company (on a consolidated basis), of
one or more of its Subsidiaries,
and/or a division of any of the foregoing. Such financial
performance may be based on net
income, Value Added (after- tax cash operating profit less
depreciation and less a capital
charge), EBITDA (earnings before interest, taxes, depreciation and
amortization), revenues,
sales, expenses, costs, gross margin, operating margin, profit
margin, pre-tax profit, market
share, volumes of a particular product or service or category
thereof, including but not limited
to the product's life cycle (for example, products introduced in
the last two years), number
of customers or subscribers, number of items in service, including
but not limited to every
category of access or network connections, return on net assets,
return on assets, return
on capital, return on invested capital, cash flow, free cash flow,
operating cash flow, operating
revenues, operating expenses, and/or operating income.
(ii) Service performance of the Company (on a consolidated basis), of
one or more of its Subsidiaries,
and/or of a division of any of the foregoing. Such service
performance may be based upon measured
customer perceptions of service quality (which may include
measurements of the customer's
likelihood to recommend the Company its products or services,
among other things), employee
satisfaction, employee retention, product development, completion
of a joint venture or other
corporate transaction, completion of an identified special
project, and effectiveness of management.
(iii) The Company's Stock price, return on stockholders' equity, total
stockholder return (Stock
price appreciation plus dividends, assuming the reinvestment of
dividends), and/or earnings
per Share.
(iv) Impacts of acquisitions, dispositions, or restructurings, on any
of the foregoing.
(c) Exclusions and Adjustments to Performance Goals.
(i) If the matters in a specific category below have a collective net
impact (whether positive
or negative) on net income, after taxes and available and
collectible insurance, that exceed
$500 million in a calendar year, then such matters (as well as any
related effects on cash
flow, if applicable) shall be excluded in determining whether or
the extent to which the relevant
Performance Goals applicable to such year are met:
Categories:
(1) changes in accounting principles;
(2) changes in Federal tax law;
(3) changes in the tax laws of the states;
(4) expenses caused by natural disasters, including but not
limited to floods, hurricanes, and earthquakes;
(5) expenses resulting from intentionally caused damage to
property of the Company or its Subsidiaries taken as a whole;
(6) non-cash accounting write-downs of goodwill, other
intangible assets, and fixed assets.
(ii) In addition, where matters in a specific category have a
collective net impact (whether positive
or negative) on net income, after taxes and available and
collectible insurance, that exceed
$200 million but not $500 million in a calendar year, then such
matters (as well as any related
effects on cash flow, if applicable) shall also be excluded in
determining the achievement
of the relevant Performance Goals but only if the combined net
effect of matters in all such
categories (exceeding $200 million but not $500 million) exceeds
$500 million.
(iii) Gains and losses related to the assets and liabilities from
pension plans and other post-retirement
benefit plans (and any associated tax effects) shall be
disregarded in determining whether
or the extent to which a Performance Goal has been met.
(iv) Unless otherwise provided by the Committee at any time, no such
adjustment shall be made for
a current or former executive officer to the extent such
adjustment would cause an Award to
fail to satisfy the performance based exemption of Section 162(m)
of the Code.
8.05 Dividend Equivalents on Performance Shares. Unless otherwise provided by the Committee, a
cash payment ("Dividend Equivalent") in an amount equal to the dividend payable on one Share
shall be made to a Participant for each Performance Share held by such Participant on the
record date for the dividend. Such Dividend Equivalent, if any, will be payable at the time
the relevant AT&T common stock dividend is payable or at such other time as determined by
the Committee, and may be modified or terminated by the Committee at any time. Notwithstanding
the foregoing, unless otherwise provided by the Committee, Dividend Equivalents paid with
respect to Performance Shares granted to an Officer Level Employee shall only be paid on the
number of Performance Shares actually distributed and such payment shall be made when the
related Performance Shares are distributed.
8.06 Form and Timing of Payment of Performance Units and Performance Shares.
(a) As soon as practicable after the applicable Performance Period has ended and all other
conditions
(other than Committee actions) to conversion and distribution of a Performance Share
and/or
Performance Unit Award have been satisfied (or, if applicable, at such other time
determined
by the Committee at or before the establishment of the Performance Goal), the Committee
shall
determine whether and the extent to which the Performance Goals were met for the
applicable
Performance Units and Performance Shares. If Performance Goals have been met, then the
number
of Performance Units and Performance Shares to be converted into Stock and/or cash and
distributed
to the Participants shall be determined in accordance with the Performance Goals for
such
Awards, subject to any limits imposed by the Committee.
(b) Payment of Performance Units and Performance Shares shall be made in a single lump sum,
as
soon as reasonably administratively possible following the determination of the number
of
Shares or amount of cash to which the Participant is entitled but not later than the 15
(th)
day of the third month following the end of the applicable Performance Period.
(c) Performance Units will be distributed to Participants in the form of cash. Unless
otherwise
provided by the Committee, Performance Shares will be distributed to Participants in
the form
of fifty percent (50%) Stock and fifty percent (50%) Cash.
(d) At any time prior to the distribution of the Performance Shares and/or Performance
Units,
unless otherwise provided by the Committee or prohibited by this Plan (such as in the
case
of a Change in Control), the Committee shall have the authority to reduce or eliminate
the
number of Performance Units or Performance Shares to be converted and distributed, or
to cancel
any part or all of a grant or award of Performance Units or Performance Shares, or to
mandate
the form in which the Award shall be paid (i.e., in cash, in Stock or both, in any
proportions
determined by the Committee).
(e) Notwithstanding anything to the contrary in this Plan, after a Change in Control, the
payout
of Performance Units and Performance Shares shall be determined exclusively by the
attainment
of the Performance Goals in effect prior to the Change in Control, and such Performance
Goals
may not be modified after such Change in Control. In addition, after a Change in
Control,
other than an adjustment to the awards based on the extent to which the Performance
Goals
were achieved, AT&T shall not reduce or eliminate the number of Performance Units or
Performance
Shares or cancel any part or all of a grant or award of Performance Units or
Performance Shares.
(f) Unless otherwise provided by the Committee, any election to take a greater amount of
cash
or Stock with respect to Performance Shares must be made in the calendar year prior to
the
calendar year in which the Performance Shares are distributed.
(g) For the purpose of converting Performance Shares into cash and distributing the same to
the
holders thereof (or for determining the amount of cash to be deferred), the value of a
Performance
Share shall be the Fair Market Value of a Share on the date the Committee authorizes
the payout
of Awards. Performance Shares to be distributed in the form of Stock will be converted
at
the rate of one (1) Share per Performance Share.
8.07 Death or Disability. In the event of the Participant's death during a Performance Period,
the Participant shall receive a lump sum payout of the related outstanding Performance Units
and Performance Shares calculated as if all unfinished Performance Periods had ended with
one hundred percent (100%) of the Performance Goals achieved, valued as of the date of death
and payable as soon thereafter as reasonably possible but not later than the 15th day of the
third month after the end of the calendar year in which such death occurred. Where the amount
or part of Dividend Equivalents is determined by the number of Performance Shares that are
paid out or is otherwise determined by a performance measure, and the related Performance
Period for the Dividend Equivalents was not completed at death, then the Dividend Equivalents
will be calculated as though one hundred percent (100%) of the goals were achieved and paid
as soon as reasonably possible. A Termination of Employment due to Disability will not affect
a Participant's Award.
8.08 Retirement, Surplus Termination, Severance Termination, or Other Termination. Unless the Committee
determines otherwise at any time, in the event of the Participant's Termination of Employment
during the Performance Period while Retirement eligible, in the event of a Surplus Termination
of Employment, Severance Termination of Employment, and in each case, not due to death or
Disability, then upon such Termination, the amount of the Participant's Performance Units
and number of Performance Shares shall be adjusted; the revised Awards shall be determined
by multiplying the amount of the Performance Units and the number of Performance Shares, as
applicable, by the number of months the Participant worked at least one day during the respective
Performance Period divided by the number of months in the Performance Period, to be paid,
if at all, at the same time and under the same terms that such outstanding Performance Units
or Performance Shares would otherwise be paid; provided, however, if the Termination of Employment
occurs during the Performance Period and is for a reason other than Death, Disability, Surplus
Termination of Employment, or Severance Termination of Employment and while not Retirement
eligible, then the related Award shall be cancelled upon such Termination.
8.09 Nontransferability. Performance Units and Performance Shares may not be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated, other than in accordance with the
AT&T Rules for Employee Beneficiary Designations.
Article 9. Beneficiary Designation.
9.01 In the event of the death of a Participant, distributions or Awards under this Plan, except
for Restricted Stock, shall pass in accordance with the AT&T Rules for Employee Beneficiary
Designations, as the same may be amended from time to time. A Participant's most recent Beneficiary
Designation that is applicable to awards under the 1996 Stock and Incentive Plan, the 2001
Incentive Plan, the 2006 Incentive Plan, or the 2011 Incentive Plan will also apply to
distributions
or awards under this Plan, except for Restricted Stock, unless and until the Participant provides
to the contrary in accordance with the procedures set forth in such Rules.
Article 10. Employee Matters.
10.01 Employment Not Guaranteed. Nothing in the Plan shall interfere with or limit in any way the
right of the Company or any Subsidiary to terminate any Participant's Employment at any time,
nor confer upon any Participant any right to continue in the employ of the Company or one
of its Subsidiaries.
10.02 Participation. No Employee shall have the right to be selected to receive an Award under this
Plan, or, having been so selected, to be selected to receive a future Award.
10.03 Loyalty Conditions and Enforcement. This section relates solely to Awards granted to a Participant
who is an Officer Level Employee or a Senior Manager as of the date the Award is made.
(a) Each Award under the Plan is intended to closely align the Participant's long-term
interests
with those of the Company and its shareholders, and the conditions set forth in
subsections
(b) or (d) hereof (collectively, the "Loyalty Conditions") are intended to protect the
Company's
critical need for each Participant's loyalty to the Company and its shareholders. If
any Participant
does not comply with a Loyalty Condition, either during employment or within the
periods described
below following Termination of Employment for any reason, then the Participant is
acting contrary
to the long-term interests of the Company, and there will be a failure of the
consideration
on which the Participant received any Award or Awards pursuant to the Plan.
Accordingly, unless
otherwise provided in the Award, as a condition of such Award, the Participant is
deemed to
agree that he shall not, without obtaining the written consent of AT&T in advance,
violate
the Loyalty Provisions of this Section 10.3. Unless otherwise expressly provided in an
Award
Agreement, if the Participant violates a Loyalty Condition, then the Company may
terminate
any outstanding, unexercised, unexpired, unpaid, or deferred Awards ("Award
Termination"),
rescind any exercise, payment or delivery pursuant to any Award or Awards
("Rescission"),
or recapture any cash or Shares (whether restricted or unrestricted) issued pursuant to
any
Award or Awards, or proceeds from the Participant's sale of such Shares ("Recapture").
Notwithstanding
any provision to the contrary, nothing in this Plan shall be interpreted to prohibit,
limit
or interfere with a Participant's right to report possible violations of federal, state
or
local law or regulation to any governmental or law enforcement agency or entity,
including,
but not limited to, the Department of Justice, the Securities and Exchange Commission,
the
Federal Communications Commission or Congress, or to make other disclosures that are
protected
under the whistleblower or other provision of federal, state or local law or
regulation. Similarly,
a Participant may report such possible violations to anyone in his or her chain of
command,
the AT&T Legal Department, AT&T Asset Protection, or any other AT&T group responsible
for
compliance with laws or AT&T policy.
(b) During the Participant's employment with the Company and any of its Subsidiaries and
for a
period of two years after a Termination of Employment for any reason, a Participant
shall
not, without the Company's prior written authorization, (i) disclose to anyone outside
the
Company or use, other than in the Company's business, any Confidential Information, or
(ii)
disclose any trade secrets of the Company, as that term is defined under Applicable
Law, for
as long as such information is not generally known to the Company's competitors through
no
fault or negligence of the Participant.
"Confidential Information" means all information belonging to,
or otherwise relating to the business of the Company, which is not
generally known, regardless of the manner in which it is stored or
conveyed to Participant, and which the Company has taken reasonable
measures under the circumstances to protect from unauthorized use
or disclosure. Confidential Information includes trade secrets as
well as other proprietary knowledge, information, know-how, and
non-public intellectual property rights, including unpublished or
pending patent applications and all related patent rights,
formulae, processes, discoveries, improvements, ideas, conceptions,
compilations of data, and data, whether or not patentable or
copyrightable and whether or not it has been conceived, originated,
discovered, or developed in whole or in part by Participant. For
example, Confidential Information includes, but is not limited to,
information concerning the Company's business plans, budgets,
operations, products, strategies, marketing, sales, inventions,
designs, costs, legal strategies, finances, employees, customers,
prospective customers, licensees, or licensors; information
received from third parties under confidential conditions; or other
valuable financial, commercial, business, technical or marketing
information concerning the Company, or any of the products or
services made, developed or sold by the Company. Confidential
Information does not include information that (i) was generally
known to the public at the time of disclosure; (ii) was lawfully
received by Participant from a third party; (iii) was known to
Participant prior to receipt from the Company; or (iv) was
independently developed by Participant or independent third
parties; in each of the foregoing circumstances, this exception
applies only if such public knowledge or possession by an
independent third party was without breach by Participant or any
third party of any obligation of confidentiality or non-use,
including but not limited to the obligations and restrictions set
forth in this Agreement.
(c) Coincidentally with the exercise, receipt of payment, or delivery of cash or Shares
pursuant
to an Award, the Company may require that the Participant shall give a certification to
the
Company in writing if the Participant is not for any reason in full compliance with the
terms
and conditions of the Plan, including its Loyalty Conditions. If a Termination of
Employment
has occurred for any reason, the Participant's certification shall state the name and
address
of the Participant's then-current employer or any entity for which the Participant
performs
business services and the Participant's title, and shall identify any organization or
business
in which the Participant owns an equity interest of greater than five percent.
(d) If the Company determines, in its sole and absolute discretion, that (i) a Participant
has
violated any of the Loyalty Conditions, or (ii) during his or her employment by the
Company
or any of its Subsidiaries, or within two years after the Termination of Employment for
any
reason, a Participant has engaged in any of the following conduct:
(i) owned, operated or controlled, or participated in the ownership,
operation or control of,
any business enterprise (including, without limitation, any
corporation, partnership, proprietorship
or other venture) that competes with the Company in the Restricted
Business (defined below)
anywhere in the Restricted Territory (defined below);
(ii) become employed as an officer or executive by any business
enterprise (including, without
limitation, any corporation, partnership, proprietorship or other
venture) that competes with
the Company in the Restricted Business anywhere in the Restricted
Territory, if such employment
or engagement requires Participant to compete against the Company
in the Restricted Business;
(iii) solicited any nonclerical employee of the Company with whom the
Participant had Contact during
his or her employment to terminate employment with the Company;
or
(iv) committed any breach of Participant's fiduciary duty or the duty
of loyalty, as determined
by Applicable Law,
then the Committee may, in its sole and absolute discretion,
impose an Award Termination, Rescission, and/or Recapture with
respect to any or all of the Participant's Awards, including any
Shares or cash associated therewith, or any proceeds thereof. For
purposes of this Agreement, the term "Restricted Business" means
the business of providing communications or connectivity services,
including both wireless and wire-lined telephone, messaging,
Internet, data, and related services; the term "Restricted
Territory" shall mean the state in which the Participant maintained
his or her principal office with the Company on the date the Award
was granted; and the term "Contact" means interaction between the
Participant and the nonclerical employee during performance of
Participant's job responsibilities on behalf of the Company.
(e) Within ten days after receiving notice from the Company of any such activity described
in
subsection (d) above, the Participant shall deliver to the Company the cash or Shares
acquired
pursuant to any and all Awards, or, if Participant has sold the Shares, the gain
realized,
or payment received as a result of the rescinded exercise, payment, or delivery;
provided,
that if the Participant returns Shares that the Participant purchased pursuant to the
exercise
of an Option (or the gains realized from the sale of such Shares), the Company shall
promptly
refund the exercise price, without earnings or interest, that the Participant paid for
the
Shares. Any payment by the Participant to the Company pursuant to this Section shall be
made
either in cash or by returning to the Company the number of Shares that the Participant
received
in connection with the rescinded exercise, payment, or delivery. It shall not be a
basis for
Award Termination, Rescission or Recapture if, after a Termination of Employment, the
Participant
purchases, as an investment or otherwise, stock or other securities of an organization
engaged
in the Restricted Business, so long as (i) such stock or other securities are listed
upon
a recognized securities exchange or traded over the counter, and (ii) such investment
does
not represent more than a ten percent (10%) equity interest in the organization or
business.
(f) Notwithstanding the foregoing provisions of this Section, the Company has sole and
absolute
discretion not to require Award Termination, Rescission and/or Recapture, and its
determination
not to require Award Termination, Rescission and/or Recapture with respect to any
particular
act by a particular Participant or Award shall not in any way reduce or eliminate the
Company's
authority to require Award Termination, Rescission and/or Recapture with respect to any
other
act or Participant or Award. Nothing in this Section shall be construed to impose
obligations
on the Participant to refrain from engaging in lawful competition with the Company
after the
Participant's Termination of Employment that does not violate subsections (b) or (d) of
this
Section, other than any obligations that are part of any separate agreement between the
Company
and the Participant or that arise under Applicable Law.
(g) All administrative and discretionary authority given to the Company under this Section
shall
be exercised by the most senior human resources executive of the Company or such other
person
or committee (including without limitation the Committee) as the Committee may
designate from
time to time.
(h) If any provision within this Section is determined to be unenforceable or invalid under
any
applicable law, such provision will be applied to the maximum extent permitted by
Applicable
Law, and shall automatically be deemed amended in a manner consistent with its
objectives
and any limitations required under Applicable Law.
10.04 Reimbursement of Company for Unearned or Ill-gotten Gains. The Participant shall repay to
the Company any amount received under any Award, and the Company may cancel or forfeit any
unpaid or unvested Award, in each case to the extent required under any policy adopted at
any time by the Company pursuant to any applicable listing standards established under Section
10D of the Securities Exchange Act of 1934. This section shall not limit the Company's right
to revoke or cancel an award or take other action against a recipient of an award for any
other reason, including but not limited to misconduct.
Article 11. Amendment and Termination of Plan or Awards.
11.01 Amendment and Termination. At any time and from time to time, the Board or the Disinterested
Committee may amend or terminate the Plan. The Board, the Disinterested Committee, or the
Non-Insider Committee (subject to Section 3.01) may amend an Award in whole or in part.
Notwithstanding
the foregoing, no termination, amendment, or modification of the Plan or any Award (other
than Performance Shares or Performance Units) that adversely affects in any material way any
Award previously granted under the Plan shall be made without the written consent of the
Participant
holding such Award; provided, however, that any such modification made for the purpose of
complying with Section 409A of the Code or due to changes in applicable law may be made by
the Company without the consent of any Participant.
11.02 Delay in Payment. To the extent required in order to avoid the imposition of any interest
and/or additional tax under Section 409A(a)(1)(B) of the Code, any amount that is considered
deferred compensation under the Plan or Agreement and that is required to be postponed pursuant
to Section 409A of the Code, following the a Participant's Termination of Employment shall
be delayed for six months if a Participant is deemed to be a "specified employee" as defined
in Section 409A(a)(2)(i)(B) of the Code; provided that, if the Participant dies during the
postponement period prior to the payment of the postponed amount, the amounts withheld on
account of Section 409A shall be paid to the executor or administrator of the decedent's estate
within 60 days following the date of his death. A "Specified Employee" means 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 twelve (12) month period ending
on each December 31st (such twelve (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 Specified Employees for purposes of the Plan during the twelve (12) month period that begins
on the first day of the 4th month following the close of such identification period.
Article 12. Withholding.
12.01 Tax Withholding. Unless otherwise provided by the Committee, the Company shall deduct or withhold
an amount sufficient to satisfy Federal, state, and local taxes (including but not limited
to the Participant's employment tax obligations) required by law to be withheld with respect
to any taxable event arising or as a result of this Plan ("Withholding Taxes").
12.02 Share Withholding.
(a) Unless otherwise provided by the Committee, upon the exercise of Options, the lapse of
restrictions
on Restricted Stock, the distribution of Performance Shares in the form of Stock, or
any other
taxable event hereunder involving the transfer of Stock to a Participant, the Company
shall
withhold Stock equal in value to the Withholding Taxes applicable to such transaction
using
the method used to value the Stock for tax purposes.
(b) Any fractional Share of Stock payable to a Participant shall be withheld as additional
Federal
withholding, or, at the option of the Company, paid in cash to the Participant.
(c) Unless otherwise determined by the Committee, when the method of payment for the
Exercise
Price is from the sale through an agent appointed by the Company of the Stock acquired
through
the Option exercise, then the tax withholding shall be satisfied out of the proceeds.
For
administrative purposes in determining the amount of taxes due, the sale price of such
Stock
shall be deemed to be the Fair Market Value of the Stock.
(d) If permitted by the Committee, prior to the end of any Performance Period a Participant
may
elect to have a greater amount of Stock withheld from the distribution of Performance
Shares
to pay withholding taxes; provided, however, the Committee may prohibit or limit any
individual
election or all such elections at any time.
(e) Alternatively, or in combination with the foregoing, the Committee may require
Withholding
Taxes to be paid in cash by the Participant or by the sale of a portion of the Stock
being
distributed in connection with an Award, or by a combination thereof.
Article 13. Successors.
13.01 All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall
be binding on any successor to the Company, whether the existence of such successor is the
result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially
all of the business and/or assets of the Company.
Article 14. Legal Construction.
14.01 Gender and Number. Except where otherwise indicated by the context, any masculine term used
herein also shall include the feminine; the plural shall include the singular and the singular
shall include the plural.
14.02 Severability. In the event any provision of the Plan shall be held illegal or invalid for
any reason, the illegality or invalidity shall not affect the remaining parts of the Plan,
and the Plan shall be construed and enforced as if the illegal or invalid provision had not
been included.
14.03 Requirements of Law. The granting of Awards and the issuance of Shares under the Plan shall
be subject to all applicable laws, rules, and regulations, and to such approvals by any
governmental
agencies or national securities exchanges as may be required.
14.04 Errors. At any time AT&T may correct any error made under the Plan without prejudice to AT&T.
Such corrections may include, among other things, changing or revoking an issuance of an Award.
14.05 Elections and Notices.
(a) Notwithstanding anything to the contrary contained in this Plan, all elections and
notices
of every kind shall be made on forms prepared by AT&T or the General Counsel, Secretary
or
Assistant Secretary, or their respective delegates or shall be made in such other
manner as
permitted or required by AT&T or the General Counsel, Secretary or Assistant Secretary,
or
their respective delegates, including but not limited to elections or notices through
electronic
means, over the Internet or otherwise. An election shall be deemed made when received
by AT&T
(or its designated agent, but only in cases where the designated agent has been
appointed
for the purpose of receiving such election), which may waive any defects in form. AT&T
may
limit the time an election may be made in advance of any deadline.
(b) Where any notice or filing required or permitted to be given to AT&T under the Plan, it
shall
be delivered to the principal office of AT&T, directed to the attention of the Senior
Executive
Vice President-Human Resources of AT&T or his or her successor. Such notice shall be
deemed
given on the date of delivery.
(c) Notice to the Participant shall be deemed given when mailed (or sent by telecopy) to
the Participant's
work or home address as shown on the records of AT&T or, at the option of AT&T, to the
Participant's
e-mail address as shown on the records of AT&T.
(d) It is the Participant's responsibility to ensure that the Participant's addresses are
kept
up to date on the records of AT&T. In the case of notices affecting multiple
Participants,
the notices may be given by general distribution at the Participants' work locations.
14.06 Governing Law. To the extent not preempted by Federal law, the Plan, and all awards and agreements
hereunder, and any and all disputes in connection therewith, shall be governed by and construed
in accordance with the substantive laws of the State of Texas, without regard to conflict
or choice of law principles which might otherwise refer the construction, interpretation or
enforceability of this Plan to the substantive law of another jurisdiction.
14.07 Venue. Because awards under the Plan are granted in Texas, records relating to the Plan and
awards thereunder are located in Texas, and the Plan and awards thereunder are administered
in Texas, except as otherwise agreed by the Participant and the Company in a Mandatory Arbitration
Agreement, the Company and the Participant to whom an award under this Plan is granted, for
themselves and their successors and assigns, irrevocably submit to the exclusive and sole
jurisdiction and venue of the state or federal courts of Texas with respect to any and all
disputes arising out of or relating to this Plan, the subject matter of this Plan or any awards
under this Plan, including but not limited to any disputes arising out of or relating to the
interpretation and enforceability of any awards or the terms and conditions of this Plan.
To achieve certainty regarding the appropriate forum in which to prosecute and defend actions
arising out of or relating to this Plan, and to ensure consistency in application and
interpretation
of the Governing Law to the Plan, except as otherwise agreed by the Participant and the Company
in a Mandatory Arbitration Agreement, the parties agree that:
(a) sole and exclusive appropriate venue for any such action shall be an appropriate
federal or
state court in Dallas County, Texas, and no other,
(b) all claims with respect to any such action shall be heard and determined exclusively in
such
Texas court, and no other,
(c) such Texas court shall have sole and exclusive jurisdiction over the person of such
parties
and over the subject matter of any dispute relating hereto, and
(d) that the parties waive any and all objections and defenses to bringing any such action
before
such Texas court, including but not limited to those relating to lack of personal
jurisdiction,
improper venue or forum non conveniens .
14.08 409A Compliance. Awards under the Plan may be structured to be exempt from or be subject to
Section 409A of the Code. To the extent that Awards granted under the Plan are subject to
Section 409A of the Code, the Plan will be construed and administered in a manner that enables
the Plan and such Awards to comply with the provisions of Section 409A of the Code.
EXHIBIT
12
AT&T INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
Three Months
Ended
March 31, Year Ended December 31,
2016 2015 2015 2014 2013 2012 2011
Earnings:
Income (loss)
from continuing
operations
before income
taxes $6,007 $ 4,728 $20,692 $10,355 $28,050 $10,496 $ 6,998
Equity in net
income of
affiliates
included above (13) - (79) (175) (642) (752) (784)
Fixed charges 1,799 1,397 6,592 5,295 5,452 4,876 4,835
Distributed
income of
equity
affiliates 8 - 30 148 318 137 161
Interest
capitalized (218) (123) (797) (234) (284) (263) (162)
Earnings, as
adjusted $7,583 $ 6,002 $26,438 $15,389 $32,894 $14,494 $ 11,048
Fixed Charges:
Interest expense $1,207 $ 899 $ 4,120 $ 3,613 $ 3,940 $ 3,444 $ 3,535
Interest
capitalized 218 123 797 234 284 263 162
Portion of
rental expense
representative
of interest
factor 374 375 1,675 1,448 1,228 1,169 1,138
Fixed Charges $1,799 $ 1,397 $ 6,592 $ 5,295 $ 5,452 $ 4,876 $ 4,835
Ratio of
Earnings to
Fixed Charges 4.22 4.30 4.01 2.91 6.03 2.97 2.29
CERTIFICATION
I, Randall Stephenson, certify that:
1. I have reviewed this report on Form 10-Q of AT&T Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant's auditors and
the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: May 5, 2016
/s/ Randall Stephenson
Randall Stephenson
Chairman of the Board,
Chief Executive Officer and President
CERTIFICATION
I, John J. Stephens, certify that:
1. I have reviewed this report on Form 10-Q of AT&T Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant's auditors and
the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: May 5, 2016
/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
Certification of Periodic Financial Reports
Pursuant to 18 U.S.C. Section 1350, each of the undersigned
officers of AT&T Inc. (the "Company") hereby certifies that the
Company's Quarterly Report on Form 10-Q for the three months ended
March 31, 2016 (the "Report") fully complies with the requirements
of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934 and that information contained in the Report
fairly presents, in all material respects, the financial condition
and results of operations of the Company.
May 5, 2016 May 5, 2016
By: /s/ Randall Stephenson By: /s/ John J. Stephens
Randall Stephenson John J. Stephens
Chairman of the Board, Chief Executive Officer Senior Executive Vice President
and President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant
to 18 U.S.C. Section 1350 and is not being filed as part of the
Report or as a separate disclosure document. This certification
shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934 ("Exchange Act") or otherwise
subject to liability under that section. This certification shall
not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Exchange Act except to the extent
this Exhibit 32 is expressly and specifically incorporated by
reference in any such filing.
A signed original of this written statement required by Section
906, or other document authenticating, acknowledging, or otherwise
adopting the signature that appears in typed form within the
electronic version of this written statement required by Section
906, has been provided to AT&T Inc. and will be retained by
AT&T Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
This information is provided by RNS
The company news service from the London Stock Exchange
END
QRFAFMITMBTBBFF
(END) Dow Jones Newswires
May 16, 2016 10:40 ET (14:40 GMT)
At&t Inc 5.500% (LSE:58KN)
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