TIDM58KN
RNS Number : 0413L
AT & T Inc.
19 December 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8610
AT&T INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
208 S. Akard St. , Dallas, Texas 75202
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically 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, a
smaller reporting company, or emerging growth company. See
definition of "accelerated filer," "large accelerated filer,"
"smaller reporting company" and "emerging growth company" in Rule
12b-2 of the Exchange Act.
Large accelerated [X] Accelerated filer [ ]
filer
Non-accelerated filer [ ] Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by checkmark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
At October 31, 2018, there were 7,278 million common shares
outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AT&T INC.
-----------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
-----------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2018 2017 2018 2017
------------------------------------------------ --------- --------- -------- --- --------
As Adjusted As Adjusted
Operating Revenues
Service $ 41,297 $ 36,378 $ 109,849 $ 109,372
Equipment 4,442 3,290 12,914 9,498
------------------------------------------------ --------- --------- -------- --- --------
Total operating revenues 45,739 39,668 122,763 118,870
------------------------------------------------ --------- --------- -------- --- --------
Operating Expenses
Cost of revenues
Equipment 4,828 4,191 14,053 12,177
Broadcast, programming and operations 7,227 5,284 17,842 15,156
Other cost of revenues (exclusive of
depreciation and
amortization shown separately below) 8,651 9,694 24,215 28,551
Selling, general and administrative 9,598 8,650 26,179 25,981
Depreciation and amortization 8,166 6,042 20,538 18,316
------------------------------------------------ --------- --------- -------- --- --------
Total operating expenses 38,470 33,861 102,827 100,181
------------------------------------------------ --------- --------- -------- --- --------
Operating Income 7,269 5,807 19,936 18,689
------------------------------------------------ --------- --------- -------- --- --------
Other Income (Expense)
Interest expense (2,051) (1,686) (5,845) (4,374)
Equity in net income (loss) of affiliates (64) 11 (71) (148)
Other income (expense) - net 1,053 842 5,108 2,255
------------------------------------------------ --------- --------- -------- --- --------
Total other income (expense) (1,062) (833) (808) (2,267)
------------------------------------------------ --------- --------- -------- --- --------
Income Before Income Taxes 6,207 4,974 19,128 16,422
Income tax expense 1,391 1,851 4,305 5,711
Net Income 4,816 3,123 14,823 10,711
------------------------------------------------ --------- --------- -------- --- --------
Less: Net Income Attributable to Noncontrolling
Interest (98) (94) (311) (298)
------------------------------------------------ --------- --------- -------- --- --------
Net Income Attributable to AT&T $ 4,718 $ 3,029 $ 14,512 $ 10,413
================================================ ========= ========= ======== === ========
Basic Earnings Per Share Attributable
to AT&T $ 0.65 $ 0.49 $ 2.19 $ 1.69
Diluted Earnings Per Share Attributable
to AT&T $ 0.65 $ 0.49 $ 2.19 $ 1.69
------------------------------------------------ --------- --------- -------- --- --------
Weighted Average Number of Common Shares
Outstanding - Basic (in millions) 7,284 6,162 6,603 6,164
Weighted Average Number of Common Shares
Outstanding - with Dilution (in millions) 7,320 6,182 6,630 6,184
Dividends Declared Per Common Share $ 0.50 $ 0.49 $ 1.50 $ 1.47
================================================ ========= ========= ======== === ========
See Notes to Consolidated Financial Statements.
2
AT&T INC.
-------------------------------------------------- -------- ------- -------- ------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
-------------------------------------------------- -------- ------- -------- ------
Three months ended Nine months ended
September 30, September 30,
2018 2017 2018 2017
-------------------------------------------------- ------------ -------- ------------ -------
Net income $ 4,816 $ 3,123 $ 14,823 $10,711
Other comprehensive income (loss), net
of tax:
Foreign currency:
Translation adjustment (includes $(7),
$10, $(37) and $6
attributable to noncontrolling interest),
net of taxes of
$(2), $74, $(145) and $580 (14) 151 (824) 490
Available-for-sale securities:
Net unrealized gains (losses), net of
taxes of $(4), $28, $(8)
and $72 (10) 45 (22) 128
Reclassification adjustment included
in net income, net of
taxes of $0, $(50), $0 and $(54) - (79) - (86)
Cash flow hedges:
Net unrealized gains (losses), net of
taxes of $0, $178,
$68 and $(94) 4 330 257 (174)
Reclassification adjustment included
in net income, net of
taxes of $3, $5, $9 and $15 12 10 35 29
Defined benefit postretirement plans:
Net prior service (cost) credit arising
during period, net of
taxes of $0, $0, $173 and $594 - - 530 969
Amortization of net prior service credit
included in net
income, net of taxes of $(108), $(157),
$(322) and $(447) (332) (256) (989) (731)
Other comprehensive income (loss) (340) 201 (1,013) 625
-------------------------------------------------- -------- ------- -------- ------
Total comprehensive income 4,476 3,324 13,810 11,336
Less: Total comprehensive income attributable
to
noncontrolling interest (91) (104) (274) (304)
-------------------------------------------------- -------- ------- -------- ------
Total Comprehensive Income Attributable
to AT&T $ 4,385 $ 3,220 $ 13,536 $11,032
================================================== ======== ======= ======== ======
See Notes to Consolidated Financial Statements.
3
AT&T INC.
---------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
---------------------------------------------------------------------------------------------
September
30, December 31,
2018 2017
-------------------------------------------------------------- ------------- --------------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 8,657 $ 50,498
Accounts receivable - net of allowances for doubtful accounts
of $845 and $663 26,312 16,522
Prepaid expenses 1,860 1,369
Other current assets 16,278 10,757
-------------------------------------------------------------- --------- ----------
Total current assets 53,107 79,146
-------------------------------------------------------------- --------- ----------
Noncurrent Inventories and Theatrical Film and Television
Production Costs 7,221 -
Property, plant and equipment 327,680 313,499
Less: accumulated depreciation and amortization (197,332) (188,277)
-------------------------------------------------------------- --------- ----------
Property, Plant and Equipment - Net 130,348 125,222
-------------------------------------------------------------- --------- ----------
Goodwill 146,475 105,449
Licenses 96,077 96,136
Trademarks and Trade Names - Net 24,389 7,021
Distribution Networks - Net 16,962 -
Other Intangible Assets - Net 28,673 11,119
Investments in and Advances to Equity Affiliates 6,128 1,560
Other Assets 25,490 18,444
-------------------------------------------------------------- --------- ----------
Total Assets $ 534,870 $ 444,097
============================================================== ========= ==========
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year $ 14,905 $ 38,374
Accounts payable and accrued liabilities 39,375 34,470
Advanced billing and customer deposits 6,045 4,213
Accrued taxes 1,460 1,262
Dividends payable 3,635 3,070
-------------------------------------------------------------- --------- ----------
Total current liabilities 65,420 81,389
-------------------------------------------------------------- --------- ----------
Long-Term Debt 168,513 125,972
-------------------------------------------------------------- --------- ----------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 60,495 43,207
Postemployment benefit obligation 28,981 31,775
Other noncurrent liabilities 26,490 19,747
-------------------------------------------------------------- --------- ----------
Total deferred credits and other noncurrent liabilities 115,966 94,729
-------------------------------------------------------------- --------- ----------
Stockholders' Equity
Common stock ($1 par value, 14,000,000,000 authorized
at September 30, 2018 and
December 31, 2017: issued 7,620,748,598 at September
30, 2018 and 6,495,231,088 at
December 31, 2017) 7,621 6,495
Additional paid-in capital 125,706 89,563
Retained earnings 57,624 50,500
Treasury stock (350,465,537 at September 30, 2018 and
355,806,544
at December 31, 2017, at cost) (12,486) (12,714)
Accumulated other comprehensive income 5,383 7,017
Noncontrolling interest 1,123 1,146
-------------------------------------------------------------- --------- ----------
Total stockholders' equity 184,971 142,007
-------------------------------------------------------------- --------- ----------
Total Liabilities and Stockholders' Equity $ 534,870 $ 444,097
============================================================== ========= ==========
See Notes to Consolidated Financial Statements.
4
AT&T INC.
-----------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
--------------------------------------------------------------- --------- -------------
Nine months ended
September 30,
2018 2017
--------------------------------------------------------------- --------- -------------
As Adjusted
Operating Activities
Net income $ 14,823 $ 10,711
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 20,538 18,316
Amortization of television and film costs 1,608 -
Undistributed earnings from investments in equity affiliates 312 171
Provision for uncollectible accounts 1,240 1,216
Deferred income tax expense 2,934 3,254
Net (gain) loss from investments, net of impairments (501) (114)
Actuarial (gain) loss on pension and postretirement benefits (2,726) (259)
Changes in operating assets and liabilities:
Accounts receivable (1,018) (652)
Other current assets, inventories and theatrical film
and television production costs (2,729) (106)
Accounts payable and other accrued liabilities (1,385) (1,437)
Equipment installment receivables and related sales 220 451
Deferred customer contract acquisition and fulfillment
costs (2,657) (1,102)
Retirement benefit funding (420) (420)
Other - net 1,283 (1,556)
--------------------------------------------------------------- -------- ---------
Total adjustments 16,699 17,762
--------------------------------------------------------------- -------- ---------
Net Cash Provided by Operating Activities 31,522 28,473
--------------------------------------------------------------- -------- ---------
Investing Activities
Capital expenditures:
Purchase of property and equipment (16,695) (15,756)
Interest during construction (404) (718)
Acquisitions, net of cash acquired (43,116) 1,154
Dispositions 983 56
(Purchases) sales of securities, net (234) 235
Advances to and investments in equity affiliates, net (1,021) -
Cash collections of deferred purchase price 500 665
Net Cash Used in Investing Activities (59,987) (14,364)
--------------------------------------------------------------- -------- ---------
Financing Activities
Net change in short-term borrowings with original maturities
of three months or less (1,071) (2)
Issuance of other short-term borrowings 4,852 -
Repayment of other short-term borrowings (1,075) -
Issuance of long-term debt 38,325 46,761
Repayment of long-term debt (43,579) (10,309)
Purchase of treasury stock (577) (460)
Issuance of treasury stock 359 26
Dividends paid (9,775) (9,030)
Other (1,138) 1,716
--------------------------------------------------------------- -------- ---------
Net Cash (Used in) Provided by Financing Activities (13,679) 28,702
--------------------------------------------------------------- -------- ---------
Net (decrease) increase in cash and cash equivalents and
restricted cash (42,144) 42,811
Cash and cash equivalents and restricted cash beginning
of year 50,932 5,935
--------------------------------------------------------------- -------- ---------
Cash and Cash Equivalents and Restricted Cash End of Period $ 8,788 $ 48,746
=============================================================== ======== =========
See Notes to Consolidated Financial Statements.
5
AT&T INC.
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
--------------------------------------------------------------------------------
September 30, 2018
--------------------
Shares Amount
---------------------------------------------------------- -------- ----------
Common Stock
Balance at beginning of year 6,495 $ 6,495
Issuance of stock 1,126 1,126
---------------------------------------------------------- -------- ---------
Balance at end of period 7,621 $ 7,621
========================================================== ======== =========
Additional Paid-In Capital
Balance at beginning of year $ 89,563
Issuance of common stock 35,473
Issuance of treasury stock (49)
Share-based payments 719
Balance at end of period $ 125,706
========================================================== ======== =========
Retained Earnings
Balance at beginning of year $ 50,500
Net income attributable to AT&T ($2.19 per diluted share) 14,512
Dividends to stockholders ($1.50 per share) (10,388)
Cumulative effect of accounting changes 3,000
---------------------------------------------------------- -------- ---------
Balance at end of period $ 57,624
========================================================== ======== =========
Treasury Stock
Balance at beginning of year (356) $ (12,714)
Repurchase and acquisition of common stock (19) (641)
Issuance of treasury stock 24 869
---------------------------------------------------------- -------- ---------
Balance at end of period (351) $ (12,486)
========================================================== ======== =========
Accumulated Other Comprehensive Income Attributable to
AT&T, net of tax
Balance at beginning of year $ 7,017
Other comprehensive income attributable to AT&T (976)
Amounts reclassified to retained earnings (658)
---------------------------------------------------------- -------- ---------
Balance at end of period $ 5,383
========================================================== ======== =========
Noncontrolling Interest
Balance at beginning of year $ 1,146
Net income attributable to noncontrolling interest 311
Contributions 8
Distributions (332)
Acquisition of noncontrolling interest 1
Acquisition of interest held by noncontrolling owners (9)
Translation adjustments attributable to noncontrolling
interest, net of taxes (37)
Cumulative effect of accounting changes 35
---------------------------------------------------------- -------- ---------
Balance at end of period $ 1,123
========================================================== ======== =========
Total Stockholders' Equity at beginning of year $ 142,007
========================================================== ======== =========
Total Stockholders' Equity at end of period $ 184,971
========================================================== ======== =========
See Notes to Consolidated Financial Statements.
6
AT&T INC.
SEPTEMBER 30, 2018
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 worldwide in the
telecommunications, media and technology industries. You should
read this document in conjunction with the consolidated financial
statements and accompanying notes included in our Annual Report on
Form 10-K for the year ended December 31, 2017. The results for the
interim periods are not necessarily indicative of those for the
full year.
In the tables throughout this document, percentage increases and
decreases that are not considered meaningful are denoted with a
dash.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS
Basis of Presentation These consolidated financial statements
include all adjustments that are necessary to present fairly the
results for the presented interim periods, consisting of normal
recurring accruals and other items. The consolidated financial
statements include the accounts of the Company and our
majority-owned subsidiaries and affiliates, including the operating
results of recently acquired Time Warner Inc. (referred to as "Time
Warner" or "WarnerMedia") as of June 15, 2018 (see Note 8).
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 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 prior period amounts have been
conformed to the current period's presentation, including impacts
for the adoption of recent accounting standards and changes in our
reportable segments (see Note 4).
Tax Reform The Tax Cuts and Jobs Act (the Act) was enacted on
December 22, 2017. The Act reduced the U.S. federal corporate
income tax rate from 35% to 21% and required companies to pay a
one-time transition tax on earnings of certain foreign subsidiaries
that were previously tax deferred. Recognizing the late enactment
of the Act and complexity of accurately accounting for its impact,
the Securities and Exchange Commission (SEC) in Staff Accounting
Bulletin (SAB) 118 provided guidance that allows registrants to
provide a reasonable estimate of the impact to their financial
statements and adjust the reported impact in a measurement period
not to exceed one year. We included the estimated impact of the Act
in our financial results at or for the period ended December 31,
2017 and did not record any adjustments thereto during the first
nine months of 2018. Our future results could include additional
adjustments, and those adjustments could be material.
Customer Fulfillment Costs During the second quarter of 2018, we
updated our analysis of economic lives of customer relationships.
As of April 1, 2018, we extended the amortization period to 58
months to better reflect the estimated economic lives of our
Entertainment Group customers. This change in accounting estimate
decreased other cost of revenues, which had an impact on net income
of $107, or $0.02 per diluted share, in the third quarter and $233,
or $0.04 per diluted share, for the first nine months of 2018.
Film and Television Production Cost Recognition, Participations
and Residuals and Impairments Film and television production costs
include the unamortized cost of completed theatrical films and
television episodes, theatrical films and television series in
production and undeveloped film and television rights. Film and
television production costs are stated at the lower of cost, less
accumulated amortization, or fair value. The amount of capitalized
film and television production costs recognized as broadcast,
programming and operations expenses for a given period is
determined using the film forecast computation method. Under this
method, the amortization of capitalized costs and the accrual of
participations and residuals is based on the proportion of the
film's revenues recognized for such period to the film's estimated
remaining ultimate revenues (i.e., the total revenue to be received
throughout a film's life cycle).
7
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
The process of estimating a film's ultimate revenues requires us
to make a series of significant judgments related to future revenue
generating activities associated with a particular film. We
estimate the ultimate revenues, less additional costs to be
incurred (including exploitation and participation costs), in order
to determine whether the value of a film or television series is
impaired and requires an immediate write-off of unrecoverable film
and television production costs. We also determine, using the film
forecast computation method, the amount of capitalized film and
television production costs and the amount of participations and
residuals to be recognized as broadcast, programming and operations
expenses for a given film or television series in a particular
period. To the extent that the ultimate revenues are adjusted, the
resulting gross margin reported on the exploitation of that film or
television series in a period is also adjusted.
Prior to the theatrical release of a film, our estimates are
based on factors such as the historical performance of similar
films, the star power of the lead actors, the rating and genre of
the film, pre-release market research (including test market
screenings), international distribution plans and the expected
number of theaters in which the film will be released. In the
absence of revenues directly related to the exhibition of owned
film or television programs on our television networks, premium pay
television or over-the-top (OTT) services, management estimates a
portion of the unamortized costs that are representative of the
utilization of that film or television program in that exhibition
and expenses such costs as the film or television program is
exhibited. The period over which ultimate revenues are estimated is
generally not to exceed ten years from the initial release of a
motion picture or from the date of delivery of the first episode of
an episodic television series. Estimates are updated based on
information available during the film's production and, upon
release, the actual results of each film. Changes in estimates of
ultimate revenues from period to period affect the amount of
production costs amortized in a given period and, therefore, could
have an impact on the financial results for that period.
Licensed Programming Inventory Cost Recognition and Impairment
We enter into agreements to license programming exhibition rights
from licensors. A programming inventory asset related to these
rights and a corresponding liability payable to the licensor are
recorded (on a discounted basis if the license agreements are
long-term) when (i) the cost of the programming is reasonably
determined, (ii) the programming material has been accepted in
accordance with the terms of the agreement, (iii) the programming
is available for its first showing or telecast, and (iv) the
license period has commenced. There are variations in the
amortization methods of these rights, depending on whether the
network is advertising-supported (e.g., TNT and TBS) or not
advertising-supported (e.g., HBO and Turner Classic Movies).
For the advertising-supported networks, our general policy is to
amortize each program's costs on a straight-line basis (or per-play
basis, if greater) over its license period. In circumstances where
the initial airing of the program has more value than subsequent
airings, an accelerated method of amortization is used. The
accelerated amortization upon the first airing versus subsequent
airings is determined based on a study of historical and estimated
future advertising sales for similar programming. For rights fees
paid for sports programming arrangements, such rights fees are
amortized using a revenue-forecast model, in which the rights fees
are amortized using the ratio of current period advertising revenue
to total estimated remaining advertising revenue over the term of
the arrangement.
For premium pay television and OTT services that are not
advertising-supported, each licensed program's costs are amortized
on a straight-line basis over its license period or estimated
period of use, beginning with the month of initial exhibition. When
we have the right to exhibit feature theatrical programming in
multiple windows over a number of years, historical audience
viewership is used as the basis for determining the amount of
programming amortization attributable to each window.
Licensed programming inventory is carried at the lower of
unamortized cost or estimated net realizable value. For networks
that generate both advertising and subscription revenues, the net
realizable value of unamortized programming costs is generally
evaluated based on the network's programming taken as a whole. In
assessing whether the programming inventory for a particular
advertising-supported network is impaired, the net realizable value
for all of the network's programming inventory is determined based
on a projection of the network's profitability. Similarly, for
premium pay television and OTT services that are not
advertising-supported, an evaluation of the net realizable value of
unamortized programming costs is performed based on the premium pay
television and OTT services' licensed programming taken as a whole.
Specifically, the net realizable value for all premium pay
television and OTT service licensed programming is determined based
on projections of estimated subscription revenues less certain
costs of delivering and distributing the licensed programming.
Changes in management's intended usage of a specific program, such
as a decision to no longer exhibit that program and forego the use
of the rights associated with the program license, results in a
reassessment of that program's net realizable value, which could
result in an impairment.
8
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Recently Adopted Accounting Standards
Revenue Recognition As of January 1, 2018, we adopted Financial
Accounting Standards Board (FASB) Accounting Standards Update (ASU)
No. 2014-09, "Revenue from Contracts with Customers (Topic 606),"
as modified (ASC 606), using the modified retrospective method,
which does not allow us to adjust prior periods. We applied the
rules to all open contracts existing as of January 1, 2018,
recording an increase of $2,342 to retained earnings for the
cumulative effect of the change, with an offsetting contract asset
of $1,737, deferred contract acquisition costs of $1,454, other
asset reductions of $239, other liability reductions of $212,
deferred income taxes of $787 and noncontrolling interest of $35.
(See Note 5)
Pension and Other Postretirement Benefits As of January 1, 2018,
we adopted, with retrospective application, ASU No. 2017-07,
"Compensation - Retirement Benefits (Topic 715): Improving the
Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost" (ASU 2017-07). We are no longer
allowed to present the interest, estimated return on assets and
amortization of prior service credits components of our net
periodic benefit cost in our consolidated operating expenses, but
rather are required to include those amounts in "other income
(expense) - net" in our consolidated statements of income. We
continue to present service costs with the associated compensation
costs within our operating expenses. As a practical expedient, we
used the amounts disclosed as the estimated basis for applying the
retrospective presentation requirement.
The following table presents our results under our historical
method and as adjusted to reflect ASU 2017-07 (presentation of
benefit cost ):
Pension and Postretirement Benefits
--------------------------------------------- -------------------------------------------
Historical Effect of
Accounting Adoption of As
Method ASU 2017-07 Adjusted
--------------------------------------------- ----------------- ------------- ---------
For the three months ended September 30,
2018
Consolidated Statements of Income
Other cost of revenues $ 8,527 $ 124 $ 8,651
Selling, general and administrative expenses 9,207 391 9,598
Operating Income 7,784 (515) 7,269
Other Income (Expense) - net 538 515 1,053
Net Income 4,816 - 4,816
=============================================== === ============ ========= ========
For the three months ended September 30,
2017
Consolidated Statements of Income
Other cost of revenues $ 9,431 $ 263 $ 9,694
Selling, general and administrative expenses 8,317 333 8,650
Operating Income 6,403 (596) 5,807
Other Income (Expense) - net 246 596 842
Net Income 3,123 - 3,123
=============================================== === ============ ========= ========
For the nine months ended September 30, 2018
Consolidated Statements of Income
Other cost of revenues $ 23,166 $ 1,049 $ 24,215
Selling, general and administrative expenses 22,859 3,320 26,179
Operating Income 24,305 (4,369) 19,936
Other Income (Expense) - net 739 4,369 5,108
Net Income 14,823 - 14,823
=============================================== === ============ ========= ========
For the nine months ended September 30, 2017
Consolidated Statements of Income
Other cost of revenues $ 27,714 $ 837 $ 28,551
Selling, general and administrative expenses 24,917 1,064 25,981
Operating Income 20,590 (1,901) 18,689
Other Income (Expense) - net 354 1,901 2,255
Net Income 10,711 - 10,711
=============================================== === ============ ========= ========
9
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Cash Flows As of January 1, 2018, we adopted, with retrospective
application, ASU No. 2016-15, "Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments" (ASU
2016-15). Under ASU 2016-15, we continue to recognize cash receipts
on owned equipment installment receivables as cash flows from
operations. However, cash receipts on the deferred purchase price
described in Note 9 are now required to be classified as cash flows
from investing activities instead of cash flows from operating
activities.
As of January 1, 2018, we adopted, with retrospective
application, ASU No. 2016-18, "Statement of Cash Flows (Topic 230)
- Restricted Cash," (ASU 2016-18). The primary impact of ASU
2016-18 was to require us to include restricted cash in our
reconciliation of beginning and ending cash and cash equivalents
(restricted and unrestricted) on the face of the statements of cash
flows. (See Note 11)
The following table presents our results under our historical
method and as adjusted to reflect ASU 2016-15 ( cash receipts on
deferred purchase price ) and ASU 2016-18 ( restricted cash ):
Cash Flows
-------------------------------------- -----------------------------------------------------
Historical Effect of Effect of
Adoption
Accounting Adoption of of As
Method ASU 2016-15 ASU 2016-18 Adjusted
------------ ------------- ------------- ---------
For the nine months ended September
30, 2018
Consolidated Statements of Cash Flows
Changes in other current assets $ (2,731) $ - $ 2 $ (2,729)
Equipment installment receivables
and related sales 720 (500) - 220
Other - net 1,399 - (116) 1,283
Cash Provided by (Used in) Operating
Activities 32,136 (500) (114) 31,522
(Purchases) sales of securities -
net 7 - (241) (234)
Cash collections of deferred purchase
price - 500 - 500
Cash (Used in) Provided by Investing
Activities (60,246) 500 (241) (59,987)
Change in cash and cash equivalents
and restricted cash $ (41,789) $ - $ (355) $(42,144)
======================================== ======== ========= ========= ========
For the nine months ended September
30, 2017
Consolidated Statements of Cash Flows
Changes in other current assets $ (106) $ - $ - $ (106)
Equipment installment receivables
and related sales 1,116 (665) - 451
Other - net (1,420) - (136) (1,556)
Cash Provided by (Used in) Operating
Activities 29,274 (665) (136) 28,473
(Purchases) sales of securities -
net (2) - 237 235
Cash collections of deferred purchase
price - 665 - 665
Cash (Used in) Provided by Investing
Activities (15,266) 665 237 (14,364)
Change in cash and cash equivalents
and restricted cash $ 42,711 $ - $ 100 $ 42,811
======================================== ======== ========= ========= ========
Financial Instruments As of January 1, 2018, we adopted ASU No.
2016-01, "Financial Instruments - Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial
Liabilities" (ASU 2016-01), which requires us to prospectively
record changes in the fair value of our equity investments, except
for those accounted for under the equity method, in net income
instead of in accumulated other comprehensive income. As of January
1, 2018, we recorded an increase of $658 in retained earnings for
the cumulative effect of the adoption of ASU 2016-01, with an
offset to accumulated other comprehensive income (accumulated
OCI).
10
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
New Accounting Standards and Accounting Standards Not Yet
Adopted
Leases In February 2016, the FASB issued ASU No. 2016-02,
"Leases (Topic 842)," as modified (ASC 842), which replaces
existing leasing rules with a comprehensive lease measurement and
recognition standard and expanded disclosure requirements. ASC 842
will require lessees to recognize most leases on their balance
sheets as liabilities, with corresponding "right-of-use" assets.
For income statement recognition purposes, leases will be
classified as either a finance or an operating lease without
relying upon the bright-line tests under current GAAP. In July
2018, the FASB amended ASC 842 to provide another transition
method, allowing a cumulative effect adjustment to the opening
balance of retained earnings during the period of adoption. Through
the same amendment, the FASB will allow lessors the option to make
a policy election to treat lease and nonlease components as a
single lease component under certain conditions. ASC 842 is
effective for annual reporting periods beginning after December 15,
2018, subject to early adoption.
Upon initial evaluation, we believe the key change upon adoption
will be the balance sheet recognition. The income statement
recognition of lease expense appears similar to our current
methodology. We are continuing to evaluate the magnitude and other
potential impacts to our financial statements.
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and
diluted earnings per share for the three months and nine months
ended September 30, 2018 and 2017, is shown in the table below:
Three months ended Nine months ended
September 30, September 30,
2018 2017 2018 2017
---------------------------------------- ------------ -------- ----------- --------
Numerators
Numerator for basic earnings per share:
Net Income $ 4,816 $ 3,123 $ 14,823 $ 10,711
Less: Net income attributable to
noncontrolling interest (98) (94) (311) (298)
---------------------------------------- -------- ------- ------- -------
Net Income attributable to AT&T 4,718 3,029 14,512 10,413
Dilutive potential common shares:
Share-based payment 4 3 13 9
---------------------------------------- -------- ------- ------- -------
Numerator for diluted earnings per
share $ 4,722 $ 3,032 $ 14,525 $ 10,422
======================================== ======== ======= ======= =======
Denominators (000,000)
Denominator for basic earnings per
share:
Weighted average number of common
shares outstanding 7,284 6,162 6,603 6,164
Dilutive potential common shares:
Share-based payment (in shares) 36 20 27 20
---------------------------------------- -------- ------- ------- -------
Denominator for diluted earnings per
share 7,320 6,182 6,630 6,184
======================================== ======== ======= ======= =======
Basic earnings per share attributable
to AT&T $ 0.65 $ 0.49 $ 2.19 $ 1.69
Diluted earnings per share attributable
to AT&T $ 0.65 $ 0.49 $ 2.19 $ 1.69
======================================== ======== ======= ======= =======
11
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
NOTE 3. OTHER COMPREHENSIVE INCOME
Changes in the balances of each component included in
accumulated OCI are presented below. All amounts are net of tax and
exclude noncontrolling interest.
Net Unrealized
Foreign Gains (Losses) Net Unrealized Accumulated
Currency on Gains (Losses) Defined Benefit Other
Translation Available-for-Sale on Cash Postretirement Comprehensive
Adjustment Securities Flow Hedges Plans Income
------------------- ------------ ------------------ -------------- ---------------- --------------
Balance as of
December
31, 2017 $ (2,054) $ 660 $ 1,402 $ 7,009 $ 7,017
Other comprehensive
income
(loss) before
reclassifications (787) (22) 257 530 (22)
Amounts
reclassified
from accumulated
OCI - 1 - 1 35 2 (989) 3 (954)
------------------- ----------- ----------------- ---------- ------------ -------------
Net other
comprehensive
income (loss) (787) (22) 292 (459) (976)
------------------- ----------- ----------------- ---------- ------------ -------------
Amounts
reclassified
to
retained earnings - (658) 4 - - (658)
------------------- ----------- ----------------- ---------- ------------ -------------
Balance as of
September
30, 2018 $ (2,841) $ (20) $ 1,694 $ 6,550 $ 5,383
=================== =========== ================= ========== ============ =============
Net Unrealized
Foreign Gains (Losses) Net Unrealized Accumulated
Currency on Gains (Losses) Defined Benefit Other
Translation Available-for-Sale on Cash Postretirement Comprehensive
Adjustment Securities Flow Hedges Plans Income
------------------- ------------ ------------------ -------------- ---------------- --------------
Balance as of
December
31, 2016 $ (1,995) $ 541 $ 744 $ 5,671 $ 4,961
Other comprehensive
income
(loss) before
reclassifications 484 128 (174) 969 1,407
Amounts
reclassified
from accumulated
OCI - 1 (86) 1 29 2 (731) 3 (788)
------------------- ----------- ----------------- ---------- ------------ -------------
Net other
comprehensive
income (loss) 484 42 (145) 238 619
------------------- ----------- ----------------- ---------- ------------ -------------
Balance as of
September
30, 2017 $ (1,511) $ 583 $ 599 $ 5,909 $ 5,580
=================== =========== ================= ========== ============ =============
1 (Gains) losses are included in Other income (expense) - net in the consolidated
statements of income.
2 (Gains) losses are included in Interest expense in the consolidated statements
of income (see Note 7).
3 The amortization of prior service credits associated with postretirement
benefits are included in Other income (expense) in the
consolidated statements of income (see Note 6).
4 With the adoption of ASU 2016-01, the unrealized (gains) losses on our
equity investments are reclassified to retained earnings
(see Note 1).
NOTE 4. SEGMENT INFORMATION
Our segments are strategic business units that offer products
and services to different customer segments over various technology
platforms and/or in different geographies that are managed
accordingly. We analyze our segments based on Segment Contribution,
which consists of operating income, excluding acquisition-related
costs and other significant items (as discussed below), and equity
in net income (loss) of affiliates for investments managed within
each segment. We have four reportable segments: (1) Communications,
(2) WarnerMedia, (3) Latin America, and (4) Xandr.
12
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
We also evaluate segment and business unit performance based on
EBITDA and/or EBITDA margin, which is defined as operating
contribution excluding equity in net income (loss) of affiliates
and depreciation and amortization. We believe EBITDA to be a
relevant and useful measurement to our investors as it is part of
our internal management reporting and planning processes and it is
an important metric that management uses to evaluate operating
performance. EBITDA does not give effect to cash used for debt
service requirements and thus does not reflect available funds for
distributions, reinvestment or other discretionary uses. EBITDA
margin is EBITDA divided by total revenues.
Due to organizational changes and our June 14, 2018 acquisition
of Time Warner, effective for the quarter ended September 30, 2018,
we revised our operating segments to align with the new management
structure and organizational responsibilities, and have accordingly
recast our segment disclosures for all periods presented. As a
result of the realignment to combine all domestic wireless products
and services into the Mobility business unit, which is now one of
our reporting units, $27,568 of goodwill from our former Business
Solutions segment and $16,540 from our former Consumer Mobility
segment was reallocated to the Mobility business unit.
With our acquisition of Time Warner, programming released on or
before the June 14, 2018 acquisition date was recorded at fair
value as an intangible asset (see Note 8). For consolidated
reporting, all amortization of pre-acquisition released programming
is reported as amortization expense on our consolidated income
statement. To best present comparable results, we report the
historical content production cost amortization as operations and
support expense within the WarnerMedia segment. The amount of
historical content production cost amortization reported in the
segment results was $1,491 for the quarter ended September 30,
2018, $772 of which was for pre-acquisition released programming.
For the 108-day period included in our nine months ended September
30, 2018, historical content production cost amortization reported
in the segment results was $1,677, $870 of which was for
pre-acquisition released programming.
The Communications segment provides wireless and wireline
telecom, video and broadband services to consumers located in the
U.S. or in U.S. territories and businesses globally. This segment
contains the following business units:
-- Mobility provides nationwide wireless service and equipment.
-- Entertainment Group provides video, including over-the-top
(OTT) services, broadband and voice communications services
primarily to residential customers. This segment also sells
advertising on DIRECTV and U-verse distribution platforms.
-- Business Wireline provides advanced IP-based services, as
well as traditional voice and data services to business
customers.
The WarnerMedia segment develops, produces and distributes
feature films, television, gaming and other content in various
physical and digital formats globally. Historical financial results
from AT&T's Regional Sports Networks (RSN) and equity
investments (predominantly Game Show Network and Otter Media
Holdings), previously included in Entertainment Group, have been
reclassified into the WarnerMedia segment and are combined with the
Time Warner operations for the period subsequent to our acquisition
on June 14, 2018. This segment contains the following business
units:
-- Turner is comprised of the historic Turner division as well
the financial results of our RSN. This business unit creates and
programs branded news, entertainment, sports and kids
multi-platform content that is sold to various distribution
affiliates. Turner also sells advertising on its networks and
digital properties.
-- Home Box Office consists of premium pay television and OTT
services domestically and premium pay, basic tier television and
OTT services internationally, as well as content licensing and home
entertainment.
-- Warner Bros. consists of the production, distribution and
licensing of television programming and feature films, the
distribution of home entertainment products and the production and
distribution of games.
The Latin America segment provides entertainment and wireless
services outside of the U.S. This segment contains the following
business units:
-- Vrio provides video services to customers using satellite
technology in Latin America and the Caribbean.
-- Mexico provides wireless service and equipment to customers in Mexico.
13
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
The Xandr segment provides advertising services. These services
utilize data insights to develop higher value targeted advertising.
Certain revenues in this segment are also reported by the
Communications segment and are eliminated upon consolidation.
Corporate and Other items reconcile our segment results to
consolidated operating income and income before income taxes, and
include:
-- Corporate , which consists of: (1) businesses no longer
integral to our operations or which we no longer actively market,
(2) corporate support functions, (3) impacts of corporate-wide
decisions for which the individual operating segments are not being
evaluated, (4) the reclassification of the amortization of prior
service credits, which we continue to report with segment operating
expenses, to consolidated other income (expense) - net and (5) the
recharacterization of programming intangible asset amortization,
for programming acquired in the acquisition, which we continue to
report with WarnerMedia segment operating expense, to consolidated
amortization expense.
-- Acquisition-related items which consists of items associated
with the merger and integration of acquired businesses, including
amortization of intangible assets.
-- Certain significant items includes (1) employee separation
charges associated with voluntary and/or strategic offers, (2)
losses resulting from abandonment or impairment of assets and (3)
other items for which the segments are not being evaluated.
-- Eliminations and consolidations , which (1) removes
transactions involving dealings between our segments, including
content licensing between WarnerMedia and Communications, and (2)
includes adjustments for our reporting of the advertising
business.
I nterest expense and other income (expense) - net, are managed
only on a total company basis and are, accordingly, reflected only
in consolidated results.
14
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
For the three months ended September 30, 2018
--------------------------------------------------------------------------------------------------------------
Equity
in Net
Operations Income
and Depreciation Operating (Loss)
Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Communications
Mobility $ 17,938 $ 10,255 $ 7,683 $ 2,079 $ 5,604 $ (1) $ 5,603
Entertainment
Group 11,589 9,155 2,434 1,331 1,103 1 1,104
Business Wireline 6,703 4,030 2,673 1,197 1,476 (1) 1,475
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Total Communications 36,230 23,440 12,790 4,607 8,183 (1) 8,182
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
WarnerMedia
Turner 2,988 1,487 1,501 59 1,442 7 1,449
Home Box Office 1,644 991 653 25 628 2 630
Warner Bros. 3,720 3,104 616 40 576 (23) 553
Other (148) (79) (69) 10 (79) (25) (104)
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Total WarnerMedia 8,204 5,503 2,701 134 2,567 (39) 2,528
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Latin America
Vrio 1,102 877 225 168 57 9 66
Mexico 731 869 (138) 129 (267) - (267)
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Total Latin America 1,833 1,746 87 297 (210) 9 (201)
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Xandr 445 109 336 3 333 - 333
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Segment Total $ 46,712 $ 30,798 $ 15,914 $ 5,041 $ 10,873 $ (31) $ 10,842
===================== ======== ========== ======= ============ ========= ========== ============
Corporate and
Other
Corporate 308 (18) 326 797 (471)
Acquisition-related
items - 362 (362) 2,329 (2,691)
Certain significant
items - 75 (75) - (75)
Eliminations and
consolidations (1,281) (913) (368) (1) (367)
--------------------- -------- ---------- ------- ------------ ---------
AT&T Inc. $ 45,739 $ 30,304 $ 15,435 $ 8,166 $ 7,269
===================== ======== ========== ======= ============ =========
For the nine months ended September 30, 2018
--------------------------------------------------------------------------------------------------------------
Equity
in Net
Operations Income
and Depreciation Operating (Loss)
Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Communications
Mobility $ 52,575 $ 30,020 $ 22,555 $ 6,287 $ 16,268 $ (1) $ 16,267
Entertainment
Group 34,498 26,623 7,875 3,986 3,889 (1) 3,888
Business Wireline 20,100 12,084 8,016 3,547 4,469 (1) 4,468
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Total Communications 107,173 68,727 38,446 13,820 24,626 (3) 24,623
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
WarnerMedia
Turner 3,767 1,933 1,834 71 1,763 39 1,802
Home Box Office 1,925 1,162 763 30 733 1 734
Warner Bros. 4,227 3,507 720 54 666 (24) 642
Other (210) (106) (104) 11 (115) (71) (186)
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Total WarnerMedia 9,709 6,496 3,213 166 3,047 (55) 2,992
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Latin America
Vrio 3,710 2,894 816 559 257 24 281
Mexico 2,099 2,459 (360) 383 (743) - (743)
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Total Latin America 5,809 5,353 456 942 (486) 24 (462)
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Xandr 1,174 218 956 4 952 - 952
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Segment Total $ 123,865 $ 80,794 $ 43,071 $ 14,932 $ 28,139 $ (34) $ 28,105
===================== ======== ========== ======= ============ ========= ========== ============
Corporate and
Other
Corporate 961 1,378 (417) 938 (1,355)
Acquisition-related
items - 750 (750) 4,669 (5,419)
Certain significant
items - 407 (407) - (407)
Eliminations and
consolidations (2,063) (1,040) (1,023) (1) (1,022)
--------------------- -------- ---------- ------- ------------ ---------
AT&T Inc. $ 122,763 $ 82,289 $ 40,474 $ 20,538 $ 19,936
===================== ======== ========== ======= ============ =========
15
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
For the three months ended September 30, 2017
--------------------------------------------------------------------------------------------------------------
Equity
in Net
Operations Income
and Depreciation Operating (Loss)
Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Communications
Mobility $ 17,370 $ 10,029 $ 7,341 $ 2,008 $ 5,333 $ - $ 5,333
Entertainment
Group 12,467 9,804 2,663 1,379 1,284 (1) 1,283
Business Wireline 7,278 4,635 2,643 1,189 1,454 1 1,455
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Total Communications 37,115 24,468 12,647 4,576 8,071 - 8,071
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
WarnerMedia
Turner 107 97 10 1 9 13 22
Home Box Office - - - - - - -
Warner Bros. - - - - - - -
Other - 1 (1) - (1) (19) (20)
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Total WarnerMedia 107 98 9 1 8 (6) 2
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Latin America
Vrio 1,363 1,075 288 206 82 17 99
Mexico 736 862 (126) 98 (224) - (224)
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Total Latin America 2,099 1,937 162 304 (142) 17 (125)
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Xandr 333 39 294 - 294 - 294
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Segment Total $ 39,654 $ 26,542 $ 13,112 $ 4,881 $ 8,231 $ 11 $ 8,242
===================== ======== ========== ======= ============ ========= ========== ============
Corporate and
Other
Corporate 382 801 (419) 24 (443)
Acquisition-related
items - 134 (134) 1,136 (1,270)
Certain significant
items (89) 325 (414) 1 (415)
Eliminations
and consolidations (279) 17 (296) - (296)
--------------------- -------- ---------- ------- ------------ ---------
AT&T Inc. $ 39,668 $ 27,819 $ 11,849 $ 6,042 $ 5,807
===================== ======== ========== ======= ============ =========
For the nine months ended September 30, 2017
--------------------------------------------------------------------------------------------------------------
Equity
in Net
Operations Income
and Depreciation Operating (Loss)
Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Communications
Mobility $ 51,922 $ 30,005 $ 21,917 $ 5,988 $ 15,929 $ - $ 15,929
Entertainment
Group 37,435 28,711 8,724 4,254 4,470 - 4,470
Business Wireline 21,911 13,906 8,005 3,583 4,422 - 4,422
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Total Communications 111,268 72,622 38,646 13,825 24,821 - 24,821
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
WarnerMedia
Turner 323 273 50 3 47 32 79
Home Box Office - - - - - - -
Warner Bros. - - - - - - -
Other - 3 (3) - (3) (55) (58)
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Total WarnerMedia 323 276 47 3 44 (23) 21
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Latin America
Vrio 4,065 3,123 942 642 300 62 362
Mexico 1,989 2,345 (356) 263 (619) - (619)
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Total Latin America 6,054 5,468 586 905 (319) 62 (257)
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Xandr 992 118 874 1 873 - 873
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
Segment Total $ 118,637 $ 78,484 $ 40,153 $ 14,734 $ 25,419 $ 39 $ 25,458
===================== ======== ========== ======= ============ ========= ========== ============
Corporate and
Other
Corporate 1,182 2,440 (1,258) 73 (1,331)
Acquisition-related
items - 622 (622) 3,508 (4,130)
Certain significant
items (89) 302 (391) 1 (392)
Eliminations
and consolidations (860) 17 (877) - (877)
--------------------- -------- ---------- ------- ------------ ---------
AT&T Inc. $ 118,870 $ 81,865 $ 37,005 $ 18,316 $ 18,689
===================== ======== ========== ======= ============ =========
16
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
The following table is a reconciliation of Segment Contributions
to "Income Before Income Taxes" reported on our consolidated
statements of income.
Third Quarter Nine-month period
----------------- ---------------------
2018 2017 2018 2017
--------------------------------------------- ------- ------- -------- -------
Communications $ 8,182 $ 8,071 $ 24,623 $ 24,821
WarnerMedia 2,528 2 2,992 21
Latin America (201) (125) (462) (257)
Xandr 333 294 952 873
--------------------------------------------- ------- ------- -------- -------
Segment Contribution 10,842 8,242 28,105 25,458
--------------------------------------------- ------- ------- -------- -------
Reconciling Items:
Corporate and Other (471) (443) (1,355) (1,331)
Merger and integration items (362) (134) (750) (622)
Amortization of intangibles acquired (2,329) (1,136) (4,669) (3,508)
Employee separation charges (75) (208) (259) (268)
Gain on wireless spectrum transactions - - - 181
Natural disaster items - (207) (104) (207)
Foreign currency devaluation - - (44) (98)
Segment equity in net income of affiliates 31 (11) 34 (39)
Eliminations and consolidations (367) (296) (1,022) (877)
--------------------------------------------- ------- ------- -------- -------
AT&T Operating Income 7,269 5,807 19,936 18,689
--------------------------------------------- ------- ------- -------- -------
Interest Expense (2,051) (1,686) (5,845) (4,374)
Equity in net income (loss) of affiliates (64) 11 (71) (148)
Other income (expense) - Net 1,053 842 5,108 2,255
--------------------------------------------- ------- ------- -------- -------
Income Before Income Taxes $ 6,207 $ 4,974 $ 19,128 $ 16,422
============================================= ======= ======= ======== =======
The following tables present intersegment revenues, assets,
investments in equity affiliates and capital expenditures by
segment.
Intersegment Reconciliation
-------------------------------- --------- --- -------------- --- ----------------- ---
Third Quarter Nine-Month Period
------------------------------- ----------------------------
2018 2017 2018 2017
-------------------------------- ---------- ------------------- ---------------------- ----
Intersegment revenues
Communications $ 6 $ - $ 8 $ -
WarnerMedia 844 33 1,053 99
Latin America - - - -
Xandr - - - -
-------------------------------- --------- --- -------------- --- ----------------- ---
Total Intersegment Revenues 850 33 1,061 99
Consolidations 431 246 1,002 761
-------------------------------- --------- --- -------------- --- ----------------- ---
Eliminations and consolidations $ 1,281 $ 279 $ 2,063 $860
================================ ========= === ============== === ================= ===
Investment
in Equity Method
Investees Capital Expenditures
------------------- ----------------------
At September 30, 2018 Assets
-------------------------------- ----------
Communications $ 487,833 $ 1 $ 16,024
WarnerMedia 132,689 5,395 298
Latin America 18,420 713 524
Xandr 2,647 - 66
Corporate and eliminations (106,719) 19 187
-------------------------------- --------- --- -------------- --- -----------------
Total $ 534,870 $ 6,128 $ 17,099
================================ ========= === ============== === =================
17
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
NOTE 5. REVENUE RECOGNITION
As of January 1, 2018, we adopted ASC 606. With our adoption of
ASC 606, we made a policy election to record certain regulatory
fees, primarily Universal Service Fund (USF) fees, on a net basis.
See the Notes to the Consolidated Financial Statements of our 2017
Annual Report on Form 10-K for additional information regarding our
policies prior to adoption of ASC 606.
When implementing ASC 606, we utilized the practical expedient
allowing us to reflect the aggregate effect of all contract
modifications occurring before the beginning of the earliest period
presented when allocating the transaction price to performance
obligations.
Wireless, Advanced Data, Legacy Voice & Data Services and
Equipment Revenue
We offer service-only contracts and contracts that bundle
equipment used to access the services and/or with other service
offerings. Some contracts have fixed terms and others are
cancellable on a short-term basis (i.e., month-to-month
arrangements).
Examples of service revenues include wireless, video
entertainment (e.g., AT&T U-verse and DIRECTV), strategic
services (e.g., virtual private network service), and legacy voice
and data (e.g., traditional local and long-distance). These
services represent a series of distinct services that is considered
a separate performance obligation. Service revenue is recognized
when services are provided, based upon either usage (e.g. minutes
of traffic/bytes of data processed) or period of time (e.g.,
monthly service fees).
Some of our services require customer premises equipment that,
when combined and integrated with AT&T's specific network
infrastructure, facilitate the delivery of service to the customer.
In evaluating whether the equipment is a separate performance
obligation, we consider the customer's ability to benefit from the
equipment on its own or together with other readily available
resources and if so, whether the service and equipment are
separately identifiable (i.e., is the service highly dependent on,
or highly interrelated with the equipment). When the equipment does
not meet the criteria to be a distinct performance obligation
(e.g., equipment associated with certain video services), we
allocate the total transaction price to the related service. When
equipment is a distinct performance obligation, we record the sale
of equipment when title has passed and the products are accepted by
the customer. For devices sold through indirect channels (e.g.,
national dealers), revenue is recognized when the dealer accepts
the device, not upon activation .
Our equipment and service revenues are predominantly recognized
on a gross basis, as most of our services do not involve a third
party and we typically control the equipment that is sold to our
customers.
Revenue recognized from fixed term contracts that bundle
services and/or equipment are allocated based on the standalone
selling price of all required performance obligations of the
contract (i.e., each item included in the bundle). Promotional
discounts are attributed to each required component of the
arrangement, resulting in recognition over the contract term.
Standalone selling prices are determined by assessing prices paid
for service-only contracts (e.g., arrangements where customers
bring their own devices) and standalone device pricing.
We offer the majority of our customers the option to purchase
certain wireless devices in installments over a specified period of
time, and, in many cases, they may be eligible to trade in the
original equipment for a new device and have the remaining unpaid
balance paid or settled. For customers that elect these equipment
installment payment programs, at the point of sale, we recognize
revenue for the entire amount of revenue allocated to the customer
receivable net of fair value of the trade-in right guarantee. The
difference between the revenue recognized and the consideration
received is recorded as a note receivable when the devices are not
discounted and our right to consideration is unconditional. When
installment sales include promotional discounts (e.g., "buy one get
one free"), the difference between revenue recognized and
consideration received is recorded as a contract asset to be
amortized over the contract term.
Less commonly, we offer certain customers highly discounted
devices when they enter into a minimum service agreement term. For
these contracts, we recognize equipment revenue at the point of
sale based on a standalone selling price allocation. The difference
between the revenue recognized and the cash received is recorded as
a contract asset that will amortize over the contract term.
Our contracts allow for customers to frequently modify their
arrangement, without incurring penalties in many cases. When a
contract is modified, we evaluate the change in scope or price of
the contract to determine if the modification should be treated as
a new contract or if it should be considered a change of the
existing contract. We generally do not have significant impacts
from contract modifications.
Revenues from transactions between us and our customers are
recorded net of revenue-based regulatory fees and taxes. Cash
incentives given to customers are recorded as a reduction of
revenue. Nonrefundable, upfront service activation and setup fees
associated with service arrangements are deferred and recognized
over the associated service contract period or customer life.
18
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Subscription Revenue
Subscription revenues from cable networks and premium pay and
basic tier television services are recognized over the license
period as programming is provided to affiliates or digital
distributors based on negotiated contractual programming rates.
When a distribution contract with an affiliate has expired and a
new distribution contract has not been executed, revenues are based
on estimated rates, giving consideration to factors including the
previous contractual rates, inflation, current payments by the
affiliate and the status of the negotiations on a new contract.
When the new distribution contract terms are finalized, an
adjustment to revenue is recorded, if necessary, to reflect the new
terms.
Subscription revenues from end-user subscribers are recognized
when services are provided, based upon either usage or period of
time. Subscription revenues from OTT services are recognized as
programming services are provided to customers.
Content Revenue
Feature films typically are produced or acquired for initial
exhibition in theaters, followed by distribution, generally
commencing within three years of such initial exhibition. Revenues
from film rentals by theaters are recognized as the films are
exhibited.
Television programs and series are initially produced for
broadcast and may be subsequently licensed or sold in physical
format and/or electronic delivery. Revenues from the distribution
of television programming through broadcast networks, cable
networks, first-run syndication and OTT services are recognized
when the programs or series are available to the licensee. In
certain circumstances, pursuant to the terms of the applicable
contractual arrangements, the availability dates granted to
customers may precede the date in which the customer can be billed
for these sales.
Revenues from sales of feature films and television programming
in physical format are recognized at the later of the delivery date
or the date when made widely available for sale or rental by
retailers based on gross sales less a provision for estimated
returns, rebates and pricing allowances. Revenues from the
licensing of television programs and series for electronic
sell-through or video-on-demand are recognized when the product has
been purchased by and made available to the consumer to either
download or stream. Revenues from the distribution of television
programming through OTT services are recognized when the television
programs or series are available to the licensee.
Upfront or guaranteed payments for the licensing of intellectual
property are recognized as revenue at either the inception of the
license term if the intellectual property has significant
standalone functionality or over the corresponding license term if
the licensee's ability to derive utility is dependent on our
continued support of the intellectual property throughout the
license term.
Revenues from the sales of console games are recognized at the
later of the delivery date or the date that the product is made
widely available for sale or rental by retailers based on gross
sales less a provision for estimated returns, rebates and pricing
allowances.
Advertising Revenue
Advertising revenues are recognized, net of agency commissions,
in the period that the advertisements are aired. If there is a
targeted audience guarantee, revenues are recognized for the actual
audience delivery and revenues are deferred for any shortfall until
the guaranteed audience delivery is met, typically by providing
additional advertisements. Advertising revenues from digital
properties are recognized as impressions are delivered or the
services are performed.
19
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Revenue Categories
The following tables set forth reported revenue by category:
For the three months ended September 30, 2018
--------------------------------------------------------------------------------------------------------------------
Service Revenues
----------------------------------------------------------------------------
Legacy
Advanced Voice
Wireless Data & Data Subscription Content Advertising Other Equipment Total
---------------- -------- -------- ------ ------------ ------- ----------- ----- --------- -------
Communications
Mobility $ 13,912 $ - $ - $ - $ - $ 77 $ - $ 3,949 $ 17,938
Entertainment
Group - 2,045 740 7,882 - 401 518 3 11,589
Business
Wireline - 3,059 2,615 - - - 830 199 6,703
WarnerMedia
Turner - - - 1,855 125 944 64 - 2,988
Home Box
Office - - - 1,517 125 - 2 - 1,644
Warner Bros. - - - 20 3,494 20 186 - 3,720
Eliminations
and Other - - - 27 (199) 19 5 - (148)
Latin America
Vrio - - - 1,102 - - - - 1,102
Mexico 440 - - - - - - 291 731
Xandr - - - - - 445 - - 445
Corporate
and Other - - - - - - 308 - 308
Eliminations
and
consolidations - - - - (829) (401) (51) - (1,281)
---------------- -------- -------- ------ ------------ ------- ----------- ----- --------- -------
Total Operating
Revenues $ 14,352 $ 5,104 $ 3,355 $ 12,403 $ 2,716 $ 1,505 $1,862 $ 4,442 $ 45,739
================ ======== ======== ====== ============ ======= =========== ===== ========= =======
For the nine months ended September 30, 2018
--------------------------------------------------------------------------------------------------------------------
Service Revenues
----------------------------------------------------------------------------
Legacy
Advanced Voice
Wireless Data & Data Subscription Content Advertising Other Equipment Total
---------------- -------- -------- ------ ------------ ------- ----------- ----- --------- -------
Communications
Mobility $ 40,912 $ - $ - $ - $ - $ 162 $ - $ 11,501 $ 52,575
Entertainment
Group - 5,904 2,317 23,559 - 1,122 1,588 8 34,498
Business
Wireline - 9,168 8,176 - - - 2,189 567 20,100
WarnerMedia
Turner - - - 2,363 146 1,181 77 - 3,767
Home Box
Office - - - 1,787 136 - 2 - 1,925
Warner Bros. - - - 27 3,949 28 223 - 4,227
Eliminations
and Other - - - 27 (255) 13 5 - (210)
Latin America
Vrio - - - 3,710 - - - - 3,710
Mexico 1,261 - - - - - - 838 2,099
Xandr - - - - - 1,174 - - 1,174
Corporate
and Other - - - - - - 961 - 961
Eliminations
and
consolidations - - - - (1,039) (1,122) 98 - (2,063)
---------------- -------- -------- ------ ------------ ------- ----------- ----- --------- -------
Total Operating
Revenues $ 42,173 $ 15,072 $10,493 $ 31,473 $ 2,937 $ 2,558 $5,143 $ 12,914 $122,763
================ ======== ======== ====== ============ ======= =========== ===== ========= =======
20
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Deferred Customer Contract Acquisition and Fulfillment Costs
Costs to acquire customer contracts, including commissions on
service activations, for our wireless, business wireline and video
entertainment services, are deferred and amortized over the
contract period or expected customer relationship life, which
typically ranges from two to five years. Costs to fulfill customer
contracts are deferred and amortized over periods ranging generally
from four to five years, reflecting the estimated economic lives of
the respective customer relationships, subject to an assessment of
the recoverability of such costs. For contracts with an estimated
amortization period of less than one year, we expense incremental
costs immediately.
Our deferred customer contract acquisition costs and deferred
customer contract fulfillment costs balances were $3,409 and
$11,304 as of September 30, 2018, respectively, of which $1,572 and
$3,905 were included in Other current assets on our consolidated
balance sheets. For the nine months ended September 30, 2018, we
amortized $959 and $2,983 of these costs, respectively.
Contract Assets and Liabilities
A contract asset is recorded when revenue is recognized in
advance of our right to bill and receive consideration (i.e., we
must perform additional services or satisfy another performance
obligation in order to bill and receive consideration). The
contract asset will decrease as services are provided and billed.
When consideration is received in advance of the delivery of goods
or services, a contract liability is recorded. Reductions in the
contract liability will be recorded as we satisfy the performance
obligations.
The following table presents contract assets and liabilities and
revenue recorded at or for the period ended September 30, 2018:
September
30,
2018
--------------------------------------------------------------------- ---------
Contract asset $ 1,923
Contract liability 6,920
Beginning of period contract liability recorded as customer contract
revenue during the period 4,716
====================================================================== =========
Our consolidated balance sheet at September 30, 2018 included
approximately $1,244 for the current portion of our contract asset
in "Other current assets" and $5,846 for the current portion of our
contract liability in "Advanced billings and customer
deposits."
Remaining Performance Obligations
Remaining performance obligations represent services we are
required to provide to customers under bundled or discounted
arrangements, which are satisfied as services are provided over the
contract term. In determining the transaction price allocated, we
do not include non-recurring charges and estimates for usage, nor
do we consider arrangements with an original expected duration of
less than one year, which are primarily prepaid wireless, video and
residential internet agreements.
Remaining performance obligations associated with business
contracts reflect recurring charges billed, adjusted to reflect
estimates for sales incentives and revenue adjustments. Performance
obligations associated with wireless contracts are estimated using
a portfolio approach in which we review all relevant promotional
activities, calculating the remaining performance obligation using
the average service component for the portfolio and the average
device price. As of September 30, 2018, the aggregate amount of the
transaction price allocated to remaining performance obligations
was $40,474 of which we expect to recognize approximately 70% by
the end of next year, with the balance recognized thereafter.
The aggregate amount of transaction price allocated to remaining
performance obligations included $12,661 from WarnerMedia
operations related to the licensing of theatrical and television
content that will be made available to customers at some point in
the future. It excludes advertising and subscription arrangements
that have an expected contract duration of one year or less.
21
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Comparative Results
Prior to 2018, revenue recognized from contracts that bundle
services and equipment was limited to the lesser of the amount
allocated based on the relative selling price of the equipment and
service already delivered or the consideration received from the
customer for the equipment and service already delivered. Our prior
accounting also separately recognized regulatory fees as operating
revenue when received and as an expense when incurred. Sales
commissions were previously expensed as incurred.
The following table presents our reported results under ASC 606
and our pro forma results using the historical accounting
method:
As Historical Accounting
For the three months ended September 30, 2018 Reported Method
------------------------------------------------- --------- ---------------------
Consolidated Statements of Income:
Service Revenues $ 41,297 $ 42,681
Equipment Revenues 4,442 3,926
Total Operating Revenues 45,739 46,607
Other cost of revenues 8,651 9,568
Selling, general and administrative expenses 9,598 10,145
Total Operating Expenses 38,470 39,934
Operating income 7,269 6,673
Income before income taxes 6,207 5,611
Income tax expense 1,391 1,245
Net income 4,816 4,366
Net income attributable to AT&T $ 4,718 $ 4,273
Basic Earnings per Share Attributable to AT&T $ 0.65 $ 0.59
Diluted Earnings per Share Attributable to AT&T $ 0.65 $ 0.59
For the nine months ended September 30, 2018
Consolidated Statements of Income:
Service Revenues $ 109,849 $ 114,048
Equipment Revenues 12,914 11,398
Total Operating Revenues 122,763 125,446
Other cost of revenues 24,215 26,964
Selling, general and administrative expenses 26,179 27,909
Total Operating Expenses 102,827 107,306
Operating income 19,936 18,140
Income before income taxes 19,128 17,332
Income tax expense 4,305 3,865
Net income 14,823 13,467
Net income attributable to AT&T $ 14,512 $ 13,173
Basic Earnings per Share Attributable to AT&T $ 2.19 $ 1.99
Diluted Earnings per Share Attributable to AT&T $ 2.19 $ 1.99
At September 30, 2018
Consolidated Balance Sheets:
Other current assets $ 16,278 $ 13,750
Other Assets 25,490 23,050
Accounts payable and accrued liabilities 39,375 39,554
Advanced billings and customer deposits 6,045 6,109
Deferred income taxes 60,495 59,264
Other noncurrent liabilities 26,490 26,252
Retained earnings 57,624 53,929
Accumulated other comprehensive income 5,383 5,385
Noncontrolling interest $ 1,123 $ 1,071
================================================= ========= =====================
22
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
NOTE 6. PENSION AND POSTRETIREMENT BENEFITS
Many of our employees are covered by one of our noncontributory
pension plans. We also provide certain medical, dental, life
insurance and death benefits to certain retired employees under
various plans and accrue actuarially determined postretirement
benefit costs. Our objective in funding these plans, in combination
with the standards of the Employee Retirement Income Security Act
of 1974, as amended (ERISA), is to accumulate assets sufficient to
provide benefits described in the plans to employees upon their
retirement.
In 2013, we made a voluntary contribution of a preferred equity
interest in AT&T Mobility II LLC, the primary holding company
for our domestic wireless business, to the trust used to pay
pension benefits under our qualified pension plans. The preferred
equity interest had a value of $8,803 at September 30, 2018. The
trust is entitled to receive cumulative cash distributions of $560
per annum, which are distributed quarterly by AT&T Mobility II
LLC to the trust, in equal amounts and accounted for as
contributions. We distributed $420 to the trust during the nine
months ended September 30, 2018. 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. On October 15, 2018, we
made an additional voluntary contribution of $80 to the qualified
pension plan.
We recognize actuarial gains and losses on pension and
postretirement plan assets in our consolidated results as a
component of other income (expense) - net at our annual measurement
date of December 31, unless earlier remeasurements are required.
During the first quarter of 2018, a substantive plan change
involving the frequency of future health reimbursement account
credit increases was communicated to our retirees. During the
second quarter of 2018, a written plan change involving the ability
of certain participants of the pension plan to receive their
benefit in a lump-sum amount upon retirement was communicated to
our employees. These plan changes triggered a remeasurement of our
postretirement and pension benefit obligations, resulting in an
actuarial gain of $930 in the first quarter and $1,796 in the
second quarter of 2018. These plan changes also resulted in
additional prior service credits recognized in other comprehensive
income, reducing our liability by $752, and increasing our
liability by $50 in the first and second quarters of 2018,
respectively. Such credits amortize through earnings over a period
approximating the average service period to full eligibility. As a
result of the plan changes and remeasurements, our postretirement
and pension benefit obligations decreased $1,682 and $1,746,
respectively.
The following table details pension and postretirement benefit
costs included in the accompanying consolidated statements of
income. The service cost component of net periodic pension cost
(benefit) is recorded in operating expenses in the consolidated
statements of income while the remaining components are recorded in
other income (expense) - net. Service costs are eligible for
capitalization as part of internal construction projects, providing
a small reduction in the net expense recorded.
23
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Three months ended Nine months ended
September 30, September 30,
2018 2017 2018 2017
------------------------------------------------ ------------ -------- ----------- --------
Pension cost:
Service cost - benefits earned during
the period $ 270 $ 282 $ 845 $ 846
Interest cost on projected benefit obligation 551 484 1,542 1,452
Expected return on assets (761) (783) (2,276) (2,350)
Amortization of prior service credit (28) (31) (87) (93)
Actuarial (gain) loss - - (1,796) -
------------------------------------------------ -------- ------- ------- -------
Net pension (credit) cost $ 32 $ (48) $ (1,772) $ (145)
================================================ ======== ======= ======= =======
Postretirement cost:
Service cost - benefits earned during
the period $ 27 $ 32 $ 82 $ 107
Interest cost on accumulated postretirement
benefit obligation 196 193 582 617
Expected return on assets (76) (81) (228) (240)
Amortization of prior service credit (412) (382) (1,222) (1,084)
Actuarial (gain) loss - - (930) (259)
------------------------------------------------ -------- ------- ------- -------
Net postretirement (credit) cost $ (265) $ (238) $ (1,716) $ (859)
================================================ ======== ======= ======= =======
Combined net pension and postretirement
(credit) cost $ (233) $ (286) $ (3,488) $(1,004)
================================================ ======== ======= ======= =======
As part of our first- and second-quarter 2018 remeasurements, we
modified the weighted-average discount rate used to measure our
benefit obligations increasing the rate to 4.10% for the
postretirement obligation and to 4.30% for the pension obligation.
The discount rate in effect for determining service and interest
costs after remeasurement is 4.30% and 3.70%, respectively, for
postretirement and 4.40% and 4.00% for pension.
We also provide senior- and middle-management employees with
nonqualified, unfunded supplemental retirement and savings plans.
For the third quarter ended 2018 and 2017, net supplemental pension
benefits costs not included in the table above were $24 and $22.
For the first nine months of 2018 and 2017, net supplemental
pension benefit costs were $65 and $67.
NOTE 7. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a
three-tiered fair value hierarchy that gives highest priority to
unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). The three levels of the
fair value hierarchy are described below:
Level 1 Inputs to the valuation methodology are unadjusted
quoted prices for identical assets or liabilities in active markets
that we have the ability to access.
Level 2 Inputs to the valuation methodology include:
-- Quoted prices for similar assets and liabilities in active markets.
-- Quoted prices for identical or similar assets or liabilities in inactive markets.
-- Inputs other than quoted market prices that are observable for the asset or liability.
-- Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
Level 3 Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
-- Fair value is often based on developed models in which there are few, if any, external observations.
24
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
The fair value measurements level of an asset or liability
within the fair value hierarchy is based on the lowest level of any
input that is significant to the fair value measurement. Our
valuation techniques maximize the use of observable inputs and
minimize the use of unobservable inputs.
The valuation methodologies described above may produce a fair
value calculation that may not be indicative of future net
realizable value or reflective of future fair values. We believe
our valuation methods are appropriate and consistent with other
market participants. The use of different methodologies or
assumptions to determine the fair value of certain financial
instruments could result in a different fair value measurement at
the reporting date. There have been no changes in the methodologies
used since December 31, 2017.
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term
debt, including current maturities, and other financial
instruments, are summarized as follows:
September 30, 2018 December 31, 2017
------------------------------------ -----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------ ----------------- ----------------- ----------------- ----------------
Notes and debentures 1 $ 177,718 $ 180,887 $ 162,526 $ 171,938
Commercial paper 3,787 3,787 - -
Bank borrowings 3 3 2 2
Investment securities 2 3,646 3,646 2,447 2,447
========================= ============= ============= ============= ============
1 Includes credit agreement borrowings.
2 Excludes investments accounted for under the equity method.
The carrying amount of debt with an original maturity of less
than one year approximates market value. The fair value
measurements used for notes and debentures are considered Level 2
and are determined using various methods, including quoted prices
for identical or similar securities in both active and inactive
markets.
Following is the fair value leveling for investment securities
that are measured at fair value and derivatives as of September 30,
2018 and December 31, 2017. Derivatives designated as hedging
instruments are reflected as "Other assets," "Other noncurrent
liabilities" and, for a portion of interest rate swaps, "Other
current assets" on our consolidated balance sheets.
September 30, 2018
----------------------------------------
Level 1 Level 2 Level 3 Total
----------------------------------- --------- -------- --------- --------
Equity Securities
Domestic equities $ 1,279 $ - $ - $ 1,279
International equities 291 - - 291
Fixed income equities 149 - - 149
Available-for-Sale Debt Securities - 881 - 881
Asset Derivatives
Cross-currency swaps - 1,330 - 1,330
Foreign exchange contracts - 52 - 52
Liability Derivatives
Interest rate swaps - (90) - (90)
Cross-currency swaps - (1,614) - (1,614)
Foreign exchange contracts - (3) - (3)
==================================== ===== ======= ==== === =======
25
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
December 31, 2017
----------------------------------------
Level 1 Level 2 Level 3 Total
----------------------------------- --------- -------- --------- --------
Equity Securities
Domestic equities $ 1,142 $ - $ - $ 1,142
International equities 321 - - 321
Fixed income equities - 152 - 152
Available-for-Sale Debt Securities - 581 - 581
Asset Derivatives
Interest rate swaps - 17 - 17
Cross-currency swaps - 1,753 - 1,753
Liability Derivatives
Interest rate swaps - (31) - (31)
Cross-currency swaps - (1,290) - (1,290)
==================================== ===== ======= ==== === =======
Investment Securities
Our investment securities include both equity and debt
securities that are measured at fair value, as well as equity
securities without readily determinable fair values. A substantial
portion of the fair values of our investment securities are
estimated based on quoted market prices. Investments in equity
securities not traded on a national securities exchange are valued
at cost, less any impairment, and adjusted for changes resulting
from observable, orderly transactions for identical or similar
securities. Investments in debt securities not traded on a national
securities exchange are valued using pricing models, quoted prices
of securities with similar characteristics or discounted cash
flows.
The components comprising total gains and losses on equity
securities are as follows:
Three months ended Nine months ended
September 30, September 30,
2018 2017 2018 2017
----------------------------------------------------- ---------- ------------ ----------- ----------
Total gains (losses) recognized on equity securities $ 80 $ 113 $ 88 $ 216
Gains (Losses) recognized on equity securities
sold 1 126 50 137
----------------------------------------------------- ---- ---- -------- ----- ---- ------
Unrealized gains (losses) recognized on equity
securities held at end of period 79 (13) 38 79
===================================================== ==== ==== ======== ===== ==== ======
Debt securities of $44 have maturities of less than one year,
$146 within one to three years, $94 within three to five years and
$597 for five or more years.
Our cash equivalents (money market securities), short-term
investments (certificate and time deposits) and nonrefundable
customer deposits are recorded at amortized cost, and the
respective carrying amounts approximate fair values. Short-term
investments and nonrefundable customer deposits are recorded in
"Other current assets" and our investment securities are recorded
in "Other Assets" on the consolidated balance sheets.
Derivative Financial Instruments
We enter into derivative transactions to manage certain market
risks, primarily interest rate risk and foreign currency exchange
risk. This includes the use of interest rate swaps, interest rate
locks, foreign exchange forward contracts and combined interest
rate foreign exchange contracts (cross-currency swaps). We do not
use derivatives for trading or speculative purposes. We record
derivatives on our consolidated balance sheets at fair value that
is derived from observable market data, including yield curves and
foreign exchange rates (all of our derivatives are Level 2). Cash
flows associated with derivative instruments are presented in the
same category on the consolidated statements of cash flows as the
item being hedged.
26
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Fair Value Hedging We designate our fixed-to-floating interest
rate swaps as fair value hedges. The purpose of these swaps is to
manage interest rate risk by managing our mix of fixed-rate and
floating-rate debt. These swaps involve the receipt of fixed-rate
amounts for floating interest rate payments over the life of the
swaps without exchange of the underlying principal amount.
We also designate some of our foreign exchange contracts as fair
value hedges. The purpose of these contracts is to hedge currency
risk associated with foreign-currency-denominated operating assets
and liabilities.
Accrued and realized gains or losses from fair value hedges
impact the same category on the consolidated statements of income
as the item being hedged. Unrealized gains on fair value hedges are
recorded at fair market value as assets, and unrealized losses are
recorded at fair market value as liabilities. Changes in the fair
value of derivative instruments designated as fair value hedges are
offset against the change in fair value of the hedged assets or
liabilities through earnings. In the nine months ended September
30, 2018 and 2017, no ineffectiveness was measured on fair value
hedges .
Cash Flow Hedging We designate our cross-currency swaps as cash
flow hedges. We have entered into multiple cross-currency swaps to
hedge our exposure to variability in expected future cash flows
that are attributable to foreign currency risk generated from the
issuance of our foreign-denominated debt. These agreements include
initial and final exchanges of principal from fixed foreign
currency denominated amounts to fixed U.S. dollar denominated
amounts, to be exchanged at a specified rate that is usually
determined by the market spot rate upon issuance. They also include
an interest rate swap of a fixed or floating foreign
currency-denominated interest rate to a fixed U.S. dollar
denominated interest rate.
We also designate some of our foreign exchange contracts as cash
flow hedges. The purpose of these contracts is to hedge currency
risk associated with variability in anticipated
foreign-currency-denominated cash flows, such as unremitted or
forecasted royalty and license fees owed to WarnerMedia's domestic
companies for the sale or anticipated sale of U.S. copyrighted
products abroad or cash flows for certain film production costs
denominated in a foreign currency.
Unrealized gains on derivatives designated as cash flow hedges
are recorded at fair value as assets, and unrealized losses are
recorded at fair value as liabilities. For derivative instruments
designated as cash flow hedges, the effective portion is reported
as a component of accumulated OCI until reclassified into the
consolidated statements of income in the same period the hedged
transaction affects earnings. The gain or loss on the ineffective
portion is recognized as "Other income (expense) - net" in the
consolidated statements of income in each period. We evaluate the
effectiveness of our cash flow hedges each quarter. In the nine
months ended September 30, 2018 and 2017, no ineffectiveness was
measured on cash flow hedges.
Periodically, we enter into and designate interest rate locks to
partially hedge the risk of changes in interest payments
attributable to increases in the benchmark interest rate during the
period leading up to the probable issuance of fixed-rate debt. We
designate our interest rate locks as cash flow hedges. Gains and
losses when we settle our interest rate locks are amortized into
income over the life of the related debt, except where a material
amount is deemed to be ineffective, which would be immediately
reclassified to "Other income (expense) - net" in the consolidated
statements of income. Over the next 12 months, we expect to
reclassify $61 from accumulated OCI to interest expense due to the
amortization of net losses on historical interest rate locks.
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 September 30, 2018, we had posted collateral
of $468 (a deposit asset) and held collateral of $1,056 (a receipt
liability). Under the agreements, if AT&T's credit rating had
been downgraded one rating level by Fitch Ratings, before the final
collateral exchange in September, we would have been required to
post additional collateral of $150. If DIRECTV Holdings LLC's
credit rating had been downgraded below BBB- (S&P), we would
have been required to post additional collateral of $200. At
December 31, 2017, we had posted collateral of $495 (a deposit
asset) and held collateral of $968 (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.
27
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Following are the notional amounts of our outstanding derivative
positions:
September
30, December 31,
---------------------------
2018 2017
----------- --------------
Interest rate swaps $ 7,333 $ 9,833
Cross-currency swaps 42,192 38,694
Foreign exchange contracts 2,386 -
--------------------------- ------- ----------
Total $ 51,911 $ 48,527
=========================== ======= ==========
Following are the related hedged items affecting our financial
position and performance:
Effect of Derivatives on the Consolidated Statements
of Income
--------------------------------------------------------------- ------ ------- ------
Three months ended Nine months ended
September 30, September 30,
Fair Value Hedging Relationships 2018 2017 2018 2017
------------------------------------------------- ------------ ---------- ----------- ----------
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ 2 $ (3) $ (60) $ (51)
Gain (Loss) on long-term debt (2) 3 60 51
================================================= === ======= ====== ======= ======
In addition, the net swap settlements that accrued and settled
in the quarter ended September 30 were offset against interest
expense.
Three months ended Nine months ended
September 30, September 30,
Cash Flow Hedging Relationships 2018 2017 2018 2017
------------------------------------------- ------------ -------- ----------- --------
Cross-currency swaps:
Gain (Loss) recognized in accumulated
OCI $ (13) $ 429 $ 308 $ (268)
Foreign exchange contracts:
Gain (Loss) recognized in accumulated
OCI 17 - 17 -
Interest rate locks:
Gain (Loss) recognized in accumulated
OCI - 79 - -
Interest income (expense) reclassified
from
accumulated OCI into income (15) (15) (44) (44)
=========================================== ======== ======= ======= =======
NOTE 8. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
Time Warner On June 14, 2018, we completed our acquisition of
Time Warner, a leader in media and entertainment whose major
businesses encompass an array of some of the most respected media
brands. The deal combines Time Warner's vast library of content and
ability to create new premium content for audiences around the
world with our extensive customer relationships and distribution,
one of the world's largest pay-TV subscriber bases and scale in TV,
mobile and broadband distribution. We expect that the transaction
will advance our direct-to-consumer efforts and provide us with the
ability to develop innovative new offerings.
Under the merger agreement, each share of Time Warner stock was
exchanged for $53.75 cash plus 1.437 shares of our common stock.
After adjustment for shares issued to trusts consolidated by
AT&T, share-based payment arrangements and fractional shares,
which were settled in cash, AT&T issued 1,125,517,510 shares to
Time Warner shareholders, giving them an approximate 16% stake in
the combined company. Based on our $32.52 per share closing stock
price on June 14, 2018, we paid Time Warner shareholders $36,599 in
AT&T stock and $42,100 in cash. Total consideration, including
share-based payment arrangements and other adjustments totaled
$79,358, excluding Time Warner's net debt at acquisition. On July
12, 2018, the U.S. Department of Justice (DOJ) appealed the U.S.
District Court's decision permitting the merger. We believe the
DOJ's appeal is without merit and we will continue to vigorously
defend our legal position in the appellate court.
28
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
The fair values of the assets acquired and liabilities assumed
were preliminarily determined using the income, cost and market
approaches. The fair value measurements were primarily based on
significant inputs that are not observable in the market and thus
represent a Level 3 measurement as defined in ASC 820, other than
cash and long-term debt acquired in the acquisition. The income
approach was primarily used to value the intangible assets,
consisting primarily of distribution network, released TV and film
content, in-place advertising network, trade names, and franchises.
The income approach estimates fair value for an asset based on the
present value of cash flow projected to be generated by the asset.
Projected cash flow is discounted at a required rate of return that
reflects the relative risk of achieving the cash flow and the time
value of money. The cost approach, which estimates value by
determining the current cost of replacing an asset with another of
equivalent economic utility, was used, as appropriate, for plant,
property and equipment. The cost to replace a given asset reflects
the estimated reproduction or replacement cost for the property,
less an allowance for loss in value due to depreciation. At
September 30, 2018, our consolidated balance sheet includes the
assets and liabilities of Time Warner, which have been measured at
fair value.
The following table summarizes the preliminary estimated fair
values of the Time Warner assets acquired and liabilities assumed
and related deferred income taxes as of the acquisition date:
Assets acquired
Cash $ 1,655
Accounts receivable 9,016
All other current assets 3,150
Noncurrent inventory and theatrical film and television production
costs 5,719
Property, plant and equipment 4,906
Intangible assets subject to amortization
Distribution network 17,470
Released television and film content 10,929
Trademarks and trade names 18,081
Other 10,300
Investments and other assets 9,428
Goodwill 38,955
-------------------------------------------------------------------------- -------
Total assets acquired 129,609
-------------------------------------------------------------------------- -------
Liabilities assumed
Current liabilities, excluding current portion of long-term debt 8,280
Debt maturing within one year 4,471
Long-term debt 18,394
Other noncurrent liabilities 19,105
-------------------------------------------------------------------------- -------
Total liabilities assumed 50,250
-------------------------------------------------------------------------- -------
Net assets acquired 79,359
-------------------------------------------------------------------------- -------
Noncontrolling interest (1)
-------------------------------------------------------------------------- -------
Aggregate value of consideration paid $ 79,358
========================================================================== =======
29
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
These estimates are preliminary in nature and subject to
adjustments, which could be material. Any necessary adjustments
will be finalized within one year from the date of acquisition.
Substantially all the receivables acquired are expected to be
collectible. We have not identified any material unrecorded
pre-acquisition contingencies where the related asset, 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 the acquisition.
Prior to the finalization of the purchase price allocation, if
information becomes available that would indicate it is probable
that unknown events had occurred and the amounts can be reasonably
estimated, such items will be included in the final purchase price
allocation and may change goodwill. Purchased goodwill is not
expected to be deductible for tax purposes. As we finalize the
valuation of assets acquired and liabilities assumed, we will
determine to which reporting units any changes in goodwill should
be recorded.
Excluded from the table above are commitments of approximately
$35,000 for future purchases primarily related to network
programming obligations, including contracts to license sports
programming.
The following unaudited pro forma consolidated results of
operations assume that the acquisition of Time Warner was completed
as of January 1, 2017:
Nine months ended
September 30,
---------------------
2018 2017
------------------------------------------------ -------- -------
Total operating revenues $ 135,658 $ 139,236
Net Income Attributable to AT&T 16,254 11,576
Basic Earnings Per Share Attributable to AT&T $ 2.23 $ 1.59
Diluted Earnings Per Share Attributable to AT&T $ 2.22 $ 1.57
================================================= ======== =======
These unaudited pro forma consolidated results reflect the
adoption of ASC 606 for the nine-month period ended September 30,
2018, which is not on a comparable basis with the period ended
September 30, 2017 (see Note 5). Pro forma data may not be
indicative of the results that would have been obtained had these
events occurred at the beginning of the periods presented, nor is
it intended to be a projection of future results.
Otter Media On August 7, 2018, we acquired the remaining
interest in Otter Media for $157 in cash and the conversion to
equity of the $1,480 advance made in the first quarter. At
acquisition, we remeasured the fair value of the total business,
which exceeded the book value of our equity method investment and
resulted in a pre-tax gain of $395 in the third quarter of 2018. We
began consolidating that business upon close and recorded those
assets at fair value, including $1,174 of goodwill that is reported
in the WarnerMedia segment.
AppNexus On August 15, 2018, we purchased AppNexus for $1,432
and recorded $1,223 of goodwill that is reported in the Xandr
segment. Our investment will allow us to create a marketplace for
TV and digital video advertising.
Held-for-Sale
In June 2018, we entered into an agreement to sell 31 of our
data centers to Brookfield Infrastructure Partners (Brookfield) for
$1,100. We expect the transaction to close by December 31, 2018,
subject to customary closing conditions.
We applied held-for-sale treatment to the assets associated with
the data centers to be sold, which primarily consist of net
property, plant and equipment of approximately $279 and goodwill of
$236. These assets are included in "Other current assets," on our
September 30, 2018 consolidated balance sheet.
NOTE 9. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES
We offer our customers the option to purchase certain wireless
devices in installments over a specified period of time and, in
many cases, once certain conditions are met, they may be eligible
to trade in the original equipment for a new device and have the
remaining unpaid balance paid or settled. As of September 30, 2018
and December 31, 2017, gross equipment installment receivables of
$5,736 and $6,079 were included on our consolidated balance sheets,
of which $3,370 and $3,340 are notes receivable that are included
in "Accounts receivable - net."
30
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
In 2014, we entered into an uncommitted agreement pertaining to
the sale of equipment installment receivables and related security
with Citibank and various other relationship banks as purchasers
(collectively, the Purchasers). Under this agreement, we transfer
certain receivables to the Purchasers for cash and additional
consideration upon settlement of the receivables, referred to as
the deferred purchase price. Since 2014, we have made beneficial
modifications to the agreement. During 2017, we modified the
agreement and entered into a second uncommitted agreement with the
Purchasers such that we receive more upfront cash consideration at
the time the receivables are transferred to the Purchasers.
Additionally, in the event a customer trades in a device prior to
the end of the installment contract period, we agree to make a
payment to the Purchasers equal to any outstanding remaining
installment receivable balance. Accordingly, we record a guarantee
obligation to the Purchasers for this estimated amount at the time
the receivables are transferred. Under the terms of the agreement,
we continue to bill and collect the payments from our customers on
behalf of the Purchasers. As of September 30, 2018, total cash
proceeds received, net of remittances (excluding amounts returned
as deferred purchase price), were $6,267.
The following table sets forth a summary of equipment
installment receivables sold during the three and nine months ended
September 30, 2018 and 2017:
Three months ended Nine months ended
September 30, September 30,
2018 2017 2018 2017
---------------- ---------------------- --------------------- --------------------- ---------------------
Gross receivables
sold $ 2,161 $ 1,619 $ 7,077 $ 6,217
Net receivables
sold 1 2,064 1,478 6,670 5,698
Cash proceeds
received 1,752 1,292 5,679 4,139
Deferred purchase
price recorded 335 285 1,161 1,767
Guarantee
obligation
recorded 75 65 270 139
================= ==== ================ === ================ === ================ === ================
1 Receivables net of allowance, imputed interest and trade-in right guarantees.
The deferred purchase price and guarantee obligation are
initially recorded at estimated fair value and subsequently carried
at the lower of cost or net realizable value. The estimation of
their fair values is based on remaining installment payments
expected to be collected and the expected timing and value of
device trade-ins. The estimated value of the device trade-ins
considers prices offered to us by independent third parties that
contemplate changes in value after the launch of a device model.
The fair value measurements used for the deferred purchase price
and the guarantee obligation are considered Level 3 under the Fair
Value Measurement and Disclosure framework (see Note 7).
The following table shows the equipment installment receivables,
previously sold to the Purchasers, which we repurchased in exchange
for the associated deferred purchase price and cash during the
three months and nine months ended September 30, 2018 and 2017:
Three months ended Nine months ended
September 30, September 30,
2018 2017 2018 2017
-------------------- ------------ ------------------ ------------------------- --------------------------
Fair value of
repurchased
receivables $ - $ 567 $ 1,481 $ 1,281
Carrying value of
deferred purchase
price - 507 1,393 1,147
--------------------- ----- ----- ---- ------------ ---- ------------------- ---- --------------------
Gain (loss) on
repurchases 1 $ - $ 60 $ 88 $ 134
===================== ===== ===== ==== ============ ==== =================== ==== ====================
1 These gains (losses) are included in "Selling, general and administrative"
in the consolidated statements of income.
At September 30, 2018 and December 31, 2017, our deferred
purchase price receivable was $1,981 and $2,749, respectively, of
which $1,114 and $1,781 are included in "Other current assets" on
our consolidated balance sheets, with the remainder in "Other
Assets." The guarantee obligation at September 30, 2018 and
December 31, 2017 was $418 and $204, respectively, of which $230
and $55 are included in "Accounts payable and accrued liabilities"
on our consolidated balance sheets, with the remainder in "Other
noncurrent liabilities." Our maximum exposure to loss as a result
of selling these equipment installment receivables is limited to
the total amount of our deferred purchase price and guarantee
obligation.
31
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
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 cash receipts on owned equipment installment receivables as
cash flows from operations in our consolidated statements of cash
flows. With the retrospective adoption of ASU 2016-15 in 2018 (see
Note 1), cash receipts on the deferred purchase price are now
classified as cash flows from investing activities instead of cash
flows from operating activities for all periods presented.
The outstanding portfolio of installment receivables
derecognized from our consolidated balance sheets, but which we
continue to service, was $8,428 and $7,446 at September 30, 2018
and December 31, 2017.
NOTE 10. INVENTORIES AND THEATRICAL FILM AND TELEVISION
PRODUCTION COSTS
Film and television production costs are stated at the lower of
cost, less accumulated amortization, or fair value and include the
unamortized cost of completed theatrical films and television
episodes, theatrical films and television series in production and
undeveloped film and television rights. The amount of capitalized
film and television production costs recognized as broadcast,
programming and operations expenses for a given period is
determined using the film forecast computation method.
The following table summarizes inventories and theatrical film
and television production costs as of September 30, 2018:
September 30,
2018
--------- --------------------------------------------------------------------- ---------------
Inventories:
Programming costs, less amortization 1 $ 4,224
Other inventory, primarily DVD and Blu-ray Discs 177
-------------------------------------------------------------------------------- -----------
Total inventories 4,401
Less: current portion of inventory (2,310)
-------------------------------------------------------------------------------- -----------
Total noncurrent inventories 2,091
================================================================================ ===========
Theatrical film production costs: 2
Released, less amortization 178
Completed and not released 821
In production 736
Development and pre-production 158
Television production costs: 2
Released, less amortization 582
Completed and not released 868
In production 1,762
Development and pre-production 25
-------------------------------------------------------------------------------- -----------
Total theatrical film and television production costs 5,130
-------------------------------------------------------------------------------- -----------
Total noncurrent inventories and theatrical film and television
production costs $ 7,221
================================================================================ ===========
1 Includes the costs of certain programming rights, primarily sports, for which
payments have been made prior to the related rights
being received.
2 Does not include $9,184 of acquired film and television library intangible
assets as of September 30, 2018, which are included in
"Other Intangible Assets - Net" on our consolidated balance sheet.
32
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
NOTE 11. ADDITIONAL FINANCIAL INFORMATION
Cash and Cash Flows
We typically maintain our restricted cash balances for purchases
and sales of certain investment securities and funding of certain
deferred compensation benefit payments. The following summarizes
cash and cash equivalents and restricted cash balances contained on
our consolidated balance sheets:
September 30, December 31,
--------------- ---------------
Cash and Cash Equivalents and
Restricted Cash 2018 2017 2017 2016
----------------------------------- ----- ------ ------ -----
Cash and cash equivalents $8,657 $48,499 $50,498 $5,788
Restricted cash in Other current
assets 56 6 6 7
Restricted cash in Other Assets 75 241 428 140
------------------------------------ ----- ------ ------ -----
Cash and cash equivalents and
restricted cash $8,788 $48,746 $50,932 $5,935
==================================== ===== ====== ====== =====
Nine months ended
September 30,
-------------------------------------------- ---------------------
Consolidated Statements of Cash Flows 2018 2017
-------------------------------------------- ------- -------
Cash paid (received) during the period for:
Interest $ 6,943 $ 5,031
Income taxes, net of refunds (537) 1,861
============================================= ======= =======
Debt Transactions
As of September 30, 2018, our total long-term debt obligations
totaled $183,418. During the first nine months we completed the
following debt activity:
-- For the purpose of providing financing in connection with our
Time Warner acquisition, we drew the following on our credit
agreements: $16,175 with JPMorgan Chase Bank, N.A, $2,500 with BNP
Paribas and $2,250 with Bank of Nova Scotia. As of September 30,
2018, we had $6,175, $0, and $2,250 outstanding under these credit
agreements.
-- Issuance of approximately $5,250 U.S. dollar denominated
floating rate notes maturing over three to six years, and other
borrowings totaling $6,925.
-- Net borrowings of approximately $3,732 of debt under our commercial paper program.
-- Net borrowings of approximately $1,000 by subsidiaries in Latin America.
-- Redemptions totaling approximately $4,550 for AT&T notes
that matured prior to September 30, 2018.
-- Redemption of $21,235 of AT&T notes issued in
anticipation of the Time Warner acquisition that were subject to
mandatory redemption.
-- With the acquisition of Time Warner, we acquired $22,865 of
debt, of which we repaid $2,000 for amounts outstanding under term
credit agreements, $2,000 of notes and $1,076 of commercial paper
borrowings.
33
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
OVERVIEW
AT&T Inc. is referred to as "we," "AT&T" or the
"Company" throughout this document, and the names of the particular
subsidiaries and affiliates providing the services generally have
been omitted. AT&T is a holding company whose subsidiaries and
affiliates operate worldwide in the telecommunications, media and
technology industries. You should read this discussion in
conjunction with the consolidated financial statements and
accompanying notes (Notes). We completed the acquisition of Time
Warner Inc. (referred to as Time Warner) on June 14, 2018, and have
included its results after that date. In accordance with U.S.
generally accepted accounting principles (GAAP), operating results
from Time Warner prior to the acquisition are excluded.
We have four reportable segments: (1) Communications, (2)
WarnerMedia, (3) Latin America and (4) Xandr. Our segment results
presented in Note 4 and discussed below for each segment follow our
internal management reporting. Percentage increases and decreases
that are not considered meaningful are denoted with a dash.
Third Quarter Nine-Month Period
-------------------------- ---------------------------
Percent Percent
2018 2017 Change 2018 2017 Change
--------------------------------- -------- ------- ------- -------- -------- -------
Operating Revenues
Communications $ 36,230 $37,115 (2.4)% $107,173 $111,268 (3.7)%
WarnerMedia 8,204 107 - 9,709 323 -
Latin America 1,833 2,099 (12.7) 5,809 6,054 (4.0)
Xandr 445 333 33.6 1,174 992 18.3
Corporate and other 308 293 5.1 961 1,093 (12.1)
Eliminations and consolidation (1,281) (279) - (2,063) (860) -
--------------------------------- ------- ------ ------- -------
AT&T Operating Revenues 45,739 39,668 15.3 122,763 118,870 3.3
================================= ======= ====== ======= =======
Operating Contribution
Communications 8,182 8,071 1.4 24,623 24,821 (0.8)
WarnerMedia 2,528 2 - 2,992 21 -
Latin America (201) (125) (60.8) (462) (257) (79.8)
Xandr 333 294 13.3 952 873 9.0
--------------------------------- ------- ------ ------- -------
Segment Operating Contribution $ 10,842 $ 8,242 31.5% $ 28,105 $ 25,458 10.4%
================================= ======= ====== ======= ======= ======= =======
The Communications segment provides services to businesses and
consumers located in the U.S. or in U.S. territories and businesses
globally. Our business strategies reflect bundled product offerings
that cut across product lines and utilize shared assets. This
segment contains the following business units:
-- Mobility provides nationwide wireless service and equipment.
-- Entertainment Group provides video, internet and voice
communications services to residential customers.
-- Business Wireline provides advanced IP-based services
(referred to as "strategic services"), as well as traditional voice
and data services to business customers.
The WarnerMedia segment develops, produces and distributes
feature films, television, gaming and other content over various
physical and digital formats. This segment contains the following
business units:
-- Warner Bros. principally produces and distributes television
shows, feature films and video games.
-- Home Box Office primarily operates multichannel premium pay television services.
-- Turner creates and programs branded news, entertainment,
sports and kids multi-platform content.
34
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
The Latin America segment provides entertainment and wireless
services outside of the U.S. This segment contains the following
business units:
-- Vrio provides video services primarily to residential
customers using satellite technology.
-- Mexico provides wireless service and equipment to customers in Mexico.
The Xandr segment provides advertising services. These services
utilize data insights to develop higher value targeted
advertising.
RESULTS OF OPERATIONS
Consolidated Results Our financial results are summarized in the
following discussions. Additional analysis is discussed in our
"Segment Results" section. Percentage increases and decreases that
are not considered meaningful are denoted with a dash. Certain
prior period amounts have been reclassified to conform to the
current period's presentation.
Third Quarter Nine-Month Period
--------------------------- ---------------------------
Percent Percent
2018 2017 Change 2018 2017 Change
-------------------------------- -------- -------- ------- -------- -------- -------
Operating Revenues
Service $ 41,297 $ 36,378 13.5% $109,849 $109,372 0.4%
Equipment 4,442 3,290 35.0 12,914 9,498 36.0
-------------------------------- ------- ------- ------- -------
Total Operating Revenues 45,739 39,668 15.3 122,763 118,870 3.3
-------------------------------- ------- ------- ------- -------
Operating expenses
Operations and support 30,304 27,819 8.9 82,289 81,865 0.5
Depreciation and amortization 8,166 6,042 35.2 20,538 18,316 12.1
-------------------------------- ------- ------- ------- -------
Total Operating Expenses 38,470 33,861 13.6 102,827 100,181 2.6
-------------------------------- ------- ------- ------- -------
Operating Income 7,269 5,807 25.2 19,936 18,689 6.7
-------------------------------- ------- ------- ------- -------
Interest expense (2,051) (1,686) 21.6 (5,845) (4,374) 33.6
Equity in net income
(loss)
of affiliates (64) 11 - (71) (148) (52.0)
Other income (expense)
- net 1,053 842 25.1 5,108 2,255 -
-------------------------------- ------- ------- ------- -------
Income Before Income
Taxes 6,207 4,974 24.8 19,128 16,422 16.5
Net Income 4,816 3,123 54.2 14,823 10,711 38.4
Net Income Attributable
to AT&T $ 4,718 $ 3,029 55.8% $ 14,512 $ 10,413 39.4%
================================ ======= ======= ======= ======= ======= =======
Operating revenues increased in the third quarter and for the
first nine months of 2018 primarily due to growth in our
WarnerMedia and Xandr segments, driven by business acquisitions in
2018. Partially offsetting the increases was our adoption of a new
revenue accounting standard, which included our policy election to
record Universal Service Fund (USF) fees on a net basis. Also
offsetting revenues were declines in our Communications segment,
which continues to experience pressure from developing technology
and shifts in customer behavior, partially offset increased
equipment revenues.
Operations and support expenses increased in the third quarter
and for the first nine months of 2018, primarily due to business
acquisitions in 2018 and higher equipment costs related to wireless
device sales and upgrades in our Communications segment. Increases
were partially offset by our adoption of new accounting rules,
which included our policy election to record USF fees on a net
basis.
35
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Depreciation and amortization expense increased in the third
quarter and for the first nine months of 2018.
-- Depreciation expense increased $159, or 3.2%, in the third
quarter and $191, or 1.3%, for the first nine months of 2018,
primarily due to WarnerMedia results as well as ongoing capital
spending for network upgrades and expansion offset by lower expense
resulting from our fourth-quarter 2017 abandonment of certain
copper network assets.
-- Amortization expense increased $1,965 in the third quarter
and increased $2,031, or 57.9%, for the first nine months of 2018,
primarily due to the amortization of intangibles associated with
WarnerMedia.
Operating income increased in the third quarter and for the
first nine months of 2018. Our operating income margin in the third
quarter increased from 14.6% in 2017 to 15.9% in 2018, and for the
first nine months increased from 15.7% in 2017 to 16.2% in
2018.
Interest expense increased in the third quarter and for the
first nine months of 2018. The increase was primarily due to higher
debt balances related to our acquisition of Time Warner, including
interest expense on Time Warner notes.
Equity in net income of affiliates decreased in the third
quarter and increased for the first nine months of 2018. Results
for the third quarter include net losses from investments acquired
through our purchase of Time Warner. The increase in the first nine
months was predominantly due to losses in the first quarter of 2017
from our legacy publishing business, which was sold in June 2017.
This increase was partially offset by the net losses from Time
Warner investments.
Other income (expense) - net increased in the third quarter and
for the first nine months. The increase in the third quarter was
primarily due to a gain resulting from our Otter Media Holdings
(Otter Media) transaction, in which we acquired the remaining
equity interest during the quarter (see Note 8), partly offset by
lower interest income after closing of the Time Warner transaction.
The increase for the first nine months was primarily due to
actuarial gains of $2,726 in 2018 compared to a gain of $259 in
2017, which resulted from remeasurement of our pension and
postretirement benefit obligations in the first half of 2018. The
nine-month increase also included $224 of additional interest
income and the gain on our Otter Media transaction that was offset
by premiums on the redemption of debt of $226 in the second quarter
of 2018.
Income taxes decreased in the third quarter of 2018 and for the
first nine months of 2018. Our effective tax rate was 22.4% in the
third quarter and 22.5% for the first nine months of 2018, as
compared to 37.2% for the third quarter and 34.8% for the first
nine months of 2017 . The standalone effective tax rate of
WarnerMedia was approximately 21.5% for the third quarter and the
108-day period ended September 30, 2018. The decreases in income
tax expense and our effective tax rates were primarily due to the
December 2017 enactment of U.S. corporate tax reform, which reduced
the federal tax rate from 35% to 21%. Partially offsetting the
decreased tax rates were higher earnings. We continue to expect our
effective tax rate, including WarnerMedia, to be approximately
23%.
36
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Selected Financial and Operating Data
--------------------------------------------------------------------- ----------- ----------
September 30,
Subscribers and connections in (000s) 2018 2017
--------------------------------------------------------------------- ----------- ----------
Domestic wireless subscribers 150,252 138,445
Mexican wireless subscribers 17,305 13,779
--------------------------------------------------------------------- ----------- ----------
North American wireless subscribers 167,557 152,224
===================================================================== =========== ==========
North American branded subscribers 110,982 105,717
North American branded net additions 3,351 2,812
Domestic satellite video subscribers 19,625 20,605
AT&T U-verse(R) (U-verse) video subscribers 3,693 3,718
DIRECTV NOW video subscribers 1,858 787
Latin America satellite video subscribers 1 13,640 13,490
--------------------------------------------------------------------- ----------- ----------
Total video subscribers 38,816 38,600
===================================================================== =========== ==========
Total domestic broadband connections 15,747 15,715
Network access lines in service 10,399 12,249
U-verse VoIP connections 5,274 5,774
Debt ratio 2 49.8% 56.4%
Net debt ratio 3 47.4% 39.7%
Ratio of earnings to fixed charges 4 3.55 3.55
Number of AT&T employees 269,280 256,800
===================================================================== =========== ==========
Excludes subscribers of our Latin America segment equity investment in SKY
1 Mexico, in which we own a 41.3% stake.
At June 30, 2018 and September 30, 2017, SKY Mexico had 8.0 million subscribers.
Debt ratios are calculated by dividing total debt (debt maturing within one
2 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.
Net debt ratios are calculated by dividing total debt (debt maturing within
3 one year plus long-term debt) less cash available
by total capital (total debt plus total stockholders' equity).
4 See Exhibit 12.
37
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
COMMUNICATIONS SEGMENT Third Quarter Nine-Month Period
------------------------- ---------------------------
Percent Percent
2018 2017 Change 2018 2017 Change
------------------------------- ------- ------- ------- -------- -------- -------
Segment Operating Revenues
Mobility $17,938 $17,370 3.3% $ 52,575 $ 51,922 1.3%
Entertainment Group 11,589 12,467 (7.0) 34,498 37,435 (7.8)
Business Wireline 6,703 7,278 (7.9) 20,100 21,911 (8.3)
------------------------------- ------ ------ ------- -------
Total Segment Operating
Revenues 36,230 37,115 (2.4) 107,173 111,268 (3.7)
=============================== ====== ====== ======= =======
Segment Operating Contribution
Mobility 5,603 5,333 5.1 16,267 15,929 2.1
Entertainment Group 1,104 1,284 (14.0) 3,888 4,470 (13.0)
Business Wireline 1,475 1,455 1.4 4,468 4,422 1.0
------------------------------- ------ ------ ------- -------
Total Segment Operating
Contribution $ 8,182 $ 8,072 1.4% $ 24,623 $ 24,821 (0.8)%
=============================== ====== ====== ======= ======= ======= =======
Operating revenues decreased in the third quarter and for the
first nine months of 2018. The decreases reflected declines in our
Entertainment Group and Business Wireline business units, partially
offset by increases in our Mobility business unit. The decreases
reflect continued declines in legacy voice and data products, shift
to unlimited wireless plans and over-the-top (OTT) video offerings,
and our policy election to no longer include USF fees in revenues,
partially offset by higher equipment revenues, from increased
postpaid smartphone sales.
In the first half of 2018, we continued to see pressure from
legacy services revenues and from wireless service revenues as we
lapped the first year of offering unlimited data plans. Since our
unlimited plans have now been in effect for over a year, service
revenues on a comparable basis have shown improvements, which we
expect to continue for the remainder of 2018.
Operating contribution increased in the third quarter and
decreased for the first nine months of 2018, and was positively
impacted by new revenue accounting rules. Operating contribution
reflected improvement in our Mobility and Business Wireline
business units, partially offset by declines in our Entertainment
Group. Our Communications segment operating income margin in the
third quarter increased from 21.7% in 2017 to 22.6% in 2018, and
for the first nine months increased from 22.3% in 2017 to 23.0% in
2018.
38
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Communications Business Unit Discussion
Mobility Results
-------------------------------- ------ ------ ----- ------ ------ -----
Third Quarter Nine-Month Period
--------------------------- ---------------------------
Percent Percent
2018 2017 Change 2018 2017 Change
-------------------------------- ------- ------- ------- -------
Operating revenues
Service $13,989 $14,475 (3.4)% $41,074 $43,414 (5.4)%
Equipment 3,949 2,895 36.4 11,501 8,508 35.2
-------------------------------- ------ ------ ------ ------
Total Operating Revenues 17,938 17,370 3.3 52,575 51,922 1.3
-------------------------------- ------ ------ ------ ------
Operating expenses
Operations and support 10,255 10,029 2.3 30,020 30,005 -
Depreciation and amortization 2,079 2,008 3.5 6,287 5,988 5.0
-------------------------------- ------ ------ ------ ------
Total Operating Expenses 12,334 12,037 2.5 36,307 35,993 0.9
-------------------------------- ------ ------ ------ ------
Operating Income 5,604 5,333 5.1 16,268 15,929 2.1
Equity in Net Income
(Loss)
of Affiliates (1) - - (1) - -
-------------------------------- ------ ------ ------ ------
Operating Contribution $ 5,603 $ 5,333 5.1% $16,267 $15,929 2.1%
================================ ====== ====== ===== ====== ====== =====
The following tables highlight other key measures of performance
for Mobility:
September 30, Percent
(in 000s) 2018 2017 Change
------------------------ ----------------------- ----------------------- ---------------------------
Wireless Subscribers 1
Postpaid smartphones 60,408 59,278 1.9%
Postpaid feature
phones and
data-centric
devices 16,588 17,756 (6.6)
------------------------ ----------------------- -----------------------
Postpaid 76,996 77,034 -
Prepaid 16,894 15,136 11.6
------------------------ ----------------------- -----------------------
Branded 93,890 92,170 1.9
Reseller 8,183 9,877 (17.2)
Connected devices 2 48,179 36,398 32.4
------------------------ ----------------------- -----------------------
Total Wireless
Subscribers 150,252 138,445 8.5
======================== ======================= =======================
Branded Smartphones 74,917 72,242 3.7
Smartphones under our
installment programs
at end of period 31,441 31,207 0.7%
======================== ======================= ======================= =================== =====
1 Represents 100% of AT&T Mobility wireless subscribers.
2 Includes data-centric devices such as session-based tablets, monitoring
devices and primarily wholesale automobile systems. Excludes
postpaid tablets.
39
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Third Quarter Nine-Month Period
----------------------------------------------- -----------------------------------------------
Percent Percent
(in 000s) 2018 2017 Change 2018 2017 Change
---------------- --------- ---- --------- --- -------------- ----------- --- ----------- --- -----------
Wireless Net
Additions 1
Postpaid 4 (232) 134 -% (110) 83 -%
Prepaid 570 324 75.9 1,264 873 44.8
---------------- --------- ---- --------- ----------- --- -----------
Branded Net
Additions 338 458 (26.2) 1,154 956 20.7
Reseller (434) (391) (11.0) (1,266) (1,341) 5.6
Connected
devices 2 3,459 2,274 52.1 9,169 7,102 29.1
---------------- --------- ---- --------- ----------- --- -----------
Wireless Net
Subscriber
Additions 3,363 2,341 43.7 9,057 6,717 34.8
================ ========= ==== ========= =========== === ===========
Smartphones sold
under our
installment
programs during
period 3,997 3,491 14.5% 11,634 10,575 10.0%
Branded Churn 3 1.70% 1.70% - BP 1.62% 1.66% (4) BP
Postpaid Churn 3 1.17% 1.06% 11 BP 1.08% 1.06% 2 BP
Postpaid
Phone-Only
Churn
3, 4 0.93% 0.84% 9 BP 0.87% 0.84% 3 BP
================ ========= === ========= ========= === =========== =========== ====== ===
1 Excludes acquisition-related additions during the period.
Includes data-centric devices such as session-based tablets, monitoring
2 devices and primarily wholesale automobile systems. Excludes
postpaid tablets.
Calculated by dividing the aggregate number of wireless subscribers who
3 canceled service during a month divided by the total number
of wireless subscribers at the beginning of that month. The churn rate for
the period is equal to the average of the churn rate for
each month of that period.
Postpaid phone net adds were 69 and (145) in the third quarter and 60 and
4 (613) for the first nine months of 2018 and 2017, respectively.
Service revenue decreased in the third quarter and for the first
nine months largely due to our adoption of a new accounting
standard that included our policy election to no longer include USF
fees in revenues which resulted in less revenue being allocated to
the service component of bundled contracts. Also contributing to
the decrease was the impact of customers continuing to shift to
discounted monthly service charges under our unlimited plans,
partially offset by higher prepaid service revenues resulting from
growth in Cricket and AT&T PREPAID SM subscribers. Since our
unlimited plans have now been in effect for over a year, service
revenues on a comparable basis have shown improvements, which we
expect to continue for the remainder of 2018.
ARPU
ARPU has been affected by the new revenue accounting standard,
which reduced the revenue recognized, and by customers shifting to
unlimited plans, which decreases overage revenues; however, price
changes and the sale of higher-priced smartphones are partially
offsetting that decline.
Churn
The effective management of subscriber churn is critical to our
ability to maximize revenue growth and to maintain and improve
margins. Postpaid churn was higher in the third quarter, but only
slightly higher for the first nine months of 2018, even with higher
tablet churn. Postpaid phone-only churn was higher in the third
quarter and for the nine months, partly reflecting the introduction
of new handsets, at promotional prices, by competitors in the third
quarter as opposed to the traditional fourth quarter .
Equipment revenue increased in the third quarter and for the
first nine months resulting from the sale of higher-priced devices
as well as the adoption of a new accounting standard that
contributed to higher revenue allocations from bundled contracts.
Equipment revenue is unpredictable as customers are choosing to
upgrade devices less frequently or bring their own devices .
40
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Operations and support expenses increased in the third quarter
and for the first nine months primarily due to increased equipment
costs related to wireless equipment sales and upgrades, partially
offset by our adoption of new accounting rules, resulting in
commission deferrals and netting of USF fees in 2018, as well as
increased operational efficiencies .
Depreciation expense increased in the third quarter and for the
first nine months primarily due to ongoing capital spending for
network upgrades and expansion partially offset by fully
depreciated assets.
Operating income increased in the third quarter and for the
first nine months. Our Mobility operating income margin in the
third quarter increased from 30.7% in 2017 to 31.2% in 2018, and
for the first nine months increased from 30.7% in 2017 to 30.9% in
2018. Our Mobility EBITDA margin in the third quarter increased
from 42.3% in 2017 to 42.8% in 2018, and for the first nine months
increased from 42.2% in 2017 to 42.9% in 2018. EBITDA is defined as
operating contribution excluding equity in net income (loss) of
affiliates and depreciation and amortization.
Subscriber Relationships
As the wireless industry has matured, future wireless growth
will increasingly depend on our ability to offer innovative
services, plans and devices and to provide these services in
bundled product offerings with our video and broadband services.
Subscribers that purchase two or more services from us have
significantly lower churn than subscribers that purchase only one
service. To support higher mobile video and data usage, our
priority is to best utilize 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 mature and highly competitive market, we have launched a wide
variety of plans, including unlimited and bundled services, as well
as equipment installment programs .
Branded Subscribers
At September 30, 2018, approximately 95% of our postpaid phone
subscriber base used smartphones, compared to 93% at September 30,
2017, with the majority of phone sales during both years
attributable to smartphones.
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. Such offerings are intended to encourage existing
subscribers to upgrade their current services and/or add connected
devices, attract subscribers from other providers and/or minimize
subscriber churn.
Our equipment installment purchase program allows for postpaid
subscribers to purchase certain devices in installments over a
specified period of time, with the option to trade in the original
device for a new device and have the remaining unpaid balance paid
or settled once conditions are met. A significant percentage of our
customers choosing equipment installment program pay a lower
monthly service charge, which results in lower service revenue
recorded for these subscribers. Over half of the postpaid
smartphone base is on an equipment installment program and the
majority of postpaid smartphone gross adds and upgrades for all
periods presented were either equipment installment program or
Bring Your Own Device (BYOD). While BYOD customers do not generate
equipment revenue or expense, the service revenue helps improve our
margins.
Connected Devices
Connected devices include data-centric devices such as
session-based tablets, monitoring devices and primarily wholesale
automobile systems. Connected device subscribers increased in 2018,
and during the third quarter and first nine months of 2018, we
added approximately 2.2 million and 5.9 million wholesale connected
cars through agreements with various carmakers, and experienced
strong growth in other Internet of Things (IoT) connections as
well. We believe that these connected car agreements give us the
opportunity to create future retail relationships with the car
owners.
41
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Entertainment Group Results
---------------------------------- ------ ------ ------ ------ ------ ------
Third Quarter Nine-Month Period
------------------------ ------------------------
Percent Percent
2018 2017 Change 2018 2017 Change
---------------------------------- ------- ------- ---------- ------- ------- ----------
Operating revenues
Video entertainment $ 8,283 $ 9,052 (8.5)% $24,681 $26,967 (8.5)%
High-speed internet 2,045 1,916 6.7 5,904 5,784 2.1
Legacy voice and data
services 740 913 (18.9) 2,317 2,889 (19.8)
Other service and equipment 521 586 (11.1) 1,596 1,795 (11.1)
---------------------------------- ------ ------ ------ ------
Total Operating Revenues 11,589 12,467 (7.0) 34,498 37,435 (7.8)
---------------------------------- ------ ------ ------ ------
Operating expenses
Operations and support 9,155 9,804 (6.6) 26,623 28,711 (7.3)
Depreciation and amortization 1,331 1,379 (3.5) 3,986 4,254 (6.3)
---------------------------------- ------ ------ ------ ------
Total Operating Expenses 10,486 11,183 (6.2) 30,609 32,965 (7.1)
---------------------------------- ------ ------ ------ ------
Operating Income 1,103 1,284 (14.1) 3,889 4,470 (13.0)
Equity in Net Income
(Loss)
of Affiliates 1 (1) - (1) - -
---------------------------------- ------ ------ ------ ------
Operating Contribution $ 1,104 $ 1,283 (14.0)% $ 3,888 $ 4,470 (13.0)%
================================== ====== ====== ====== ====== ====== ======
The following tables highlight other key measures of performance
for the Entertainment Group business unit:
Percent
September 30, Change
--------------------------
(in 000s) 2018 2017
-------------------- ----------------- -----------------
Video Connections
Satellite 19,625 20,605 (4.8)%
U-verse 3,669 3,691 (0.6)
DIRECTV NOW 1 1,858 787 -
------------------- ----------------- -----------------
Total Video
Connections 25,152 25,083 0.3
=================== ================= =================
Broadband
Connections
IP 13,723 13,367 2.7
DSL 718 964 (25.5)
------------------- ----------------- -----------------
Total Broadband
Connections 14,441 14,331 0.8
=================== ================= =================
Retail Consumer
Switched Access
Lines 4,144 4,996 (17.1)
U-verse Consumer VoIP
Connections 4,757 5,337 (10.9)
--------------------- ----------------- -----------------
Total Retail Consumer
Voice Connections 8,901 10,333 (13.9)%
===================== ================= ================= ================= ======
Consistent with industry practice, DIRECTV NOW includes connections that
1 are on a free-trial.
42
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Third Quarter Nine-Month Period
------------------------------------------ ------------------------------------------
Percent Percent
(in 000s) 2018 2017 Change 2018 2017 Change
---------------- ---------- ---------- ------------------ ---------- ---------- ------------------
Video Net
Additions
Satellite 1 (359) (251) (43.0)% (833) (407) -%
U-verse 1 13 (134) - 38 (562) -
DIRECTV NOW 2 49 296 (83.4) 703 520 35.2
---------------- ---------- ---------- ---------- ----------
Net Video
Additions (297) (89) - (92) (449) 79.5
================ ========== ========== ========== ==========
Broadband Net
Additions
IP 31 125 (75.2) 261 479 (45.5)
DSL (45) (96) 53.1 (170) (327) 48.0
---------------- ---------- ---------- ---------- ----------
Net Broadband
Additions (14) 29 -% 91 152 (40.1)%
================ ========== ========== ============ === ========== ========== ============ ===
1 Includes disconnections for customers that migrated to DIRECTV NOW.
Consistent with industry practice, DIRECTV NOW includes connections that
2 are on a free-trial.
Video entertainment revenues are comprised of subscription and
advertising revenues. Revenues decreased in the third quarter and
for the first nine months of 2018, largely driven by a 4.1% decline
in linear video subscribers and, for the third quarter, a 2017
pay-per-view event. For the first nine months of 2018, our
over-the-top video subscriber net additions partially offset our
decline in linear video connections. However, this shift by our
customers, consistent with the rest of the industry, from a premium
linear service to our more economically priced OTT video service
has pressured our video revenues. OTT net additions declined in the
third quarter due to price changes and promotions. Also
contributing to the decrease was the impact of newly adopted
accounting rules, which resulted in less revenue allocated to video
services when these services are bundled with other offerings.
Churn rose for subscribers with linear video only service,
partially reflecting price increases .
High-speed internet revenues increased in the third quarter and
for the first nine months of 2018. Our bundling strategy is helping
to lower churn with subscribers who bundle broadband with another
AT&T service, having about half the churn of broadband-only
subscribers.
Legacy voice and data service revenues decreased in the third
quarter and for the first nine months of 2018, reflecting the
continued migration of customers to our more advanced IP-based
offerings or to competitors.
Operations and support expenses decreased in the third quarter
and for the first nine months of 2018, primarily due to our
adoption of new accounting rules, resulting in commission deferrals
and netting of USF fees in 2018. Also contributing to the decreases
were our ongoing focus on cost efficiencies and merger synergies,
lower employee-related expenses resulting from workforce
reductions, lower amortization of fulfillment cost deferrals due to
a longer estimated economic life for our entertainment group
customers (see Note 1) and lower advertising costs, which were
partially offset by annual content cost increases and an additional
week in the third quarter of NFL SUNDAY TICKET.
Depreciation expenses decreased in the third quarter and for the
first nine months of 2018, primarily due to our fourth-quarter 2017
abandonment of certain copper network assets, partially offset by
ongoing capital spending for network upgrades and expansion.
Operating income decreased in the third quarter and for the
first nine months of 2018. Our Entertainment Group operating income
margin in the third quarter decreased from 10.3% in 2017 to 9.5% in
2018, and for the first nine months decreased from 11.9% in 2017 to
11.3% in 2018. Our Entertainment Group EBITDA margin in the third
quarter decreased from 21.4% in 2017 to 21.0% in 2018, and for the
first nine months decreased from 23.3% in 2017 to 22.8% in
2018.
43
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Business Wireline Results
---------------------------------- ----- ----- ------ ------ ------ ------
Third Quarter Nine-Month Period
---------------------- ------------------------
Percent Percent
2018 2017 Change 2018 2017 Change
---------------------------------- ------ ------ ---------- ------- ------- ----------
Operating revenues
Strategic services $3,059 $3,018 1.4% $ 9,168 $ 8,880 3.2%
Legacy voice and data
services 2,615 3,343 (21.8) 8,176 10,314 (20.7)
Other service and equipment 1,029 917 12.2 2,756 2,717 1.4
---------------------------------- ----- ----- ------ ------
Total Operating Revenues 6,703 7,278 (7.9) 20,100 21,911 (8.3)
---------------------------------- ----- ----- ------ ------
Operating expenses
Operations and support 4,030 4,635 (13.1) 12,084 13,906 (13.1)
Depreciation and amortization 1,197 1,189 0.7 3,547 3,583 (1.0)
---------------------------------- ----- ----- ------ ------
Total Operating Expenses 5,227 5,824 (10.3) 15,631 17,489 (10.6)
---------------------------------- ----- ----- ------ ------
Operating Income 1,476 1,454 1.5 4,469 4,422 1.1
Equity in Net Income
of Affiliates (1) 1 - (1) - -
---------------------------------- ----- ----- ------ ------
Operating Contribution $1,475 $1,455 1.4% $ 4,468 $ 4,422 1.0%
================================== ===== ===== ====== ====== ====== ======
Strategic services revenues increased in the third quarter and
for the first nine months of 2018, driven by increases in Dedicated
Internet services of $19 and $82; VoIP of $26 and $75; Security
services of $32 and $75; and Ethernet services of $14 and $69, in
the third quarter and for the first nine months, respectively.
Legacy voice and data service revenues decreased in the third
quarter and for the first nine months of 2018, 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 in the third
quarter and for the first nine months of 2018, driven by revenues
from intangible assets. Other service revenues include
project-based revenue, which is nonrecurring in nature, as well as
revenues from other managed services, outsourcing, government
professional services and customer premises equipment.
Operations and support expenses decreased in the third quarter
and for the first nine months of 2018, primarily due to our
adoption of new accounting rules, resulting in netting of USF fees
in 2018. Also contributing to declines were our ongoing efforts to
automate and digitize our support activities.
Depreciation expense in creased in the third quarter and
decreased for the first nine months of 2018. The increase in the
third quarter was primarily due to increases in capital spending
for network upgrades and expansion. The decrease in the first nine
months was primarily due to updates to the asset lives of certain
network assets and our fourth-quarter 2017 abandonment of certain
copper network assets.
Operating income increased in the third quarter and for the
first nine months of 2018. Our Business Wireline operating income
margin in the third quarter increased from 20.0% in 2017 to 22.0%
in 2018, and for the first nine months increased from 20.2% in 2017
to 22.2% in 2018. Our Business Wireline EBITDA margin in the third
quarter increased from 36.3% in 2017 to 39.9% in 2018, and for the
first nine months increased from 36.5% in 2017 to 39.9% in
2018.
44
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
SUPPLEMENTAL COMMUNICATIONS OPERATING INFORMATION
As a supplemental presentation to our Communications segment
operating results, we are providing a view of our AT&T Business
Solutions results which includes both wireless and wireline
operations. This combined view presents a complete profile of the
entire business customer relationship, and underscores the
importance of mobile solutions to serving our business customers.
See "Discussion and Reconciliation of Non-GAAP Measures" for a
reconciliation of these supplemental measures to the most directly
comparable financial measures calculated and presented in
accordance with GAAP.
Business Solutions Results
---------------------------------- ----- ----- ------ ------ ------ ------
Third Quarter Nine-Month Period
---------------------- ------------------------
Percent Percent
2018 2017 Change 2018 2017 Change
------ ------ ---------- ------- ------- ----------
Operating revenues
Wireless service $1,877 $2,023 (7.2)% $ 5,497 $ 6,030 (8.8)%
Strategic services 3,059 3,018 1.4 9,168 8,880 3.2
Legacy voice and data
services 2,615 3,343 (21.8) 8,176 10,314 (20.7)
Other service and equipment 1,029 917 12.2 2,756 2,717 1.4
Wireless equipment 590 340 73.5 1,752 988 77.3
---------------------------------- ----- ----- ------ ------
Total Operating Revenues 9,170 9,641 (4.9) 27,349 28,929 (5.5)
---------------------------------- ----- ----- ------ ------
Operating expenses
Operations and support 5,598 6,096 (8.2) 16,808 18,147 (7.4)
Depreciation and amortization 1,499 1,466 2.3 4,444 4,409 0.8
---------------------------------- ----- ----- ------ ------
Total Operating Expenses 7,097 7,562 (6.1) 21,252 22,556 (5.8)
---------------------------------- ----- ----- ------ ------
Operating Income 2,073 2,079 (0.3) 6,097 6,373 (4.3)
Equity in Net Income
of Affiliates (1) - - (1) - -
---------------------------------- ----- ----- ------ ------ ------
Operating Contribution $2,072 $2,079 (0.3)% $ 6,096 $ 6,373 (4.3)%
================================== ===== ===== ====== ====== ====== ======
45
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
WARNERMEDIA SEGMENT Third Quarter Nine-Month Period
--------------------- -------------------------
Percent Percent
2018 2017 Change 2018 2017 Change
Segment Operating Revenues
Turner $ 2,988 $ 107 -% $ 3,767 $ 323 -%
Home Box Office 1,644 - - 1,925 - -
Warner Bros. 3,720 - - 4,227 - -
Eliminations & Other (148) - - (210) - -
----- --------
Total Segment Operating
Revenues 8,204 107 - 9,709 323 -
===== ========
Segment Operating Contribution
Turner 1,449 22 - 1,802 79 -
Home Box Office 630 - - 734 - -
Warner Bros. 553 - - 642 - -
Eliminations & Other (104) (20) - (186) (58) -
----- --------
Total Segment Operating
Contribution $ 2,528 $ 2 -% $ 2,992 $ 21 -%
===== ========
Our WarnerMedia segment consists of our Turner, Home Box Office
and Warner Bros. business units. The order of presentation reflects
the consistency of revenue streams, rather than overall magnitude
as that is subject to timing and frequency of studio releases.
The WarnerMedia segment does not include results from Time
Warner operations for the periods prior to our June 14, 2018
acquisition, and as such, increased operating revenues and expenses
are a result of the acquisition. Otter Media is included as an
equity method investment for periods prior to our August 7, 2018
acquisition of the remaining interest and is in the segment
operating results following the acquisition. Consistent with our
past practice, many of the fair value adjustments from the
application of purchase accounting required under GAAP have not
been allocated to the segment, instead they are reported as
acquisition-related items in the reconciliation to consolidated
results.
Operating revenues were $8,204 in the third quarter and $9,709
for the first nine months of 2018.
Operating contribution was $2,528 for the third quarter and
$2,992 for the first nine months of 2018. Our WarnerMedia segment
operating income margin was 31.3% in the third quarter and 31.4%
for the first nine months of 2018.
46
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
WarnerMedia Business Unit Discussion
Turner Results
---------------------------------- ----- --- ------ ----- --- -----
Third Quarter Nine-Month Period
--------------------
Percent Percent
2018 2017 Change 2018 2017 Change
---------------------------------- ------ ---- ---------- --------- ---- ---------
Operating revenues
Subscription $1,855 $ 90 -% $ 2,363 $271 -%
Advertising 944 17 - 1,181 52 -
Content and other 189 - - 223 - -
---------------------------------- ----- --- ----- ---
Total Operating Revenues 2,988 107 - 3,767 323 -
---------------------------------- ----- --- ----- ---
Operating expenses
Operations and support 1,487 97 - 1,933 273 -
Depreciation and amortization 59 1 - 71 3 -
---------------------------------- ----- --- ----- ---
Total Operating Expenses 1,546 98 - 2,004 276 -
---------------------------------- ----- --- ----- ---
Operating Income 1,442 9 - 1,763 47 -
Equity in Net Income
of Affiliates 7 13 (46.2) 39 32 21.9
---------------------------------- ----- --- ----- ---
Operating Contribution $1,449 $ 22 -% $ 1,802 $ 79 -%
================================== ===== === ====== ===== === =====
Turner includes the WarnerMedia businesses managed by Turner as
well as our financial results for Regional Sports Networks (RSN),
which comprise the 2017 results reported in this business unit.
Operating revenues for Turner are generated primarily from
licensing programming to distribution affiliates and from selling
advertising on its networks and digital properties. Revenues for
the third quarter included $1,855 of subscription, $944 of
advertising and $189 of content and other revenue. For the
nine-month period, revenues included $2,363 of subscription, $1,181
of advertising and $223 of content and other revenue.
Operations and support expenses totaled $1,487 for the third
quarter and $1,933 for the first nine months of 2018.
Operating income was $1,442 in the third quarter and $1,763 for
the first nine months of 2018. Our Turner operating income margin
was 48.3% in the third quarter and 46.8% for the first nine months
of 2018. Our Turner EBITDA margin was 50.2% in the third quarter
and 48.7% for the first nine months of 2018.
47
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Home Box Office Results
---
Third Quarter Nine-Month Period
Percent Percent
2018 2017 Change 2018 2017 Change
Operating revenues
Subscription $ 1,517 $ - -% $ 1,787 $ - -%
Content and other 127 - - 138 - -
Total Operating Revenues 1,644 - - 1,925 - -
---
Operating expenses
Operations and support 991 - - 1,162 - -
Depreciation and amortization 25 - - 30 - -
---
Total Operating Expenses 1,016 - - 1,192 - -
---
Operating Income 628 - - 733 - -
Equity in Net Income
of Affiliates 2 - - 1 - -
---
Operating Contribution $ 630 $ - -% $ 734 $ - -%
===
Operating revenues for Home Box Office are generated from the
exploitation of original and licensed programming through
distribution outlets. Revenues for the third quarter included
$1,517 of subscription and $127 of content and other revenue. For
the nine-month period, revenues included $1,787 of subscription and
$138 of content and other revenue.
Operations and support expenses totaled $991 for the third
quarter and $1,162 for the first nine months of 2018.
Operating income was $628 in the third quarter and $733 for the
first nine months of 2018. Our Home Box Office operating income
margin was 38.2% in the third quarter and 38.1% for the first nine
months of 2018. Our Home Box Office EBITDA margin was 39.7% in the
third quarter and 39.6% for the first nine months of 2018.
Warner Bros. Results
---
Third Quarter Nine-Month Period
Percent Percent
2018 2017 Change 2018 2017 Change
Operating revenues
Theatrical product $1,694 $ - -% $ 1,917 $ - -%
Television product 1,591 - - 1,794 - -
Games and other 435 - - 516 - -
---
Total Operating Revenues 3,720 - - 4,227 - -
---
Operating expenses
Operations and support 3,104 - - 3,507 - -
Depreciation and amortization 40 - - 54 - -
---
Total Operating Expenses 3,144 - - 3,561 - -
---
Operating Income 576 - - 666 - -
Equity in Net Income (Loss)
of Affiliates (23) - - (24) - -
---
Operating Contribution $ 553 $ - -% $ 642 $ - -%
===
48
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Operating revenues for Warner Bros. primarily relate to
theatrical product (which is content made available for initial
exhibition in theaters) and television product (which is content
made available for initial airing on television or OTT services).
For the third quarter, total operating revenues were $3,720 and
included $1,694 from theatrical product, $1,591 from television
product and $435 from games and other. For the nine-month period,
total operating revenues were $4,227 and included $1,917 from
theatrical product, $1,794 from television product and $516 from
games and other.
Operations and support expenses totaled $3,104 for the third
quarter and $3,507 for the first nine months of 2018.
Operating income was $576 in the third quarter and $666 for the
first nine months of 2018. Our Warner Bros. operating income margin
was 15.5% in the third quarter and 15.8% for the first nine months
of 2018. Our Warner Bros. EBITDA margin was 16.6% in the third
quarter and 17.0% for the first nine months of 2018.
LATIN AMERICA SEGMENT Third Quarter Nine-Month Period
Percent Percent
2018 2017 Change 2018 2017 Change
------------------------------- ------ ------ ---------- ------ ------ ----------
Segment Operating Revenues
Vrio $1,102 $1,363 (19.1)% $3,710 $4,065 (8.7)%
Mexico 731 736 (0.7) 2,099 1,989 5.5
Total Segment Operating
Revenues 1,833 2,099 (12.7) 5,809 6,054 (4.0)
=============================== ===== ===== ====== ===== ===== ======
Segment Operating Contribution
Vrio 66 99 (33.3) 281 362 (22.4)
Mexico (267) (224) (19.2) (743) (619) (20.0)
Total Segment Operating
Contribution $(201) $(125) (60.8)% $(462) $(257) (79.8)%
=============================== ===== ===== ====== ===== ===== ======
Operating Results
Our international subsidiaries conduct business in their local
currency and operating results are converted to U.S. dollars using
official exchange rates. Our Latin America segment is subject to
foreign currency fluctuations.
Latin America Business Unit
Discussion
Vrio Results
----- ------ ----- ----- ------
Third Quarter Nine-Month Period
----------------------
Percent Percent
2018 2017 Change 2018 2017 Change
------ ------ ------ ------ ----------
Operating revenues $1,102 $1,363 (19.1)% $3,710 $4,065 (8.7)%
Operating expenses
Operations and support 877 1,075 (18.4) 2,894 3,123 (7.3)
Depreciation and amortization 168 206 (18.4) 559 642 (12.9)
----- ----- ----- -----
Total Operating Expenses 1,045 1,281 (18.4) 3,453 3,765 (8.3)
----- ----- ----- -----
Operating Income 57 82 (30.5) 257 300 (14.3)
Equity in Net Income
of Affiliates 9 17 (47.1) 24 62 (61.3)
----- ----- ----- -----
Operating Contribution $ 66 $ 99 (33.3)% $ 281 $ 362 (22.4)%
===== ===== ====== ===== ===== ======
49
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
The following tables highlight other key measures of performance
for Vrio:
September 30, Percent
(in 000s) 2018 2017 Change
---------------- ---------- ------------- -------------
Vrio Satellite
Subscribers
1 13,640 13,490 1.1%
========== ============= =============
Excludes subscribers of our equity investment in SKY Mexico, in which we
1 own a 41.3% stake. SKY Mexico had 8.0 million
subscribers at June 30, 2018 and September 30, 2017.
Third Quarter Nine-Month Period
Percent Percent
(in 000s) 2018 2017 Change 2018 2017 Change
---------------- ------------- -------------
Vrio Satellite
Net Subscriber
Additions 1 (73) (132) 44.7% 52 (97) -%
========== ============= =============
Excludes SKY Mexico net subscriber additions of 51 and 5 for the quarter
1 ended June 30, 2018 and 2017, respectively.
Operating revenues decreased in the third quarter and for the
first nine months of 2018, primarily due to foreign exchange
pressures.
Operations and support expenses decreased in the third quarter
and for the first nine months of 2018, primarily due to changes in
foreign currency exchange rates partially offset by higher
programming and other operating costs. Approximately 14% of Vrio
expenses are U.S. dollar based, with the remainder in the local
currency.
Depreciation expense decreased in the third quarter and for the
first nine months of 2018, primarily due to changes in foreign
currency exchange rates.
Operating income decreased in the third quarter and for the
first nine months of 2018. Our Vrio operating income margin in the
third quarter decreased from 6.0% in 2017 to 5.2% in 2018, and for
the first nine months decreased from 7.4% in 2017 to 6.9% in 2018.
Our Vrio EBITDA margin in the third quarter decreased from 21.1% in
2017 to 20.4% in 2018, and for the first nine months decreased from
23.2% in 2017 to 22.0% in 2018.
Mexico Results
---------------------------------- ----- ----- ------ ----- ----- ------
Third Quarter Nine-Month Period
---------------------- ----------------------
Percent Percent
2018 2017 Change 2018 2017 Change
---------------------------------- ------ ------ ---------- ------ ------ ----------
Operating revenues
Service $ 440 $ 536 (17.9)% $1,261 $1,546 (18.4)%
Equipment 291 200 45.5 838 443 89.2
---------------------------------- ----- ----- ----- -----
Total Operating Revenues 731 736 (0.7) 2,099 1,989 5.5
---------------------------------- ----- ----- ----- -----
Operating expenses
Operations and support 869 862 0.8 2,459 2,345 4.9
Depreciation and amortization 129 98 31.6 383 263 45.6
---------------------------------- ----- ----- ----- -----
Total Operating Expenses 998 960 4.0 2,842 2,608 9.0
---------------------------------- ----- ----- ----- -----
Operating Income (Loss) (267) (224) (19.2) (743) (619) (20.0)
Equity in Net Income
of Affiliates - - - - - -
---------------------------------- ----- ----- ----- -----
Operating Contribution $(267) $(224) (19.2)% $(743) $(619) (20.0)%
================================== ===== ===== ====== ===== ===== ======
50
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
The following tables highlight other key measures of performance
for Mexico:
September 30, Percent
(in 000s) 2018 2017 Change
------------------------------ ---- ---- ---------- ------- ------ ---------
Mexico Wireless Subscribers
Postpaid 5,822 5,316 9.5%
Prepaid 11,270 8,231 36.9
------------------------------- ---- ---- ------ ------- ------
Branded 17,092 13,547 26.2
Reseller 213 232 (8.2)
------------------------------- ---- ---- ------ ------- ------
Total Mexico Wireless
Subscribers 17,305 13,779 25.6%
=============================== ==== ==== ====== ======= ====== =====
Third Quarter Nine-Month Period
---------------------- --------------------------
Percent Percent
(in 000s) 2018 2017 Change 2018 2017 Change
------------------------------ ---- ---------- ------- ------ ---------
Mexico Wireless Net Additions
Postpaid 73 129 (43.4)% 324 351 (7.7)%
Prepaid 802 585 37.1 1,873 1,504 24.5
------------------------------- ---- ---- ------- ------
Branded 875 714 22.5 2,197 1,855 18.4
Reseller 32 (17) - 9 (49) -
------------------------------- ---- ---- ------- ------
Mexico Wireless
Net Subscriber Additions 907 697 30.1 2,206 1,806 22.1%
=============================== ==== ==== ====== ======= ====== =====
Service revenues decreased in the third quarter and for the
first nine months of 2018, primarily due to competitive pricing for
services, our s hutdown of a legacy wholesale business and our
adoption of the new U.S. revenue accounting standard .
Equipment revenues increased in the third quarter and for the
first nine months of 2018, primarily due to the offering of
equipment installment programs and growth in our subscriber
base.
Operations and support expenses increased in the third quarter
and for the first nine months of 2018, primarily driven by higher
operational costs partly associated with higher equipment sales and
expenses associated with our network expansion, partially offset by
lower wholesale costs and changes in foreign currency exchange
rates. Approximately 13% of Mexico expenses are U.S. dollar based,
with the remainder in the local currency.
Depreciation expense increased in the third quarter and for the
first nine months of 2018 due to higher capital spending in
Mexico.
Operating income decreased in the third quarter and for the
first nine months of 2018. Our Mexico operating income margin in
the third quarter decreased from (30.4)% in 2017 to (36.5)% in
2018, and for the first nine months decreased from (31.1)% in 2017
to (35.4)% in 2018. Our Mexico EBITDA margin in the third quarter
decreased from (17.1)% in 2017 to (18.9)% in 2018, and for the
first nine months increased from (17.9)% in 2017 to (17.2)% in
2018.
51
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
XANDR SEGMENT
------- --- -----
Third Quarter Nine-Month Period
-------------------- ------------------------
Percent Percent
2018 2017 Change 2018 2017 Change
---------------------------------- ------- ---- ----------- ----
Operating revenues $ 445 $333 33.6% $ 1,174 $992 18.3%
Operating expenses
Operations and support 109 39 - 218 118 84.7
Depreciation and amortization 3 - - 4 1 -
---------------------------------- --- --- ------- ---
Total Operating Expenses 112 39 - 222 119 86.6
---------------------------------- --- --- ------- ---
Operating Income 333 294 13.3 952 873 9.0
Equity in Net Income - - - - - -
of Affiliates
---------------------------------- --- --- ------- ---
Operating Contribution $ 333 $294 13.3% $ 952 $873 9.0%
================================== === === ===== ======= === =====
Operating revenues increased in the third quarter and for the
first nine months of 2018, primarily due to higher political
advertising revenues and our acquisition of AppNexus in August 2018
(see Note 8).
Operations and support expenses increased in the third quarter
and for the first nine months of 2018, primarily due to our
acquisition of AppNexus and our ongoing development of the platform
supporting Xandr's business.
Operating income increased in the third quarter and for the
first nine months of 2018. Our Xandr segment operating income
margin in the third quarter decreased from 88.3% in 2017 to 74.8%
in 2018, and for the first nine months decreased from 88.0% in 2017
to 81.1% in 2018.
SUPPLEMENTAL TOTAL ADVERTISING REVENUE INFORMATION
As a supplemental presentation to our Xandr segment operating
results, we are providing a view of total advertising revenues
generated by AT&T. This combined view presents the entire
portfolio of advertising revenues reported across all operating
segments and represents a significant strategic initiative and
growth opportunity for AT&T. See revenue categories tables in
Note 5 for a reconciliation.
Total Advertising Revenues
--------------------------- ----- ----- ------ ------- ----- ------
Third Quarter Nine-Month Period
---------------------- ------------------------
Percent Percent
2018 2017 Change 2018 2017 Change
--------------------------- ------ ------ ---------- -------- ------ ----------
Operating Revenues
WarnerMedia $ 983 $ 17 -% $ 1,222 $ 52 -%
Communications 478 368 29.9 1,284 1,093 17.5
Xandr 445 333 33.6 1,174 992 18.3
Eliminations (401) (329) (21.9) (1,122) (980) (14.5)
--------------------------- ----- ----- ------- -----
Total Advertising Revenues $1,505 $ 389 -% $ 2,558 $1,157 -%
=========================== ===== ===== ====== ======= ===== ======
52
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Supplemental Results Under Historical Accounting Method
As a supplemental discussion of our operating results, we are
providing results under the comparative historical accounting
method prior to our adoption of ASC 606 for the three-months ended
September 30, 2018.
Promotions Commission Historical
Reported & Other USF Deferrals Accounting
Service Revenues
Communications
Mobility $ 13,989 $ (380) $(441) $ - $ 14,810
Entertainment Group 11,586 (49) (158) - 11,793
Business Wireline 6,504 2 (316) - 6,818
WarnerMedia 8,204 - - - 8,204
Latin America 1,542 (34) - - 1,576
Xandr 445 - - - 445
Corporate and Other 308 (6) (2) - 316
Eliminations (1,281) - - - (1,281)
AT&T Service Revenues 41,297 (467) (917) - 42,681
Business Solutions 8,580 (138) (382) - 9,100
Equipment Revenues
Communications
Mobility 3,949 505 - - 3,444
Entertainment Group 3 1 - - 2
Business Wireline 199 - - - 199
WarnerMedia - - - - -
Latin America 291 10 - - 281
Corporate and Other - - - - -
AT&T Equipment Revenues 4,442 516 - - 3,926
Business Solutions 590 167 - - 423
53
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Promotions Commission Historical
Reported & Other USF Deferrals Accounting
Total Operating Revenues
Communications
Mobility 17,938 125 (441) - 18,254
Entertainment Group 11,589 (48) (158) - 11,795
Business Wireline 6,703 2 (316) - 7,017
WarnerMedia 8,204 - - - 8,204
Latin America 1,833 (24) - - 1,857
Xandr 445 - - - 445
Corporate and Other 308 (6) (2) - 316
Eliminations (1,281) - - - (1,281)
AT&T Operating Revenues 45,739 49 (917) - 46,607
Business Solutions 9,170 29 (382) - 9,523
Total Operating Expenses
Communications
Mobility 12,334 72 (441) (281) 12,984
Entertainment Group 10,486 (3) (158) (270) 10,917
Business Wireline 5,227 7 (316) (30) 5,566
WarnerMedia 5,637 - - - 5,637
Latin America 2,043 8 - (46) 2,081
Xandr 112 - - - 112
Corporate and Other 3,545 (4) (2) - 3,551
Eliminations (914) - - - (914)
AT&T Operating Expenses 38,470 80 (917) (627) 39,934
Business Solutions 7,097 9 (382) (31) 7,501
Total Operating Income
Communications
Mobility 5,604 53 - 281 5,270
Entertainment Group 1,103 (45) - 270 878
Business Wireline 1,476 (5) - 30 1,451
WarnerMedia 2,567 - - - 2,567
Latin America (210) (32) - 46 (224)
Xandr 333 - - - 333
Corporate and Other (3,237) (2) - - (3,235)
Eliminations (367) - - - (367)
AT&T Operating Income 7,269 (31) - 627 6,673
Business Solutions 2,073 20 - 31 2,022
54
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Mobility
Supplemental Results
Third Quarter
Historical
Reported Accounting Method Percent
2018 Impact 2018 2017 Change
Operating revenues
Service $ 13,989 $ (821) $ 14,810 $14,475 2.3%
Equipment 3,949 505 3,444 2,895 19.0
Total Operating Revenues 17,938 (316) 18,254 17,370 5.1
Operating expenses
Operations and support 10,255 (650) 10,905 10,029 8.7
EBITDA 7,683 334 7,349 7,341 0.1
Depreciation and amortization 2,079 - 2,079 2,008 3.5
Total Operating Expenses 12,334 (650) 12,984 12,037 7.9
Operating Income 5,604 334 5,270 5,333 (1.2)
Equity in Net Income (Loss)
of Affiliates (1) - (1) - -
Operating Contribution $ 5,603 $ 334 $ 5,269 $ 5,333 (1.2)%
Operating Income Margin 31.2% 28.9% 30.7% (180) BP
EBITDA Margin 42.8% 40.3% 42.3% (200) BP
EBITDA Service Margin 54.9% 49.6% 50.7% (110) BP
55
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Entertainment Group
Supplemental Results
Third Quarter
Historical
Reported Accounting Method Percent
2018 Impact 2018 2017 Change
Operating revenues
Video entertainment $ 8,283 $ (113) $ 8,396 $ 9,052 (7.2)%
High-speed internet 2,045 - 2,045 1,916 6.7
Legacy voice and data services 740 (29) 769 913 (15.8)
Other service and equipment 521 (64) 585 586 (0.2)
Total Operating Revenues 11,589 (206) 11,795 12,467 (5.4)
Operating expenses
Operations and support 9,155 (431) 9,586 9,804 (2.2)
EBITDA 2,434 225 2,209 2,663 (17.0)
Depreciation and amortization 1,331 - 1,331 1,379 (3.5)
Total Operating Expenses 10,486 (431) 10,917 11,183 (2.4)
Operating Income 1,103 225 878 1,284 (31.6)
Equity in Net Income (Loss)
of Affiliates 1 - 1 (1) -
Operating Contribution $ 1,104 $ 225 $ 879 $ 1,283 (31.5)%
Operating Income Margin 9.5% 7.4% 10.3% (290) BP
EBITDA Margin 21.0% 18.7% 21.4% (270) BP
56
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Business Wireline
Supplemental Results
Third Quarter
Historical
Reported Accounting Method Percent
2018 Impact 2018 2017 Change
Operating revenues
Strategic services $ 3,059 $ (3) $ 3,062 $3,018 1.5%
Legacy voice and data services 2,615 (242) 2,857 3,343 (14.5)
Other service and equipment 1,029 (69) 1,098 917 19.7
Total Operating Revenues 6,703 (314) 7,017 7,278 (3.6)
Operating expenses
Operations and support 4,030 (339) 4,369 4,635 (5.7)
EBITDA 2,673 25 2,648 2,643 0.2
Depreciation and amortization 1,197 - 1,197 1,189 0.7
Total Operating Expenses 5,227 (339) 5,566 5,824 (4.4)
Operating Income 1,476 25 1,451 1,454 (0.2)
Equity in Net Income (Loss)
of Affiliates (1) - (1) 1 -
Operating Contribution $ 1,475 $ 25 $ 1,450 $1,455 (0.3)%
Operating Income Margin 22.0% 20.7% 20.0% 70 BP
EBITDA Margin 39.9% 37.7% 36.3% 140 BP
57
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Business Solutions
Supplemental Results
Third Quarter
Historical
Reported Accounting Method Percent
2018 Impact 2018 2017 Change
Operating revenues
Wireless service $ 1,877 $ (206) $ 2,083 $2,023 3.0%
Strategic services 3,059 (3) 3,062 3,018 1.5
Legacy voice and data services 2,615 (242) 2,857 3,343 (14.5)
Other service and equipment 1,029 (69) 1,098 917 19.7
Wireless equipment 590 167 423 340 24.4
Total Operating Revenues 9,170 (353) 9,523 9,641 (1.2)
Operating expenses
Operations and support 5,598 (404) 6,002 6,096 (1.5)
EBITDA 3,572 51 3,521 3,545 (0.7)
Depreciation and amortization 1,499 - 1,499 1,466 2.3
Total Operating Expenses 7,097 (404) 7,501 7,562 (0.8)
Operating Income 2,073 51 2,022 2,079 (2.7)
Equity in Net Income (Loss)
of Affiliates (1) - (1) - -
Operating Contribution $ 2,072 $ 51 $ 2,021 $2,079 (2.8)%
Operating Income Margin 22.6% 21.2% 21.6% (40) BP
EBITDA Margin 39.0% 37.0% 36.8% 20 BP
58
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Latin America
Supplemental Segment Results
Third Quarter
Historical
Reported Accounting Method Percent
2018 Impact 2018 2017 Change
Segment operating revenues
Vrio $ 1,102 $ - $ 1,102 $1,363 (19.1)%
Mexico 731 (24) 755 736 2.6
Total Segment Operating Revenues 1,833 (24) 1,857 2,099 (11.5)
Segment operating expenses
Operations and support 1,746 (38) 1,784 1,937 (7.9)
EBITDA 87 14 73 162 (54.9)
Depreciation and amortization 297 - 297 304 (2.3)
Total Segment Operating Expenses 2,043 (38) 2,081 2,241 (7.1)
Segment Operating Income
(Loss) (210) 14 (224) (142) (57.7)
Equity in Net Income (Loss)
of Affiliates 9 - 9 17 (47.1)
Segment Contribution $ (201) $ 14 $ (215) $(125) (72.0)%
Operating Income Margin (11.5)% (12.1)% (6.8)% (530) BP
EBITDA Margin 4.7% 3.9% 7.7% (380) BP
OTHER BUSINESS MATTERS
Time Warner On June 14, 2018, we completed our acquisition of
Time Warner, a leader in media and entertainment whose major
businesses encompass an array of some of the most respected media
brands. The deal combines Time Warner's vast library of content and
ability to create new premium content for audiences around the
world with our extensive customer relationships and distribution,
one of the world's largest pay-TV subscriber bases and scale in TV,
mobile and broadband distribution. We expect that the transaction
will advance our direct-to-consumer efforts and provide us with the
ability to develop innovative new content offerings. Total
consideration totaled $79,358, excludes Time Warner's net debt at
acquisition. On July 12, 2018, the U.S. Department of Justice (DOJ)
appealed the U.S. District Court's decision permitting the merger.
We believe the DOJ's appeal is without merit and we will continue
to vigorously defend our legal position in the appellate court,
which has scheduled the oral arguments for December 6, 2018.
Litigation Challenging DIRECTV's NFL SUNDAY TICKET More than two
dozen putative class actions were filed in the U.S. District Courts
for the Central District of California and the Southern District of
New York against DIRECTV and the National Football League (NFL).
These cases were brought by residential and commercial DIRECTV
subscribers that have purchased NFL SUNDAY TICKET. The plaintiffs
allege that (i) the 32 NFL teams have unlawfully agreed not to
compete with each other in the market for nationally televised NFL
football games and instead have "pooled" their broadcasts and
assigned to the NFL the exclusive right to market them; and (ii)
the NFL and DIRECTV have entered into an unlawful exclusive
distribution agreement that allows DIRECTV to charge
"supra-competitive" prices for the NFL SUNDAY TICKET package. The
complaints seek unspecified treble damages and attorneys' fees
along with injunctive relief. The first complaint, Abrahamian v.
National Football League, Inc., et al. , was served in June 2015.
In December 2015, the Judicial Panel on Multidistrict Litigation
transferred the cases outside the Central District of California to
that court for consolidation and management of pre-trial
proceedings. We vigorously dispute the allegations. In August 2016,
DIRECTV filed a motion to compel arbitration and the NFL defendants
filed a motion to dismiss the complaint. In June 2017, the court
granted the NFL defendants' motion to dismiss the complaint without
leave to amend, finding that: (1) the plaintiffs did not plead a
viable market; (2) the
plaintiffs did not plead facts supporting the contention that
the exclusive agreement between the NFL and DIRECTV harms
competition; (3) the claims failed to overcome the fact that the
NFL and its teams must cooperate to sell broadcasts; and (4) the
plaintiffs do not have standing to challenge the horizontal
agreement among the NFL and the teams. In light of the order
granting the motion to dismiss, the court denied DIRECTV's motion
to compel arbitration as moot. In July 2017, plaintiffs filed an
appeal in the U.S. Court of Appeals for the Ninth Circuit, which is
pending. The appeal has been fully briefed and oral argument is
scheduled for December 7, 2018.
59
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
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 money damages under Section 5
of the Federal Trade Commission Act and Section 4 of the Restore
Online Shoppers' Confidence Act. The FTC's allegations concern
DIRECTV's advertising, marketing and sale of programming packages.
The FTC alleges that DIRECTV did not adequately disclose all
relevant terms. We vigorously dispute these allegations. A bench
trial began in August 2017, and was suspended after the FTC rested
its case, so that the court could consider DIRECTV's motion for
judgment. The hearing on the motion occurred in October 2017, and
the judge took it under advisement. On August 16, 2018, the court
granted DIRECTV's motion in large part, substantially limiting
DIRECTV's possible liability and damages. Following this decision,
the FTC agreed to dismissal of its claims with prejudice.
Unlimited Data Plan Claims In October 2014, the FTC filed a
civil suit in the U.S. District Court for the Northern District of
California against AT&T Mobility, LLC seeking injunctive relief
and unspecified money damages under Section 5 of the Federal Trade
Commission Act. The FTC's allegations concern the application of
AT&T's Maximum Bit Rate (MBR) program to customers who enrolled
in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces
in certain instances the download speeds of a small portion of our
legacy Unlimited Data Plan customers each month after the customer
exceeds a designated amount of data during the customer's billing
cycle. MBR is an industry-standard practice that is designed to
affect only the most data-intensive applications (such as video
streaming). Texts, emails, tweets, social media posts, internet
browsing and many other applications are typically unaffected.
Contrary to the FTC's allegations, our MBR program is permitted by
our customer contracts, was fully disclosed in advance to our
Unlimited Data Plan customers, and was implemented to protect the
network for the benefit of all customers. We are engaged in
pre-trial discovery. In addition to the FTC case, several class
actions were filed challenging our MBR program. We secured
dismissals in each of these cases except Roberts v. AT&T
Mobility LLC, which is ongoing.
Labor Contracts A contract now covering approximately 8,600
traditional wireline employees in our Midwest region expired in
April 2018 and employees are working under the terms of the prior
contract, including benefits, while negotiations continue. In
addition, a contract now covering approximately 3,400 traditional
wireline employees in our legacy AT&T Corp. business also
expired in April 2018. Those employees are working under the terms
of their prior contract, including benefits, while negotiations
continue. Work stoppages or labor disruptions may occur in the
absence of new contracts or other agreements being reached.
COMPETITIVE AND REGULATORY ENVIRONMENT
Overview AT&T subsidiaries operating within the United
States are subject to federal and state regulatory authorities.
AT&T subsidiaries operating outside the United States are
subject to the jurisdiction of national and supranational
regulatory authorities in the markets where service is
provided.
In the Telecommunications Act of 1996 (Telecom Act), Congress
established a national policy framework intended to bring the
benefits of competition and investment in advanced
telecommunications facilities and services to all Americans by
opening all telecommunications markets to competition and reducing
or eliminating regulatory burdens that harm consumer welfare. Since
the Telecom Act was passed, the Federal Communications Commission
(FCC) and some state regulatory commissions have maintained or
expanded certain regulatory requirements that were imposed decades
ago on our traditional wireline subsidiaries when they operated as
legal monopolies. The new leadership at the FCC is charting a more
predictable and balanced regulatory course that will encourage
long-term investment and benefit consumers. Based on its public
statements, we expect the FCC to continue to eliminate antiquated,
unnecessary regulations and streamline processes. In addition, we
are pursuing, at both the state and federal levels, additional
legislative and regulatory measures to reduce regulatory burdens
that are no longer appropriate in a competitive telecommunications
market and that inhibit our ability to compete more effectively and
offer services wanted and needed by our customers, including
initiatives to transition services from traditional networks to all
IP-based networks. At the same time, we also seek to ensure that
legacy regulations are not further extended to broadband or
wireless services, which are subject to vigorous competition.
60
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
In April 2017, the FCC adopted an order that maintains light
touch pricing regulation of packet-based services, extends such
light touch pricing regulation to high-speed Time Division
Multiplex (TDM) transport services and to most of our TDM channel
termination services, based on a competitive market test for such
services. For those services that do not qualify for light touch
regulation, the order allows companies to offer volume and term
discounts, as well as contract tariffs. Several parties appealed
the FCC's decision. On August 28, 2018, the U.S. Court of Appeals
for the Eighth Circuit largely upheld the FCC decision, but found
that the FCC had not provided adequate notice of the possibility
that it might apply light touch regulation to all transport
services. The FCC has since remedied that notice deficiency and has
proposed to reinstate its light touch approach for transport
services.
In October 2016, a sharply divided FCC adopted new rules
governing the use of customer information by providers of broadband
internet access service. Those rules were more restrictive in
certain respects than those governing other participants in the
internet economy, including so-called "edge" providers such as
Google and Facebook. In April 2017, the President signed a
resolution passed by Congress repealing the new rules under the
Congressional Review Act, which prohibits the issuance of a new
rule that is substantially the same as a rule repealed under its
provisions, or the reissuance of the repealed rule, unless the new
or reissued rule is specifically authorized by a subsequent act of
Congress.
Privacy-related legislation has been considered in a number of
states since the Congressional Review Act was passed. The policy
environment is complex and rapidly evolving. Legislative and
regulatory action could result in increased costs of compliance,
claims against broadband internet access service providers and
others, and increased uncertainty in the value and availability of
data. On June 28, 2018, the State of California enacted
comprehensive privacy legislation that gives California consumers
the right to know what personal information is being collected
about them, to know whether and to whom it is sold or disclosed,
and to access and request deletion of this information. Subject to
certain exceptions, it also gives consumers the right to opt-out of
the sale of personal information. The law applies the same rules to
all companies that collect consumer information. The new law could
significantly affect how data markets operate and will impose
implementation costs and challenges. We will continue to support
congressional action to codify a set of standard consumer rules of
the internet including a federal privacy framework.
In February 2015, the FCC released an order classifying both
fixed and mobile consumer broadband internet access services as
telecommunications services, subject to Title II of the
Communications Act. The Order, which represented a departure from
longstanding bipartisan precedent, significantly expanded the FCC's
authority to regulate broadband internet access services, as well
as internet interconnection arrangements. AT&T and several
other parties appealed the FCC's order. In June 2016, a divided
panel of the District of Columbia Court of Appeals upheld the FCC's
rules by a 2-1 vote, and petitions for rehearing en banc were
denied in May 2017. Petitions for a writ of Certiorari at the U.S.
Supreme Court remain pending. Meanwhile, in December 2017, the FCC
reversed its 2015 decision by reclassifying fixed and mobile
consumer broadband services as information services and repealing
most of the rules that were adopted in 2015. In lieu of broad
conduct prohibitions, the order requires internet service providers
to disclose information about their network practices and terms of
service, including whether they block or throttle internet traffic
or offer paid prioritization. Several parties, including several
state Attorneys General, net neutrality advocacy groups and others,
have
appealed the FCC's December 2017 decision. Those appeals, which
initially were consolidated in the U.S. Court of Appeals for the
Ninth Circuit, were transferred at the request of the parties to
the D.C. Circuit. Although the FCC order expressly preempted
inconsistent state or local measures, a number of states are
considering or have adopted legislation that would reimpose the
very rules the FCC repealed, and in some cases, establish
additional requirements that go beyond the FCC's February 2015
order. Additionally, some state governors have issued executive
orders that effectively re-impose the repealed requirements. Suits
have recently been filed concerning laws in California and Vermont,
and other lawsuits are possible. We will continue to support
congressional action to codify a set of standard consumer rules for
the internet.
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, and
some of Warner Media's businesses are also subject to obligations
under the Communications Act and related FCC regulations. In
addition, states representing a majority of our local service
access lines have adopted legislation that enables us to provide
IP-based service through a single statewide or state-approved
franchise (as opposed to the need to acquire hundreds or even
thousands of municipal-approved franchises) to offer a competitive
video product. We also are supporting efforts to update and improve
regulatory treatment for our services. Regulatory reform and
passage of legislation is uncertain and depends on many
factors.
61
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
WarnerMedia creates, owns and distributes intellectual property,
including copyrights, trademarks and licenses of intellectual
property. To protect its intellectual property, WarnerMedia relies
on a combination of laws and license agreements. Outside the U.S.,
laws and regulations relating to intellectual property protection
and the effective enforcement of these laws and regulations vary
greatly from country to country. The European Union Commission is
pursuing legislative and regulatory initiatives that could impair
Warner Bros.' current country-by-country licensing approach in the
European Union. Piracy, particularly of digital content, continues
to threaten WarnerMedia's revenues from products and services, and
WarnerMedia works to limit that threat through a combination of
approaches, including technological and legislative solutions.
Outside the U.S., various laws and regulations, as well as trade
agreements with the U.S., also apply to the distribution or
licensing of feature films for exhibition in theaters and on
broadcast and cable networks. For example, in certain countries,
including China, laws and regulations limit the number of foreign
films exhibited in such countries in a calendar year.
On September 27, 2018, the FCC released an order to ensure that
state and local governments do not erect unreasonable barriers to
5G technology deployment. Among other things, the order clarifies
that state and local governments may not charge excessive fees or
impose unreasonable aesthetic standards for access to or placement
of small wireless facilities in rights of way. It also established
time limits for consideration of applications for placement of
small wireless facilities.
We provide wireless services in robustly competitive markets,
but are subject to substantial governmental regulation. Wireless
communications providers must obtain licenses from the FCC to
provide communications services at specified spectrum frequencies
within specified geographic areas and must comply with the FCC
rules and policies governing the use of the spectrum. While
wireless communications providers' prices and offerings are
generally not subject to state or local regulation, states
sometimes attempt to regulate or legislate various aspects of
wireless services, such as in the areas of consumer protection and
the deployment of cell sites and equipment. The anticipated
industry-wide deployment of 5G technology, which is needed to
satisfy extensive demand for video and internet access, will
involve significant deployment of "small cell" equipment and
therefore increase the need for local permitting processes that
allow for the placement of small cell equipment on reasonable
timelines and terms. Federal regulations also can delay and impede
broadband services, including small cell equipment. In March 2018,
the FCC adopted an order to streamline the wireless infrastructure
review process in order to facilitate deployment of next-generation
wireless facilities. Among other actions, the order excludes most
small cell facilities from federal review under the National
Environmental Policy Act and the National Historic Preservation
Act, while clarifying and streamlining the process for tribal
participation in historic preservation reviews where such review is
still required. In addition, to date, 21 states have adopted
legislation to facilitate small cell deployment.
Also facilitating the deployment of next-generation wireless
facilities, in May 2014, the FCC issued an order revising its
policies governing mobile spectrum holdings. The FCC rejected the
imposition of caps on the amount of spectrum any carrier could
acquire, retaining its case-by-case review policy. Moreover, it
increased the amount of spectrum that could be acquired before
exceeding an aggregation "screen" that would automatically trigger
closer scrutiny of a proposed transaction. On the other hand, it
indicated that it will separately consider an acquisition of "low
band" spectrum that exceeds one-third of the available low band
spectrum as presumptively harmful to competition. The spectrum
screen (including the low band screen) recently increased by 23
MHz. On balance, the order and the spectrum screen should allow
AT&T to obtain additional spectrum to meet our customers'
needs.
62
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
As the wireless industry has matured, future wireless growth
will increasingly depend on our ability to offer innovative
services, plans and devices and to provide these services in
bundled product offerings to best utilize a wireless network that
has sufficient spectrum and capacity to support these innovations
on as broad a geographic basis as possible. We continue to invest
significant capital in expanding our network capacity, as well as
to secure and utilize spectrum that meets our long-term needs. To
that end, we have:
-- Submitted winning bids for 251 Advanced Wireless Services (AWS) spectrum licenses for a near-nationwide contiguous block of high-quality spectrum in the AWS-3 Auction.
-- Redeployed spectrum previously used for basic 2G services to
support more advanced mobile internet services on our 3G and 4G
networks.
-- Secured the First Responder Network Authority (FirstNet)
contract, which provides us with access to 20 MHz of nationwide low
band spectrum.
-- Invested in 5G and millimeter-wave technologies with our
acquisition of Fiber-Tower Corporation, which holds significant
amounts of spectrum in the millimeter wave bands (39 GHz) that the
FCC recently reallocated for mobile broadband services. These bands
will help to accelerate our entry into 5G services.
LIQUIDITY AND CAPITAL RESOURCES
With the completion of the Time Warner transaction, we had
$8,657 in cash and cash equivalents available at September 30,
2018. Cash and cash equivalents included cash of $3,083 and money
market funds and other cash equivalents of $5,574. Approximately
$1,810 of our cash and cash equivalents were held by our foreign
entities in accounts predominantly outside of the U.S. and may be
subject to restrictions on repatriation.
Cash and cash equivalents decreased $41,841 since December 31,
2017. In the first nine months of 2018, cash inflows were primarily
provided by the cash receipts from operations, including cash from
our sale and transfer of certain wireless equipment installment
receivables and other customer receivables to third parties,
issuance of commercial paper and long-term debt and collateral
received from banks and other participants in our derivative
arrangements. These inflows were offset by cash used to meet the
needs of the business, including, but not limited to, the
acquisition of Time Warner and AppNexus, payment of operating
expenses, funding capital expenditures, debt repayments, and
dividends to stockholders.
We actively manage the timing of our vendor payments to optimize
the use of our cash. Among other things, we seek to have vendor
payments made on 90-day or greater terms, while providing vendors
with access to bank facilities that permit earlier payments at the
vendors' cost. In addition, for payments to a key supplier, we have
arrangements that allow us to extend payment terms between
approximately 40 to 60 days at an additional cost to us. We believe
these arrangements provide benefits to us relative to alternative
financing arrangements. During the third quarter of 2018 and for
the first nine months then ended, the net impact of these cash
management activities on our cash flows provided by operating
activities was not material.
On December 22, 2017, federal tax reform was enacted into law.
Beginning with 2018, the Act reduces the U.S. federal corporate tax
rate from 35% to 21% and permits immediate deductions for certain
new assets. As a result, cash taxes will be significantly lower
than they would have been in 2018 and beyond without federal tax
reform.
Cash Provided by or Used in Operating Activities
During the first nine months of 2018, cash provided by operating
activities was $31,522, compared to $28,473 for the first nine
months of 2017. Higher operating cash flows in 2018 were primarily
due to net tax refunds and contributions from WarnerMedia, offset
by higher interest payments and acquisition-related costs.
Cash Used in or Provided by Investing Activities
For the first nine months of 2018, cash used in investing
activities totaled $59,987, and consisted primarily of $43,116 for
acquisition costs related to Time Warner and other acquisitions and
$16,695 for capital expenditures, excluding interest during
construction.
The majority of our capital expenditures are spent on our
networks, including product development and related support
systems. Capital expenditures, excluding interest during
construction, increased $939 in the first nine months. During 2018,
approximately $1,400 of assets related to FirstNet build have been
placed into service with a net cash impact of $660. Total
reimbursements from the government for FirstNet during the first
nine months of 2018 were $336. We expect reimbursement of
approximately $1,300 during the fourth quarter of 2018 as the
government has approved certain network build milestones.
63
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
In connection with capital improvements, we negotiate favorable
payment terms (referred to as vendor financing), which are excluded
from our investing activities and reported as financing activities.
We enter into these supplier arrangements when the terms provide
benefits to us relative to alternative financing arrangements. For
the first nine months of 2018, vendor financing payments related to
capital investments were approximately $349. During the first nine
months, we entered into $872 of new vendor financing commitments,
with $1,419 of vendor financing payables included in on our
September 30, 2018 c onsolidated balance sheet, of which $910 are
due within one year and the remainder are due between two and five
years.
The amount of capital expenditures is influenced by demand for
services and products, capacity needs and network enhancements. We
are also focused on ensuring DIRECTV merger commitments are met. As
of September 30, 2018, we market our fiber-to-the-premises network
to 10.1 million customer locations and are on track to meet our FCC
commitment of 12.5 million locations by mid-2019.
In 2018, we expect capital investment, which consists of capital
expenditures plus vendor financing payments, of approximately
$24,000, $22,000 net of expected FirstNet reimbursements and vendor
financing.
Cash Provided by or Used in Financing Activities
For the first nine months of 2018, cash used in financing
activities totaled $13,679 and included net proceeds of $38,325,
primarily resulting from drawing $20,925 on our Term Loan Credit
Agreements in connection with our acquisition of Time Warner. The
remaining amount consisted primarily of the following
issuances:
-- April issuance of approximately $2,000 of notes issued by our
subsidiary Vrio Corp. (Vrio). See discussion below.
-- June issuance of $1,500 of floating rate global notes due 2021.
-- August issuance of $825 of 5.625% global notes due 2067.
-- August issuance of EUR2,250 ($2,637 U.S. dollar equivalent)
floating rate global notes due 2020.
-- August issuance of $3,750 of floating rate global notes due 2024.
-- August issuance of CAD$1,250 of 4.000% global notes due 2025
and CAD$750 of 5.100% global notes due 2048 (together, equivalent
to $1,536 when issued).
-- September issuance of GBP750 global notes due 2026 (equivalent to $972 when issued).
-- September issuance of A$475 of floating rate notes due 2023,
A$150 of 3.450% notes due 2023, A$300 of 4.100% notes due 2026 and
A$400 of 4.600% notes due 2028 (together, equivalent to $955 when
issued).
During the first nine months of 2018, we redeemed $43,579 of
long-term debt. Approximately $21,236 were notes subject to
mandatory redemption if we did not complete our acquisition of Time
Warner by April 22, 2018. The remaining amount primarily consisted
of the following redemptions:
-- $2,500 of 5.500% notes due 2018.
-- $750 of 1.750% notes due 2018.
-- $300 of 6.450% notes due 2018.
-- $1,000 of 5.600% notes due 2018.
-- $2,000 repayment of amounts outstanding under Warner Media, LLC's Term Credit Agreement.
-- $600 of 6.875% historic TW Inc. notes due 2018.
-- $1,000 of notes issued by Vrio.
-- $10,000 repayment of amounts outstanding under our Term Loan Agreement.
-- $2,500 repayment of amounts outstanding under our June 2018 Term Loan.
-- $57 of 5.200% notes due 2020.
-- $58 of 5.875% notes due 2019.
-- $1,400 of 4.875% Warner Media, LLC notes due 2020.
64
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Our weighted average interest rate of our entire long-term debt
portfolio, including the impact of derivatives, was approximately
4.4% as of September 30, 2018 and December 31, 2017. We had
$177,718 of total notes and debentures outstanding at September 30,
2018, which included Euro, British pound sterling, Swiss franc,
Brazilian real, Mexican peso, Canadian dollar and Australian dollar
denominated debt that totaled approximately $42,083.
As a result of the Time Warner acquisition, we acquired debt
with a fair value of $22,865 at the time of acquisition, of which
$17,121 at face value remained on our balance sheet as of September
30, 2018. The face value of the remaining debt acquired is
summarized primarily as follows:
-- $774 maturing between 2018 and 2019 with an interest rate ranging from 1.250% to 2.100%.
-- $5,487 maturing between 2020 and 2024 with an interest rate
ranging from 1.950% to 9.150%.
-- $5,898 maturing between 2025 and 2034 with an interest rate
ranging from 2.950% to 7.700%.
-- $4,962 maturing between 2035 and 2045 with an interest rate
ranging from 4.650% to 8.300%.
At September 30, 2018, we had $14,905 of debt maturing within
one year, including $3,787 of commercial paper borrowing and
$10,993 of 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.
-- An accreting zero-coupon note that may be redeemed each May
until maturity in 2022. In May 2017, $1 was redeemed by the holder
for $1. If the remainder of the zero-coupon note (issued for
principal of $500 in 2007 and partially exchanged in the 2017 debt
exchange offers) is held to maturity, the redemption amount will be
$592.
Vrio, a consolidated holding company for our Latin American
digital entertainment services units, DIRECTV Latin America and SKY
Brasil, subsidiaries of Vrio, entered into the following long-term
debt issuances:
-- April 2018 borrowing of approximately $1,000 of debt
denominated in Brazilian reais that matures in 2021. The current
floating rate for the facility is based upon the Brazil interbank
deposit rate annualized (DI Rate), plus 100 basis points. This
borrowing is unhedged and remained outstanding at September 30,
2018.
At September 30, 2018, we had approximately 376 million shares
remaining from share repurchase authorizations approved by the
Board of Directors in 2013 and 2014. During the first nine months
of 2018, we repurchased approximately 13 million shares under these
authorizations.
We paid dividends of $9,775 during the first nine months of
2018, compared with $9,030 for the first nine months of 2017,
primarily reflecting the increase in the number of shares
outstanding related to our acquisition of Time Warner as well as an
increase in our quarterly dividend approved by our Board of
Directors in December 2017. Dividends declared by our Board of
Directors totaled $1.50 per share in the first nine months of 2018
and $1.47 per share for the first nine months of 2017. 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.
Credit Facilities
The following summary of our various credit and loan agreements
does not purport to be complete and is qualified in its entirety by
reference to each agreement filed as exhibits to our Annual Report
on Form 10-K.
We use credit facilities as a tool in managing our liquidity
status. At September 30, 2018, we had no amounts outstanding on our
five-year $12,000 revolving credit agreement.
In September 2017, we entered into a $2,250 syndicated term loan
credit agreement containing (i) a three-year $750 term loan
facility, (ii) a four-year $750 term loan facility and (iii) a
five-year $750 term loan facility , with certain investment and
commercial banks and The Bank of Nova Scotia, as administrative
agent. We drew on all three facilities during the first quarter of
2018, with $2,250 in advances outstanding as of September 30,
2018.
65
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
In anticipation of the Time Warner acquisition, we entered into
a $16,175 term loan agreement ("Term Loan") containing (i) a 2.5
year $8,087.5 facility (the "Tranche A Facility") and (ii) a 4.5
year $8,087.5 facility (the "Tranche B Facility") with a commitment
termination date of December 31, 2018. We drew on the entire Term
Loan for the acquisition during the second quarter of 2018. On
September 20, 2018, we repaid $5,000 of Tranche A loans and $5,000
of Tranche B loans, with $3,088 Tranche A loans and $3,087 Tranche
B loans outstanding as of September 30, 2018.
In June 2018, we entered into an additional $2,500 Term Loan
Credit Agreement ("June 2018 Term Loan") to finance a portion of
the cash consideration of the Time Warner acquisition. We drew on
the agreement on June 14, 2018. In August 2018, we prepaid in full
all indebtedness and the June 2018 Term Loan was terminated in its
entirety.
We also utilize other external financing sources, which include
various credit arrangements supported by government agencies to
support network equipment purchases, as well as a commercial paper
program.
Each of our credit and loan agreements contains covenants that
are customary for an issuer with an investment grade senior debt
credit rating as well as a net debt-to-EBITDA financial ratio
covenant requiring AT&T to maintain, as of the last day of each
fiscal quarter, a ratio of not more than 3.5-to-1. As of September
30, 2018, we were in compliance with the covenants for our credit
facilities.
Collateral Arrangements
During the first nine months of 2018, we received $116 of
additional cash collateral, on a net basis, from banks and other
participants in our derivative arrangements. Cash postings under
these arrangements vary with changes in credit ratings and netting
agreements. (See Note 7)
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 September 30, 2018, our debt ratio was 49.8%,
compared to 56.4% at September 30, 2017 and 53.6% at December 31,
2017. Our net debt ratio was 47.4% at September 30, 2018, compared
to 39.7% at September 30, 2017 and 37.2% at December 31, 2017. The
debt ratio is affected by the same factors that affect total
capital, and reflects our recent debt issuances and repayments.
During the first nine months of 2018, we received $6,904 from
the monetization of various assets, primarily the sale of certain
equipment installment receivables. We plan to continue to explore
similar opportunities.
In 2013, we made a voluntary contribution of a preferred equity
interest in AT&T Mobility II LLC (Mobility), the holding
company for our U.S. wireless operations, to the trust used to pay
benefits under our qualified pension plans. The preferred equity
interest had a value of $8,803 as of September 30, 2018, and $9,155
as of December 31, 2017, does not have any voting rights and has a
liquidation value of $8,000. The trust is entitled to receive
cumulative cash distributions of $560 per annum, which are
distributed quarterly in equal amounts upon declaration. We
distributed $420 to the trust during the first nine months of 2018.
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.
66
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURES
We believe the following measures are relevant and useful
information to investors as it is used by management as a method of
comparing performance with that of many of our competitors. These
supplemental measures should be considered in addition to, but not
as a substitute of, our consolidated and segment financial
information.
Supplemental Operational Measures
We provide a supplemental discussion of our Business Solutions
operations that is calculated by combining our Mobility and
Business Wireline operating units, and then adjusting to remove
non-business operations. The following table presents a
reconciliation of our supplemental Business Solutions results.
Three Months Ended
September 30, 2018 September 30, 2017
Business Adjustments Business Business Adjustments Business
Mobility Wireline 1 Solutions Mobility Wireline 1 Solutions
Operating
Revenues
Wireless
service $ 13,989 $ - $ (12,112) $ 1,877 $ 14,475 $ - $ (12,452) $ 2,023
Fixed
strategic
services - 3,059 - 3,059 - 3,018 - 3,018
Legacy voice
and data
services - 2,615 - 2,615 - 3,343 - 3,343
Other service
and
equipment - 1,029 - 1,029 - 917 - 917
Wireless
equipment 3,949 - (3,359) 590 2,895 - (2,555) 340
Total Operating
Revenues 17,938 6,703 (15,471) 9,170 17,370 7,278 (15,007) 9,641
Operating
Expenses
Operations
and support 10,255 4,030 (8,687) 5,598 10,029 4,635 (8,568) 6,096
EBITDA 7,683 2,673 (6,784) 3,572 7,341 2,643 (6,439) 3,545
Depreciation
and
amortization 2,079 1,197 (1,777) 1,499 2,008 1,189 (1,731) 1,466
Total Operating
Expense 12,334 5,227 (10,464) 7,097 12,037 5,824 (10,299) 7,562
Operating
Income 5,604 1,476 (5,007) 2,073 5,333 1,454 (4,708) 2,079
Equity in net
income of
affiliates (1) (1) 1 (1) - 1 (1) -
Operating
Income $ 5,603 $ 1,475 $ (5,006) $ 2,072 $ 5,333 $ 1,455 $ (4,709) $ 2,079
1 Non-business wireless reported in the Communications segment under the Mobility
business unit.
67
AT&T INC.
SEPTEMBER 30, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per
share and per subscriber amounts
Nine Months Ended
September 30, 2018 September 30, 2017
Business Adjustments Business Business Adjustments Business
Mobility Wireline 1 Solutions Mobility Wireline 1 Solutions
Operating
Revenues
Wireless
service $ 41,074 $ - $ (35,577) $ 5,497 $ 43,414 $ - $ (37,384) $ 6,030
Fixed
strategic
services - 9,168 - 9,168 - 8,880 - 8,880
Legacy voice
and data
services - 8,176 - 8,176 - 10,314 - 10,314
Other service
and
equipment - 2,756 - 2,756 - 2,717 - 2,717
Wireless
equipment 11,501 - (9,749) 1,752 8,508 - (7,520) 988
Total Operating
Revenues 52,575 20,100 (45,326) 27,349 51,922 21,911 (44,904) 28,929
Operating
Expenses
Operations
and support 30,020 12,084 (25,296) 16,808 30,005 13,906 (25,764) 18,147
EBITDA 22,555 8,016 (20,030) 10,541 21,917 8,005 (19,140) 10,782
Depreciation
and
amortization 6,287 3,547 (5,390) 4,444 5,988 3,583 (5,162) 4,409
Total Operating
Expense 36,307 15,631 (30,686) 21,252 35,993 17,489 (30,926) 22,556
Operating
Income 16,268 4,469 (14,640) 6,097 15,929 4,422 (13,978) 6,373
Equity in Net
Income of
Affiliates (1) (1) 1 (1) - - - -
Operating
Income $ 16,267 $ 4,468 $ (14,639) $ 6,096 $ 15,929 $ 4,422 $ (13,978) $ 6,373
1 Non-business wireless reported in the Communications segment under the Mobility
business unit.
68
AT&T INC.
SEPTEMBER 30, 2018
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Dollars in millions except per share amounts
At September 30, 2018, we had interest rate swaps with a
notional value of $7,333 and a fair value of $(90).
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 $42,192 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 $(284) at September 30, 2018.
We have foreign exchange contracts with a U.S. dollar notional
value of $2,386 to provide currency at a fixed rate to hedge a
portion of the exchange risk involved in foreign
currency-denominated transactions. These foreign exchange contracts
include fair value hedges, cash flow hedges and economic
(nonqualifying) hedges with a total net fair value of $49 at
September 30, 2018.
We have designated EUR700 million aggregate principal amount of
debt as a hedge of the variability of some of the Euro-denominated
net investments of WarnerMedia. The gain or loss on the debt that
is designated as, and is effective as, an economic hedge of the net
investment in a foreign operation is recorded as a currency
translation adjustment within accumulated other comprehensive
income, net on the consolidated balance sheet.
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 September 30, 2018. 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 September 30, 2018.
69
AT&T INC.
SEPTEMBER 30, 2018
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this report contains forward-looking
statements that are subject to risks and uncertainties, and actual
results could differ materially. Many of these factors are
discussed in more detail in the "Risk Factors" section. We claim
the protection of the safe harbor for forward-looking statements
provided by the Private Securities Litigation Reform Act of
1995.
The following factors could cause our future results to differ
materially from those expressed in the forward-looking
statements:
-- Adverse economic and/or capital access changes in the markets
served by us or in countries in which we have significant
investments, including the impact on customer demand and our
ability and our suppliers' ability to access financial markets at
favorable rates and terms.
-- Changes in available technology and the effects of such
changes, including product substitutions and deployment costs.
-- Increases in our benefit plans' costs, including increases
due to adverse changes in the United States and foreign securities
markets, resulting in worse-than-assumed investment returns and
discount rates; adverse changes in mortality assumptions; adverse
medical cost trends; and unfavorable or delayed implementation or
repeal of healthcare legislation, regulations or related court
decisions.
-- The final outcome of FCC and other federal, state or foreign
government agency proceedings (including judicial review, if any,
of such proceedings) involving issues that are important to our
business, including, without limitation, special access and
business data services; intercarrier compensation; interconnection
obligations; pending Notices of Apparent Liability; the transition
from legacy technologies to IP-based infrastructure, including the
withdrawal of legacy TDM-based services; universal service;
broadband deployment; wireless equipment siting regulations; E911
services; competition policy; privacy; net neutrality; unbundled
network elements and other wholesale obligations; multi-channel
video programming distributor services and equipment; availability
of new spectrum, on fair and balanced terms; and wireless and
satellite license awards and renewals.
-- The final outcome of state and federal legislative efforts
involving issues that are important to our business, including
deregulation of IP-based services, relief from Carrier of Last
Resort obligations and elimination of state commission review of
the withdrawal of services.
-- Enactment of additional state, local, federal and/or foreign
regulatory and tax laws and regulations, or changes to existing
standards and actions by tax agencies and judicial authorities
including the resolution of disputes with any taxing jurisdictions,
pertaining to our subsidiaries and foreign investments, including
laws and regulations that reduce our incentive to invest in our
networks, resulting in lower revenue growth and/or higher operating
costs.
-- Potential changes to the electromagnetic spectrum currently
used for broadcast television and satellite distribution being
considered by the FCC could negatively impact WarnerMedia's ability
to deliver linear network feeds of its domestic cable networks to
its affiliates, and in some cases, WarnerMedia's ability to produce
high-value news and entertainment programming on location.
-- U.S. and foreign laws and regulations regarding intellectual
property rights protection and privacy, personal data protection
and user consent are complex and rapidly evolving and could result
in impact to our business plans, increased costs, or claims against
us that may harm our reputation.
-- Our ability to absorb revenue losses caused by increasing
competition, including offerings that use alternative technologies
or delivery methods (e.g., cable, wireless, VoIP and over-the-top
video service), subscriber reluctance to purchase new wireless
handsets, and our ability to maintain capital expenditures.
-- The extent of competition including from governmental
networks and other providers and the resulting pressure on customer
totals and segment operating margins.
-- Our ability to develop attractive and profitable
product/service offerings to offset increasing competition and
increasing fragmentation of customer viewing habits.
-- 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
non-regulation of comparable alternative technologies (e.g., VoIP
and data usage).
-- The continued development and delivery of attractive and
profitable video and broadband offerings; the extent to which
regulatory and build-out requirements apply to our offerings; our
ability to match speeds offered by our competitors 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 video, wireless service and devices and
device financing plans.
70
AT&T INC.
SEPTEMBER 30, 2018
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
-- Our ability to generate advertising revenue from attractive
video content, especially from WarnerMedia, in the face of
unpredictable and rapidly evolving public viewing habits.
-- The availability and cost of additional wireless spectrum and
regulations and conditions relating to spectrum use, licensing,
obtaining additional spectrum, technical standards and deployment
and usage, including network management rules.
-- Our ability to manage growth in wireless video and data
services, including network quality and acquisition of adequate
spectrum at reasonable costs and terms.
-- The outcome of pending, threatened or potential litigation
(which includes arbitrations), including, without limitation,
patent and product safety claims by or against third parties.
-- The impact from major equipment failures on our networks,
including satellites operated by DIRECTV; the effect of security
breaches related to the network or customer information; our
inability to obtain handsets, equipment/software or have handsets,
equipment/software serviced in a timely and cost-effective manner
from suppliers; and in the case of satellites launched, timely
provisioning of services from vendors; or severe weather
conditions, natural disasters, pandemics, energy shortages, wars or
terrorist attacks.
-- The issuance by the Financial Accounting Standards Board or
other accounting oversight bodies of new accounting standards or
changes to existing standards.
-- The U.S. Department of Justice prevailing on its appeal of
the court decision permitting our acquisition of Time Warner
Inc.
-- Our ability to successfully integrate our Warner Media
operations, including the ability to manage various businesses in
widely dispersed business locations and with decentralized
management.
-- Our ability to take advantage of the desire of advertisers to
change traditional video advertising models.
-- Our ability to adequately fund our wireless operations,
including payment for additional spectrum, network upgrades and
technological advancements.
-- Our increased exposure to foreign economies, including
foreign exchange fluctuations as well as regulatory and political
uncertainty.
-- Changes in our corporate strategies, such as changing
network-related requirements or acquisitions and dispositions,
which may require significant amounts of cash or stock, to respond
to competition and regulatory, legislative and technological
developments.
-- The uncertainty surrounding further congressional action to
address spending reductions, which may result in a significant
decrease in government spending and reluctance of businesses and
consumers to spend in general.
Readers are cautioned that other factors discussed in this
report, although not enumerated here, also could materially affect
our future earnings.
71
AT&T INC.
SEPTEMBER 30, 2018
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.
Our ability to successfully integrate our June 2018 acquisition
of Time Warner, including the risk that the costs savings and
revenue synergies from the acquisition may not be fully realized or
may take longer to realize than expected; our costs in financing
the acquisition and potential adverse effects on our share price
and dividend amount due to the issuance of additional shares; the
addition of Time Warner's existing debt to our balance sheet;
disruption from the acquisition making it more difficult to
maintain relationships with customers, employees or suppliers; and
competition and its effect on pricing, spending, third-party
relationships and revenues.
We completed our acquisition of Time Warner in June 2018. We
believe that the acquisition will give us the scale, resources and
ability to deploy video content more efficiently to more customers
than otherwise possible and to provide very attractive integrated
offerings of video, broadband and wireless services; compete more
effectively against other video providers as well as other
technology, media and communications companies; create premium
advertising opportunities, and produce cost and revenue synergies.
We must integrate a large number of operational and administrative
systems, which may involve significant management time and create
uncertainty for employees, customers and suppliers. The integration
process may also result in significant expenses and charges against
earnings, both cash and noncash. This acquisition also has
increased the amount of debt on our balance sheet leading to
additional interest expense and, due to the additional shares
issued, will result in additional cash being required for any
dividends declared. Both of these factors could put pressure on our
financial flexibility to continue capital investments, develop new
services and declare future dividends. In addition, events outside
our control, including changes in regulation and laws as well as
economic trends, could adversely affect our ability to realize the
expected benefits from this acquisition. Following the closing, the
U.S. Department of Justice filed an appeal of the court decision
allowing us to complete the acquisition; we believe the lower court
decision will be upheld.
72
AT&T INC.
SEPTEMBER 30, 2018
PART II - OTHER INFORMATION - CONTINUED
Dollars in millions except per share amounts
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) A summary of our repurchases of common stock during the third quarter of
2018 is as follows:
(a) (b) (c) (d)
Maximum Number
(or Approximate
Total Number of Dollar Value)
Shares (or Units) of Shares (or
Total Number Purchased as Part Units) That May
of Shares (or Average Price of Publicly Announced Yet Be Purchased
Units) Purchased Paid Per Share Plans or Programs Under The Plans
Period 1, 2, 3 (or Unit) 1 or Programs
July 1, 2018 -
July 31, 2018 300,973 $ 31.66 - 375,662,000
August 1, 2018 -
August 31, 2018 49,008 32.11 - 375,662,000
September 1, 2018
-
September 30, 2018 684,429 33.02 - 375,662,000
Total 1,034,410 $ 31.90 -
In March 2014, our Board of Directors approved an additional authorization
1 to repurchase up to 300 million shares of our common
stock. In March 2013, our Board of Directors authorized the repurchase of
up to an additional 300 million shares of our common stock.
The authorizations have no expiration date.
Of the shares repurchased, 403,258 shares were acquired through the withholding
2 of taxes on the vesting of restricted stock
and performance shares or on the exercise price of options.
Of the shares repurchased, 631,152 shares were acquired through reimbursements
3 from AT&T maintained Voluntary Employee Benefit
Association (VEBA) trusts.
Item 6. Exhibits
The following exhibits are filed or incorporated by reference as a part of this
report:
Exhibit
Number Exhibit Description
10-a Stock Purchase and Deferral Plan
10-b Cash Deferral Plan
10-c Short Term 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
73
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.
November 2, 2018 /s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
74
Exhibit 10-a
AT&T INC.
STOCK PURCHASE AND DEFERRAL PLAN
Adopted November 19, 2004
As amended through September 27, 2018
Article 1 - Statement of Purpose
The purpose of the Stock Purchase and Deferral Plan ("Plan") is
to increase stock ownership by, and to provide savings
opportunities to, a select group of management employees of
AT&T Inc. ("AT&T") and its Subsidiaries.
Article 2 - Definitions
For the purpose of this Plan, the following words and phrases
shall have the meanings indicated, unless the context indicates
otherwise:
Annual Bonus . The award designated the "Annual Bonus" by
AT&T (including but not limited to an award that may be paid in
more frequent installments than annually), together with any
individual discretionary award made in connection therewith, or
comparable awards, if any, determined by AT&T to be used in
lieu of these awards.
Base Compensation. The following types of cash-based
compensation paid by an Employer (but not including payments made
by a non-Employer, such as state disability payments), before
reduction due to any contribution pursuant to this Plan or
reduction pursuant to any deferral plan of an Employer, including
but not limited to a plan that includes a qualified cash or
deferral arrangement under Section 401(k) of the Code:
(a) base salary;
(b) lump sum payments in lieu of a base salary increase; and
(c) Annual Bonus.
Payments by an Employer under a disability plan made in lieu of
any compensation described above shall be deemed to be a part of
the respective form of compensation it replaces for purposes of
this definition. Base Compensation does not include zone allowances
or any other geographical differential and shall not include
payments made in lieu of unused vacation or other paid days off,
and such payments shall not be contributed to this Plan.
Determinations by AT&T (the Committee with respect to
Officer Level Employees) of the items that make up Base
Compensation shall be final. The Committee may, from time to time,
add or subtract types of compensation to or from the definition of
"Base Compensation" provided, however, any such addition or
subtraction shall be effective only with respect to the next period
in which a Participant may make an election to establish a Share
Deferral Account. Base Compensation that was payable in a prior
Plan Year but paid in a later Plan Year shall not be used to
determine Employee Contributions or Matching Contributions in such
later Plan Year.
1
Business Day. Any day during regular business hours that AT&T is open for business.
Change in Control. With respect to AT&T's direct and
indirect ownership of an Employer, a "Change in the effective
control of a Corporation," as defined in Treasury Regulation
Section 1.409A-3(i)(5)(vi)(A)(1), regardless of whether the
Employer is a corporation or non corporate entity as permitted by
the regulation, and using "50 percent" in lieu of "30 percent" in
such regulation. A Change in Control will not apply to AT&T
itself.
Chief Executive Officer. The Chief Executive Officer of AT&T Inc.
Code. References to the Code shall be to provisions of the
Internal Revenue Code of 1986, as amended, including regulations
promulgated thereunder and successor provisions. Similarly,
references to regulations shall include amendments and successor
provisions.
Committee. The Human Resources Committee of the Board of Directors of AT&T Inc.
Disability. Absence of an Employee from work with an Employer
under the relevant Employer's disability plan.
Eligible Employee. An Employee who:
(a) is a full or part time, salaried Employee of AT&T or an
Employer in which AT&T has a direct or indirect 100% ownership
interest and who is on active duty or Leave of Absence (but only
while such Employee is deemed by the Employer to be an Employee of
such Employer);
(b) is, as determined by AT&T, a member of Employer's
"select group of management or highly compensated employees" within
the meaning of the Employee Retirement Income Security Act of 1974,
as amended, and regulations thereunder ("ERISA"), which is deemed
to include each Officer Level Employee; and
(c) has an employment status which has been approved by AT&T
to be eligible to participate in this Plan or is an Officer Level
Employee.
Notwithstanding the foregoing, AT&T (the Committee with
respect to Officer Level Employees) may, from time to time, exclude
any Employee or group of Employees from being deemed an "Eligible
Employee" under this Plan.
In the event a court or other governmental authority determines
that an individual was improperly excluded from the class of
persons who would be permitted to make Employee Contributions
during a particular time for any reason, that individual shall not
be permitted to make such contributions for purposes of the Plan
for the period of time prior to such determination.
Employee. Any person employed by an Employer and paid on an
Employer's payroll system, excluding persons hired for a fixed
maximum term and excluding persons who are neither citizens nor
permanent residents of the United States, all as determined by
AT&T. For purposes of this Plan, a person on Leave of Absence
who otherwise would be an Employee shall be deemed to be an
Employee.
2
Employee Contributions. Amounts credited to a Share Deferral
Account pursuant to Section 4.1 (Election to Make Contributions) of
the Plan.
Employer. AT&T Inc. or any of its Subsidiaries.
Exercise Price. The price per share of Stock purchasable under an Option.
Fair Market Value or FMV. In valuing Stock or any other item
subject to valuation under this Plan, the Committee may use such
index or measurement as the Committee may reasonably determine from
time to time, and such index or measurement shall be the FMV of
such Stock or other item, provided that for purposes of determining
the Exercise Price of Stock Options, the Committee shall use a
value consistent with the requirements of Section 409A. In the
absence of such action by the Committee, FMV means, with respect to
Stock, the closing price on the New York Stock Exchange ("NYSE") of
the Stock on the relevant date, or if on such date the Stock is not
traded on the NYSE, then the closing price on the immediately
preceding date such Stock is so traded.
Leave of Absence. Where a person is absent from employment with
an Employer on a leave of absence, military leave, sick leave, or
Disability where the leave is given in order to prevent a break in
the continuity of term of employment, and permission for such leave
is granted (and not revoked) in conformity with the rules of the
Employer that employs the individual, as adopted from time to time,
and the Employee is reasonably expected to return to service.
Except as set forth below, the leave shall not exceed six (6)
months for purposes of this Plan, and the Employee shall Terminate
Employment upon termination of such leave if the Employee does not
return to work prior to or upon expiration of such six (6) month
period, unless the individual retains a right to reemployment under
law or by contract. A twenty-nine (29) month limitation shall apply
in lieu of such six (6) month limitation if the leave is due to the
Employee being "disabled" (within the meaning of Treasury
Regulation --1.409A-3(i)(4)). A Leave of Absence shall not commence
or shall be deemed to cease under the Plan where the Employee has
incurred a Termination of Employment.
Officer Level Employee. Any executive officer of AT&T, as
that term is used under the Securities Exchange Act of 1934, as
amended, and any Employee that is an "officer level" Employee for
compensation purposes as shown on the records of AT&T.
Options or Stock Options. Options to purchase Stock issued pursuant to this Plan.
Participant. An Employee or former Employee who participates in this Plan.
Plan Year. Each of the following shall be a Plan Year: the
period January 1, 2005, through January 15, 2006; the period
January 16, 2006, through December 31, 2006; and, for all later
Plan Years, it is defined as the period from January 1 through
December 31.
Retirement or Retire. Termination of Employment on or after the
earlier of the following dates, unless otherwise provided by the
Committee: (a) for Officer Level Employees, the date the
Participant is at least age 55 and has five (5) years of Net
Credited Service; or (b) the date the Participant has attained one
of the following combinations of age and Net Credited Service:
3
Net Credited Service
Age
10 years or more
65 or older
20 years or more
55 or older
25 years or more
50 or older
30 years or more
Any age
For purposes of this Plan only, Net Credited Service shall be
calculated in the same manner as "Pension Eligibility Service"
under the AT&T Pension Benefit Plan - Nonbargained Program
("Pension Plan"), as amended from time to time, except that service
with an Employer shall be counted as though the Employer were a
"Participating Company" under the Pension Plan and the Employee was
a participant in the Pension Plan.
Senior Manager. Any Employee who is a "senior manager" for
compensation purposes as shown on the records of AT&T.
Shares or Share Units. An accounting entry representing the
right to receive an equivalent number of shares of Stock.
Share Deferral Account or Account. The Account or Accounts
established annually by an election by a Participant to make
Employee Contributions to the Plan, with each Account relating to a
Plan Year. For each Plan Year after 2008, there shall be (1) a
separate Share Deferral Account for Share Units purchased with
Employee Contributions of Base Compensation (excluding Annual
Bonus) and related Matching Share Units and (2) a separate Share
Deferral Account for Share Units purchased with Employee
Contributions of Short Term Incentive Award and/or Annual Bonus and
any related Matching Share Units. Earnings on Share Units and
Matching Share Units shall accrue to the respective Share Deferral
Accounts where they are earned.
Short Term Incentive Award. A cash award paid by an Employer
(and not by a non-Employer, such as state disability payments)
under the Short Term Incentive Plan or any successor plan, together
with any individual discretionary award made in connection
therewith; an award under a similar plan intended by the Committee
to be in lieu of an award under such Short Term Incentive Plan,
including, but not limited to, Performance Units granted under the
2006 Incentive Plan or any successor plan. It shall also include
any other award that the Committee designates as a Short Term
Incentive Award specifically for purposes of this Plan (regardless
of the purpose of the award) provided the deferral election is made
in accordance with Section 409A.
Specified Employee . Any Participant who is a "Key Employee" (as
defined in Code Section 416(i) without regard to paragraph (5)
thereof), as determined by AT&T in accordance with its uniform
policy with respect to all arrangements subject to Code Section
409A, based upon the 12-month period ending on each December 31st
(such 12-month period is referred to below as the "identification
period"). All Participants who are determined to be Key Employees
under Code Section 416(i) (without regard to paragraph (5) thereof)
during the identification period shall be treated as Key Employees
for purposes of the Plan during the 12-month period that begins on
the first day of the 4th month following the close of such
identification period.
Stock. The common stock of AT&T Inc.
4
Subsidiary. Any corporation, partnership, venture or other
entity or business with which AT&T would be considered a single
employer under Sections 414(b) and (c) of the Code, using 50% as
the ownership threshold as provided under Section 409A of the
Code.
Termination of Employment. References herein to "Termination of
Employment," "Terminate Employment" or a similar reference, shall
mean the event where the Employee has a "separation from service,"
as defined under Section 409A, with all Employers. For purposes of
this Plan, a Termination of Employment with respect to an Employer
shall be deemed to also occur when such Employer incurs a Change in
Control.
Article 3 - Administration of the Plan
3.1
The Committee .
Except as delegated by this Plan or by the Committee, the
Committee shall be the administrator of the Plan and will
administer the Plan, interpret, construe and apply its provisions
and determine all questions of administration, interpretation and
application of the Plan, including, without limitation, questions
and determinations of eligibility, entitlement to benefits and
payment of benefits, all in its sole and absolute discretion. The
Committee may further establish, adopt or revise such rules and
regulations and such additional terms and conditions regarding
participation in the Plan as it may deem necessary or advisable for
the administration of the Plan. References in this Plan to
determinations or other actions by AT&T, herein, shall mean
actions authorized by the Committee, the Chief Executive Officer,
the Senior Executive Vice President of AT&T in charge of Human
Resources, or their respective successors or duly authorized
delegates, in each case in the discretion of such person. All
decisions by the Committee, its delegate or AT&T, as
applicable, shall be final and binding.
3.2
Authorized Shares of Stock.
(a) Except as provided below, the number of shares of Stock
which may be distributed pursuant to the Plan, exclusive of Article
8 - Options, is 76,000,000. The number of shares of Stock which may
be issued pursuant to the exercise of Stock Options is 34,000,000
(together with an equal number of Stock Options). In determining
the number of authorized shares remaining available for issuance,
shares withheld for taxes in a distribution shall not be considered
issued and shall not reduce the number of authorized shares. When
an Option is exercised, the authorized shares of Stock that may be
issued pursuant to an Option exercise shall be reduced by the
number of Options so exercised. To the extent an Option issued
under this Plan is canceled, terminates, expires, or lapses for any
reason, such Option shall again be available for issuance under the
Plan. Conversions of Stock awards into Share Units and their
eventual distribution (excluding the effects of any dividends on
such Share Units) shall count only against the limits of the plans
from which they originated and shall not be applied against the
limits in this Plan. To the extent Share Units are credited through
deferrals of Stock or Employee Contributions where the distribution
of which would be deductible by AT&T under Section 162(m) of
the Code without regard to the size of the distribution, and such
deductible Share Units are available for distribution, such Share
Units shall be distributed first.
(b) In the event the Committee determines that continuing the
issuance of Share Units under the Plan or Stock Options under the
Plan may cause the number of shares of Stock that are to be
distributed under this Plan or the number of Stock Options (as
determined pursuant to subsection (a), above) to exceed the number
of authorized shares of Stock, then in lieu of distributing Stock,
the Committee may provide after such determination and only with
respect to Share Units that have not theretofore been credited to a
Share Deferral Account, that such Share Units may be settled in
cash equal to the value of the Stock that would otherwise be
distributed based on the FMV of the Stock on the date of the
distribution of such Share Unit. The Committee may also provide
after such determination and only with respect to Stock Options
that have not theretofore been issued that such Stock Options may
only be settled on a Net-Settled basis in cash equal to the value
of the Stock that would otherwise be distributed based on the FMV
of the Stock on the day of exercise.
5
(c) In the event of a merger, reorganization, consolidation,
recapitalization, separation, liquidation, stock dividend, stock
split, share combination, or other change in the corporate
structure of AT&T affecting the shares of Stock (including a
conversion of Stock into cash or other property), such adjustment
shall be made to the number and class of the shares of Stock which
may be delivered under the Plan (including but not limited to
individual limits), and in the number and class of and/or price of
shares of Stock subject to outstanding Options granted under the
Plan, and/or in the number of outstanding Options and Share Units,
or such other adjustment determined by the Committee, in each case
as may be determined to be appropriate and equitable by the
Committee, in its sole discretion, to prevent dilution or
enlargement of rights.
3.3
Claims and Appeals .
(a)
Claims. A person who believes that he or she is being denied a
benefit to which he or she is entitled under this Plan (hereinafter
referred to as a "Claimant") may file a written request for such
benefit with the Executive Compensation Administration Department,
setting forth his or her claim. The request must be addressed to
the AT&T Executive Compensation Administration Department at
its then principal place of business.
(b)
Claim Decision. Upon receipt of a claim, the AT&T Executive
Compensation Administration Department shall review the claim and
provide the Claimant with a written notice of its decision within a
reasonable period of time, not to exceed ninety (90) days, after
the claim is received. If the AT&T Executive Compensation
Administration Department determines that special circumstances
require an extension of time beyond the initial ninety (90)- day
claim review period, the AT&T Executive Compensation
Administration Department shall notify the Claimant in writing
within the initial ninety (90)-day period and explain the special
circumstances that require the extension and state the date by
which the AT&T Executive Compensation Administration Department
expects to render its decision on the claim. If this notice is
provided, the AT&T Executive Compensation Administration
Department may take up to an additional ninety (90) days (for a
total of one hundred eighty (180) days after receipt of the claim)
to render its decision on the claim.
If the claim is denied by the AT&T Executive Compensation
Administration Department, in whole or in part, the AT&T
Executive Compensation Administration Department shall provide a
written decision using language calculated to be understood by the
Claimant and setting forth: (i) the specific reason or reasons for
such denial; (ii) specific references to pertinent provisions of
this Plan on which such denial is based; (iii) a description of any
additional material or information necessary for the Claimant to
perfect his or her claim and an explanation of why such material or
such information is necessary; (iv) a description of the Plan's
procedures for review of denied claims and the steps to be taken if
the Claimant wishes to submit the claim for review; (v) the time
limits for requesting a review of a denied claim under this section
and for conducting the review under this section; and (vi) a
statement of the Claimant's right to bring a civil action under
Section 502(a) of ERISA if the claim is denied following review
under this section.
(c)
Request for Review. Within sixty (60) days after the receipt by
the Claimant of the written decision on the claim provided for in
this section, the Claimant may request in writing that the
Committee review the determination of the AT&T Executive
Compensation Administration Department. Such request must be
addressed to the Committee at the address for giving notice in this
Plan. To assist the Claimant in deciding whether to request a
review of a denied claim or in preparing a request for review of a
denied claim, a Claimant shall be provided, upon written request to
the Committee and free of charge, reasonable access to, and copies
of, all documents, records and other information relevant to the
claim. The Claimant or his or her duly authorized representative
may, but need not, submit a statement of the issues and comments in
writing, as well as other documents, records or other information
relating to the claim for consideration by the Committee. If the
Claimant does not request a review by the Committee of the AT&T
Executive Compensation Administration Department's decision within
such sixty (60)-day period, the Claimant shall be barred and
stopped from challenging the determination of the AT&T
Executive Compensation Administration Department.
6
(d)
Review of Decision. Within sixty (60) days after the Committee's
receipt of a request for review, the Administrator will review the
decision of the AT&T Executive Compensation Administration
Department. If the Committee determines that special circumstances
require an extension of time beyond the initial sixty (60)-day
review period, the Committee shall notify the Claimant in writing
within the initial sixty (60)-day period and explain the special
circumstances that require the extension and state the date by
which the Committee expects to render its decision on the review of
the claim. If this notice is provided, the Committee may take up to
an additional sixty (60) days (for a total of one hundred twenty
(120) days after receipt of the request for review) to render its
decision on the review of the claim.
During its review of the claim, the Committee shall:
(1)
Take into account all comments, documents, records, and other
information submitted by the Claimant relating to the claim,
without regard to whether such information was submitted or
considered in the initial review of the claim conducted pursuant to
this section;
(2)
Follow reasonable procedures to verify that its benefit
determination is made in accordance with the applicable Plan
documents; and
(3)
Follow reasonable procedures to ensure that the applicable Plan
provisions are applied to the Participant to whom the claim relates
in a manner consistent with how such provisions have been applied
to other similarly-situated Participants.
After considering all materials presented by the Claimant, the
Committee will render a decision, written in a manner designed to
be understood by the Claimant. If the Committee denies the claim on
review, the written decision will include (i) the specific reasons
for the decision; (ii) specific references to the pertinent
provisions of this Plan on which the decision is based; (iii) a
statement that the Claimant is entitled to receive, upon request to
the Committee and free of charge, reasonable access to, and copies
of, all documents, records, and other information relevant to the
claim; and (iv) a statement of the Claimant's right to bring a
civil action under Section 502(a) of ERISA.
The Committee shall serve as the final review committee under
the Plan and shall have sole and complete discretionary authority
to administer, interpret, construe and apply the Plan provisions,
and determine all questions of administration, interpretation,
construction, and application of the Plan, including questions and
determinations of eligibility, entitlement to benefits and the
type, form and amount of any payment of benefits, all in its sole
and absolute discretion. The Committee shall further have the
authority to determine all relevant facts and related issues, and
all documents, records and other information relevant to a claim
conclusively for all parties, and in accordance with the terms of
the documents or instruments governing the Plan. Decisions by the
Committee shall be conclusive and binding on all parties and not
subject to further review.
In any case, a Participant or Beneficiary may have further
rights under ERISA. The Plan provisions require that Participants
or Beneficiary pursue all claim and appeal rights described in this
section before they seek any other legal recourse regarding claims
for benefits.
7
Article 4 - Contributions
4.1
Election to Make Contributions.
(a)
The Committee shall establish dates and other conditions for
participation in the Plan and making contributions as it deems
appropriate. Except as otherwise provided by the Committee, each
year an Employee who is an Eligible Employee as of September 30 may
thereafter make an election on or prior to the last Business Day of
the immediately following November (such election shall be
cancelled if the Employee is not an Eligible Employee on the last
day such an election may be made) to contribute on a pre-tax basis,
through payroll deductions, any combination of the following:
(1) From 6% to 30% (in whole percentage increments) of the
Participant's monthly Base Compensation, other than Annual Bonus,
during the calendar year (the Plan Year for such contributions)
following the calendar year of such election. The Employee
Contributions shall be used to acquire Share Units to be credited
to the Share Deferral Account for that Plan Year.
(2) Up to 95% (in whole percentage increments or limited to the
target amount) of a Short Term Incentive Award, or from 6% to 30%
(in whole percentage increments) of Annual Bonus, in each case such
contributions shall be made during the second calendar year (which
is the Plan Year for such contributions) following the year of such
election, except that in 2008 a separate election may be made with
respect to contributions to be made in 2009. An Employee may make
such an election with respect to the type of Award (Short Term
Incentive Award or Annual Bonus) that the Employee is under as of
the time the Employee's eligibility to make such election is
determined. If because of a promotion or otherwise, the Employee
receives a different type of Award instead of, or in partial or
full replacement for, the type of Award subject to the Employee's
election for the relevant Plan Year, the election will apply to the
other Award as well, including but not limited to any individual
discretionary award related thereto.
(b) The Committee may permit an Eligible Employee to make an
election to purchase Share Units under this Plan with compensation
other than Base Compensation or Short Term Incentive Awards on such
terms and conditions as such Committee may permit from time to
time, provided that any such election is made in accordance with
Section 409A of the Code. In no event shall an acquisition of Share
Units pursuant to this paragraph (b) or pursuant to the conversion
of a right to receive Stock into Share Units (such as through a
distribution of Stock under the 2001 Incentive Plan) result in the
crediting of an AT&T Matching Contribution or Options.
(c) Notwithstanding anything to the contrary in this Plan, no
election shall be effective to the extent it would permit an
Employee Contribution or distribution to be made that is not in
compliance with Section 409A of the Code. To the extent such
election related to Employee Contributions that complied with such
statute and regulations thereunder, that portion of the election
shall remain valid, except as otherwise provided under this
Plan.
(d) To the extent permitted by Section 409A of the Code,
AT&T may refuse or terminate, in whole or in part, any election
to purchase Share Units in the Plan at any time; provided, however,
that only the Committee may take such action with respect to
persons who are Officer Level Employees.
8
(e) In the event the Participant takes a hardship withdrawal
pursuant to Treasury Regulation --1.401(k)-1 from a benefit plan
qualified under the Code and sponsored by an Employer, any election
to make Employee Contributions by such Participant shall be
cancelled on a prospective basis, and the Participant shall not be
permitted to make a new election with respect to Employee
Contributions that would be contributed during the then current and
immediately following calendar year.
4.2
Purchase of Share Units.
(a) Employee Contributions (as well as any corresponding
AT&T Matching Contributions) shall be made pursuant to a proper
election, only during the Participant's lifetime; provided,
however, with respect to Employee Contribution elections made prior
to 2007, the Employee must remain an Eligible Employee while making
any such contributions. In the event of a Change in Control of an
Employer, subsequent compensation from the Employer may not be
contributed to the Plan. The Employer may continue the then current
elections of the participants under a subsequent plan in order to
comply with applicable tax laws.
(b) The number of Share Units purchased by a Participant during
a calendar month shall be found by dividing the Participant's
Employee Contributions during the month by the FMV of a share of
Stock on the last day of such month.
(c) A contribution to the Plan shall be made when the
compensation - from which the contribution is to be deducted - is
to be paid ("paid," as used in this Plan, includes amounts
contributed to the Plan that would have been paid were it not for
an election under this Plan), as determined by the relevant
Employer. The Committee may modify or change this paragraph (c)
from time to time.
4.3
Reinvestment of Dividends.
In the month containing a record date for a cash dividend on
Stock, each Share Deferral Account shall be credited with that
number of Share Units equal to the declared dividend per share of
Stock, multiplied by the number of Share Units held in such Share
Deferral Account as of such record date, and dividing the product
by the FMV of a share of Stock on the last day of such month.
Article 5 - AT&T Matching Contributions
5.1
AT&T Match.
(a) Each month AT&T shall credit the Participant's relevant
Share Deferral Account with the number of "Matching Share Units"
found by taking eighty percent (80%) of the Participant's Employee
Contributions from Base Compensation made to this Plan and to the
Cash Deferral Plan during the month with respect to the first six
percent (6%) of the Participant's monthly Match Eligible
Compensation (as defined below) and dividing the resulting figure
by the FMV of the Stock on the last day of such month (such
resulting amount shall be the "Matching Contribution"). The monthly
"Match Eligible Compensation" shall be the sum of:
(1) the monthly Employee Contributions from Base Compensation to
this Plan and the Cash Deferral Plan (in the aggregate, "Deferred
BC"), plus
(2) the amount of the Participant's monthly Base Compensation in
excess of the Deferred BC ("Non-Deferred BC") but only to the
extent such monthly Non-Deferred BC, when aggregated with the
Participant's total Non-Deferred BC for prior months in such Plan
Year, as determined by the relevant Employer, exceeds the limit in
effect under Section 401(a)(17) of the Code applicable with respect
to such Plan Year.
9
The foregoing formula shall apply regardless of whether or not
the Participant makes contributions to a 401(k) plan.
A Participant may receive Matching Share Units in a Share
Deferral Account for a particular form of compensation only if the
Participant is then making contributions to the same Share Deferral
Account; provided, however, this condition shall not apply for
purposes of determining under Section 5.1(a)(2) whether the limit
described therein has been reached.
As provided in the definition of Share Deferral Account,
Matching Share Units shall be credited to the respective Share
Deferral Account that is related to the same form of Employee
Contributions (either (1) Base Compensation excluding Annual Bonus
or (2) Annual Bonus).
(b) In the event the Participant is not eligible to earn pension
accruals under a pension plan offered by AT&T or a Subsidiary
and either (1) first becomes an Employee on or after January 1,
2015, or (2) the Participant Terminates Employment on or after
January 1, 2015, and the Participant is subsequently rehired as an
Employee, then the "eighty percent (80%)" reference in section
5.1(a) shall be replaced with "one hundred percent (100%)" for
purposes of determining the number of Matching Share Units to which
the Participant would be entitled pursuant to contribution
elections made after such hiring or rehiring.
(c) In the sole discretion of the Committee, in the event the
Committee reduces the number of Options that AT&T issues for
each Share Unit purchased, the Committee may provide for the
contribution of a Bonus Matching Contribution on such terms as the
Committee determines. Such Bonus Matching Contribution may not
exceed 20% of the Participant's Employee Contributions for the
month. The Bonus Matching Contribution shall be subject to such
terms and conditions as required by the Committee and, unless
otherwise provided by the Committee, to the same distribution
requirements as Matching Contributions. Pursuant to the foregoing
authority and until otherwise provided by the Committee, effective
for Share Accounts created pursuant to Employee Contribution
elections where such elections are made after January 1, 2010,
AT&T shall make Bonus Matching Contributions equal to 20% of
the Participant's monthly Employee Contributions from each of Base
Compensation and Short Term Incentive Award (not to exceed the
target amount of such award, which limit shall be pro rated for any
partial year award). Such Bonus Matching Contribution shall be used
to purchase that number of Matching Share Units found by dividing
the relevant Bonus Matching Contribution for the month by the FMV
of the Stock on the last day of such month.
5.2
Distribution of Share Units Acquired with Matching Contributions
.
A Participant's Matching Share Units shall be distributed in a
lump sum, in accordance with the Plan's distribution provisions, in
the earlier of: (a) the calendar year following the calendar year
of the Termination of Employment of the Participant, or (b) the
calendar year in which the Participant reaches age 55, in each case
only with respect to Matching Share Units relating to Share
Deferral Accounts for Plan Years before such distribution calendar
year.
Matching Share Units acquired as part of a Share Deferral
Account that commences in or after the calendar year the Employee
reaches age 55 or after the calendar year in which the Employee
Terminates Employment will be distributed in the same manner and
time as other Share Units in such Share Deferral Account.
10
Notwithstanding anything to the contrary in this section,
Matching Share Units acquired in 2008 and later shall be
distributed at the same time as other Share Units (including those
acquired with Employee Contributions) in the same Share Deferral
Account.
Article 6 - Distributions
6.1 Distributions of Share Units.
(a) Initial Election with Respect to a Share Deferral Account.
At the time the Participant makes an election to make Employee
Contributions with respect to a Share Deferral Account, the
Participant shall also elect the calendar year the Share Deferral
Account shall be distributed, which may be from the first through
fifth calendar years after the Plan Year the Account commenced
(except as otherwise provided in this Plan with respect to Matching
Share Units). For example, if an Account commenced in 2005, the
Participant may elect to commence the distribution in any calendar
year from and including 2006 to and including 2010. If no timely
distribution election is made by the Participant, then the
Participant will be deemed to have made an election to have the
Share Deferral Account distributed in a single installment in the
first calendar year after the calendar year the Account
commenced.
(b) Election to Delay a Scheduled Distribution.
(i) An Employee may elect to defer a scheduled distribution of a Share
Deferral Account for five (5) additional calendar years beyond that
previously elected (except as otherwise provided in this Plan with
respect to Matching Share Units). Unless otherwise provided by AT&T,
the election to defer the distribution must be made on or after October
16, and on or before the last Business Day of the next following December,
of the calendar year that is the second calendar year preceding the
calendar year of the relevant scheduled distribution.
(ii) To make this election, the Participant must be an Employee that is,
as determined by AT&T, a member of Employer's "select group of management
or highly compensated employees" within the meaning of ERISA on the
September 30 immediately preceding such election and on the day of
such election.
(iii) An election to defer the distribution of a Share Deferral Account
may not be made in the same calendar year that the election to establish
the Share Deferral Account is made. Notwithstanding anything to the
contrary in this Plan:
a. an election to defer the distribution of a Share Deferral Account
must be made at least 12 months prior to the date of the first
scheduled payment under the prior distribution election, and
b. the election shall not take effect until at least 12 months
after the date on which the election is made.
(c) A Participant's Share Deferral Account shall be distributed
to the Participant on March 10 (or as soon thereafter as
administratively practicable as determined by AT&T) of the
calendar year elected by the Participant for that Account. In the
event the distribution is to be made to a "Specified Employee" as a
result of the Participant's Termination of Employment (other than
as a result of a Change in Control), the distribution shall not
occur until the later of such March 10 or six (6) months after the
Termination of Employment, except it shall be distributed upon the
Participant's earlier death in accordance with this Plan.
11
6.2
Death of the Participant.
In the event of the death of a Participant, notwithstanding
anything to the contrary in this Plan, all undistributed Share
Deferral Accounts shall be distributed to the Participant's
beneficiary in accordance with the AT&T Rules for Employee
Beneficiary Designations, as the same may be amended from time to
time, within the later of 90 days following such determination or
the end of the calendar year in which determination was made.
6.3
Unforeseeable Emergency Distribution .
If a Participant experiences an "Unforeseeable Emergency," the
Participant may submit a written petition to AT&T (the
Committee in the case of Officer Level Employees), to receive a
partial or full distribution of his Share Deferral Account(s). In
the event that AT&T (the Committee in the case of Officer Level
Employees), upon review of the written petition of the Participant,
determines in its sole discretion that the Participant has suffered
an "Unforeseeable Emergency," AT&T shall make a distribution to
the Participant from the Participant's Share Deferral Accounts
(other than Matching Share Units), on a pro-rata basis, within the
later of 90 days following such determination or the end of the
calendar year in which determination was made, subject to the
following:
(a)
"Unforeseeable Emergency" shall mean a severe financial hardship
to the Participant resulting from an illness or accident of the
Participant, the Participant's legal spouse, the Participant's
beneficiary, or the Participant's dependent (as defined in Code
Section 152, without regard to Code Section 152(b)(1), (b)(2), and
(d)(1)(B)); loss of the Participant's property due to casualty; or
other similar extraordinary and unforeseeable circumstances arising
as a result of events beyond the control of the Participant, all as
determined in the sole discretion of the Committee. Whether a
Participant is faced with an Unforeseeable Emergency permitting a
distribution is to be determined based on the relevant facts and
circumstances of each case, but, in any case, a distribution on
account of Unforeseeable Emergency shall not be made to the extent
that such emergency is or may be relieved through reimbursement or
compensation from insurance or otherwise, by liquidation of the
Participant's assets, to the extent the liquidation of such assets
would not cause severe financial hardship, or by cessation of
deferrals under the Plan.
(b)
The amount of a distribution to be made because of an
Unforeseeable Emergency shall not exceed the lesser of (i) the FMV
of the Participant's vested Share Deferral Account, calculated as
the date on which the amount becomes payable, as determined by
AT&T (the Committee in the case of Officer Level Employees) in
its sole discretion, and (ii) the amount reasonably necessary, as
determined by the AT&T (the Committee in the case of Officer
Level Employees) in its sole discretion, to satisfy the emergency
need (which may include amounts necessary to pay any Federal,
state, local, or foreign income taxes or penalties reasonably
anticipated to result from the distribution). Determinations of the
amount reasonably necessary to satisfy the emergency need shall
take into account any additional compensation that is available if
the plan provides for cancellation of a deferral election upon a
payment due to an Unforeseeable Emergency. The determination of
amounts reasonably necessary to satisfy the Unforeseeable Emergency
need is not required to, but may, take into account any additional
compensation that, due to the Unforeseeable Emergency, is available
under another nonqualified deferred compensation plan but has not
actually been
paid, or that is available due to the Unforeseeable Emergency
under another plan that would provide for deferred compensation
except due to the application of the effective date provisions
under Treasury Regulation --1.409A-6.
12
(c)
Upon such distribution on account of an Unforeseeable Emergency
under this Plan, any election to make Employee Contributions by
such Participant shall be immediately cancelled, and the
Participant shall not be permitted to make a new election with
respect to Employee Contributions that would be contributed during
the then current and immediately following calendar year.
6.4
Ineligible Participant.
Notwithstanding any other provisions of this Plan to the
contrary, if AT&T receives an opinion from counsel selected by
AT&T, or a final determination is made by a Federal, state or
local government or agency, acting within its scope of authority,
to the effect that an individual's continued participation in the
Plan would violate applicable law, then such person shall not make
further contributions to the Plan to the extent permitted by
Section 409A of the Code.
6.5
Conflict of Interest Distribution.
AT&T may in its sole discretion accelerate a distribution(s)
to the Participant, provided he or she is no longer actively
employed by AT&T: (a) to the extent necessary for any Federal
officer or employee in the executive branch to comply with an
ethics agreement with the Federal government or (b) to the extent
reasonably necessary to avoid the violation of an applicable
Federal, state, local, or foreign ethics law or conflicts of
interest law (including where such payment is reasonably necessary
to permit the service provider to participate in activities in the
normal course of his or her position in which the service provider
would otherwise not be able to participate under an applicable
rule). Any such distribution may only be made in accordance with
Section 409A of the Code and the regulations thereunder.
6.6 Distribution Process.
A Share Deferral Account shall be distributed under this Plan by
taking the number of Share Units comprising the Account to be
distributed and converting them into an equal number of shares of
Stock. (Once distributed, a Share Unit shall be canceled.)
Article 7 - Transition Provisions
7.1 Stockholder Approval
The Plan was approved by Stockholders at the 2005 Annual Meeting
of Stockholders.
7.2
2005 Share Deferral Accounts.
Notwithstanding Article 4 to the contrary, if an Employee is an
Eligible Employee on September 30, 2004, the Employee may make an
election under Article 4 on or prior to December 15, 2004, with
respect to the establishment of a Share Deferral Account for the
(i) contribution of Base Compensation and/or Short Term Incentive
Awards paid during the period from January 1, 2005, through January
15, 2006, which shall be the Plan Year for such Share Deferral
Account; and/or (ii) the conversion of a distribution of Stock that
would be made during the same Plan Year pursuant to the 2001
Incentive Plan into an equal number of Share Units, so long as such
conversion would not cause the recognition of income for Federal
income tax purposes in respect of such distribution of Stock prior
to distribution of Share Units under this Plan.
13
7.3
2007 Amendments.
(a) Amendments made to the Plan on November 15, 2007, shall be
effective January 1, 2008. except for amendments to this Article 7,
which shall be effective upon adoption. Any Participants electing
prior to November 15, 2007, to make Employee Contributions in 2008
shall have their elections canceled if they do not consent by
December 14, 2007, to all prior amendments to this Plan and to the
Cash Deferral Plan. Subject to the foregoing consent requirements,
all Employee Contribution elections made prior to 2008, including
but not limited to elections to contribute Stock that would be
distributed under the 2001 Incentive Plan or a successor plan,
shall remain in force, subject to all other terms of the amended
Plan. In addition, all unvested but not forfeited Matching Share
Units shall vest on November 15, 2007. Matching Shares that have
been forfeited shall not be reinstated, and no amendment to this
Plan shall be interpreted as reinstating such forfeitures.
(b) Not withstanding anything to the contrary in this Plan, a
Participant who as of December 29, 2006, was eligible for an
additional payment pursuant to Section 4A of the BellSouth
Corporation Executive Incentive Award Deferral Plan shall not, with
respect to the 2008 Plan Year, receive Matching Share Units on Base
Compensation that exceeds $230,000.
7.4
2008 Amendments.
For Plan Years prior to 2009, Participants who, at the time of
the determination of their eligibility to participate in an
Account, are paid through a "sales plan" involving the use of
commissions may elect to contribute up to 40% of Base Compensation.
For the 2008 Plan Year, only Salary and Short Term Incentive Awards
paid after Termination of Employment may be contributed to the
Plan.
Article 8 - Options
8.1
Grants.
Options may be issued in definitive form or recorded on the
books and records of AT&T for the account of the Participant,
at the discretion of AT&T. If AT&T elects not to issue the
Options in definitive form, they shall be deemed issued, and the
Participants shall have all rights incident thereto as if they were
issued on the dates provided herein, without further action on the
part of AT&T or the Participant. In addition to the terms
herein, all Options shall be subject to such additional provisions
and limitations as provided in any Administrative Procedures
adopted by the Committee prior to the issuance of such Options. The
number of Options issued to a Participant shall be reflected on the
Participant's annual statement of account.
8.2
Term of Options.
The Options may only be exercised: (a) after the earlier of (i)
the expiration of one (1) year from date of issue or (ii) the
Participant's Termination of Employment, and (b) no later than the
tenth (10 th ) anniversary of their issue; and Options shall be
subject to earlier termination as provided herein.
8.3
Exercise Price.
The Exercise Price of an Option shall be the FMV of the Stock on
the date of issuance of the Option, and an Option may not be
repriced.
14
8.4
Issuance of Options .
(a) For each Share Deferral Account established by a Participant
pursuant to an Employee Contribution election where such election
was made prior to January 1, 2010:
(1) on June 15 of the Plan Year for the Share Deferral Account,
the Participant shall receive two (2) Options for each Share Unit
acquired by the Participant as part of such Share Deferral Account
during the immediately preceding January through May period with
Employee Contributions of Base Compensation and/or Short Term
Incentive Award. A fractional number of Options shall be rounded up
to the next whole number.
(2) on the February 15 immediately following the Plan Year for
the Share Deferral Account, a Participant shall receive:
(i) two (2) Options for each Share Unit acquired by the Participant
as part of such Share Deferral Account during the immediately preceding
June through the remainder of the relevant Plan Year with Employee
Contributions of Base Compensation and/or Short Term Incentive Award;
and
(ii)
two (2) Options for each Share Unit acquired prior to such date
by the Participant with dividend equivalents that were derived,
directly or indirectly (such as dividend equivalents paid on Share
Units acquired with dividend equivalents), from Share Units
acquired with Employee Contributions as part of such Share Deferral
Account.
(b) A fractional number of Options shall be rounded up to the
next whole number.
(c) If Stock is not traded on the NYSE on any of the foregoing
Option issuance dates, then the Options shall not be issued until
the next such day on which Stock is so traded.
(d) If a Participant Terminates Employment other than (i) while
Retirement eligible or (ii) because of death or Disability, no
further Options shall be issued to or with respect to such
Participant. In the event of re-Employment following a Termination
of Employment, the preceding sentence shall not apply to those
Options resulting from participation in the Plan after such
re-Employment until a subsequent Termination of Employment.
(e) No more than 400,000 Options shall be issued to any
individual under this Plan during a calendar year. No Share Unit
may be counted more than once for the issuance of Options.
(f) The Committee may, in its sole discretion, at any time,
increase or lower the number of Options that are to be issued for
each Share Unit acquired, not to exceed two (2) Options per Share
Unit purchased. However, if the Committee lowers the number of
Options, then such change shall only be effective with respect to
the next Share Deferral Account a Participant may elect to
establish.
(g) The Committee may also, at any time and in any manner, limit
the number of Options which may be acquired as a result of the
Short Term Incentive Award being contributed to the Plan. Further,
except as otherwise provided by the Committee, in determining the
number of Options to be issued to a Participant with respect to a
Participant's contribution of a Short Term Incentive Award to the
Plan and subsequent crediting of Share Units, Options may be issued
only with respect to an amount which does not exceed the target
amount of such award (or such other portion of the award as may be
determined by the Committee). Where a Participant's election to
contribute a Short Term Incentive Award to the Plan becomes
applicable to Annual Bonus, the above limitation on options shall
apply to the contribution of Annual Bonus as though it were a Short
Term Incentive Award.
15
(h) No options shall be issued to or in respect of a Participant
for a particular issuance, unless at least ten (10) Options will be
issued to that Participant.
8.5
Exercise and Payment of Options .
Options shall be exercised by providing notice to the designated
agent selected by AT&T (if no such agent has been designated,
then to AT&T), in the manner and form determined by AT&T,
which notice shall be irrevocable, setting forth the exact number
of shares of Stock with respect to which the Option is being
exercised and including with such notice payment of the Exercise
Price. When Options have been transferred, AT&T or its
designated agent may require appropriate documentation that the
person or persons exercising the Option, if other than the
Participant, has the right to exercise the Option. No Option may be
exercised with respect to a fraction of a share of Stock.
Exercises of Options may be effected only on days and during the
hours that the New York Stock Exchange is open for regular trading
or as otherwise provided or limited by AT&T. If an Option
expires on a day or at a time when exercises are not permitted,
then the Options may be exercised no later than the immediately
preceding date and time that the Options were exercisable.
The Exercise Price shall be paid in full at the time of
exercise. No Stock shall be issued or transferred until full
payment has been received therefore.
Payment may be made:
(a) in cash, or
(b) unless otherwise provided by the Committee at any time, and
subject to such additional terms and conditions and/or
modifications as AT&T may impose from time to time, and further
subject to suspension or termination of this provision by AT&T
at any time, by:
(i) electing a Stock-Settled Exercise on or after February 1,
2013. Upon exercise of Options through a Stock-Settled Exercise,
the Participant shall receive that number of shares of Stock found
by (1) subtracting the Exercise Price of an Option being exercised
(on a per share basis) from the FMV of the Stock as of the
immediately preceding day that the Stock was traded on the NYSE,
(2) multiplying the difference by the number of Options being
exercised, and (3) dividing the result by the same FMV. For
example, a Participant exercises 1,000 Options with an Exercise
Price of $30 (exercises may only occur on a day when the NYSE is
open for regular trading) and the FMV for the immediately preceding
trading day was $40. In that case, the Participant would receive
his $10,000 profit in the form of 250 shares of Stock, subject to
tax withholding and any other costs provided under this Plan.
or;
(ii) if AT&T has designated a stockbroker to act as
AT&T's agent to process Option exercises, issuance of an
exercise notice to such stockbroker together with instructions
irrevocably instructing the stockbroker: (A) to immediately sell
(which shall include an exercise notice that becomes effective upon
execution of a sell order) a sufficient portion of the Stock to pay
the Exercise Price of the Options being exercised and the required
tax withholding, and (B) to deliver on the settlement date the
portion of the proceeds of the sale equal to the Exercise Price and
tax withholding to AT&T. In the event the stockbroker sells any
Stock on behalf of a Participant, the stockbroker shall be acting
solely as the agent of the Participant, and AT&T disclaims any
responsibility for the actions of the stockbroker in making any
such sales. No Stock shall be issued until the settlement date and
until the proceeds (equal to the Exercise Price and tax
withholding) are paid to AT&T.
16
8.6
Restrictions on Exercise and Transfer.
No Option shall be transferable except: (a) upon the death of a
Participant in accordance with AT&T's Rules for Employee
Beneficiary Designations, as the same may be amended from time to
time; and (b) in the case of any holder after the Participant's
death, only by will or by the laws of descent and distribution.
During the Participant's lifetime, the Participant's Options shall
be exercisable only by the Participant or by the Participant's
guardian or legal representative. After the death of the
Participant, an Option shall only be exercised by the holder
thereof (including but not limited to an executor or administrator
of a decedent's estate) or his or her guardian or legal
representative. In each such case the Option holder shall be
considered a Participant for the limited purpose of exercising such
Options.
8.7
Termination of Employment .
(a) Not Retirement Eligible. Unless otherwise provided by the
Committee, if a Participant Terminates Employment while not
Retirement eligible, a Participant's Options may be exercised, to
the extent then exercisable:
(i) if such Termination of Employment is by reason of death or
Disability, then for a period of three (3) years from the date of
such Termination of Employment or until the expiration of the
stated term of such Option, whichever period is shorter; or
(ii) if such Termination of Employment is for any other reason,
then for a period of one (1) year from the date of such Termination
of Employment or until the expiration of the stated term of such
Option, whichever period is shorter.
(b) Retirement Eligible. Unless otherwise provided by the
Committee, if a Participant Terminates Employment while Retirement
eligible, the Participant's Option may be exercised, to the extent
then exercisable: (i) for a period of five (5) years from the date
of Retirement or (ii) until the expiration of the stated term of
such Option, whichever period is shorter.
(c) Re-Employment of a Participant after a Termination of
Employment shall have no effect on the periods during which Options
resulting from the prior Employment may be exercised. For example,
if the Option exercise period has been shortened because of the
prior Termination of Employment, it shall not be extended because
of the re-Employment.
(d) Notwithstanding any other definition of Termination of
Employment under this Plan, for purposes of this Article 8 -
Options only, a Termination of Employment shall mean the cessation
of the Employee being employed by any corporation, partnership,
venture or other entity in which AT&T holds, directly or
indirectly, a 50% or greater ownership interest, including but not
limited to where AT&T ceases to hold such interest in the
employing company. In addition, the definition of Retirement for
purposes of this Article 8 shall use the immediately foregoing
definition of Termination of Employment in lieu of any other
definition.
Article 9 - Discontinuation, Termination, Amendment .
9.1
AT&T's Right to Discontinue Offering Share Units.
The Committee may at any time discontinue offerings of Share
Units under the Plan. Any such discontinuance shall have no effect
upon existing Share Units or the terms or provisions of this Plan
as applicable to such Share Units.
17
9.2
AT&T's Right to Terminate Plan.
The Committee may terminate the Plan at any time. Upon
termination of the Plan, contributions shall no longer be made
under the Plan.
After termination of the Plan, Participants shall continue to
earn dividend equivalents in the form of Share Units on
undistributed Share Units and shall continue to receive all
distributions under this Plan at such time as provided in and
pursuant to the terms and conditions of Participant's elections and
this Plan. Notwithstanding the foregoing, the termination of the
Plan shall be made solely in accordance with Section 409A of the
Code and in no event shall cause the accelerated distribution of
any Account unless such termination is effected in accordance with
Section 409A of the Code.
9.3 Amendment .
The Committee may at any time amend the Plan in whole or in part
including but not limited to changing the formulas for determining
the amount of AT&T Matching Contributions under Article 5 or
decreasing the number of Options to be issued under Article 8;
provided, however, that no amendment, including but not limited to
an amendment to this section, shall be effective, without the
consent of a Participant, to alter, to the material detriment of
such Participant, a Share Deferral Account of the Participant,
other than as provided elsewhere in this section. For purposes of
this section, an alteration to the material detriment of a
Participant shall include, but not be limited to, a material
reduction in the period of time over which Stock may be distributed
to a Participant, any reduction in the Participant's number of
vested Share Units or Options, or an increase in the Exercise Price
or decrease in the term of an Option. Any such consent may be in a
writing, telecopy, or e-mail or in another electronic format. An
election to acquire Share Units with Employee Contributions shall
be conclusively deemed to be the consent of the Participant to any
and all amendments to the Plan prior to such election, and such
consent shall be a condition to making any election with respect to
Employee Contributions.
Notwithstanding anything to the contrary contained in this
section of the Plan, the Committee may modify this Plan with
respect to any person subject to the provisions of Section 16 of
the Securities Exchange Act of 1934, as amended ("Exchange Act") to
place additional restrictions on the exercise of any Option or the
transfer of any Stock not yet issued under the Plan.
The Plan is established in order to provide deferred
compensation to a select group of management and highly compensated
employees with in the meaning of Sections 201(2) and 301(a)(3) of
ERISA. To the extent legally required, the Code and ERISA shall
govern the Plan, and if any provision hereof is in violation of an
applicable requirement thereof, the Company reserves the right to
retroactively amend the Plan to comply therewith to the extent
permitted under the Code and ERISA. The Company also reserves the
right to make such other changes as may facilitate implementation
of Section 409A of the Code. Provided, however, that in no event
shall any such amendments be made in violation of the requirements
of Section 409A of the Code.
18
Article 10 - Miscellaneous.
10.1
Tax Withholding .
Upon distribution of Stock, including but not limited to, shares
of Stock issued upon the exercise of an Option, AT&T shall
withhold shares of Stock sufficient in value, using the FMV on the
date determined by AT&T to be used to value the Stock for tax
purposes, to satisfy the minimum amount of Federal, state, and
local taxes required by law to be withheld as a result of such
distribution. Employment taxes incurred by a Participant on
Employee Contributions and on Matching Contributions shall be
withheld from the Participant's regular wages or paid in cash by
the Participant as they become due.
Any fractional share of Stock payable to a Participant shall be
withheld as additional Federal withholding, or, at the option of
AT&T, paid in cash to the Participant.
Unless otherwise determined by the Committee, when the method of
payment for the Exercise Price is from the sale by a stockbroker
pursuant to Section 8.5, hereof, 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 FMV of the Stock.
10.2
Elections and Notices.
Notwithstanding anything to the contrary contained in this Plan,
all elections and notices of every kind under this Plan shall be
made (1) on forms prepared by AT&T or the General Counsel,
Secretary or Assistant Secretary, or their respective delegates, or
(2) in such other manner as permitted or required by AT&T or
the General Counsel, Secretary or Assistant Secretary, or their
respective delegates, including 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.
Unless made irrevocable by the electing person, each election with
regard to making Employee Contributions or distributions of Share
Deferral Accounts shall become irrevocable at the close of business
on the last day the Employee is permitted to make such election.
Notwithstanding anything to the contrary in this Plan, AT&T may
place additional limits on the times during which elections may be
made to make contribution(s) or to delay distribution(s).
If not otherwise specified by this Plan or AT&T, any notice
or filing required or permitted to be given to AT&T under the
Plan shall be delivered to the principal office of AT&T,
directed to the attention of the Senior Executive Vice President in
charge of Human Resources for AT&T or his or her successor.
Such notice shall be deemed given on the date of delivery.
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. 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.
19
By participating in the Plan, each Participant agrees that
AT&T may provide any documents required or permitted under the
Federal or state securities laws, including but not limited to the
Securities Act of 1933, as amended, and the Securities Exchange Act
of 1934, as amended, by e-mail, by e-mail attachment, or by notice
by e-mail of electronic delivery through AT&T's Internet Web
site or by other electronic means.
10.3
Unsecured General Creditor .
Participants and their beneficiaries, heirs, successors, and
assigns shall have no legal or equitable rights, interest, or
claims in any property or assets of any Employer. No assets of any
Employer shall be held under any trust for the benefit of
Participants, their beneficiaries, heirs, successors, or assigns,
or held in any way as collateral security for the fulfilling of the
obligations of any Employer under this Plan. Any and all of each
Employer's assets shall be, and remain, the general, unpledged,
unrestricted assets of such Employer. The only obligation of an
Employer under the Plan shall be merely that of an unfunded and
unsecured promise of AT&T to distribute shares of Stock
corresponding to Share Units and Options, under the Plan.
10.4
Non-Assignability .
Neither a Participant nor any other person shall have any right
to commute, sell, assign, transfer, pledge, anticipate, mortgage,
or otherwise encumber, transfer, hypothecate or convey in advance
of actual receipt, shares of Stock corresponding to Share Units
under the Plan, if any, or any part thereof, which are, and all
rights to which are, expressly declared to be unassignable and
non-transferable. No part of the Stock distributable shall, prior
to actual distribution, be subject to seizure or sequestration for
the payment of any debts, judgments, alimony or separate
maintenance owed by a Participant or any other person, nor be
transferable by operation of law in the event of a Participant's or
any other person's bankruptcy or insolvency.
10.5
Employment Not Guaranteed .
Nothing contained in this Plan nor any action taken hereunder
shall be construed as a contract of employment or as giving any
employee any right to be retained in the employ of an Employer or
to serve as a director.
10.6
Errors.
At any time AT&T or an Employer may correct any error made
under the Plan without prejudice to AT&T or any Employer.
Neither AT&T nor any Employer shall be liable for any damages
resulting from failure to timely allow any contribution to be made
to the Plan or for any damages resulting from the correction of, or
a delay in correcting, any error made under the Plan. In no event
shall AT&T or any Employer be liable for consequential or
incidental damages arising out of a failure to comply with the
terms of the Plan.
10.7 Captions .
The captions of the articles, sections, and paragraphs of this
Plan are for convenience only and shall not control nor affect the
meaning or construction of any of its provisions.
10.8
Governing Law .
To the extent not preempted by Federal law, the Plan, and all
benefits 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.
20
Because benefits under the Plan are granted in Texas, records
relating to the Plan and benefits thereunder are located in Texas,
and the Plan and benefits thereunder are administered in Texas,
AT&T and the Participant under this Plan, 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
benefits under this Plan, including but not limited to any disputes
arising out of or relating to the interpretation and enforceability
of any benefits 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, 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 .
10.9
Plan to Comply with Section 409A.
In the event any provision of this Plan is held invalid, void,
or unenforceable, the same shall not affect, in any respect
whatsoever, the validity of any other provision of this Plan.
Notwithstanding any provision to the contrary in this Plan, each
provision in this Plan shall be interpreted to permit the deferral
of compensation in accordance with Section 409A of the Code and any
provision that would conflict with such requirements shall not be
valid or enforceable.
10.10
Successors and Assigns .
This Plan shall be binding upon AT&T and its successors and
assigns.
10.11 Loyalty Conditions for Officer Level Employees and Senior
Managers
Each Officer Level Employee or a Senior Manager who elects to
make Employee Contributions under Section 4.1 of this Plan shall be
subject to the agreements and conditions of this section.
(a)
By making an Employee Contribution election under Section 4.1 of
this Plan after September 1, 2009, a Participant acknowledges that
AT&T would be unwilling to provide for such an election but for
the loyalty conditions and covenants set forth in this section, and
that the conditions and covenants herein are a material inducement
to AT&T's willingness to sponsor the Plan and to offer Plan
benefits for the Participants. Accordingly, as a condition to
making an Employee Contribution election under Section 4.1 of this
Plan after September 1, 2009, each such electing Participant is
deemed to agree that he shall not, without obtaining the written
consent of the Committee in advance, participate in activities that
constitute engaging in competition with AT&T or engaging in
conduct disloyal to AT&T, as those terms are defined in this
section.
21
(b)
Definitions . For purposes of this section and of the Plan
generally:
(i) an "Employer Business" shall mean AT&T Inc. and any of its Subsidiaries,
or any business in which they or any affiliate of theirs has a substantial
ownership or joint venture interest;
(ii) "engaging in competition with AT&T" shall mean, while employed
by AT&T or any of its Subsidiaries, or within two (2) years after
Participant's Termination of Employment, engaging by the Participant
in any business or activity in all or any portion of the same geographical
market where the same or substantially similar business or activity
is being carried on by an Employer Business. "Engaging in competition
with AT&T" shall not include owning a non-substantial publicly
traded interest as a shareholder in a business that competes with
an Employer Business. "Engaging in competition with AT&T" shall
include representing or providing consulting services to, or being
an employee of, any person or entity that is engaged in competition
with any Employer Business or that takes a position adverse to
any Employer Business.
(iii) "engaging in conduct disloyal to AT&T" means, while employed by
AT&T or any of its Subsidiaries, or within two (2) years after
Participant's Termination of Employment, (i) soliciting for employment
or hire, whether as an employee or as an independent contractor,
for any business in competition with an Employer Business, any
person employed by AT&T or any of its Subsidiaries during the
one (1) year prior to the Participant's Termination of Employment,
whether or not acceptance of such position would constitute a
breach of such person's contractual obligations to AT&T or any
of its Subsidiaries; (ii) soliciting, encouraging, or inducing
any vendor or supplier with which Participant had business contact
on behalf of any Employer Business during the two (2) years prior
to the Participant's Termination of Employment (regardless of
the reason for that termination) to terminate, discontinue, renegotiate,
reduce, or otherwise cease or modify its relationship with AT&T
or any of its Subsidiaries; or (iii) soliciting, encouraging,
or inducing any customer or active prospective customer with whom
Participant had business contact, whether in person or by other
media ("Customer"), on behalf of any Employer Business during
the two (2) years prior to the Participant's Termination of Employment
(regardless of the reason for that termination), to terminate,
discontinue, renegotiate, reduce, or otherwise cease or modify
its relationship with any Employer Business, or to purchase competing
goods or services from a business competing with any Employer
Business, or accepting or servicing business from such Customer
on behalf of himself or any other business. "Engaging in conduct
disloyal to AT&T" shall also mean, disclosing Confidential Information
to any third party or using Confidential Information, other than
for an Employer Business, or failing to return any Confidential
Information to the Employer Business following termination of
employment.
(iv) "Confidential Information" shall mean all information belonging
to, or otherwise relating to, an Employer Business, which is not
generally known, regardless of the manner in which it is stored
or conveyed to Participant, and which the Employer Business 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 Employer Business' 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 Employer Business, or any of the products or services
made, developed or sold by the Employer Business. 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 Employer Business; 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
Plan.
(c)
Equitable Relief. The parties recognize that any Participant's
breach of any of the covenants in this section will cause
irreparable injury to the AT&T, will represent a failure of the
consideration under which AT&T (in its capacity as creator and
sponsor of the Plan) agreed to provide the Participant with the
opportunity to receive Plan benefits, and that monetary damages
would not provide AT&T with an adequate or complete remedy that
would warrant AT&T's continued sponsorship of the Plan
(including the accrual or granting of Share Units, Matching Share
Units and Options) for all Participants. Accordingly, in the event
of a Participant's actual or threatened breach of the covenants in
this section, the Committee, in addition to all other rights and
acting as a fiduciary under ERISA on behalf of all Participants,
shall have a fiduciary duty (in order to assure that AT&T
receives fair and promised consideration for its continued Plan
sponsorship and funding) to seek an injunction restraining the
Participant from breaching the covenants in this Section. AT&T
shall pay for any Plan expenses that the Committee incurs
hereunder, and shall be entitled to recover from the Participant
its reasonable attorneys' fees and costs incurred in obtaining such
injunctive remedies.
(d)
Uniform Enforcement. In recognition of AT&T's need for
nationally uniform standards for the Plan administration, it is an
absolute condition in consideration of any Participant's ability to
make Employee Contribution elections under Section 4.1 of this Plan
after September 1, 2009, that each and all of the following
conditions apply to all such electing Participants:
(i) ERISA shall control all issues and controversies hereunder, and
the Committee shall serve for purposes hereof as a "fiduciary" of
the Plan and its "named fiduciary" within the meaning of ERISA.
(ii) All litigation between the parties relating to this section shall
occur in federal court, which shall have exclusive jurisdiction;
any such litigation shall be held in the United States District
Court for the Northern District of Texas, and the only remedies
available with respect to the Plan shall be those provided under
ERISA.
22
Exhibit 10-b
AT&T INC.
CASH DEFERRAL PLAN
Adopted November 19, 2004
As amended through September 27, 2018
Article 1 - Statement of Purpose
The purpose of the Cash Deferral Plan ("Plan") is to provide
savings opportunities to a select group of management employees of
AT&T Inc. ("AT&T") and its Subsidiaries.
Article 2 - Definitions
For the purpose of this Plan, the following words and phrases
shall have the meanings indicated, unless the context indicates
otherwise:
Annual Bonus. The award designated the "Annual Bonus" by
AT&T (including but not limited to an award that may be paid in
more frequent installments than annually), together with any
individual discretionary award made in connection therewith, or
comparable awards, if any, determined by AT&T to be used in
lieu of these awards.
Base Compensation. The following types of cash-based
compensation paid by an Employer (but not including payments made
by a non-Employer, such as state disability payments), before
reduction due to any contribution pursuant to this Plan or
reduction pursuant to any deferral plan of an Employer, including
but not limited to a plan that includes a qualified cash or
deferral arrangement under Section 401(k) of the Code:
(a) base salary;
(b) lump sum payments in lieu of a base salary increase; and
(c) Annual Bonus.
Payments by an Employer under a disability plan made in lieu of
any compensation described above, shall be deemed to be a part of
the respective form of compensation it replaces for purposes of
this definition. Base Compensation does not include zone allowances
or any other geographical differential and shall not include
payments made in lieu of unused vacation or other paid days off,
and such payments shall not be contributed to this Plan.
Determinations by AT&T (the Committee with respect to
Officer Level Employees) of the items that make up Base
Compensation shall be final. The Committee may, from time to time,
add or subtract types of compensation to or from the definition of
"Base Compensation" provided, however, any such addition or
subtraction shall be effective only with respect to the next period
in which a Participant may make an election to establish a Cash
Deferral Account. Base Compensation that was payable in a prior
Plan Year but paid in a later Plan Year shall not be used to
determine Employee Contributions in the later Plan Year.
1
Business Day. Any day during regular business hours that
AT&T is open for business.
Cash Deferral Account or Account. The Account or Accounts
established annually by an election by a Participant to make
Employee Contributions to the Plan with each account relating to a
Plan Year. For each Plan Year after 2008, there shall be a separate
Cash Deferral Account for Base Compensation (excluding Annual
Bonus) and a separate Cash Deferral Account for the Short Term
Incentive Award and/or Annual Bonus. Earnings on each of Employee
Contributions shall accrue to the respective Cash Deferral Accounts
where they are earned.
Change in Control. With respect to AT&T's direct and
indirect ownership of an Employer, a "Change in the effective
control of a Corporation," as defined in Treasury Regulation
Section 1.409A-3(i)(5)(vi)(A)(1), regardless of whether the
Employer is a corporation or non-corporate entity as permitted by
the regulation, and using "50 percent" in lieu of "30 percent" in
such regulation. A Change in Control will not apply to AT&T
itself.
Chief Executive Officer. The Chief Executive Officer of AT&T
Inc.
Code. References to the Code shall be to provisions of the
Internal Revenue Code of 1986, as amended, including regulations
promulgated thereunder and successor provisions. Similarly,
references to regulations shall include amendments and successor
provisions.
Committee. The Human Resources Committee of the Board of
Directors of AT&T Inc.
Disability. Absence of an Employee from work with an Employer
under the relevant Employer's disability plan.
Eligible Employee. An Employee who:
(a) is a full or part time, salaried Employee of AT&T or an
Employer in which AT&T has a direct or indirect 100% ownership
interest and who is on active duty or Leave of Absence (but only
while such Employee is deemed by the Employer to be an Employee of
such Employer);
(b) is, as determined by AT&T, a member of Employer's
"select group of management or highly compensated employees" within
the meaning of the Employee Retirement Income Security Act of 1974,
as amended, and regulations thereunder ("ERISA"), which is deemed
to include each Officer Level Employee; and
(c) has an employment status which has been approved by AT&T
to be eligible to participate in this Plan or is an Officer Level
Employee.
Notwithstanding the foregoing, AT&T (the Committee with
respect to Officer Level Employees) may, from time to time, exclude
any Employee or group of Employees from being deemed an "Eligible
Employee" under this Plan.
In the event a court or other governmental authority determines
that an individual was improperly excluded from the class of
persons who would be permitted to make Employee Contributions
during a particular time for any reason, that individual shall not
be permitted to make such contributions for purposes of the Plan
for the period of time prior to such determination.
2
Employee. Any person employed by an Employer and paid on an
Employer's payroll system, excluding persons hired for a fixed
maximum term and excluding persons who are neither citizens nor
permanent residents of the United States, all as determined by
AT&T. For purposes of this Plan, a person on Leave of Absence
who otherwise would be an Employee shall be deemed to be an
Employee.
Employee Contributions. Amounts credited to a Cash Deferral
Account pursuant to Section 4.1 (Election to Make Contributions) of
the Plan.
Employer. AT&T Inc. or any of its Subsidiaries.
Incentive Award. A cash award paid by an Employer (and not by a
non-Employer, such as state disability payments) under the Short
Term Incentive Plan or any successor plan, the 2006 Incentive Plan
or any successor plan, or any other award that the Committee
specifically permits to be contributed to a Cash Deferral Account
under this Plan (regardless of the purpose of the award).
Leave of Absence. Where a person is absent from employment with
an Employer on a leave of absence, military leave, sick leave, or
Disability, where the leave is given in order to prevent a break in
the continuity of term of employment, and permission for such leave
is granted (and not revoked) in conformity with the rules of the
Employer that employs the individual, as adopted from time to time,
and the Employee is reasonably expected to return to service.
Except as set forth below, the leave shall not exceed six (6)
months for purposes of this Plan, and the Employee shall Terminate
Employment upon termination of such leave if the Employee does not
return to work prior to or upon expiration of such six (6) month
period, unless the individual retains a right to reemployment under
law or by contract. A twenty-nine (29) month limitation shall apply
in lieu of such six (6) month limitation if the leave is due to the
Employee being "disabled" (within the meaning of Treasury
Regulation --1.409A-3(i)(4)). A Leave of Absence shall not commence
or shall be deemed to cease under the Plan where the Employee has
incurred a Termination of Employment.
Officer Level Employee. Any executive officer of AT&T, as
that term is used under the Securities Exchange Act of 1934, as
amended, and any Employee that is an "officer level" Employee for
compensation purposes as shown on the records of AT&T.
Participant. An Employee or former Employee who participates in
this Plan.
Plan Interest Rate. An annual rate of interest equal to Moody's
Long-Term Corporate Bond Yield Average for the September preceding
the calendar year during which the interest rate will apply. The
Committee may choose another method of calculating the Plan
Interest Rate, but such other method may only apply to Cash
Deferral Units that Participants have not yet elected to
establish.
Plan Year. Each of the following shall be a Plan year: the
period from January 1, 2005 through January 15, 2006; the period
January 16, 2006 through December 31, 2006; and, for all later Plan
Years, it is defined as the period from January 1 through December
31.
3
Retirement or Retire. Termination of Employment on or after the
date the Participant has attained one of the following combinations
of age and Net Credited Service:
Net Credited Service
Age
10 years or more
65 or older
20 years or more
55 or older
25 years or more
50 or older
30 years or more
Any age
For purposes of this Plan only, Net Credited Service shall be
calculated in the same manner as "Pension Eligibility Service"
under the AT&T Pension Benefit Plan - Nonbargained Program
("Pension Plan"), as the same existed on October 1, 2008, except
that service with an Employer shall be counted as though the
Employer were a "Participating Company" under the Pension Plan and
the Employee was a participant in the Pension Plan.
Senior Manager. Any Employee who is a "senior manager" for
compensation purposes as shown on the records of AT&T.
Short Term Incentive Award. A cash award paid by an Employer
(and not by a non-Employer, such as state disability payments)
under the Short Term Incentive Plan or any successor plan, together
with any individual discretionary award made in connection
therewith; an award under a similar plan intended by the Committee
to be in lieu of an award under such Short Term Incentive Plan,
including, but not limited to, Performance Units granted under the
2006 Incentive Plan or any successor plan. It shall also include
any other award that the Committee designates as a Short Term
Incentive Award specifically for purposes of this Plan (regardless
of the purpose of the award) provided the deferral election is made
in accordance with Section 409A.
Specified Employee. Any Participant who is a "Key Employee" (as
defined in Code Section 416(i) without regard to paragraph (5)
thereof), as determined by AT&T in accordance with its uniform
policy with respect to all arrangements subject to Code Section
409A, based upon the 12-month period ending on each December 31st
(such 12-month period is referred to below as the "identification
period"). All Participants who are determined to be Key Employees
under Code Section 416(i) (without regard to paragraph (5) thereof)
during the identification period shall be treated as Key Employees
for purposes of the Plan during the 12-month period that begins on
the first day of the 4th month following the close of such
identification period.
Subsidiary. Any corporation, partnership, venture or other
entity or business with which AT&T would be considered a single
employer under Sections 414(b) and (c) of the Code, using 50% as
the ownership threshold as provided under Section 409A of the
Code.
Termination of Employment. References herein to "Termination of
Employment," "Terminate Employment" or a similar reference, shall
mean the event where the Employee has a "separation from service,"
as defined under Section 409A, with all Employers. For purposes of
this Plan, a Termination of Employment with respect to an Employer
also shall be deemed to occur when such Employer incurs a Change in
Control.
4
Article 3 - Administration of the Plan
3.1
The Committee.
Except as delegated by this Plan or by the Committee, the
Committee shall be the administrator of the Plan and will
administer the Plan, interpret, construe and apply its provisions
and all questions of administration, interpretation and application
of the Plan, including, without limitation, questions and
determinations of eligibility entitlement to benefits and payment
of benefits, all in its sole and absolute discretion. The Committee
may further establish, adopt or revise such rules and regulations
and such additional terms and conditions regarding participation in
the Plan as it may deem necessary or advisable for the
administration of the Plan. References in this Plan to
determinations or other actions by AT&T, herein, shall mean
actions authorized by the Committee, the Chief Executive Officer,
the Senior Executive Vice President of AT&T in charge of Human
Resources, or their respective successors or duly authorized
delegates, in each case in the discretion of such person. All
decisions by the Committee, its delegate or AT&T, as
applicable, shall be final and binding.
3.2
Claims and Appeals.
(a)
Claims. A person who believes that he or she is being denied a
benefit to which he or she is entitled under this Plan (hereinafter
referred to as a "Claimant") may file a written request for such
benefit with the Executive Compensation Administration Department,
setting forth his or her claim. The request must be addressed to
the AT&T Executive Compensation Administration Department at
its then principal place of business.
(b)
Claim Decision. Upon receipt of a claim, the AT&T Executive
Compensation Administration Department shall review the claim and
provide the Claimant with a written notice of its decision within a
reasonable period of time, not to exceed ninety (90) days, after
the claim is received. If the AT&T Executive Compensation
Administration Department determines that special circumstances
require an extension of time beyond the initial ninety (90)-day
claim review period, the AT&T Executive Compensation
Administration Department shall notify the Claimant in writing
within the initial ninety (90)-day period and explain the special
circumstances that require the extension and state the date by
which the AT&T Executive Compensation Administration Department
expects to render its decision on the claim. If this notice is
provided, the AT&T Executive Compensation Administration
Department may take up to an additional ninety (90) days (for a
total of one hundred eighty (180) days after receipt of the claim)
to render its decision on the claim.
If the claim is denied by the AT&T Executive Compensation
Administration Department, in whole or in part, the AT&T
Executive Compensation Administration Department shall provide a
written decision using language calculated to be understood by the
Claimant and setting forth: (i) the specific reason or reasons for
such denial; (ii) specific references to pertinent provisions of
this Plan on which such denial is based; (iii) a description of any
additional material or information necessary for the Claimant to
perfect his or her claim and an explanation of why such material or
such information is necessary; (iv) a description of the Plan's
procedures for review of denied claims and the steps to be taken if
the Claimant wishes to submit the claim for review; (v) the time
limits for requesting a review of a denied claim under this section
and for conducting the review under this section; and (vi) a
statement of the Claimant's right to bring a civil action under
Section 502(a) of ERISA if the claim is denied following review
under this section.
5
(c)
Request for Review. Within sixty (60) days after the receipt by
the Claimant of the written decision on the claim provided for in
this section, the Claimant may request in writing that the
Committee review the determination of the AT&T Executive
Compensation Administration Department. Such request must be
addressed to the Committee at the address for giving notice under
this Plan. To assist the Claimant in deciding whether to request a
review of a denied claim or in preparing a request for review of a
denied claim, a Claimant shall be provided, upon written request to
the Committee and free of charge, reasonable access to, and copies
of, all documents, records and other information relevant to the
claim. The Claimant or his or her duly authorized representative
may, but need not, submit a statement of the issues and comments in
writing, as well as other documents, records or other information
relating to the claim for consideration by the Committee. If the
Claimant does not request a review of the AT&T Executive
Compensation Administration Department's decision by the Committee
within such sixty (60)-day period, the Claimant shall be barred and
estopped from challenging the determination of the AT&T
Executive Compensation Administration Department.
(d)
Review of Decision. Within sixty (60) days after the Committee's
receipt of a request for review, the Administrator will review the
decision of the AT&T Executive Compensation Administration
Department. If the Committee determines that special circumstances
require an extension of time beyond the initial sixty (60)-day
review period, the Committee shall notify the Claimant in writing
within the initial sixty (60)-day period and explain the special
circumstances that require the extension and state the date by
which the Committee expects to render its decision on the review of
the claim. If this notice is provided, the Committee may take up to
an additional sixty (60) days (for a total of one hundred twenty
(120) days after receipt of the request for review) to render its
decision on the review of the claim.
During its review of the claim, the Committee shall:
(1)
Take into account all comments, documents, records, and other
information submitted by the Claimant relating to the claim,
without regard to whether such information was submitted or
considered in the initial review of the claim conducted pursuant to
this section;
(2)
Follow reasonable procedures to verify that its benefit
determination is made in accordance with the applicable Plan
documents; and
(3)
Follow reasonable procedures to ensure that the applicable Plan
provisions are applied to the Participant to whom the claim relates
in a manner consistent with how such provisions have been applied
to other similarly-situated Participants.
After considering all materials presented by the Claimant, the
Committee will render a decision, written in a manner designed to
be understood by the Claimant. If the Committee denies the claim on
review, the written decision will include (i) the specific reasons
for the decision; (ii) specific references to the pertinent
provisions of this Plan on which the decision is based; (iii) a
statement that the Claimant is entitled to receive, upon request to
the Committee and free of charge, reasonable access to, and copies
of, all documents, records, and other information relevant to the
claim; and (iv) a statement of the Claimant's right to bring a
civil action under Section 502(a) of ERISA.
6
The Committee shall serve as the final review committee under
the Plan and shall have sole and complete discretionary authority
to administer, interpret, construe and apply the Plan provisions,
and determine all questions of administration, interpretation,
construction, and application of the Plan, including questions and
determinations of eligibility, entitlement to benefits and the
type, form and amount of any payment of benefits, all in its sole
and absolute discretion. The Committee shall further have the
authority to determine all relevant facts and related issues, and
all documents, records and other information relevant to a claim
conclusively for all parties, and in accordance with the terms of
the documents or instruments governing the Plan. Decisions by the
Committee shall be conclusive and binding on all parties and not
subject to further review.
In any case, a Participant or Beneficiary may have further
rights under ERISA. The Plan provisions require that Participants
or Beneficiary pursue all claim and appeal rights described in this
section before they seek any other legal recourse regarding claims
for benefits.
Article 4 - Contributions
4.1
Election to Make Contributions.
(a) The Committee shall establish dates and other conditions for
participation in the Plan and making contributions as it deems
appropriate. Except as otherwise provided by the Committee, each
year an Employee who is an Eligible Employee as of September 30 may
thereafter make an election on or prior to the last Business Day of
the immediately following November (such election shall be
cancelled if the Employee is not an Eligible Employee on the last
day such an election may be made) to contribute on a pre-tax basis,
through payroll deductions, any combination of the following:
(1) From 1% to 50% (in whole percentage increments) of the
Participant's monthly Base Compensation, other than Annual Bonus,
during the calendar year (the Plan Year for such contributions)
following the calendar year of such election. Employees who are
below the level of Senior Manager, as shown on the records of
AT&T at the time of the election, may contribute no more than
25% or such other amount as determined by AT&T.
(2) Up to 95% (in whole percentage increments) of a Short Term
Incentive Award, or up to 50% (in whole percentage increments) of
Annual Bonus (25% for Employees who are below the level of Senior
Manager), in each case such contributions shall be made during the
second calendar year (which is the Plan Year for such
contributions) following the year of such election, except that in
2008 a separate election may be made with respect to contributions
to be made in 2009. An Employee may make such an election with
respect to the type of Award (Short Term Incentive Award or Annual
Bonus) that the Employee is under as of the time the Employee's
eligibility to make such election is determined. If because of a
promotion or otherwise, the Employee receives a different type of
Award instead of or in partial or full replacement for the type of
Award subject to the Employee's election for the relevant Plan
Year, the election will apply to the other Award as well, including
but not limited to any individual discretionary award related
thereto.
7
(b) The Committee may permit an Eligible Employee to make an
election to make other contributions under this Plan with
compensation other than Base Compensation or Short Term Incentive
Awards on such terms and conditions as such Committee may permit
from time to time provided that any such election is made in
accordance with Section 409A of the Code.
(c) Notwithstanding anything to the contrary in this Plan, no
election shall be effective to the extent it would permit an
Employee Contribution or distribution to be made that is not in
compliance with Section 409A of the Code. To the extent such
election related to Employee Contributions that complied with such
statute and regulations, thereunder, that portion of the election
shall remain valid, except as otherwise provided under this
Plan.
(d) To the extent permitted by Section 409A of the Code,
AT&T may refuse or terminate, in whole or in part, any election
to make contributions to the Plan at any time; provided, however,
only the Committee may take such action with respect to persons who
are Officer Level Employees.
(e) In the event the Participant takes a hardship withdrawal
pursuant to Treasury Regulation --1.401(k)-1 from a benefit plan
qualified under the Code and sponsored by an Employer, any election
to make Employee Contributions by such Participant shall be
cancelled on a prospective basis, and the Participant shall not be
permitted to make a new election with respect to Employee
Contributions that would be contributed during the then current and
immediately following calendar year.
(f) To the extent a Participant makes contributions to the Plan
where the payment of which would be deductible by AT&T under
Section 162(m) of the Code without regard to the size of the
distribution, such contributions and earnings thereon shall be
distributed first.
(g) With respect to a Plan Year, an Employee may elect to (1)
make Employee Contributions of Base Compensation other than Annual
Bonus to this Plan but only if the Employee elects to contribute at
least 6% of Base Compensation other than Annual Bonus for the same
Plan Year to the Stock Purchase and Deferral Plan and/or (2) make
Employee Contributions of Annual Bonus to this Plan but only if the
Employee elects to contribute at least 6% of Annual Bonus for the
same Plan Year to the Stock Purchase and Deferral Plan.
4.2
Contributions to a Cash Deferral Account.
(a) Employee Contributions shall be made pursuant to a proper
election, only during the Participant's lifetime; provided,
however, with respect to Employee Contribution elections made prior
to 2007, the Employee must remain an Eligible Employee while making
any such contributions. In the event of a Change in Control of an
Employer, subsequent compensation from the Employer may not be
contributed to the Plan. The Employer may continue the then current
elections of the participants under a subsequent plan in order to
comply with applicable tax laws.
8
(b) A Participant's contributions shall be credited to the
Participant's Cash Deferral Account on the day the compensation -
from which the contribution is to be deducted - is to be paid
("paid," as used in this Plan, includes amounts contributed to the
Plan that would have been paid were it not for an election under
this Plan), as determined by the relevant Employer. Earnings on
each Cash Deferral Account shall be recorded on Participant's
statements quarterly. The Committee may modify or change this
paragraph (b) from time to time.
4.3
Earnings on Cash Deferral Accounts.
During a calendar year, the Participant's Cash Deferral Account
shall accrue interest on amounts held by such Account at the Plan
Interest Rate for such year, compounded quarterly on the last day
of each quarter. Interest will accrue on unpaid amounts in the Cash
Deferral Account from the date credited to such Account.
Article 5 - Distributions
5.1
Distributions of Cash Deferral Accounts.
(a) Initial Election with Respect to a Cash Deferral Account. At
the time the Participant makes an election to make Employee
Contributions with respect to a Cash Deferral Account, the
Participant shall also elect the calendar year of the distribution
of the Cash Deferral Account and the number of installments. The
Participant may elect either of the following:
(i) Specified Date Distribution. That the distribution of the
Cash Deferral Account commence in the calendar year specified by
the Participant, but no later than the 10th calendar year after the
Plan Year the Cash Deferral Account commenced, in up to Ten (10)
installments. However, for purposes of Initial Elections with
respect to Plan Years prior to 2009 only, in the event the
Participant Terminates Employment prior to the calendar year of the
distribution, the Cash Deferral Account must commence distribution
the calendar year following the calendar year of the Termination of
Employment, with the same number of installments, unless the
Employee has made an irrevocable election under (b), below. For
example, if the Participant elected a 2010 distribution with five
(5) installments, but Terminated Employment in 2007, the Cash
Deferral Account would commence distribution in 2008.
(ii) Retirement Distribution. That the distribution of the Cash
Deferral Account commence the calendar year following the calendar
year of Retirement in up to (10) installments. If the Participant
Terminates Employment while not Retirement eligible, the
distribution shall commence the calendar year following the
calendar year of Termination of Employment, but shall be limited to
five (5) installments. This distribution alternative will not be
available for Initial Elections made after 2007.
If no timely distribution election is made by the Participant,
then the Participant will be deemed to have made an election to
have the Cash Deferral Account distributed in a single installment
in the first calendar year after the calendar year Employee
Contributions were first made.
9
(b) Election to Delay a Specified Date Distribution.
(i)
If an Employee elected a Specified Date Distribution for a Cash
Deferral Account, the Employee may elect to delay the Specified
Date Distribution commencement date and, as part of such delay
election elect a new number of installments; provided, however,
Termination of Employment will not accelerate the distribution,
unlike the initial deferral election. Unless otherwise provided by
AT&T, the election of a new distribution commencement date for
a Cash Deferral Account must be made on or after October 16, and on
or before the last Business Day of the next following December, of
the calendar year that is the second calendar year preceding the
calendar year in which the distribution would otherwise
commence.
(ii)
To make this election, the Participant must be an Employee that
is, as determined by AT&T, a member of Employer's "select group
of management or highly compensated employees" within the meaning
of ERISA on the September 30 immediately preceding such election
and on the day of such election. The new distribution election must
delay commencement of the distribution by five (5) years.
(iii)
An election to delay the Specified Date Distribution
commencement date of a Cash Deferral Account may not be made in the
same calendar year the election to establish the Cash Deferral
Account is made. Notwithstanding anything to the contrary in this
Plan:
a. an election to delay the Specified Date Distribution commencement
date must be made at least 12 months prior to the date of the
first scheduled payment under the prior distribution election,
and
b. the election shall not take effect until at least 12 months after
the date on which the election is made.
(c) A Participant's Cash Deferral Account shall be distributed
to the Participant on March 10 (or as soon thereafter as
administratively practicable, as determined by AT&T) of the
calendar year elected by the Participant for the Account. In the
event the distribution is to be made to a "Specified Employee" as a
result of the Participant's Termination of Employment (other than
as a result of a Change in Control), the distribution shall not
occur until the later of such March 10 or six (6) months after the
Termination of Employment, except it shall be distributed upon the
Participant's earlier death in accordance with this Plan. The
distributions shall continue annually on each successive March 10
(or such other date as determined by AT&T) until the number of
installments elected by the Participant is reached. In each
installment, AT&T shall distribute to the Participant that
portion of the Participant's Cash Deferral Account that is equal to
the total dollar amount of the Participant's Account divided by the
number of remaining installments.
(d) The Committee may establish other distribution alternatives
from time to time, but such alternatives may be offered no earlier
than the next period in which a Participant may make an election to
establish a Cash Deferral Account.
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5.2
Death of the Participant.
In the event of the death of a Participant, notwithstanding
anything to the contrary in this Plan, all undistributed Cash
Deferral Accounts shall be distributed to the Participant's
beneficiary in accordance with the AT&T Rules for Employee
Beneficiary Designations, as the same may be amended from time to
time, within the later of 90 days following such determination or
the end of the calendar year in which determination was made.
5.3
Unforeseeable Emergency Distribution.
If a Participant experiences an "Unforeseeable Emergency," the
Participant may submit a written petition to AT&T (the
Committee in the case of Officer Level Employees), to receive a
partial or full distribution of his Cash Deferral Account(s). In
the event that AT&T (the Committee in the case of Officer Level
Employees), upon review of the written petition of the Participant,
determines in its sole discretion that the Participant has suffered
an "Unforeseeable Emergency," AT&T shall make a distribution to
the Participant from the Participant's Cash Deferral Accounts, on a
pro-rata basis, within the later of 90 days following such
determination or the end of the calendar year in which
determination was made, subject to the following:
(a)
"Unforeseeable Emergency" shall mean a severe financial hardship
to the Participant resulting from an illness or accident of the
Participant, the Participant's legal spouse, the Participant's
beneficiary, or the Participant's dependent (as defined in Code
Section 152, without regard to Code Section 152(b)(1), (b)(2), and
(d)(1)(B)); loss of the Participant's property due to casualty; or
other similar extraordinary and unforeseeable circumstances arising
as a result of events beyond the control of the Participant, all as
determined in the sole discretion of the Committee. Whether a
Participant is faced with an Unforeseeable Emergency permitting a
distribution is to be determined based on the relevant facts and
circumstances of each case, but, in any case, a distribution on
account of Unforeseeable Emergency shall not be made to the extent
that such emergency is or may be relieved through reimbursement or
compensation from insurance or otherwise, by liquidation of the
Participant's assets, to the extent the liquidation of such assets
would not cause severe financial hardship, or by cessation of
deferrals under the Plan.
(b)
The amount of a distribution to be made because of an
Unforeseeable Emergency shall not exceed the amount reasonably
necessary, as determined by AT&T (the Committee in the case of
Officer Level Employees) in its sole discretion, to satisfy the
emergency need (which may include amounts necessary to pay any
Federal, state, local, or foreign income taxes or penalties
reasonably anticipated to result from the distribution).
Determinations of the amount reasonably necessary to satisfy the
emergency need shall take into account any additional compensation
that is available if the plan provides for cancellation of a
deferral election upon a payment due to an Unforeseeable Emergency.
The determination of amounts reasonably necessary to satisfy the
Unforeseeable Emergency need is not required to, but may, take into
account any additional compensation that, due to the Unforeseeable
Emergency, is available under another nonqualified deferred
compensation plan but has not actually been paid, or that is
available due to the Unforeseeable Emergency under another plan
that would provide for deferred compensation except due to the
application of the effective date provisions under Treasury
Regulation -- 1.409A-6.
11
(c)
Upon such distribution on account of an Unforeseeable Emergency
under this Plan, any election to make Employee Contributions by
such Participant shall be immediately cancelled, and the
Participant shall not be permitted to make a new election with
respect to Employee Contributions that would be contributed during
the then current and immediately following calendar year.
5.4
Ineligible Participant.
Notwithstanding any other provisions of this Plan to the
contrary, if AT&T receives an opinion from counsel selected by
AT&T, or a final determination is made by a Federal, state or
local government or agency, acting within its scope of authority,
to the effect that an individual's continued participation in the
Plan would violate applicable law, then such person shall not make
further contributions to the Plan to the extent permitted by
Section 409A of the Code.
5.5
Conflict of Interest Distribution.
AT& T may in its sole discretion accelerate a
distribution(s) to the Participant, provided he or she is no longer
actively employed by AT&T: (a) to the extent necessary for any
Federal officer or employee in the executive branch to comply with
an ethics agreement with the Federal government or (b) to the
extent reasonably necessary to avoid the violation of an applicable
Federal, state, local, or foreign ethics law or conflicts of
interest law (including where such payment is reasonably necessary
to permit the service provider to participate in activities in the
normal course of his or her position in which the service provider
would otherwise not be able to participate under an applicable
rule). Any such distribution may only be made in accordance with
Section 409A of the Code and the regulations thereunder.
Article 6 - Transition Provisions
6.1
2005 Cash Deferral Accounts.
Notwithstanding Article 4 to the contrary, if an Employee is an
Eligible Employee on September 30, 2004, the Employee may make an
election under Article 4 on or prior to December 15, 2004, with
respect to the establishment of a Cash Deferral Account for the
contribution of Base Compensation and/or Incentive Awards that
would otherwise be paid during the period from January 1, 2005,
through January 15, 2006, which shall be the Plan Year for such
Cash Deferral Account.
6.2
2007 Amendments.
Amendments made to the Plan on November 15, 2007, shall be
effective January 1, 2008, except for amendments to this Article 7,
which shall be effective upon adoption. Any Participants electing
prior to November 15, 2007, to make Employee Contributions in 2008
shall have their elections canceled if they do not consent by
December 14, 2007, to all prior amendments to this Plan and to the
Stock Purchase and Deferral Plan. Subject to the foregoing consent
requirements, all Employee Contribution elections made prior to
2008, including but not limited to elections to contribute cash
with respect to Performance Shares granted that would be
distributed under the 2001 Incentive Plan or a successor plan,
shall remain in force, subject to all other terms of the amended
Plan.
12
6.3
2008 Amendments. For the 2008 Plan Year, only Salary and Short
Term Incentive Awards paid after Termination of Employment may be
contributed to the Plan. Article 7 - Discontinuation, Termination,
Amendment.
7.1
AT&T's Right to Discontinue Offering Cash Deferral
Accounts.
The Committee may at any time discontinue offerings of Cash
Deferral Accounts or contributions under the Plan. Any such
discontinuance shall have no effect upon existing Cash Deferral
Accounts or the terms or provisions of this Plan as applicable to
such Accounts.
7.2
AT&T's Right to Terminate Plan.
The Committee may terminate the Plan at any time. Upon
termination of the Plan, contributions shall no longer be made
under the Plan.
After termination of the Plan, Participants shall continue to
earn interest on undistributed amounts and shall continue to
receive all distributions under this Plan at such time as provided
in and pursuant to the terms and conditions of Participant's
elections and this Plan. Notwithstanding the foregoing, the
termination of the Plan shall be made solely in accordance with
Section 409A of the Code and in no event shall cause the
accelerated distribution of any Account unless such termination is
effected in accordance with Section 409A of the Code.
7.3
Amendment.
The Committee may at any time amend the Plan in whole or in
part; provided, however, that no amendment, including but not
limited to an amendment to this section, shall be effective,
without the consent of a Participant, to alter, to the material
detriment of such Participant, any of the Cash Deferral Accounts of
the Participant, other than as provided elsewhere in this section.
For purposes of this section, an alteration to the material
detriment of a Participant shall include, but not be limited to, a
material reduction in the period of time over which the
Participant's Cash Deferral Account may be distributed to a
Participant, any reduction in the amounts credited to the
Participant's Cash Deferral Accounts, or any reduction in the Plan
Interest Rate (other than as it may fluctuate in accordance with
its terms) for Cash Deferral Accounts previously elected by the
Participant. Any such consent may be in a writing, telecopy, or
e-mail or in another electronic format. An election to make
Employee Contributions shall be conclusively deemed to be the
consent of the Participant to any and all amendments to the Plan
prior to such election, and such consent shall be a condition to
making any election with respect to Employee Contributions.
The Plan is established in order to provide deferred
compensation to a select group of management and highly compensated
employees with in the meaning of Sections 201(2) and 301(a)(3) of
ERISA. To the extent legally required, the Code and ERISA shall
govern the Plan, and if any provision hereof is in violation of an
applicable requirement thereof, the Company reserves the right to
retroactively amend the Plan to comply therewith to the extent
permitted under the Code and ERISA. The Company also reserves the
right to make such other changes as may facilitate implementation
of Section 409A of the Code. Provided, however, that in no event
shall any such amendments be made in violation of the requirements
of Section 409A of the Code.
13
Article 8 - Miscellaneous
8.1
Tax Withholding.
Upon a distribution from a Participant's Cash Deferral Account,
AT&T shall withhold sufficient amounts to satisfy the minimum
amount of Federal, state, and local taxes required by law to be
withheld as a result of such distribution.
8.2
Loyalty Conditions for Officer Level Employees and Senior
Managers.
Each Officer Level Employee or a Senior Manager who elects to
make Employee Contributions under Section 4.1 of this Plan shall be
subject to the agreements and conditions of this section.
(a)
By making an Employee Contribution election under Section 4.1 of
this Plan after September 1, 2009, a Participant acknowledges that
AT&T would be unwilling to provide for such an election but for
the loyalty conditions and covenants set forth in this section, and
that the conditions and covenants herein are a material inducement
to AT&T's willingness to sponsor the Plan and to offer Plan
benefits for the Participants. Accordingly, as a condition to
making an Employee Contribution election under Section 4.1 of this
Plan after September 1, 2009, each such electing Participant is
deemed to agree that he shall not, without obtaining the written
consent of the Committee in advance, participate in activities that
constitute engaging in competition with AT&T or engaging in
conduct disloyal to AT&T, as those terms are defined in this
section.
(b)
Definitions . For purposes of this section and of the Plan
generally:
(i) an "Employer Business" shall mean AT&T Inc. and any of its Subsidiaries,
or any business in which they or any affiliate of theirs has a substantial
ownership or joint venture interest;
(ii) "engaging in competition with AT&T" shall mean, while employed
by AT&T or any of its Subsidiaries, or within two (2) years after
Participant's Termination of Employment, engaging by the Participant
in any business or activity in all or any portion of the same geographical
market where the same or substantially similar business or activity
is being carried on by an Employer Business. "Engaging in competition
with AT&T" shall not include owning a non-substantial publicly
traded interest as a shareholder in a business that competes with
an Employer Business. "Engaging in competition with AT&T" shall
include representing or providing consulting services to, or being
an employee of, any person or entity that is engaged in competition
with any Employer Business or that takes a position adverse to
any Employer Business.
(iii) "engaging in conduct disloyal to AT&T" means, while employed by
AT&T or any of its Subsidiaries, or within two (2) years after
Participant's Termination of Employment, (i) soliciting for employment
or hire, whether as an employee or as an independent contractor,
for any business in competition with an Employer Business, any
person employed by AT&T or any of its Subsidiaries during the
one (1) year prior to the Participant's Termination of Employment,
whether or not acceptance of such position would constitute a
breach of such person's contractual obligations to AT&T or any
of its Subsidiaries; (ii) soliciting, encouraging, or inducing
any vendor or supplier with which Participant had business contact
on behalf of any Employer Business during the two (2) years prior
to the Participant's Termination of Employment (regardless of
the reason for that termination) to terminate, discontinue, renegotiate,
reduce, or otherwise cease or modify its relationship with AT&T
or any of its Subsidiaries; or (iii) soliciting, encouraging,
or inducing any customer or active prospective customer with whom
Participant had business contact, whether in person or by other
media ("Customer"), on behalf of any Employer Business during
the two (2) years prior to the Participant's Termination of Employment
(regardless of the reason for that termination), to terminate,
discontinue, renegotiate, reduce, or otherwise cease or modify
its relationship with any Employer Business, or to purchase competing
goods or services from a business competing with any Employer
Business, or accepting or servicing business from such Customer
on behalf of himself or any other business. "Engaging in conduct
disloyal to AT&T" shall also mean, disclosing Confidential Information
to any third party or using Confidential Information, other than
for an Employer Business, or failing to return any Confidential
Information to the Employer Business following termination of
employment.
(iv) "Confidential Information" shall mean all information belonging
to, or otherwise relating to, an Employer Business, which is not
generally known, regardless of the manner in which it is stored
or conveyed to Participant, and which the Employer Business 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 Employer Business' 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 Employer Business, or any of the products or services
made, developed or sold by the Employer Business. 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 Employer Business; 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
Plan.
14
(c)
Equitable Relief. The parties recognize that any Participant's
breach of any of the covenants in this section will cause
irreparable injury to the AT&T, will represent a failure of the
consideration under which AT&T (in its capacity as creator and
sponsor of the Plan) agreed to provide the Participant with the
opportunity to receive Plan benefits, and that monetary damages
would not provide AT&T with an adequate or complete remedy that
would warrant AT&T's continued sponsorship of the Plan
(including the accrual or granting of Share Units, Matching Share
Units and Options) for all Participants. Accordingly, in the event
of a Participant's actual or threatened breach of the covenants in
this section, the Committee, in addition to all other rights and
acting as a fiduciary under ERISA on behalf of all Participants,
shall have a fiduciary duty (in order to assure that AT&T
receives fair and promised consideration for its continued Plan
sponsorship and funding) to seek an injunction restraining the
Participant from breaching the covenants in this Section. AT&T
shall pay for any Plan expenses that the Committee incurs
hereunder, and shall be entitled to recover from the Participant
its reasonable attorneys' fees and costs incurred in obtaining such
injunctive remedies.
(d)
Uniform Enforcement. In recognition of AT&T's need for
nationally uniform standards for the Plan administration, it is an
absolute condition in consideration of any Participant's ability to
make Employee Contribution elections under Section 4.1 of this Plan
after September 1, 2009, that each and all of the following
conditions apply to all such electing Participants:
(i) ERISA shall control all issues and controversies hereunder, and
the Committee shall serve for purposes hereof as a "fiduciary" of
the Plan and its "named fiduciary" within the meaning of ERISA.
(ii) All litigation between the parties relating to this section shall
occur in federal court, which shall have exclusive jurisdiction;
any such litigation shall be held in the United States District
Court for the Northern District of Texas, and the only remedies
available with respect to the Plan shall be those provided under
ERISA.
8.3
Elections and Notices.Notwithstanding anything to the contrary
contained in this Plan, all elections and notices of every kind
under this Plan shall be made (1) on forms prepared by AT&T or
the General Counsel, Secretary or Assistant Secretary, or their
respective delegates, or (2) in such other manner as permitted or
required by AT&T or the General Counsel, Secretary or Assistant
Secretary, or their respective delegates, including 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. Unless made irrevocable by the electing person,
each election with regard to making Employee Contributions or
distributions of Cash Deferral Accounts shall become irrevocable at
the close of business on the last day the Employee is permitted to
make such election. Notwithstanding anything to the contrary in
this Plan, AT&T may place additional limits on the times during
which elections may be made to make contribution(s) or to delay
distribution(s).
15
If not otherwise specified by this Plan or AT&T, any notice
or filing required or permitted to be given to AT&T under the
Plan shall be delivered to the principal office of AT&T,
directed to the attention of the Senior Executive Vice President in
charge of Human Resources for AT&T or his or her successor.
Such notice shall be deemed given on the date of delivery.
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. 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.
By participating in the Plan, each Participant agrees that
AT&T may provide any documents required or permitted under the
Federal or state securities laws, including but not limited to the
Securities Act of 1933, as amended, and the Securities Exchange Act
of 1934, as amended, by e-mail, by e-mail attachment, or by notice
by e-mail of electronic delivery through AT&T's Internet Web
site or by other electronic means.
8.4
Unsecured General Creditor.
Participants and their beneficiaries, heirs, successors, and
assigns shall have no legal or equitable rights, interest, or
claims in any property or assets of any Employer. No assets of any
Employer shall be held under any trust for the benefit of
Participants, their beneficiaries, heirs, successors, or assigns,
or held in any way as collateral security for the fulfilling of the
obligations of any Employer under this Plan. Any and all of each
Employer's assets shall be, and remain, the general, unpledged,
unrestricted assets of such Employer. The only obligation of an
Employer under the Plan shall be merely that of an unfunded and
unsecured promise of AT&T to make distributions under and in
accordance with the terms of the Plan.
8.5
Non-Assignability.
Neither a Participant nor any other person shall have any right
to commute, sell, assign, transfer, pledge, anticipate, mortgage,
or otherwise encumber, transfer, hypothecate or convey in advance
of actual receipt, any Cash Deferral Account under the Plan, if
any, or any part thereof, which are, and all rights to which are,
expressly declared to be unassignable and non-transferable. No part
of a distributable Cash Deferral Account shall, prior to actual
distribution, be subject to seizure or sequestration for the
payment of any debts, judgments, alimony or separate maintenance
owed by a Participant or any other person, nor be transferable by
operation of law in the event of a Participant's or any other
person's bankruptcy or insolvency.
8.6
Employment Not Guaranteed.
Nothing contained in this Plan nor any action taken hereunder
shall be construed as a contract of employment or as giving any
employee any right to be retained in the employ of an Employer or
to serve as a director.
16
8.7
Errors.
At any time AT&T or an Employer may correct any error made
under the Plan without prejudice to AT&T or any Employer.
Neither AT&T nor any Employer shall be liable for any damages
resulting from failure to timely allow any contribution to be made
to the Plan or for any damages resulting from the correction of, or
a delay in correcting, any error made under the Plan. In no event
shall AT&T or any Employer be liable for consequential or
incidental damages arising out of a failure to comply with the
terms of the Plan.
8.8
Captions.
The captions of the articles, sections, and paragraphs of this
Plan are for convenience only and shall not control nor affect the
meaning or construction of any of its provisions.
8.9
Governing Law.
To the extent not preempted by Federal law, the Plan, and all
benefits 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.
Because benefits under the Plan are granted in Texas, records
relating to the Plan and benefits thereunder are located in Texas,
and the Plan and benefits thereunder are administered in Texas,
AT&T and the Participant under this Plan, 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
benefits under this Plan, including but not limited to any disputes
arising out of or relating to the interpretation and enforceability
of any benefits 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, 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.
8.10
Plan to Comply with Section 409A.
In the event any provision of this Plan is held invalid, void,
or unenforceable, the same shall not affect, in any respect
whatsoever, the validity of any other provision of this Plan.
Notwithstanding any provision to the contrary in this Plan, each
provision in this Plan shall be interpreted to permit the deferral
of compensation in accordance with Section 409A of the Code and any
provision that would conflict with such requirements shall not be
valid or enforceable.
8.11
Successors and Assigns.
This Plan shall be binding upon AT&T and its successors and
assigns.
17
Exhibit 10-c
AT&T INC.
SHORT TERM INCENTIVE PLAN
Effective February 1, 2018
The Short Term Incentive Plan ("Plan") is established to provide
Executive Officers, Officers, Senior Managers and, where
appropriate, other Employees, with short-term incentive
compensation based upon the achievement of performance goals.
1. Definitions .
For purposes of this Plan, the following underlined words and
phrases shall have the meanings indicated, unless the context
clearly indicates otherwise:
Award shall mean an award under this Plan, which shall consist
of the Target Award and related payout schedule, together with the
associated Performance Goals, Performance Period, and any other
terms and conditions, as well as the Key Contributor Award.
AT&T or the Company shall mean AT&T Inc., a Delaware
Corporation.
Disability shall mean absence of an Employee from work under the
relevant Employer disability plan.
Employee shall mean any person designated as an employee in the
payroll and personnel records of an Employer and paid on an
Employer's payroll system.
Executive Officer shall mean any Officer who is identified by
AT&T as an executive officer under Rule 3b-7 of the Securities
Exchange Act of 1934.
Employer shall mean AT&T or any of its Subsidiaries.
Leave of Absence shall mean an Employee's absence from
employment with an Employer on a formally granted leave of absence
(i.e., the absence is with formal permission in order to prevent a
break in the continuity of term of employment, which permission is
granted (and not revoked) in conformity with the rules of the
applicable Employer, as adopted from time to time).
Officer shall mean an Employee who is designated as an officer
for compensation purposes on the records of AT&T.
Performance Goals shall mean any financial, service, or other
goals applicable to the payment of Target Awards under this
Plan.
Performance Period shall mean the time period over which
Performance Goals are measured, but in no case shall a Performance
Period exceed one (1) year.
1
Retire or Retirement shall mean the Termination of an Employee's
employment with AT&T or any of its subsidiaries on or after
attaining one of the following combinations of age and Term of
Employment (as determined under the applicable Employer pension
plan), as applicable:
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
Notwithstanding the foregoing, "Retire" or "Retirement" for an
Officer also refers to the Termination of Employment of an Officer,
other than for cause, who has attained age 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.
Senior Manager shall mean an Employee who is designated as a
senior manager for compensation purposes on the records of
AT&T.
SEVP-HR shall mean the AT&T's highest ranking Officer (below
the Chief Executive Officer (CEO)) who is specifically responsible
for human resources matters. Any authority granted to the SEVP-HR
shall also be held by the CEO.
Subsidiary shall mean any U.S. corporation in which AT&T
owns, directly or indirectly, more than fifty percent (50%) of the
total combined voting power of all classes of stock, or any other
entity (including, but not limited to, partnerships and joint
ventures) in which AT&T owns, directly or indirectly, more than
fifty percent (50%) of the combined equity thereof.
Target Award shall mean a specific dollar value or percentage of
salary that may be paid based on the 100% achievement of the
related Performance Goals.
Termination of Employment, Termination , or a similar reference
shall mean the event where the Employee ceases to be an Employee
and is no longer employed by an Employer.
2.
Administration.
The Human Resources Committee (the "Committee") shall have
complete authority over the administration of the Plan and the
authority to construe, interpret, and implement the Plan or any
Award thereunder, and make factual determinations under the Plan.
The CEO and the SEVP-HR, in their sole respective discretions,
shall have complete authority to construe, interpret, and implement
the provisions of the Plan or any Award solely with respect to Plan
or Award matters delegated to them or to delegate all or part of
their authority. All actions and determinations by the Committee,
the CEO, the SEVP-HR (each an "Administrator"), or their respective
delegates, authorized by this Plan shall be final and binding and
shall be afforded the greatest legal deference on review.
2
3. Establishing, Modifying, or Terminating Awards.
Awards under this Plan shall be established, modified, or
terminated by the Committee, the CEO, or the SEVP-HR, as
follows:
A. The Committee may establish, modify, or terminate an Award for any Employee.
B. Except as prohibited by the Committee, the CEO may interpret, establish, modify
or terminate an Award for any Officer (other than an Executive Officer) or
lower level employee, even if the Award was originally granted by the Committee.
C. Except as prohibited by the Committee or the CEO, the SEVP-HR may interpret,
establish, modify or terminate an Award for any Employee that is not an Officer,
even if the Award was originally granted by the Committee or the CEO.
D. Except as prohibited by the Committee or the Plan, in the event of a promotion,
change in responsibility, or new hire during the Performance Period, the CEO
or SEVP-HR may establish or modify an Award for an Employee.
4.
Award Terms.
An authorized Administrator establishing an Award, shall
determine the terms and conditions of the Award, including any
Performance Goals and associated performance exclusions that would
be used to determine, in whole or in part, the amount of any payout
of an Award. The terms of an Award, including any Performance Goals
and associated performance exclusions, may be modified, reduced or
cancelled at any time before the Award is finally distributed.
5.
Final Award Determination.
Actual performance shall be compared to any predetermined
Performance Goals to determine payout of Awards. An authorized
Administrator shall then determine the percentage of the Target
Award (using the related payout schedule) to be distributed to
Employees for the relevant Performance Period as it may determine
in its sole and complete discretion.
The final Award to be distributed to an Employee (or former
Employee) may be more or less in an authorized Administrator's
discretion (including no award) than the percentage of the Target
Award determined for such Employee; for example, an authorized
Administrator may approve a final Award greater or less than the
(prorated, if applicable) performance-adjusted Target Award.
Determination and distribution of all Awards is subject to
approval by an authorized Administrator, except as provided herein.
All Awards are payable in cash and will be paid within two and
one-half (2 1/2 ) months of the end of the Performance Period and
in all cases no later than March 15 of the year following the year
in which a Performance Period ends.
For purposes of other plans, the portion of an Award payout that
is earned while an Employee is a Senior Manager or below shall be
classified as an Annual Bonus; and the portion earned while an
Employee is an Officer shall be classified as a Short Term
Incentive Award. In each case, unless otherwise provided by an
authorized Administrator, the Key Contributor Award, if any, paid
with respect to a Performance Period shall be classified as either
an Annual Bonus or a Short Term Incentive Award, based upon the
recipient's management level at the end of the Performance
Period.
3
6.
Key Contributor Awards.
An authorized Administrator may provide an additional payment to
recipients of Target Awards to recognize and reward outstanding or
exceptional achievement. Such a payment shall be called a "Key
Contributor Award" or "KCA." The number of Employees within an
organization that may receive a KCA may be limited by an authorized
Administrator.
7.
Award Adjustments.
Unless otherwise provided by an authorized Administrator, an
Employee who experiences one of the following events during the
Performance Period shall have his/her Award under this Plan
automatically adjusted as follows:
When an Award is established after the Award shall be prorated based on the
beginning of the Performance Period time period of active service under
the applicable Award terms
Modification of an Award during the Performance Award shall be prorated based on the
Period time period of active service under
each applicable set of Award terms
Leave of Absence during the Performance Award shall be prorated to exclude the
Period time period of the leave
Involuntary Termination during the Performance Award shall be prorated to the date
Period of Termination of Employment
Voluntary Termination prior to the end No Award
of the performance period (except as provided
below)
Retirement or Termination of Employment Award shall be prorated to the date
due to death or Disability during the performance of Termination of Employment
period
Dismissal for cause, even if Retirement Award shall be forfeited upon Termination
eligible, during or after a Performance of Employment
Period, but prior to Award payout
The receipt of short-term Disability benefits during the
Performance Period shall have no effect on an Award.
4
8.
Other Conditions .
A. No person shall have any claim to be granted an Award under the Plan
and there is no obligation for uniformity of treatment of Employees
under the Plan. Awards under the Plan may not be assigned or alienated.
B. Neither the Plan nor any action taken hereunder shall be construed as
giving to any Employee the right to be retained in the employ of AT&T
or any subsidiary thereof.
C. Awards shall be subject to applicable withholding taxes as required
by law.
D. The Plan shall be governed by the laws of the State of Texas and applicable
Federal law.
E. The AT&T Rules for Employee Beneficiary Designations shall apply to
Awards under this Plan.
5
EXHIBIT
12
AT&T INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
Nine Months Ended
September 30, Year Ended December 31,
(Unaudited)
2018 2017 2017 2016 2015 2014 2013
Earnings:
Income from continuing
operations before
income
taxes $ 19,128 $ 16,422 $15,139 $19,812 $20,692 $10,355 $28,050
Equity in net loss
(income)
of affiliates included
above 71 148 128 (98) (79) (175) (642)
Fixed charges 7,480 6,235 8,854 7,296 6,592 5,295 5,452
Distributed income of
equity
affiliates 242 22 46 61 30 148 318
Interest capitalized (404) (718) (903) (892) (797) (234) (284)
Earnings, as adjusted $ 26,517 $ 22,109 $23,264 $26,179 $26,438 $15,389 $32,894
Fixed Charges:
Interest expense $ 5,845 $ 4,374 $ 6,300 $ 4,910 $ 4,120 $ 3,613 $ 3,940
Interest capitalized 404 718 903 892 797 234 284
Portion of rental
expense
representative of
interest
factor 1,231 1,143 1,651 1,494 1,675 1,448 1,228
Fixed Charges $ 7,480 $ 6,235 $ 8,854 $ 7,296 $ 6,592 $ 5,295 $ 5,452
Ratio of Earnings to
Fixed
Charges 3.55 3.55 2.63 3.59 4.01 2.91 6.03
Exhibit 31.1
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: November 2, 2018
/s/ Randall Stephenson
Randall Stephenson
Chairman of the Board,
Chief Executive Officer and President
Exhibit 31.2
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: November 2, 2018
/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
Exhibit 32
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
September 30, 2018 (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.
November 2, 2018 November 2, 2018
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 news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
QRTDKLFFVLFEFBZ
(END) Dow Jones Newswires
December 19, 2018 13:33 ET (18:33 GMT)
At&t Inc 5.500% (LSE:58KN)
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