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| Name | Symbol | Market | Type |
|---|---|---|---|
| At&t Inc 5.500% | LSE:58KN | London | Bond |
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|---|---|---|---|---|---|---|---|---|---|---|
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From Nov 2019 to Nov 2024
TIDM58KN
RNS Number : 0123G
AT & T Inc.
23 May 2017
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Hot Features
Premium
(Mark One)
x QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period
ended March 31, 2017
or
o TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 1-8610
AT&T INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer," "large accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated [X] Accelerated filer [ ]
filer
Non-accelerated [ ] (Do not check if a smaller reporting Smaller reporting [ ]
filer company) company
Emerging growth company [ ]
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
At April 30, 2017, there were 6,148 million common shares outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AT&T INC.
----------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
----------------------------------------------------------------------------------
Three months ended
March 31,
2017 2016
--------------------------------------------------------- ----------- --------
Operating Revenues
Service $ 36,456 $ 37,101
Equipment 2,909 3,434
---------------------------------------------------------- ------- -------
Total operating revenues 39,365 40,535
---------------------------------------------------------- ------- -------
Operating Expenses
Cost of services and sales
Equipment 3,848 4,375
Broadcast, programming and operations 4,974 4,629
Other cost of services (exclusive of depreciation
and
amortization shown separately below) 9,065 9,396
Selling, general and administrative 8,487 8,441
Depreciation and amortization 6,127 6,563
---------------------------------------------------------- ------- -------
Total operating expenses 32,501 33,404
---------------------------------------------------------- ------- -------
Operating Income 6,864 7,131
---------------------------------------------------------- ------- -------
Other Income (Expense)
Interest expense (1,293) (1,207)
Equity in net income (loss) of affiliates (173) 13
Other income (expense) - net (20) 70
---------------------------------------------------------- ------- -------
Total other income (expense) (1,486) (1,124)
---------------------------------------------------------- ------- -------
Income Before Income Taxes 5,378 6,007
Income tax expense 1,804 2,122
---------------------------------------------------------- ------- -------
Net Income 3,574 3,885
---------------------------------------------------------- ------- -------
Less: Net Income Attributable to Noncontrolling Interest (105) (82)
---------------------------------------------------------- ------- -------
Net Income Attributable to AT&T $ 3,469 $ 3,803
========================================================== ======= =======
Basic Earnings Per Share Attributable to AT&T $ 0.56 $ 0.62
Diluted Earnings Per Share Attributable to AT&T $ 0.56 $ 0.61
---------------------------------------------------------- ------- -------
Weighted Average Number of Common Shares Outstanding
- Basic (in millions) 6,166 6,172
Weighted Average Number of Common Shares Outstanding
- with Dilution (in millions) 6,186 6,190
Dividends Declared Per Common Share $ 0.49 $ 0.48
========================================================== ======= =======
See Notes to Consolidated Financial Statements.
2
AT&T INC.
------------------------------------------------------------------ ----------- -------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
------------------------------------------------------------------ ----------- -------
Three months ended
March 31,
2017 2016
------------------------------------------------------------------ ----------- -------
Net income $ 3,574 $ 3,885
Other comprehensive income (loss), net of tax:
Foreign currency:
Foreign currency translation adjustment (includes $6
and $0 attributable to
noncontrolling interest), net of taxes of $391 and $(10) 372 (44)
Available-for-sale securities:
Net unrealized gains (losses), net of taxes of $15 and
$(15) 33 (26)
Reclassification adjustment included in net income,
net of taxes of $3, and $(2) 5 (3)
Cash flow hedges:
Net unrealized gains, net of taxes of $7 and $67 13 124
Reclassification adjustment included in net income,
net of taxes of $5 and $5 10 10
Defined benefit postretirement plans:
Amortization of net prior service credit included in
net income, net of taxes of $(139)
and $(131) (228) (215)
------------------------------------------------------------------- ------- ------
Other comprehensive income (loss) 205 (154)
------------------------------------------------------------------- ------- ------
Total comprehensive income 3,779 3,731
Less: Total comprehensive income attributable to noncontrolling
interest (111) (82)
------------------------------------------------------------------- ------- ------
Total Comprehensive Income Attributable to AT&T $ 3,668 $ 3,649 =================================================================== ======= ====== See Notes to Consolidated Financial Statements.
3
AT&T INC.
------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
------------------------------------------------------------------------------------
December
March 31, 31,
2017 2016
-------------------------------------------------------- ------------- ---------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 14,884 $ 5,788
Accounts receivable - net of allowances for doubtful
accounts of $699 and $661 15,078 16,794
Prepaid expenses 1,418 1,555
Other current assets 14,347 14,232
--------------------------------------------------------- --------- --------
Total current assets 45,727 38,369
--------------------------------------------------------- --------- --------
Property, plant and equipment 319,108 319,648
Less: accumulated depreciation and amortization (193,816) (194,749)
--------------------------------------------------------- --------- --------
Property, Plant and Equipment - Net 125,292 124,899
--------------------------------------------------------- --------- --------
Goodwill 105,593 105,207
Licenses 94,617 94,176
Customer Lists and Relationships - Net 13,366 14,243
Other Intangible Assets - Net 8,295 8,441
Investments in Equity Affiliates 1,551 1,674
Other Assets 17,462 16,812
--------------------------------------------------------- --------- --------
Total Assets $ 411,903 $ 403,821
========================================================= ========= ========
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year $ 12,681 $ 9,832
Accounts payable and accrued liabilities 27,120 31,138
Advanced billing and customer deposits 4,493 4,519
Accrued taxes 3,384 2,079
Dividends payable 3,012 3,008
--------------------------------------------------------- --------- --------
Total current liabilities 50,690 50,576
--------------------------------------------------------- --------- --------
Long-Term Debt 120,568 113,681
--------------------------------------------------------- --------- --------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 61,100 60,128
Postemployment benefit obligation 33,404 33,578
Other noncurrent liabilities 21,160 21,748
--------------------------------------------------------- --------- --------
Total deferred credits and other noncurrent liabilities 115,664 115,454
--------------------------------------------------------- --------- --------
Stockholders' Equity
Common stock ($1 par value, 14,000,000,000 authorized
at March 31, 2017 and
December 31, 2016: issued 6,495,231,088 at March
31, 2017 and December 31, 2016) 6,495 6,495
Additional paid-in capital 89,411 89,604
Retained earnings 35,175 34,734
Treasury stock (347,741,277 at March 31, 2017 and
356,237,141
at December 31, 2016, at cost) (12,400) (12,659)
Accumulated other comprehensive income 5,160 4,961
Noncontrolling interest 1,140 975
--------------------------------------------------------- --------- --------
Total stockholders' equity 124,981 124,110
--------------------------------------------------------- --------- --------
Total Liabilities and Stockholders' Equity $ 411,903 $ 403,821
========================================================= ========= ========
See Notes to Consolidated Financial Statements.
4
AT&T INC.
-----------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
---------------------------------------------------------------- ----------- --------
Three months ended
March 31,
2017 2016
---------------------------------------------------------------- ----------- --------
Operating Activities
Net income $ 3,574 $ 3,885
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 6,127 6,563
Undistributed loss (earnings) from investments in
equity affiliates 182 (13)
Provision for uncollectible accounts 393 374
Deferred income tax expense 480 1,346
Net loss (gain) from sale of investments, net of impairments 61 (44)
Changes in operating assets and liabilities:
Accounts receivable 445 43
Other current assets 228 1,319
Accounts payable and other accrued liabilities (1,778) (3,990)
Equipment installment receivables and related sales 579 454
Deferred fulfillment costs (436) (542)
Retirement benefit funding (140) (140)
Other - net (497) (1,355)
----------------------------------------------------------------- ------- -------
Total adjustments 5,644 4,015
----------------------------------------------------------------- ------- -------
Net Cash Provided by Operating Activities 9,218 7,900
----------------------------------------------------------------- ------- -------
Investing Activities
Capital expenditures:
Purchase of property and equipment (5,784) (4,451)
Interest during construction (231) (218)
Acquisitions, net of cash acquired (162) (165)
Dispositions 6 81
Sale of securities, net - 445
----------------------------------------------------------------- ------- -------
Net Cash Used in Investing Activities (6,171) (4,308)
----------------------------------------------------------------- ------- -------
Financing Activities
Net change in short-term borrowings with original maturities
of three months or less (1) -
Issuance of long-term debt 12,440 5,978
Repayment of long-term debt (3,053) (2,296)
Purchase of treasury stock (177) -
Issuance of treasury stock 21 89
Dividends paid (3,009) (2,947)
Other (172) 471
----------------------------------------------------------------- ------- -------
Net Cash Provided by Financing Activities 6,049 1,295
----------------------------------------------------------------- ------- -------
Net increase in cash and cash equivalents 9,096 4,887
Cash and cash equivalents beginning of year 5,788 5,121
----------------------------------------------------------------- ------- -------
Cash and Cash Equivalents End of Period $ 14,884 $ 10,008
================================================================= ======= ======= Cash paid (received) during the three months ended March 31 for: Interest $ 1,643 $ 1,459 Income taxes, net of refunds $ (160) $ 477 See Notes to Consolidated Financial Statements.
5
AT&T INC.
----------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
----------------------------------------------------------------------------
March 31, 2017
------------------
Shares Amount
------------------------------------------------------- ------- --------
Common Stock
Balance at beginning of year 6,495 $ 6,495
Issuance of stock - -
------------------------------------------------------- ------ -------
Balance at end of period 6,495 $ 6,495
========================================================= ====== =======
Additional Paid-In Capital
Balance at beginning of year $ 89,604
Issuance of treasury stock 4
Share-based payments (197)
--------------------------------------------------------- ------ -------
Balance at end of period $ 89,411
========================================================= ====== =======
Retained Earnings
Balance at beginning of year $ 34,734
Net income attributable to AT&T ($0.56 per diluted
share) 3,469
Dividends to stockholders ($0.49 per share) (3,030)
Other 2
--------------------------------------------------------- ------ -------
Balance at end of period $ 35,175
========================================================= ====== =======
Treasury Stock
Balance at beginning of year (356) $(12,659)
Repurchase and acquisition of common stock (5) (200)
Issuance of treasury stock 13 459
--------------------------------------------------------- ------ -------
Balance at end of period (348) $(12,400)
========================================================= ====== =======
Accumulated Other Comprehensive Income Attributable
to AT&T, net of tax
Balance at beginning of year $ 4,961
Other comprehensive income attributable to AT&T 199
--------------------------------------------------------- ------ -------
Balance at end of period $ 5,160
========================================================= ====== =======
Noncontrolling Interest
Balance at beginning of year $ 975
Net income attributable to noncontrolling interest 105
Distributions (77)
Acquisition of noncontrolling interest 131
Translation adjustments attributable to noncontrolling
interest, net of taxes 6
--------------------------------------------------------- ------ -------
Balance at end of period $ 1,140
========================================================= ====== =======
Total Stockholders' Equity at beginning of year $124,110
========================================================= ====== =======
Total Stockholders' Equity at end of period $124,981
========================================================= ====== =======
See Notes to Consolidated Financial Statements.
6
AT&T INC.
MARCH 31, 2017
For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2016. The results for the interim periods are not necessarily indicative of those for the full year.
In the tables throughout this document, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period's presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS
Basis of Presentation These consolidated financial statements include all adjustments that are necessary to present fairly the results for the presented interim periods, consisting of normal recurring accruals and other items. The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates.
All significant intercompany transactions are eliminated in the consolidation process. Investments in less than majority-owned subsidiaries and partnerships where we have significant influence are accounted for under the equity method. Earnings from certain investments accounted for using the equity method are included for periods ended within up to one quarter of our period end. We also record our proportionate share of our equity method investees' other comprehensive income (OCI) items, including cumulative translation adjustments.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. Certain amounts have been reclassified to conform to the current period's presentation.
Recently Adopted Accounting Standards
Income Taxes As of January 1, 2017, we adopted Accounting Standards Update (ASU) No. 2016-16, "Income Taxes (Topic 740)" (ASU 2016-16), with modified retrospective application, resulting in our recognition of an immaterial adjustment to retained earnings. Under ASU 2016-16, we recognize the income tax effects of the intercompany sales or transfers of assets other than inventory (e.g., intellectual property or property, plant and equipment) during the period of intercompany sale or transfer instead of the period of either the sale or transfer to a third party or recognition of depreciation or impairment.
New Accounting Standards
Pension and Other Postretirement Benefits In March 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" (ASU 2017-07), which changes the presentation of periodic benefit cost components. Under ASU 2017-07, we will continue to present service costs within our operating expenses but present amortization of prior service credits and other components of our net periodic benefit cost in "other income (expense)" in our consolidated statements of income. ASU 2017-07 is effective for annual reporting periods beginning after December 15, 2017. See Note 5 for our components of net periodic benefit cost.
Revenue Recognition In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASC 606), and has modified the standard thereafter. This standard replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASC 606, as amended, becomes effective for annual reporting periods beginning after December 15, 2017, at which point we plan to adopt the standard using the "modified retrospective method." Under that method, we will apply the rules to all contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous accounting standards.
7
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months ended March 31, 2017 and 2016, is shown in the table below:
Three months ended
March 31,
2017 2016
------------------------------------------------------------ ----------- -------
Numerators
Numerator for basic earnings per share:
Net Income $ 3,574 $ 3,885
Less: Net income attributable to noncontrolling interest (105) (82)
------------------------------------------------------------- ------- ------
Net Income attributable to AT&T 3,469 3,803
Dilutive potential common shares:
Share-based payment 4 4
------------------------------------------------------------- ------- ------
Numerator for diluted earnings per share $ 3,473 $ 3,807
============================================================= ======= ======
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common shares outstanding 6,166 6,172
Dilutive potential common shares:
Share-based payment (in shares) 20 18
------------------------------------------------------------- ------- ------
Denominator for diluted earnings per share 6,186 6,190
============================================================= ======= ======
Basic earnings per share attributable to AT&T $ 0.56 $ 0.62
Diluted earnings per share attributable to AT&T $ 0.56 $ 0.61
============================================================= ======= ======
8
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
NOTE 3. OTHER COMPREHENSIVE INCOME
Changes in the balances of each component included in accumulated other comprehensive income (accumulated OCI) are presented below. All amounts are net of tax and exclude noncontrolling interest.
Net
Net Unrealized Unrealized
Foreign Gains (Losses) Gains Defined Accumulated
Currency on (Losses) 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 366 33 13 - 412
Amounts
reclassified
from accumulated
OCI - (1) 5 (1) 10 (2) (228) (3) (213)
------------------- ----------- --- ----------------- --- ---------- --- ------------- --- -------------
Net other
comprehensive
income (loss) 366 38 23 (228) 199
------------------- ----------- --- ----------------- --- ---------- --- ------------- --- -------------
Balance as of March
31, 2017 $ (1,629) $ 579 $ 767 $ 5,443 $ 5,160
=================== =========== === ================= === ========== === ============= === =============
Net
Net Unrealized Unrealized
Foreign Gains (Losses) Gains Defined Accumulated
Currency on (Losses) Benefit Other
Translation Available-for-Sale on Cash Postretirement Comprehensive
Adjustment Securities Flow Hedges Plans Income
------------------- ------------ --- ------------------ --- ----------- --- -------------- --- --------------
Balance as of
December
31, 2015 $ (1,198) $ 484 $ 16 $ 6,032 $ 5,334
Other comprehensive
income
(loss) before
reclassifications (44) (26) 124 - 54
Amounts
reclassified
from accumulated
OCI - (1) (3) (1) 10 (2) (215) (3) (208)
------------------- ----------- --- ----------------- --- ---------- --- ------------- --- -------------
Net other
comprehensive
income (loss) (44) (29) 134 (215) (154)
------------------- ----------- --- ----------------- --- ---------- --- ------------- --- -------------
Balance as of March
31, 2016 $ (1,242) $ 455 $ 150 $ 5,817 $ 5,180
=================== =========== === ================= === ========== === ============= === =============
(Gains) losses are included in Other income (expense) - net in the
(1) consolidated statements of income.
(Gains) losses are included in Interest expense in the consolidated
(2) statements of income. See Note 6 for additional information.
The amortization of prior service credits associated with postretirement
(3) benefits, net of amounts capitalized as part of construction
labor, are included in Cost of services and sales and Selling, general
and administrative in the consolidated statements of income
(see Note 5).
NOTE 4. SEGMENT INFORMATION
Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. We analyze our segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items (as discussed below), and equity in net income (loss) of affiliates for investments managed within each segment. We have four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.
We also evaluate segment performance based on EBITDA and/or EBITDA margin, which is defined as Segment Contribution excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate segment operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.
9
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
The Business Solutions segment provides services to business customers, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively referred to as fixed strategic services; as well as traditional data and voice products. We utilize our wireless and wired networks to provide a complete communications solution to our business customers.
The Entertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the United States or in U.S. territories. We utilize our copper and IP-based wired network and/or our satellite technology.
The Consumer Mobility segment provides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our network to provide voice and data services, including high-speed internet, video and home monitoring services over wireless devices.
The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates.
In reconciling items to consolidated operating income and income before income taxes, Corporate and Other includes: (1) operations that are not considered reportable segments and that are no longer integral to our operations or which we no longer actively market, and (2) impacts of corporate-wide decisions for which the individual segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.
Certain operating items are not allocated to our business segments, and those include:
-- Acquisition-related items which consists of (1) items associated
with the merger and integration of acquired businesses and (2) the
noncash amortization of intangible assets acquired in acquisitions.
-- Certain significant items which consists of (1) noncash actuarial
gains and losses from pension and other postretirement benefits,
(2) employee separation charges associated with voluntary and/or
strategic offers, (3) losses resulting from abandonment or impairment
of assets and (4) other items for which the segments are not being
evaluated.
Interest expense and other income (expense) - net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results.
Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as our satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by segment, and, therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment.
10
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
For the three months ended March 31, 2017
----------------------------------------------------------------------------------------------------------------------
Equity
in Net
Income
Operations Depreciation Operating (Loss)
and Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
-------------------- ---------- ----------- ------- -------------- ----------- ------------ --------------
Business Solutions $ 16,848 $ 10,176 $ 6,672 $ 2,312 $ 4,360 $ - $ 4,360
Entertainment
Group 12,623 9,601 3,022 1,419 1,603 (6) 1,597
Consumer Mobility 7,740 4,528 3,212 873 2,339 - 2,339
International 1,929 1,759 170 290 (120) 20 (100 )
--------------------- ------ ---------- ------ ---------- ------- -------- ----------
Segment Total 39,140 26,064 13,076 4,894 8,182 $ 14 $ 8,196
--------------------- ------ ---------- ------ ---------- ------- -------- ----------
Corporate and
Other 225 221 4 31 (27)
Acquisition-related
items - 207 (207) 1,202 (1,409)
Certain significant
items - (118) 118 - 118
--------------------- ------ ---------- ------ ---------- -------
AT&T Inc. $ 39,365 $ 26,374 $12,991 $ 6,127 $ 6,864
===================== ====== ========== ====== ========== =======
For the three months ended March 31, 2016
---------------------------------------------------------------------------------------------------------------------
Equity
in Net
Income
Operations Depreciation Operating (Loss)
and Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
-------------------- ---------- ----------- ------- -------------- ----------- ------------ --------------
Business Solutions $ 17,609 $ 10,802 $ 6,807 $ 2,508 $ 4,299 $ - $ 4,299
Entertainment
Group 12,658 9,578 3,080 1,488 1,592 3 1,595
Consumer Mobility 8,328 4,912 3,416 922 2,494 - 2,494
International 1,667 1,588 79 277 (198) 14 (184 )
--------------------- ------ ---------- ------ ---------- ------- -------- ----------
Segment Total 40,262 26,880 13,382 5,195 8,187 $ 17 $ 8,204
--------------------- ------ ---------- ------ ---------- ------- -------- ----------
Corporate and
Other 273 377 (104) 17 (121)
Acquisition-related
items - 295 (295) 1,351 (1,646)
Certain significant
items - (711) 711 - 711
--------------------- ------ ---------- ------ ---------- -------
AT&T Inc. $ 40,535 $ 26,841 $13,694 $ 6,563 $ 7,131
===================== ====== ========== ====== ========== =======
11
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
The following table is a reconciliation of Segment Contribution to "Income
Before Income Taxes" reported on our consolidated statements of income.
First Quarter
--------------------
2017 2016
----------------------------------------------------------- ---------- -------
Business Solutions $ 4,360 $ 4,299
Entertainment Group 1,597 1,595
Consumer Mobility 2,339 2,494
International (100) (184)
------------------------------------------------------------ ------ ------
Segment Contribution 8,196 8,204
------------------------------------------------------------ ------ ------
Reconciling Items:
Corporate and Other (27) (121)
Merger and integration charges (207) (295)
Amortization of intangibles acquired (1,202) (1,351)
Employee separation costs - (25)
Gain on wireless spectrum transactions 118 736
Segment equity in net (income) loss of affiliates (14) (17)
------------------------------------------------------------ ------ ------
AT&T Operating Income 6,864 7,131
------------------------------------------------------------ ------ ------
Interest expense 1,293 1,207
Equity in net income (loss) of affiliates (173) 13
Other income (expense) - net (20) 70
------------------------------------------------------------ ------ ------
Income Before Income Taxes $ 5,378 $ 6,007
============================================================ ====== ======
NOTE 5. PENSION AND POSTRETIREMENT BENEFITS
Many of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental, life insurance and death benefits to certain retired employees under various plans and accrue actuarially determined postretirement benefit costs. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits described in the plans to employees upon their retirement.
In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $8,426 at March 31, 2017. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly by AT&T Mobility II LLC to the trust, in equal amounts and accounted for as contributions. We distributed $140 to the trust during the three months ended March 31, 2017. So long as we make the distributions, we will have no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan's separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation.
We recognize actuarial gains and losses on pension and postretirement plan assets in our operating results at our annual measurement date of December 31, unless earlier remeasurements are required. The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income. A portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded. Service costs and prior service credits are reported in our segment results while interest costs and expected return on plan assets are included with Corporate and Other (see Note 4).
12
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
Three months ended
March 31,
2017 2016
------------------------------------------------------------------ ----------- -------
Pension cost:
Service cost - benefits earned during the period $ 282 $ 278
Interest cost on projected benefit obligation 484 495
Expected return on assets (783) (778)
Amortization of prior service credit (31) (26)
------------------------------------------------------------------- ------- ------
Net pension (credit) cost $ (48) $ (31)
=================================================================== ======= ======
Postretirement cost:
Service cost - benefits earned during the period $ 41 $ 48
Interest cost on accumulated postretirement benefit obligation 222 243
Expected return on assets (80) (89)
Amortization of prior service credit (336) (319)
------------------------------------------------------------------- ------- ------
Net postretirement (credit) cost $ (153) $ (117)
=================================================================== ======= ======
Combined net pension and postretirement (credit) cost $ (201) $ (148)
=================================================================== ======= ======
The decrease in the combined net pension and postretirement costs in the first quarter reflects higher amortization of prior service credits due to plan changes, including changes to future costs for continued retiree healthcare coverage. The reduction also reflects decreasing corporate bond rates, which contributed to lower interest costs.
We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the first quarter ended 2017 and 2016, net supplemental pension benefits costs not included in the table above were $22 and $23.
NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 Inputs to the valuation methodology are unadjusted quoted prices
for identical assets or liabilities in active markets that we have
the ability to access.
Level 2 Inputs to the valuation methodology include:
-- Quoted prices for similar assets and liabilities
in active markets.
-- Quoted prices for identical or similar assets or liabilities
in inactive markets.
-- Inputs other than quoted market prices that are observable
for the asset or liability.
-- Inputs that are derived principally from or corroborated
by observable market data by correlation or other means.
Level 3 Inputs to the valuation methodology are unobservable and significant
to the fair value measurement.
-- Fair value is often based on developed models in which
there are few, if any, external observations.
The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
13
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2016.
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities, and other financial instruments, are summarized as follows:
March 31, 2017 December 31, 2016
------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------ --------- -------- ----------- --------
Notes and debentures (1) $132,379 $138,944 $ 122,381 $128,726
Bank borrowings 3 3 4 4
Investment securities 2,640 2,640 2,587 2,587
=========================================== ======= ======= ======= =======
(1) Includes credit agreement borrowings.
The carrying amount of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.
Following is the fair value leveling for available-for-sale securities and derivatives as of March 31, 2017 and December 31, 2016:
March 31, 2017
--------------------------------------------------
Level 1 Level 2 Level 3 Total
------------------------------------------- ------------ ------------- --------- ---------
Available-for-Sale Securities
Domestic equities $ 1,253 $ - $ - $ 1,253
International equities 639 - - 639
Fixed income bonds - 501 - 501
Asset Derivatives(1)
Interest rate swaps - 62 - 62
Cross-currency swaps - 235 - 235
Liability Derivatives(1)
Interest rate swaps - (20) - (20)
Cross-currency swaps - (3,635) - (3,635)
============================================ ======== ========= ==== === ========
(1) Derivatives designated as hedging instruments are reflected as "Other
assets," "Other noncurrent liabilities" and, for a portion of interest rate
swaps, "Other current assets" in our consolidated balance sheets.
14
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
December 31, 2016
--------------------------------------------------
Level 1 Level 2 Level 3 Total
------------------------------------------ ------------ ------------- --------- ---------
Available-for-Sale Securities
Domestic equities $ 1,215 $ - $ - $ 1,215
International equities 594 - - 594
Fixed income bonds - 508 - 508
Asset Derivatives(1)
Interest rate swaps - 79 - 79
Cross-currency swaps - 89 - 89
Liability Derivatives(1)
Interest rate swaps - (14) - (14 )
Cross-currency swaps - (3,867) - (3,867 )
=========================================== ======== ========= ==== === ========
(1) Derivatives designated as hedging instruments are reflected as "Other
assets," "Other noncurrent liabilities" and, for a portion of interest rate
swaps, "Other current assets" in our consolidated balance sheets.
Investment Securities
Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in "Other income (expense) - net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in "Other income (expense) - net" with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $236 have maturities of less than one year, $58 within one to three years, $47 within three to five years and $160 for five or more years.
Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and nonrefundable customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments and nonrefundable customer deposits are recorded in "Other current assets" and our investment securities are recorded in "Other Assets" on the consolidated balance sheets.
Derivative Financial Instruments
We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.
Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the three months ended March 31, 2017 and March 31, 2016, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.
15
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
Cash Flow Hedging We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro, British pound sterling, Canadian dollar and Swiss franc denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency denominated amounts to fixed U.S. dollar denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign currency-denominated rate to a fixed U.S. dollar denominated interest rate.
Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as "Other income (expense) - net" in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the three months ended March 31, 2017 and March 31, 2016, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.
Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) - net" in the consolidated statements of income. Over the next 12 months, we expect to reclassify $59 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.
We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) - net" in the consolidated statements of income. In the three months ended March 31, 2017 and March 31, 2016, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.
Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At March 31, 2017, we had posted collateral of $2,846 (a deposit asset) and held no collateral. Under the agreements, if AT&T's credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in March, we would have been required to post additional collateral of $123. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- (S&P), we would have been required to post additional collateral of $246. At December 31, 2016, we had posted collateral of $3,242 (a deposit asset) and held no collateral. We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.
Following are the notional amounts of our outstanding derivative positions:
March 31, December 31,
2017 2016
--------------------- ------------ --------------
Interest rate swaps $ 10,450 $ 9,650
Cross-currency swaps 29,642 29,642
---------------------- ------- ----------
Total $ 40,092 $ 39,292
====================== ======= ==========
16
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
Following are the related hedged items affecting our financial position
and performance:
Effect of Derivatives on the Consolidated Statements
of Income
-------------------------------------------------------------- ------------ ------
Three months ended
--------------------------------------------------------------
March 31,
Fair Value Hedging Relationships 2017 2016
-------------------------------------------------------------- ------------- ------
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ (25) $ 66
Gain (Loss) on long-term debt 25 (66)
=============================================================== ==== ====== =====
In addition, the net swap settlements that accrued and settled in the quarter ended March 31 were offset against interest expense.
Three months ended
March 31,
Cash Flow Hedging Relationships 2017 2016
------------------------------------------------------------- ----------- ----------
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI $ 20 $ 191
Interest rate locks:
Interest income (expense) reclassified from accumulated
OCI into income (15) (15)
============================================================== ====== ======
NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Subsequent and Pending Acquisitions
Time Warner Inc. On October 22, 2016, we entered into and announced a merger agreement (Merger Agreement) to acquire Time Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately $85,400 at the date of the announcement (Merger). Combined with Time Warner's net debt at December 31, 2016, the total transaction value is approximately $108,200. Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a number of shares of AT&T common stock equal to the exchange ratio. If the average stock price (as defined in the Merger Agreement) at the time of closing the Merger is between (or equal to) $37.411 and $41.349 per share, the exchange ratio will be the quotient of $53.75 divided by the average stock price. If the average stock price is greater than $41.349, the exchange ratio will be 1.300. If the average stock price is less than $37.411, the exchange ratio will be 1.437. Post-transaction, Time Warner shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding. The cash portion of the purchase price will be financed with new debt and cash.
Time Warner is a global leader in media and entertainment whose major businesses encompass an array of some of the most respected and successful media brands. The deal combines Time Warner's vast library of content and ability to create new premium content for audiences around the world with our extensive customer relationships and distribution, one of the world's largest pay-TV subscriber bases and leading scale in TV, mobile and broadband distribution.
The Merger Agreement was approved by Time Warner shareholders on February 15, 2017 and remains subject to review by the U.S. Department of Justice. The Federal Communications Commission (FCC) has stated that it does not believe it will need to review the deal as no licenses are involved. It is also a condition to closing that necessary consents from foreign governmental entities must be obtained. The transaction is expected to close before year-end 2017. If the Merger is terminated as a result of reaching the termination date (and at that time one or more of the conditions relating to certain regulatory approvals have not been satisfied) or there is a final, non-appealable order preventing the transaction relating to antitrust laws, communications laws, utilities laws or foreign regulatory laws, then under certain circumstances, we would be obligated to pay Time Warner $500.
17
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
Auction 1000 On April 13, 2017, the FCC announced that we were the successful bidder for $910 of spectrum in 18 markets. We provided the FCC an initial deposit of $2,348 in July 2016 and received a refund of $1,438 in April 2017.
Other Events
FirstNet On March 30, 2017, the First Responder Network Authority (FirstNet) announced its selection of AT&T to build and manage the first nationwide broadband network dedicated to America's first responders. FirstNet expects to provide 20 MHz of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states electing to participate in FirstNet. We do not expect FirstNet to materially impact our 2017 results given the timing of the state opt-in process.
NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES
We offer our customers the option to purchase certain wireless devices in installments over a period of up to 30 months and, in many cases, they have the right to trade in the original equipment for a new device within a set period and have the remaining unpaid balance satisfied. As of March 31, 2017 and December 31, 2016, gross equipment installment receivables of $4,119 and $5,665 were included on our consolidated balance sheets, of which $2,346 and $3,425 are notes receivable that are included in "Accounts receivable - net."
In 2014, we entered into an uncommitted agreement pertaining to the sale of equipment installment receivables and related security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under this agreement, we transferred certain receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. Since inception, cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $3,740.
The following table sets forth a summary of equipment installment receivables sold during the three months ended March 31, 2017 and 2016:
Three months ended
March 31,
2017 2016
------------------------------------------------------------ --------------- ----------
Gross receivables sold $ 2,846 $ 2,482
Net receivables sold (1) 2,621 2,256
Cash proceeds received 1,432 1,521
Deferred purchase price recorded 1,189 719
============================================================= ========== =========
(1) Receivables net of allowance, imputed interest and trade-in right guarantees.
The deferred purchase price is initially recorded at estimated fair value, which is based on remaining installment payments expected to be collected, adjusted by the expected timing and value of device trade-ins, and subsequently carried at the lower of cost or net realizable value. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).
18
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
The following table shows the equipment installment receivables, previously sold to the Purchasers, which we repurchased in exchange for the associated deferred purchase price during the three months ended March 31, 2017 and 2016:
Three months ended
March 31,
2017 2016
----------------------------------------------------------------- ------------- ----------
Fair value of repurchased receivables $ 377 $ 532
Carrying value of deferred purchase price 339 539
------------------------------------------------------------------ --- ------- --- -----
Gain (loss) on repurchases (1) $ 38 $ (7)
================================================================== === ======= === =====
(1) These gains (losses) are included in "Selling, general and administrative"
in the consolidated statements of income.
At March 31, 2017 and December 31, 2016, our deferred purchase price receivable was $3,813 and $3,090, respectively, of which $2,049 and $1,606 are included in "Other current assets" on our consolidated balance sheets, with the remainder in "Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the amount of our deferred purchase price at any point in time.
The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate risk.
Derecognized Installment Receivables
The following table sets forth a summary of equipment installment receivables that were sold to Purchasers and are no longer considered our assets.
2017
--------------------------------------------------- -------
Outstanding derecognized receivables at January 1, $ 7,232
Gross receivables sold 2,846
Collections on cash purchase price (1,128)
Collections on deferred purchase price (185)
Fees (23)
Trade ins and other (73)
Fair value of repurchased receivables (377)
---------------------------------------------------- ------
Outstanding derecognized receivables at March 31, $ 8,292
==================================================== ======
19
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share and per subscriber amounts
RESULTS OF OPERATIONS
AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements.
Consolidated Results Our financial results in the first quarter of 2017 and 2016 are summarized as follows:
First Quarter
--------------------------
Percent
2017 2016 Change
-------------------------------------------- ------- ------- --------
Operating Revenues
Service $36,456 $37,101 (1.7)%
Equipment 2,909 3,434 (15.3)
--------------------------------------------- ------ ------
Total Operating Revenues 39,365 40,535 (2.9)
--------------------------------------------- ------ ------
Operating expenses
Cost of services and sales
Equipment 3,848 4,375 (12.0)
Broadcast, programming and operations 4,974 4,629 7.5
Other cost of services 9,065 9,396 (3.5)
Selling, general and administrative 8,487 8,441 0.5
Depreciation and amortization 6,127 6,563 (6.6)
--------------------------------------------- ------ ------
Total Operating Expenses 32,501 33,404 (2.7)
--------------------------------------------- ------ ------
Operating Income 6,864 7,131 (3.7)
Income Before Income Taxes 5,378 6,007 (10.5)
Net Income 3,574 3,885 (8.0)
Net Income Attributable to AT&T $ 3,469 $ 3,803 (8.8)%
============================================= ====== ====== =======
Overview
Operating revenues decreased $1,170, or 2.9%, in the first quarter of 2017.
Service revenues decreased $645, or 1.7%, in the first quarter of 2017. The decrease was primarily due to continued declines in legacy wireline voice and data products and lower wireless service revenues reflecting adoption of unlimited and Mobile Share plans. These were partially offset by increased revenues from video and strategic business services.
Equipment revenues decreased $525, or 15.3%, in the first quarter of 2017. The decrease was primarily due to lower wireless handset sales, driven by a low rate of customer device upgrades and strong Bring Your Own Device (BYOD) participation. Equipment revenue is becoming increasingly unpredictable as customers are choosing to upgrade devices less frequently or bring their own.
Operating expenses decreased $903, or 2.7%, in the first quarter of 2017.
Equipment expenses decreased $527, or 12.0%, in the first quarter of 2017. The decrease was driven by a decline in devices sold reflecting a change in customer buying habits.
Broadcast, programming and operations expenses increased $345, or 7.5%, in the first quarter of 2017, reflecting annual content cost increases.
20
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Other cost of services expenses decreased $331, or 3.5%, in the first quarter of 2017. The decrease reflects our continued cost structure management and utilizing automation and digitalization where appropriate. Federal Universal Service Fund (USF) rates and fees were also lower when compared to the prior year. These expense declines were partially offset by higher handset insurance costs.
Selling, general and administrative expenses increased $46, or 0.5%, in the first quarter of 2017. Expenses include an increase of approximately $618 resulting from lower gains on wireless spectrum transactions in the first quarter of 2017 than in the comparable period of 2016. Offsetting this increase were lower advertising costs, decreased expenses for merger and integration-related activities and reductions from our disciplined cost management.
Depreciation and amortization expense decreased $436, or 6.6%, in the first quarter of 2017. Depreciation expense decreased $288, or 5.5%, in the first quarter. The decrease was primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage values of certain assets associated with our transition to an IP-based network, which accounted for $327 of the decrease. This decrease was partially offset by increases resulting from ongoing capital spending for upgrades and expansion.
Amortization expense decreased $148, or 11.0%, in the first quarter of 2017 due to lower amortization of intangibles for the customer lists associated with acquisitions.
Operating income decreased $267, or 3.7%, for the first quarter of 2017. Our operating income margin in the first quarter decreased from 17.6% in 2016 to 17.4% in 2017.
Interest expense increased $86, or 7.1%, in the first quarter of 2017. The increases were primarily due to higher average rates and debt balances when compared to the prior year.
Equity in net income of affiliates decreased $186 in the first quarter of 2017, predominantly from losses from our legacy publishing business, partially offset by income from our investments in video-related businesses.
Other income (expense) - net We had other expense of $20 in the first quarter of 2017 and other income of $70 in the first quarter of 2016. Results in the first quarter of 2017 included net losses on the sale of non-strategic assets and investments of $61 and interest and dividend income of $30.
Other income (expense) in the first quarter of 2016 included net gains on the sale of non-strategic assets and investments of $44 and interest and dividend income of $29.
Income taxes decreased $318, or 15.0%, in the first quarter of 2017. Our effective tax rate was 33.5% for the first quarter of 2017, as compared to 35.3% for the first quarter of 2016. The decrease in income tax expense and our effective tax rate for the first quarter of 2017 was primarily due to lower income before income taxes in 2017 and the recognition of tax benefits related to the restructuring of a portion of our wireless business.
21
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Selected Financial and Operating Data
---------------------------------------------- -------- -------
March 31,
Subscribers and connections in (000s) 2017 2016
---------------------------------------------- -------- -------
Domestic wireless subscribers 134,218 130,445
Mexican wireless subscribers 12,606 9,213
------------------------------------------------ ------- -------
North American wireless subscribers 146,824 139,658
================================================ ======= =======
North American branded subscribers 103,532 98,158
North American branded net additions 738 1,195
Domestic satellite video subscribers 21,012 20,112
AT&T U-verse(R) (U-verse) video subscribers 4,048 5,260
Latin America satellite video subscribers (1) 13,678 12,436 ------------------------------------------------ ------- ------- Total video subscribers 38,738 37,808 ================================================ ======= ======= Total domestic broadband connections 15,695 15,764 Network access lines in service 13,363 15,975 U-verse VoIP connections 5,858 5,484 Debt ratio (2) 51.6% 51.2% Net debt ratio (3) 45.8% 47.3% Ratio of earnings to fixed charges (4) 3.80 4.22 Number of AT&T employees 264,530 280,870 ================================================ ======= =======
(1) Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At December 31, 2016, SKY Mexico had 8.0 million subscribers.
(2) Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders' equity) and do not consider cash available to pay down debt. See our "Liquidity and Capital Resources" section for discussion.
(3) Net debt ratios are calculated by deriving total debt (debt maturing within one year plus long-term debt) less cash available by total capital (total debt plus total stockholders' equity).
(4) See Exhibit 12.
Segment Results
Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items, and equity in net income (loss) of affiliates for investments managed within each segment. We have four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.
We also evaluate segment performance based on EBITDA and/or EBITDA margin, which is defined as Segment Contribution, excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.
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AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
The Business Solutions segment provides services to business customers, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively referred to as fixed strategic services; as well as traditional data and voice products. We utilize our wireless and wired networks to provide a complete integrated communications solution to our business customers.
The Entertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the United States or in U.S. territories. We utilize our copper and IP-based wired network and/or our satellite technology.
The Consumer Mobility segment provides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our networks to provide voice and data services, including high-speed internet, video and home monitoring services over wireless devices.
The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.
Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as an international satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by segment, and therefore asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment.
Business Solutions
Segment Results
------------------------------------ ------- ------- --------
First Quarter
--------------------------
Percent
2017 2016 Change
------------------------------------ ------- ------- --------
Segment operating revenues
Wireless service $ 7,929 $ 7,855 0.9%
Fixed strategic services 2,974 2,751 8.1
Legacy voice and data services 3,630 4,373 (17.0)
Other service and equipment 817 859 (4.9)
Wireless equipment 1,498 1,771 (15.4)
------------------------------------- ------ ------
Total Segment Operating Revenues 16,848 17,609 (4.3)
------------------------------------- ------ ------
Segment operating expenses
Operations and support 10,176 10,802 (5.8)
Depreciation and amortization 2,312 2,508 (7.8)
------------------------------------- ------ ------
Total Segment Operating Expenses 12,488 13,310 (6.2)
------------------------------------- ------ ------
Segment Operating Income 4,360 4,299 1.4
Equity in Net Income of Affiliates - - -
------------------------------------ ------ ------
Segment Contribution $ 4,360 $ 4,299 1.4%
===================================== ====== ====== =======
23
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
The following tables highlight other key measures of performance for the Business Solutions segment:
March 31,
Percent
(in 000s) 2017 2016 Change
--------------------------------------------------- ---------- --------- -------
Business Wireless Subscribers
Postpaid/Branded 50,839 48,844 4.1%
Reseller 76 64 18.8
Connected devices (1) 31,439 26,863 17.0
----------------------------------------------------- --------- ---------
Total Business Wireless Subscribers 82,354 75,771 8.7
===================================================== ========= =========
Business IP Broadband Connections 980 928 5.6%
===================================================== ========= ========= =======
(1) Includes data-centric devices such as session-based tablets, monitoring
devices and automobile systems. Excludes postpaid tablets.
First Quarter
-------------------------------------------
(in 000s) 2017 2016 Percent Change
-------------------------------------- -------- --- ------- --- --------------
Business Wireless Net Additions
(1, 4)
Postpaid/Branded (125) 133 -%
Reseller 6 (22) -
Connected devices (2) 2,553 1,578 61.8
---------------------------------------- ------- --- ------- ---
Business Wireless Net Subscriber
Additions 2,434 1,689 44.1
======================================== ======= === ======= ===
Business Wireless Postpaid Churn(1,
3, 4) 1.07% 1.02% 5 BP
======================================== ======= =======
Business IP Broadband Net Additions 4 17 (76.5)%
======================================== ======= === ======= === ==============
(1) Excludes migrations between AT&T segments and/or subscriber categories
and acquisition-related additions during the period.
(2) Includes data-centric devices such as session-based tablets, monitoring
devices and automobile systems. Excludes postpaid tablets.
(3) Calculated by dividing the aggregate number of wireless subscribers
who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period. (4) 2017 excludes the impact of the 2G shutdown, which was reflected in beginning of period subscribers.
Operating Revenues decreased $761, or 4.3%, in the first quarter of 2017. Revenue declines reflect technological shifts away from legacy products, as well as decreasing wireless equipment revenues resulting from changes in customer buying habits. Our second-quarter 2016 sale of certain hosting operations also negatively impacted revenue comparability. These decreases were partially offset by continued growth in wireless services and fixed strategic services, which represent 40% of non-wireless revenues.
Wireless service revenues increased $74, or 0.9%, in the first quarter of 2017. The revenue increase is primarily due to the migration of customers from our Consumer Mobility segment.
At March 31, 2017, we served 82.4 million subscribers, an increase of 8.7% from the prior year. Postpaid subscribers increased 4.1% from the prior year reflecting the addition of new customers as well as migrations from our Consumer Mobility segment, partially offset by continuing competitive pressures in the industry. Connected devices, which have lower average revenue per average subscriber (ARPU) and churn, increased 17.0% from the prior year reflecting growth in our connected car business and other data centric devices that utilize the network to connect and control physical devices using embedded computing systems and/or software, commonly called the Internet of Things (IoT).
24
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. In the first quarter, business wireless postpaid churn increased to 1.07% in 2017 from 1.02% in 2016.
Fixed strategic services revenues increased $223, or 8.1%, in the first quarter of 2017. Our revenues increased in the first quarter of 2017 primarily due to: Ethernet of $73; Dedicated Internet services of $59; IP Broadband, Voice, and Video of $44; and VoIP of $43.
Legacy wired voice and data service revenues decreased $743, or 17.0%, in the first quarter of 2017. Legacy voice billings in the first quarter of 2017 decreased $402 and traditional data billings decreased $341. The decreases were primarily due to lower demand, as customers continue to shift to our more advanced IP-based offerings or to competitors, and the sale of certain hosting operations in 2016.
Wireless equipment revenues decreased $273, or 15.4%, in the first quarter of 2017. The decrease in the first quarter was primarily due to decreases in handset upgrades.
Operations and support expenses decreased $626, or 5.8%, in the first quarter of 2017. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.
Decreased operations and support expenses in the first quarter were primarily due to lower wireless equipment sales and upgrade transactions, which decreased equipment costs $248, and efforts to automate and digitize our support activities, which improved results approximately $170. Expense reductions also reflect lower USF rates, contributing to a $77 reduction in USF fees, and fewer traffic compensation and wireless interconnect costs, resulting in a $51 decline in access and interconnect costs.
Depreciation expense decreased $196, or 7.8%, in the first quarter of 2017. The decreases were primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain network assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated, partially offset by ongoing capital spending for network upgrades and expansion.
Operating income increased $61, or 1.4%, in the first quarter of 2017. Our Business Solutions segment operating income margin in the first quarter increased from 24.4% in 2016 to 25.9% in 2017. Our Business Solutions EBITDA margin in the first quarter increased from 38.7% in 2016 to 39.6% in 2017.
25
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Entertainment Group
Segment Results
------------------------------------------ ------- ------- --------
First Quarter
---------------------------
Percent
2017 2016 Change
------------------------------------------ ------- ------- --------
Segment operating revenues
Video entertainment $ 9,020 $ 8,904 1.3%
High-speed internet 1,941 1,803 7.7
Legacy voice and data services 1,056 1,313 (19.6)
Other service and equipment 606 638 (5.0)
------------------------------------------- ------ ------
Total Segment Operating Revenues 12,623 12,658 (0.3)
------------------------------------------- ------ ------
Segment operating expenses
Operations and support 9,601 9,578 0.2
Depreciation and amortization 1,419 1,488 (4.6)
------------------------------------------- ------ ------
Total Segment Operating Expenses 11,020 11,066 (0.4)
------------------------------------------- ------ ------
Segment Operating Income 1,603 1,592 0.7
Equity in Net Income (Loss) of Affiliates (6) 3 -
------------------------------------------- ------ ------
Segment Contribution $ 1,597 $ 1,595 0.1%
=========================================== ====== ====== =======
The following tables highlight other key measures of performance for the Entertainment Group segment:
March 31,
Percent
(in 000s) 2017 2016 Change
---------------------------------------- ------- ------ -------
Linear Video Connections
Satellite 21,012 20,112 4.5%
U-verse 4,020 5,232 (23.2)
------------------------------------------ ------ ------
Total Linear Video Connections 25,032 25,344 (1.2)
========================================== ====== ======
Broadband Connections
IP 13,130 12,542 4.7
DSL 1,164 1,749 (33.4)
------------------------------------------ ------ ------
Total Broadband Connections 14,294 14,291 -
========================================== ====== ======
Retail Consumer Switched Access Lines 5,533 6,888 (19.7)
U-verse Consumer VoIP Connections 5,470 5,225 4.7
------------------------------------------ ------ ------
Total Retail Consumer Voice Connections 11,003 12,113 (9.2)%
========================================== ====== ====== =======
26
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
First Quarter
-------------------------------- ---
Percent
(in 000s) 2017 2016 Change
------------------------------------------------ ----------- ------- -------- ---
Linear Video Net Additions (1)
Satellite - 328 -%
U-verse (233) (382) 39.0
----------------------------------------------------- ------- ------
Linear Net Video Additions (233) (54) -
===================================================== ======= ======
Broadband Net Additions
IP 242 186 30.1
DSL (127) (181) 29.8
----------------------------------------------------- ------- ------
Net Broadband Additions 115 5 -%
===================================================== ======= ====== =======
(1) Includes disconnections for customers that migrated to DIRECTV NOW.
Operating revenues decreased $35, or 0.3%, in the first quarter of 2017, largely due to lower revenues from legacy voice and data products, substantially offset by growth in revenues from consumer IP broadband and satellite video services.
As consumers continue to demand more mobile access to video, we provide streaming access to our subscribers, including mobile access for existing satellite and U-verse subscribers. In November 2016, we launched DIRECTV NOW, our newest video streaming option that does not require either satellite or U-verse service (commonly called over-the-top video service).
Video entertainment revenues increased $116, or 1.3%, in the first quarter of 2017, primarily due to a 1.8% increase in average revenue per linear video connection. Our continued focus on satellite service and the lower marginal content costs associated with those subscribers contributed to increased video revenue. However, this strategy contributed to lower U-verse video revenue and connections. More than 80% of our linear video subscribers are on the DIRECTV platform. Our decline in linear video connections for the first quarter of 2017 reflects, in part, the migration of satellite customers to DIRECTV NOW. Churn rose for subscribers with linear video only service, partially reflecting annual content cost increases.
High-speed internet revenues increased $138, or 7.7%, in the first quarter of 2017. When compared to 2016, IP broadband subscribers increased 4.7%, to 13.1 million subscribers at March 31, 2017, reflecting higher IP broadband net additions. Also contributing to higher revenues was a 3.3% increase in average revenue per IP broadband connection.
To compete more effectively against other broadband providers, we continued to deploy our all-fiber, high-speed wireline network, which has improved customer retention rates in those areas.
Legacy voice and data service revenues decreased $257, or 19.6%, in the first quarter of 2017. For the quarter ended March 31, 2017, legacy voice and data services represented approximately 8% of our total Entertainment Group revenue compared to 10% at March 31, 2016, and reflect decreases of $174 in local voice and long-distance, and $83 in traditional data billings. The decreases reflect the continued migration of customers to our more advanced IP-based offerings or to competitors. At March 31, 2017, approximately 8% of our broadband connections were DSL compared to 12% at March 31, 2016.
Operations and support expenses increased $23, or 0.2%, in the first quarter of 2017. Operations and support expenses consist of costs associated with providing video content, and expenses incurred to provide our products and services, which include costs of operating and maintaining our networks, as well as personnel charges for compensation and benefits.
Increased operations and support expenses were primarily due to annual content cost increases and the impact of storms and flooding on the West Coast in 2017. Partially offsetting these increases was the impact of our ongoing focus on cost efficiencies and merger synergies, lower employee-related expenses resulting from workforce reductions and lower advertising costs.
27
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Depreciation expense decreased $69, or 4.6%, in the first quarter of 2017. The decrease was primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated assets. These decreases were offset by ongoing capital spending for network upgrades and expansion.
Operating income increased $11, or 0.7%, in the first quarter of 2017. Our Entertainment Group segment operating income margin in the first quarter increased from 12.6% in 2016 to 12.7% in 2017. Our Entertainment Group segment EBITDA margin in the first quarter decreased from 24.3% in 2016 to 23.9% in 2017.
Consumer Mobility
Segment Results
----------------------------------- ------ ------ --------
First Quarter
------------------------
Percent
2017 2016 Change
----------------------------------- ------ ------ --------
Segment operating revenues
Service $6,609 $6,943 (4.8)%
Equipment 1,131 1,385 (18.3)
------------------------------------ ----- -----
Total Segment Operating Revenues 7,740 8,328 (7.1)
------------------------------------ ----- -----
Segment operating expenses
Operations and support 4,528 4,912 (7.8)
Depreciation and amortization 873 922 (5.3)
------------------------------------ ----- -----
Total Segment Operating Expenses 5,401 5,834 (7.4)
------------------------------------ ----- -----
Segment Operating Income 2,339 2,494 (6.2)
Equity in Net Income of Affiliates - - -
----------------------------------- ----- -----
Segment Contribution $2,339 $2,494 (6.2)%
==================================== ===== ===== =======
The following tables highlight other key measures of performance for the
Consumer Mobility segment:
March 31,
Percent
(in 000s) 2017 2016 Change
--------
Consumer Mobility Subscribers
Postpaid 26,510 28,294 (6.3)%
Prepaid 13,844 12,171 13.7
--------- --------
Branded 40,354 40,465 (0.3)
Reseller 10,549 13,313 (20.8)
Connected devices (1) 961 896 7.3
--------- --------
Total Consumer Mobility Subscribers 51,864 54,674 (5.1)%
========= ========
(1) Includes data-centric devices such as session-based tablets, monitoring
devices and automobile systems. Excludes postpaid tablets.
28
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
First Quarter
(in 000s) 2017 2016 Percent Change
Consumer Mobility Net Additions (1, 4)
Postpaid (66) (4) -%
Prepaid 282 500 (43.6)
Branded Net Additions 216 496 (56.5)
Reseller (588) (378) (55.6)
Connected devices (2) 19 (26) -
Consumer Mobility Net Subscriber Additions (353) 92 -%
Total Churn (1, 3, 4) 2.42% 2.11% 31 BP
Postpaid Churn (1, 3, 4) 1.22% 1.24% (2) BP
(1) Excludes migrations between AT&T segments and/or subscriber categories
and acquisition-related additions during the period.
(2) Includes data-centric devices such as session-based tablets, monitoring
devices and automobile systems. Excludes postpaid tablets.
(3) Calculated by dividing the aggregate number of wireless subscribers
who canceled service during a month divided by the total number of wireless
subscribers at the beginning of that month. The churn rate for the period
is equal to the average of the churn rate for each month of that period.
(4) 2017 excludes the impact of the 2G shutdown and a true-up to the reseller
subscriber base, which were reflected in beginning of period subscribers.
Operating Revenues decreased $588, or 7.1%, in the first quarter of 2017. Decreased revenues reflect declines in postpaid service revenues due to customers migrating to our Business Solutions segment and choosing unlimited and Mobile Share plans, partially offset by higher prepaid service revenues. Our business wireless offerings allow for individual subscribers to purchase wireless services through employer-sponsored plans for a reduced price. The migration of these subscribers to the Business Solutions segment negatively impacted our consumer postpaid subscriber total and service revenue growth.
Service revenue decreased $334, or 4.8%, in the first quarter of 2017. The decrease was largely due to the migration of subscribers to Business Solutions and postpaid customers continuing to shift to discounted monthly service charges under our unlimited and Mobile Share plans. Revenues from postpaid customers declined $507, or 9.9%, in the first quarter of 2017. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 5.4%. The decreases were partially offset by higher prepaid service revenues of $239, or 18.4%, primarily from growth in Cricket subscribers.
Equipment revenue decreased $254, or 18.3%, in the first quarter of 2017. The decrease in equipment revenues resulted from lower handset sales and upgrades. As previously discussed, equipment revenue is becoming increasingly unpredictable as customers are choosing to upgrade devices less frequently or bring their own.
Operations and support expenses decreased $384, or 7.8%, in the first quarter of 2017. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel expenses, such as compensation and benefits.
Decreased operations and support expenses were primarily due to lower volumes of wireless equipment sales and upgrades, which decreased equipment costs $257. Also contributing to the declines were increased operational efficiencies and lower marketing and advertising costs resulting from the timing of scheduled ad campaigns and integrated advertising.
Depreciation expense decreased $49, or 5.3%, in the first quarter of 2017. The decrease was primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion.
Operating income decreased $155, or 6.2%, in the first quarter of 2017. Our Consumer Mobility segment operating income margin in the first quarter increased from 29.9% in 2016 to 30.2% in 2017. Our Consumer Mobility EBITDA margin in the first quarter increased from 41.0% in 2016 to 41.5% in 2017.
29
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
International
Segment Results
First Quarter
Percent
2017 2016 Change
Segment operating revenues
Video entertainment $1,341 $1,130 18.7%
Wireless service 475 455 4.4
Wireless equipment 113 82 37.8
Total Segment Operating Revenues 1,929 1,667 15.7
Segment operating expenses
Operations and support 1,759 1,588 10.8
Depreciation and amortization 290 277 4.7
Total Segment Operating Expenses 2,049 1,865 9.9
Segment Operating Income (Loss) (120) (198) 39.4
Equity in Net Income (Loss) of Affiliates 20 14 42.9
Segment Contribution $ (100) $ (184) 45.7%
The following tables highlight other key measures of performance for the International segment:
(in 000s) First Quarter
Percent
2017 2016 Change
--------- -------
Mexican Wireless Subscribers
Postpaid 5,095 4,404 15.7%
Prepaid 7,244 4,445 63.0
-------- -------
Branded 12,339 8,849 39.4
Reseller 267 364 (26.6)
-------- -------
Total Mexican Wireless Subscribers 12,606 9,213 36.8
======== =======
Latin America Satellite Subscribers
PanAmericana 8,090 7,094 14.0
SKY Brazil (1) 5,588 5,342 4.6
-------- -------
Total Latin America Satellite Subscribers 13,678 12,436 10.0%
======== ======= =======
(1) Excludes subscribers of our International segment equity investments
in SKY Mexico, in which we own a 41.3% stake. SKY Mexico had 8.0 million
subscribers at December 31, 2016 and 7.7 million subscribers at March 31,
2016.
30
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
First Quarter
Percent
(in 000s) 2017 2016 Change
Mexican Wireless Net Additions
Postpaid 130 116 12.1%
Prepaid 517 450 14.9
----
Branded Net Additions 647 566 14.3
Reseller (14) (37) 62.2
----
Mexican Wireless Net Subscriber Additions 633 529 19.7
====
Latin America Satellite Net Additions (1)
PanAmericana 52 28 85.7
SKY Brazil 39 (101) -
----
Latin America Satellite Net Subscriber Additions(2) 91 (73) -%
==== ====
(1) In 2017, we updated the methodology used to account for prepaid video
connections. The impact of this change is excluded.
(2) SKY Mexico had net subscriber additions of 100,000 for the quarter ended
December 31, 2016, and 398,000 for the quarter ended March 31, 2016.
Operating Results
Our International segment consists of the Latin American operations acquired with DIRECTV as well as our Mexican wireless operations. Video entertainment services are provided to primarily residential customers using satellite technology. Our international subsidiaries conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.
Operating revenues increased $262, or 15.7%, in the first quarter of 2017. The increase in the first quarter includes $211, or 18.7%, from video services in Latin America driven by price increases and favorable foreign currency exchange rates. Mexico wireless revenues increased $51, or 9.5%, in the first quarter of 2017, primarily due to an increase in our subscriber base and higher equipment sales offset by lower ARPU (average revenue per average wireless subscriber) and foreign currency pressure.
Operations and support expenses increased $171, or 10.8%, in the first quarter of 2017. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and providing video content and personnel expenses, such as compensation and benefits. The increase in expenses is primarily due to higher programming and other operating costs in Latin America, and favorable foreign currency exchange rates.
Depreciation expense increased $13, or 4.7%, in the first quarter of 2017. The increase was primarily due to updating the estimated asset lives for video equipment in Latin America.
Operating income increased $78, or 39.4%, in the first quarter of 2017. Our International segment operating income margin in the first quarter increased from (11.9)% in 2016 to (6.2)% in 2017. Our International EBITDA margin in the first quarter increased from 4.7% in 2016 to 8.8% in 2017.
31
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Supplemental Operating Information
As a supplemental discussion of our operating results, for comparison purposes, we are providing a view of our combined domestic wireless operations (AT&T Mobility). See "Discussion and Reconciliation of Non-GAAP Measure" for a reconciliation of these supplemental measures to the most directly comparable financial measures calculated and presented in accordance with U.S. generally accepted accounting principles.
AT&T Mobility Results
First Quarter
Percent
2017 2016 Change
Operating revenues
Service $14,538 $14,798 (1.8)%
Equipment 2,629 3,156 (16.7)
Total Operating Revenues 17,167 17,954 (4.4)
Operating expenses
Operations and support 9,998 10,624 (5.9)
EBITDA 7,169 7,330 (2.2)
Depreciation and amortization 1,997 2,056 (2.9)
Total Operating Expenses 11,995 12,680 (5.4)
Operating Income $ 5,172 $ 5,274 (1.9)%
The following tables highlight other key measures of performance for AT&T
Mobility:
First Quarter
Percent
(in 000s) 2017 2016 Change
-----------
Wireless Subscribers (1)
Postpaid smartphones 59,025 58,258 1.3%
Postpaid feature phones and data-centric devices 18,324 18,880 (2.9)
Postpaid 77,349 77,138 0.3
Prepaid 13,844 12,171 13.7
Branded 91,193 89,309 2.1
Reseller 10,625 13,378 (20.6)
Connected devices (2) 32,400 27,758 16.7
Total Wireless Subscribers 134,218 130,445 2.9
Branded Smartphones 71,274 68,271 4.4
Smartphones under our installment programs
at end of period 31,583 28,548 10.6%
=======
(1) Represents 100% of AT&T Mobility wireless subscribers.
(2) Includes data-centric devices such as session-based tablets, monitoring
devices and automobile systems. Excludes postpaid tablets.
32
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
First Quarter
(in 000s) 2017 2016 Percent Change
Wireless Net Additions (1, 4)
Postpaid (191) 129 -%
Prepaid 282 500 (43.6)
Branded Net Additions 91 629 (85.5)
Reseller (582) (400) (45.5)
Connected devices (2) 2,572 1,552 65.7
Wireless Net Subscriber Additions 2,081 1,781 16.8
Smartphones sold under our installment programs
during period 3,501 4,135 (15.3)%
Total Churn (3, 4) 1.46% 1.42% 4 BP
Branded Churn (3, 4) 1.71% 1.63% 8 BP
Postpaid Churn (3, 4) 1.12% 1.10% 2 BP
Postpaid Phone Only Churn (3, 4) 0.90% 0.96% (6) BP
(1) Excludes acquisition-related additions during the period.
(2) Includes data-centric devices such as session-based tablets, monitoring
devices and automobile systems. Excludes postpaid tablets.
(3) Calculated by dividing the aggregate number of wireless subscribers
who canceled service during a month divided by the total number of wireless
subscribers at the beginning of that month. The churn rate for the period
is equal to the average of the churn rate for each month of that period.
(4) 2017 excludes the impact of the 2G shutdown and a true-up to the reseller
subscriber base, which were reflected in beginning of period subscribers.
Operating income decreased $102, or 1.9%, in the first quarter of 2017. The first-quarter operating income margin of AT&T Mobility increased from 29.4% in 2016 to 30.1% in 2017. AT&T Mobility's first-quarter EBITDA margin increased from 40.8% in 2016 to 41.8% in 2017. AT&T Mobility's first-quarter EBITDA service margin decreased from 49.5% in 2016 to 49.3% in 2017 (EBITDA service margin is operating income before depreciation and amortization, divided by total service revenues.)
Subscriber Relationships
As the wireless industry continues to mature, future wireless growth will become increasingly dependent on our ability to offer innovative services, plans and devices and a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. To attract and retain subscribers in a maturing market, we have launched a wide variety of plans, including unlimited and Mobile Share, as well as equipment installment programs. Beginning in the first quarter of 2017, we expanded our unlimited wireless data plans to make them available to customers that do not subscribe to our video services.
ARPU
Postpaid phone-only ARPU was $58.09 and postpaid phone-only ARPU plus equipment installment billings was $68.81 for the first quarter of 2017, compared to $59.53 and $69.54 in 2016.
Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total churn and postpaid churn were higher for the first quarter of 2017, reflecting higher tablets churn. Postpaid phone only churn was lower in the first quarter of 2017 despite competitive pressure in the industry.
33
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Branded Subscribers
Branded subscribers decreased 0.1% in the first quarter of 2017 when compared to December 31, 2016 and increased 2.1% when compared to March 31, 2016. The sequential decrease reflects a 0.6% decline in postpaid subscribers partially offset by a 2.3% increase in prepaid subscribers. The year-over-year increase includes increases of 0.3% and 13.7% in postpaid and prepaid subscribers, respectively.
At March 31, 2017, 91% of our postpaid phone subscriber base used smartphones, compared to 88% at March 31, 2016. Virtually all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. Device connections on our Mobile Share and unlimited wireless data plans now represent 85% of our postpaid customer base, compared to 81% at March 31, 2016. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers and/or minimize subscriber churn.
Our equipment installment purchase programs, including AT&T Next, allow for postpaid subscribers to purchase certain devices in installments over a period of up to 30 months. Additionally, after a specified period of time, AT&T Next subscribers also have the right to trade in the original device for a new device with a new installment plan and have the remaining unpaid balance satisfied. For installment programs, we recognize equipment revenue at the time of the sale for the amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest. A significant percentage of our customers choosing equipment installment programs pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers. At March 31, 2017, about 54% of the postpaid smartphone base is on an equipment installment program compared to 49% at March 31, 2016. Of the postpaid smartphone gross adds and upgrades during the first quarter of 2017, 92% were either equipment installment plans or BYOD, compared to 91% in 2016. While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins.
Connected Devices
Connected Devices includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Connected device subscribers increased 2.6% during the first quarter when compared to December 31, 2016 and 16.7% when compared to March 31, 2016. During the first quarter of 2017, we added approximately 1.6 million "connected" cars through agreements with various carmakers, and experienced strong growth in other IoT connections as well. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.
OTHER BUSINESS MATTERS
Time Warner Inc. Acquisition In October 2016, we announced an agreement (Merger Agreement) to acquire Time Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately $85,400 at the date of the announcement (Merger). Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a number of shares of AT&T common stock equal to the exchange ratio. The cash portion of the purchase price will be financed with new debt and cash. The transaction remains subject to review by the U.S. Department of Justice, but is expected to close before year-end 2017. See Note 7 for additional details of the transaction and "Liquidity" for a discussion of our financing arrangements.
Straight Path Communications Acquisition As announced on April 10, 2017, we offered to acquire Straight Path Communications, Inc. (Straight Path), which holds a nationwide portfolio of millimeter wave spectrum, including 39 GHz and 28 GHz licenses. Subsequent to our agreement, Straight Path received a proposal from an unsolicited bidder. The process is ongoing at the time of this filing.
FirstNet On March 30, 2017, the First Responder Network Authority (FirstNet) announced its selection of AT&T to build and manage the first nationwide broadband network dedicated to America's first responders. FirstNet expects to provide 20 MHz of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout. We expect to spend about $40,000 over the life of the 25-year contract to build, deploy, operate and maintain the network. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states electing to participate in FirstNet. We do not expect FirstNet to materially impact our 2017 results given the timing of the state opt-in process.
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AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Litigation Challenging DIRECTV's NFL SUNDAY TICKET More than two dozen putative class actions were filed in the U.S. District Courts for the Central District of California and the Southern District of New York against DIRECTV and the National Football League (NFL). These cases were brought by residential and commercial DIRECTV subscribers that have purchased NFL SUNDAY TICKET. The plaintiffs allege that (i) the 32 NFL teams have unlawfully agreed not to compete with each other in the market for nationally televised NFL football games and instead have "pooled" their broadcasts and assigned to the NFL the exclusive right to market them; and (ii) the NFL and DIRECTV have entered into an unlawful exclusive distribution agreement that allows DIRECTV to charge "supra-competitive" prices for the NFL SUNDAY TICKET package. The complaints seek unspecified treble damages and attorneys' fees along with injunctive relief. The first complaint, Abrahamian v. National Football League, Inc., et al., was served in June 2015. In December 2015, the Judicial Panel on Multidistrict Litigation transferred the cases outside the Central District of California to that court for consolidation and management of pre-trial proceedings. In June 2016, the plaintiffs filed a consolidated amended complaint. We vigorously dispute the allegations the complaints have asserted. In August 2016, DIRECTV filed a motion to compel arbitration and the NFL defendants filed a motion to dismiss the complaint. The court held a hearing on both motions on February 13, 2017. The court has not yet ruled.
SportsNet LA Litigation On November 2, 2016, the U.S. Department of Justice filed a civil antitrust complaint in federal court (Central District of California) against DIRECTV Group Holdings, LLC and AT&T Inc., as successor in interest to DIRECTV, alleging that DIRECTV, in 2014, unlawfully exchanged strategic information with certain competitors in connection with negotiations with SportsNet LA about carrying the Los Angeles Dodgers games. The complaint alleges that DIRECTV's conduct violated Section 1 of the Sherman Act. The complaint seeks a declaration that DIRECTV's conduct unlawfully restrained trade and seeks an injunction (1) barring DIRECTV and AT&T from engaging in unlawful information sharing in connection with future negotiations for video programming distribution, (2) requiring DIRECTV and AT&T to monitor relevant communications between their executives and competitors and to periodically report to the Department of Justice, and (3) requiring DIRECTV and AT&T to implement training and compliance programs. The complaint asks that the government be awarded its litigation costs. We vigorously dispute these allegations. On March 23, 2017, the parties advised the court that they have finalized a settlement to resolve the case.
Federal Trade Commission Litigation Involving DIRECTV In March 2015, the Federal Trade Commission (FTC) filed a civil suit in the U.S. District Court for the Northern District of California against DIRECTV seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act and Section 4 of the Restore Online Shoppers' Confidence Act. The FTC's allegations concern DIRECTV's advertising, marketing and sale of programming packages. The FTC alleges that DIRECTV did not adequately disclose all relevant terms. We vigorously dispute these allegations. On April 4, 2017, we reported to the court that we had reached a written settlement with the FTC Bureau of Consumer Protection. Commission approval is still required. The court scheduled trial to begin on August 14, 2017, if Commission approval has not been secured by that date.
Unlimited Data Plan Claims In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The FTC's allegations concern the application of AT&T's Maximum Bit Rate (MBR) program to customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces in certain instances the download speeds of a small portion of our legacy Unlimited Data Plan customers each month after the customer exceeds a designated amount of data during the customer's billing cycle. MBR is an industry-standard practice that is designed to affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media posts, internet browsing and many other applications are typically unaffected. Contrary to the FTC's allegations, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers. In March 2015, our motion to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court granted our motion to certify its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit subsequently granted our petition to accept the appeal, and on August 29, 2016, issued its decision reversing the district court and finding that the FTC lacked jurisdiction to proceed with the action. The FTC has asked the Court of Appeals to reconsider the decision but the Court has not ruled on that request. In addition to the FTC case, several class actions have been filed also challenging our MBR program. We vigorously dispute the allegations the complaints have asserted.
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AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
In June 2015, the FCC issued a Notice of Apparent Liability and Order (NAL) to AT&T Mobility, LLC concerning our MBR policy that applies to Unlimited Data Plan customers described above. The NAL alleges that we violated the FCC's Open Internet Transparency Rule by using the term "unlimited" in connection with the offerings subject to the MBR policy and by failing adequately to disclose the speed reductions that apply once a customer reaches a specified data threshold. The NAL proposes a forfeiture penalty of $100, and further proposes to order us to correct any misleading and inaccurate statements about our unlimited plans, inform customers of the alleged violation, revise our disclosures to address the alleged violation and inform these customers that they may cancel their plans without penalty after reviewing the revised disclosures. In July 2015, we filed our response to the NAL. We believe that the NAL is unlawful and should be withdrawn, because we have fully complied with the Open Internet Transparency Rule and the FCC has no authority to impose the proposed remedies. The matter is currently pending before the FCC.
Labor Contracts As of March 31, 2017, we employed approximately 265,000 persons. Approximately 48% of our employees are represented by the Communications Workers of America, the International Brotherhood of Electrical Workers or other unions. After expiration of the agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.
A summary of labor contract negotiations, by region or employee group, is as follows:
-- Approximately 20,000 traditional wireline employees in the Southwest
ratified a new contract in April 2017. The new contract will expire
in April 2021.
-- Approximately 5,000 traditional wireline employees primarily in
the Midwest are covered by a contract that expires in June 2017.
In April, we reached a tentative agreement on a new five-year contract
that is subject to ratification.
-- Approximately 20,000 mobility employees across the country are covered
by contracts that expired in early 2017. We continue to negotiate
with labor representatives.
-- Approximately 15,000 traditional wireline employees in our West
region are covered by contracts that expired in April 2016. We continue
to negotiate with labor representatives.
-- Approximately 11,000 former DIRECTV employees were eligible for
and chose union representation. Bargaining has resulted in approximately
80% of these employees now being covered under ratified contracts
that expire between 2017 and 2021.
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AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
COMPETITIVE AND REGULATORY ENVIRONMENT
Overview AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided.
In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. Since the Telecom Act was passed, the Federal Communications Commission (FCC) and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. However, based on their public statements and written opinions, we expect the new leadership at the FCC to chart a more predictable and balanced regulatory course that will encourage long-term investment and benefit consumers. In addition, we are pursuing, at both the state and federal levels, additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers, including initiatives to transition services from traditional networks to all IP-based networks. At the same time, we also seek to ensure that legacy regulations are not further extended to broadband or wireless services, which are subject to vigorous competition.
In March 2017, the FCC circulated a draft order proposing to significantly reduce regulation of the bulk data connections that telecom companies provide to businesses otherwise known as special access services or business data services. That order, which was adopted on April 20, 2017, maintains light touch pricing regulation of packet-based services, largely eliminates pricing regulation of high-speed TDM transport services, and establishes a competitive market test for granting pricing flexibility for other TDM services. For those services that do not meet the competitive test, the order allows companies to offer volume and term discounts, as well as contract tariffs. The order establishes a period of permissive detariffing with a date certain for mandatory detariffing in all areas that meet the competitive market test.
In January 2017, the FCC removed from its list of active proceedings proposed rules on cable set-top boxes.
In October 2016, a sharply divided FCC adopted new rules governing the use of customer information by providers of broadband internet access service. Those rules were more restrictive in certain respects than those governing other participants in the internet economy, including so-called "edge" providers such as Google and Facebook. On April 3, 2017, the President signed a resolution passed by Congress repealing the new rules under the Congressional Review Act, which prohibits the issuance of a new rule that is substantially the same as a rule repealed under its provisions, or the reissuance of the repealed rule, unless the new or reissued rule is specifically authorized by a subsequent act of Congress.
In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to comprehensive regulation under the Telecom Act. The FCC's decision significantly expanded its existing authority to regulate the provision of fixed and mobile broadband internet access services. On April 26, 2017, the FCC announced that, in May 2017, it will initiate a proceeding to reverse its 2015 decision to classify broadband internet access services as telecommunications services. On a separate track, AT&T and other providers of broadband internet access services challenged the FCC's decision before the U.S. Court of Appeals for the D.C. Circuit. In June 2016, a panel of the Court of Appeals upheld the FCC's rules by a 2-1 vote. In July 2016, AT&T and several of the other parties that challenged the rules filed petitions with the Court of Appeals asking that the case be reheard either by the panel or by the full Court of Appeals. On May 1, 2017, those rehearing petitions were rejected by the D.C. Circuit. Parties now have 90 days from issuance of that decision to determine whether to seek review by the U.S. Supreme Court. The outcome of the April 26, 2017 FCC proceedings could influence the court rulings.
We provide satellite video service through our subsidiary DIRECTV, whose satellites are licensed by the FCC. The Communications Act of 1934 and other related acts give the FCC broad authority to regulate the U.S. operations of DIRECTV. In addition, states representing a majority of our local service access lines have adopted legislation that enables us to provide IP-based service through a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or even thousands of municipal-approved franchises) to offer a competitive video product. We also are supporting efforts to update and improve regulatory treatment for our services. Regulatory reform and passage of legislation is uncertain and depends on many factors.
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AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
We provide wireless services in robustly competitive markets, but are subject to substantial governmental regulation. Wireless communications providers must obtain licenses from the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of the spectrum. While wireless communications providers' prices and offerings are generally not subject to state regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer protection.
The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. government to make more spectrum available. The FCC finished its most recent auction in April 2017 of certain spectrum that is currently used by broadcast television licensees (the "600 MHz Auction").
On March 30, 2017, FirstNet announced that it awarded AT&T the contract for constructing and operating the nationwide public safety broadband network. The actual reach of the network will depend on participation by the individual states.
In May 2014, the FCC issued an order revising its policies governing mobile spectrum holdings. The FCC rejected the imposition of caps on the amount of spectrum any carrier could acquire, retaining its case-by-case review policy. Moreover, it increased the amount of spectrum that could be acquired before exceeding an aggregation "screen" that would automatically trigger closer scrutiny of a proposed transaction. On the other hand, it indicated that it will separately consider an acquisition of "low band" spectrum that exceeds one-third of the available low band spectrum as presumptively harmful to competition. The spectrum screen (including the low band screen) recently increased by 23 MHz. On balance, the order and the spectrum screen should allow AT&T to obtain additional spectrum to meet our customers' needs.
As the wireless industry continues to mature, future wireless growth will become increasingly dependent on our ability to offer innovative video and data services and a wireless network that has sufficient spectrum and capacity to support these innovations. We continue to invest significant capital in expanding our network capacity, as well as to secure and utilize spectrum that meets our long-term needs. To that end, we have:
-- Submitted winning bids for 251 AWS spectrum licenses for a near-nationwide
contiguous block of high-quality AWS spectrum in the AWS-3 Auction.
-- Redeployed spectrum previously used for basic 2G services to support
more advanced mobile internet services on our 3G and 4G networks.
-- Secured the FirstNet contract, which provides us with access to
a nationwide low band 20 MHz of spectrum, assuming all states opt
in.
-- Invested in 5G and millimeter-wave technologies with our in-process
acquisition of Fiber Tower Corporation, which holds significant
amounts of spectrum in the millimeter wave bands (28 GHz and 39
GHz) that the FCC recently reallocated for mobile broadband services.
These bands will help to accelerate our entry into 5G services.
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AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURE
We believe the following measure is relevant and useful information to investors as it is used by management as a method of comparing performance with that of many of our competitors. This supplemental measure should be considered in addition to, but not as a substitute of, our consolidated and segment financial information.
Supplemental Operational Measure
We provide a supplemental discussion of our domestic wireless operations that is calculated by combining our Consumer Mobility and Business Solutions segments, and then adjusting to remove non-wireless operations. The following table presents a reconciliation of our supplemental AT&T Mobility results.
Supplemental Operational Measure
Three Months Ended
March 31, 2017 March 31, 2016
Consumer Business AT&T Consumer Business AT&T
Mobility Solutions Adjustments(1) Mobility Mobility Solutions Adjustments(1) Mobility
---------
Operating
Revenues
Wireless
service $ 6,609 $ 7,929 $ - $ 14,538 $ 6,943 $ 7,855 $ - $ 14,798
Fixed
strategic
services - 2,974 (2,974) - - 2,751 (2,751) -
Legacy
voice and
data services - 3,630 (3,630) - - 4,373 (4,373) -
Other service
and equipment - 817 (817) - - 859 (859) -
Wireless
equipment 1,131 1,498 - 2,629 1,385 1,771 - 3,156
Total Operating
Revenues 7,740 16,848 (7,421) 17,167 8,328 17,609 (7,983) 17,954
Operating
Expenses
Operations
and support 4,528 10,176 (4,706) 9,998 4,912 10,802 (5,090) 10,624
EBITDA 3,212 6,672 (2,715) 7,169 3,416 6,807 (2,893) 7,330
Depreciation
and
amortization 873 2,312 (1,188) 1,997 922 2,508 (1,374) 2,056
Total Operating
Expenses 5,401 12,488 (5,894) 11,995 5,834 13,310 (6,464) 12,680
Operating
Income $ 2,339 $ 4,360 $ (1,527) $ 5,172 $ 2,494 $ 4,299 $ (1,519) $ 5,274
(1) Non-wireless (fixed) operations reported in Business Solutions segment.
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AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
LIQUIDITY AND CAPITAL RESOURCES
We had $14,884 in cash and cash equivalents available at March 31, 2017. Cash and cash equivalents included cash of $3,307 and money market funds and other cash equivalents of $11,577. Approximately $1,303 of our cash and cash equivalents resided in foreign jurisdictions, some of which are subject to restrictions on repatriation.
Cash and cash equivalents increased $9,096 since December 31, 2016. In the first three months of 2017, cash inflows were primarily provided by the issuance of long-term debt, and cash receipts from operations, including cash from our sale and transfer of certain wireless equipment installment receivables to third parties. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, funding capital expenditures, debt repayments, dividends to stockholders, and the acquisition of wireless spectrum and other operations. We discuss many of these factors in detail below.
Cash Provided by or Used in Operating Activities
During the first three months of 2017, cash provided by operating activities was $9,218, compared to $7,900 for the first three months of 2016. Higher operating cash flows in 2017 were primarily due to lower tax payments and working capital improvements.
Cash Used in or Provided by Investing Activities
For the first three months of 2017, cash used in investing activities totaled $6,171 and consisted primarily of $5,784 for capital expenditures, excluding interest during construction, and $162 for the acquisition of business operations and wireless spectrum.
The majority of our capital expenditures are spent on our networks, our video services and related support systems. Capital expenditures, excluding interest during construction, increased $1,333 in the first three months. The increase was primarily due to our continued fiber buildout and timing of build schedules in 2017 compared with 2016. Additionally, in connection with capital improvements, we negotiate favorable payment terms (referred to as vendor financing). For the first three months of 2017, vendor financing related to capital investments was $107. We do not report capital expenditures at the segment level.
We continue to expect our 2017 capital expenditures to be in the $22,000 range, and we expect our capital expenditures to be in the 15% range of service revenues or lower for each of the years 2017 through 2019. The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. Our capital spending also takes into account existing tax law and does not reflect anticipated tax reform. We are also focused on ensuring DIRECTV merger commitments are met.
Cash Provided by or Used in Financing Activities
For the first three months of 2017, cash provided by financing activities totaled $6,049 and included net proceeds of $12,440 primarily from the following long-term debt issuances:
-- February issuance of $1,250 of 3.200% global notes due
2022.
-- February issuance of $750 of 3.800% global notes due
2024.
-- February issuance of $2,000 of 4.250% global notes due
2027.
-- February issuance of $3,000 of 5.250% global notes due
2037.
-- February issuance of $2,000 of 5.450% global notes due
2047.
-- February issuance of $1,000 of 5.700% global notes due
2057.
-- March issuance of $1,430 of 5.500% global notes due
2047.
-- March issuance of $800 floating rate global notes due 2020. The
floating rate for the notes is based upon the three-month London
Interbank Offered Rate (LIBOR), reset quarterly, plus 65 basis points.
-- March draw of $300 on a private financing agreement with Banco Nacional
de Mexico, S.A. due March 2019. The agreement contains terms similar
to that provided under our syndicated credit arrangements; the interest
rate is a market rate.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
During the first three months of 2017, we redeemed $3,053 of debt, primarily consisting of the following:
-- $1,142 of 2.400% global notes due 2017.
-- $1,000 of 1.600% global notes due 2017.
-- $500 of floating rate notes due 2017.
The FCC's 600 MHz Auction concluded in April 2017. We submitted winning bids to purchase spectrum licenses in 18 markets for which we paid $910. With our previous deposit made in July 2016, we received a refund from the FCC in the amount of $1,438 on April 19, 2017.
Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.3% as of March 31, 2017, compared to 4.2% as of December 31, 2016. We had $132,379 of total notes and debentures outstanding at March 31, 2017, which included Euro, British pound sterling, Swiss franc, Brazilian real, Mexican peso and Canadian dollar denominated debt that totaled approximately $24,941.
As of March 31, 2017, we had approximately 396 million shares remaining from 2013 and 2014 authorizations from our Board of Directors to repurchase shares of our common stock. During the first three months of 2017, we did not repurchase any shares under these authorizations. In 2017, we intend to use free cash flow (operating cash flows less construction and capital expenditures) after dividends primarily to pay down debt.
We paid dividends of $3,009 during the first three months of 2017, compared with $2,947 for the first three months of 2016, primarily reflecting the increase in the quarterly dividend approved by our Board of Directors in October 2016, partially offset by the impact of the decline in shares outstanding due to repurchases in 2016. Dividends declared by our Board of Directors totaled $0.49 per share in the first three months of 2017 and $0.48 per share for the first three months of 2016. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.
At March 31, 2017, we had $12,681 of debt maturing within one year, $12,507 of which was related to long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:
-- $1,000 of annual put reset securities issued by BellSouth that may
be put back to us each April until maturity in 2021. No such put
was exercised during April 2017.
-- An accreting zero-coupon note that may be redeemed each May until
maturity in 2022. If the zero-coupon note (issued for principal
of $500 in 2007) is held to maturity, the redemption amount will
be $1,030.
Credit Facilities
The following summary of our various credit and loan agreements does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form 10-K.
We use credit facilities as a tool in managing our liquidity status. In December 2015, we entered into a five-year $12,000 revolving credit agreement of which no amounts are outstanding as of March 31, 2017. We also have a $9,155 syndicated credit agreement, of which $4,155 remains outstanding as of March 31, 2017 ($2,286 of which is payable March 2018).
In connection with our pending Merger with Time Warner, we have also entered into a $30,000 bridge loan credit agreement ("Bridge Loan") and a $10,000 term loan agreement ("Term Loan"). No amounts will be borrowed under either the Bridge Loan or the Term Loan prior to the closing of the Merger. Borrowings under either agreement will be used solely to finance a portion of the cash to be paid in the Merger, the refinancing of debt of Time Warner and its subsidiaries and the payment of related expenses.
Each of our credit and loan agreements contains covenants that are customary for an issuer with an investment grade senior debt credit rating as well as a net debt-to-EBITDA financial ratio covenant requiring AT&T to maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.5-to-1. As of March 31, 2017, we were in compliance with the covenants for our credit facilities.
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MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Collateral Arrangements
During the first three months of 2017, we received $396 of additional cash collateral, on a net basis, from banks and other participants in our derivative arrangements. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 6)
Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders' equity. Our capital structure does not include debt issued by our equity method investments. At March 31, 2017, our debt ratio was 51.6%, compared to 51.2% at March 31, 2016, and 49.9% at December 31, 2016. Our net debt ratio was 45.8% at March 31, 2017, compared to 47.3% at March 31, 2016 and 47.5% at December 31, 2016. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments.
During the first three months of 2017, we received $1,446 from the monetization of various assets, primarily the sale of certain equipment installment receivables. We plan to continue to explore similar opportunities.
In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding company for our U.S. wireless operations, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $8,426 as of March 31, 2017, and $8,477 as of December 31, 2016, does not have any voting rights and has a liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly in equal amounts. We distributed $140 to the trust during the first three months of 2017. So long as we make the distributions, the terms of the preferred equity interest will not impose any limitations on our ability to declare a dividend or repurchase shares.
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MARCH 31, 2017
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
At March 31, 2017, we had interest rate swaps with a notional value of $10,450 and a fair value of $42.
We have fixed-to-fixed and floating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a U.S. dollar notional value of $29,642 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $(3,400) at March 31, 2017.
Item 4. Controls and Procedures
The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of March 31, 2017. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant's disclosure controls and procedures were effective as of March 31, 2017.
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CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the "Risk Factors" section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.
The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:
-- Adverse economic and/or capital access changes in the markets served
by us or in countries in which we have significant investments, including
the impact on customer demand and our ability and our suppliers' ability
to access financial markets at favorable rates and terms.
-- Changes in available technology and the effects of such changes, including
product substitutions and deployment costs.
-- Increases in our benefit plans' costs, including increases due to adverse
changes in the United States and foreign securities markets, resulting
in worse-than-assumed investment returns and discount rates; adverse
changes in mortality assumptions; adverse medical cost trends; and unfavorable
or delayed implementation or repeal of healthcare legislation, regulations
or related court decisions.
-- The final outcome of FCC and other federal, state or foreign government
agency proceedings (including judicial review, if any, of such proceedings)
involving issues that are important to our business, including, without
limitation, special access and business data services; intercarrier compensation;
interconnection obligations; pending Notices of Apparent Liability; the
transition from legacy technologies to IP-based infrastructure, including
the withdrawal of legacy TDM-based services; universal service; broadband
deployment; E911 services; competition policy; privacy; net neutrality,
including the FCC's order classifying broadband as Title II services
subject to much more comprehensive regulation; unbundled network elements
and other wholesale obligations; multi-channel video programming distributor
services and equipment; availability of new spectrum, on fair and balanced
terms; and wireless and satellite license awards and renewals.
-- The final outcome of state and federal legislative efforts involving
issues that are important to our business, including deregulation of
IP-based services, relief from Carrier of Last Resort obligations and
elimination of state commission review of the withdrawal of services.
-- Enactment of additional state, local, federal and/or foreign regulatory
and tax laws and regulations, or changes to existing standards and actions
by tax agencies and judicial authorities including the resolution of
disputes with any taxing jurisdictions, pertaining to our subsidiaries
and foreign investments, including laws and regulations that reduce our
incentive to invest in our networks, resulting in lower revenue growth
and/or higher operating costs.
-- Our ability to absorb revenue losses caused by increasing competition,
including offerings that use alternative technologies or delivery methods
(e.g., cable, wireless, VoIP and over-the-top video service), subscriber
reluctance to purchase new wireless handsets, and our ability to maintain
capital expenditures.
-- The extent of competition including from governmental networks and other
providers and the resulting pressure on customer and access line totals
and segment operating margins.
-- Our ability to develop attractive and profitable product/service offerings
to offset increasing competition.
-- The ability of our competitors to offer product/service offerings at
lower prices due to lower cost structures and regulatory and legislative
actions adverse to us, including state regulatory proceedings relating
to unbundled network elements and non-regulation of comparable alternative
technologies (e.g., VoIP).
-- The continued development and delivery of attractive and profitable video
offerings through satellite and IP-based networks; the extent to which
regulatory and build-out requirements apply to our offerings; and the
availability, cost and/or reliability of the various technologies and/or
content required to provide such offerings.
-- Our continued ability to maintain margins, attract and offer a diverse
portfolio of wireless service and devices and device financing plans.
-- The availability and cost of additional wireless spectrum and regulations
and conditions relating to spectrum use, licensing, obtaining additional
spectrum, technical standards and deployment and usage, including network
management rules.
-- Our ability to manage growth in wireless video and data services, including
network quality and acquisition of adequate spectrum at reasonable costs
and terms.
-- The outcome of pending, threatened or potential litigation (which includes
arbitrations), including, without limitation, patent and product safety
claims by or against third parties.
-- The impact from major equipment failures on our networks, including satellites
operated by DIRECTV; the effect of security breaches related to the network
or customer information; our inability to obtain handsets, equipment/software
or have handsets, equipment/software serviced in a timely and cost-effective
manner from suppliers; and in the case of satellites launched, timely
provisioning of services from vendors; or severe weather conditions,
natural disasters, pandemics, energy shortages, wars or terrorist attacks.
-- The issuance by the Financial Accounting Standards Board or other accounting
oversight bodies of new accounting standards or changes to existing standards.
-- Our ability to integrate our acquisition of DIRECTV.
-- Our ability to close our pending acquisition of Time Warner Inc. and
successfully integrate its operations.
-- Our ability to adequately fund our wireless operations, including payment
for additional spectrum, network upgrades and technological advancements.
-- Our increased exposure to video competition and foreign economies due
to our recent acquisitions of DIRECTV and Mexican wireless properties,
including foreign exchange fluctuations as well as regulatory and political
uncertainty.
-- Changes in our corporate strategies, such as changing network-related
requirements or acquisitions and dispositions, which may require significant
amounts of cash or stock, to respond to competition and regulatory, legislative
and technological developments.
-- The uncertainty surrounding further congressional action to address spending
reductions, which may result in a significant decrease in government
spending and reluctance of businesses and consumers to spend in general.
-- The uncertainty and impact of anticipated regulatory and corporate tax
reform, which may impact the overall economy and incentives for business
investments.
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.
44
AT&T INC.
MARCH 31, 2017
PART II - OTHER INFORMATION
Dollars in millions except per share amounts
Item 1A. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the first quarter 2017, there were no such material developments.
(a)Total Number of Shares (or Units) Purchased (1, 2, 3)
(b) Average Price Paid Per Share (or Unit)
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1)
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
(c) A summary of our repurchases of common stock during the first quarter
of 2017 is as follows:
(a) (b) (c) (d)
Period
January 1, 2017
-
January 31, 2017 658,242 $ 40.95 - 395,550,000
February 1, 2017
-
February 28, 2017 1,782,268 41.86 - 395,550,000
March 1, 2017 -
March 31, 2017 2,346,758 41.91 - 395,550,000
Total 4,787,268 $ 41.74 -
In March 2014, our Board of Directors approved an additional
authorization
to repurchase up to 300 million shares of our common stock. In March
2013,
our Board of Directors authorized the repurchase of up to an additional
300 million shares of our common stock. The authorizations have no
expiration
(1) date.
Of the shares repurchased, 4,244,764 shares were acquired through the
withholding of taxes on the vesting of restricted stock and performance
(2) shares or on the exercise price of options.
Of the shares repurchased, 542,504 shares were acquired through
reimbursements
from AT&T maintained Voluntary Employee Benefit Association (VEBA)
(3) trusts.
45
AT&T INC.
MARCH 31, 2017
Item 6. Exhibits
Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610.
10-a Stock Purchase and Deferral Plan
10-b Cash Deferral Plan
12 Computation of Ratios of Earnings to Fixed Charges
31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32 Section 1350 Certifications
101 XBRL Instance Document
46
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AT&T Inc.
May 4, 2017 /s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
47
Exhibit 10-a
AT&T INC.
STOCK PURCHASE AND DEFERRAL PLAN
Adopted November 19, 2004
As amended through March 30, 2017
Article 1 - Statement of Purpose
The purpose of the Stock Purchase and Deferral Plan ("Plan") is to increase stock ownership by, and to provide savings opportunities to, a select group of management employees of AT&T Inc. ("AT&T") and its Subsidiaries.
Article 2 - Definitions
For the purpose of this Plan, the following words and phrases shall have the meanings indicated, unless the context indicates otherwise:
Annual Bonus. The award designated the "Annual Bonus" by AT&T (including but not limited to an award that may be paid in more frequent installments than annually), together with any individual discretionary award made in connection therewith, or comparable awards, if any, determined by AT&T to be used in lieu of these awards.
Base Compensation. The following types of cash-based compensation paid by an Employer (but not including payments made by a non-Employer, such as state disability payments), before reduction due to any contribution pursuant to this Plan or reduction pursuant to any deferral plan of an Employer, including but not limited to a plan that includes a qualified cash or deferral arrangement under Section 401(k) of the Code:
(a) base salary;
(b) lump sum payments in lieu of a base salary increase; and
(c) Annual Bonus.
Payments by an Employer under a disability plan made in lieu of any compensation described above shall be deemed to be a part of the respective form of compensation it replaces for purposes of this definition. Base Compensation does not include zone allowances or any other geographical differential and shall not include payments made in lieu of unused vacation or other paid days off, and such payments shall not be contributed to this Plan.
Determinations by AT&T (the Committee with respect to Officer Level Employees) of the items that make up Base Compensation shall be final. The Committee may, from time to time, add or subtract types of compensation to or from the definition of "Base Compensation" provided, however, any such addition or subtraction shall be effective only with respect to the next period in which a Participant may make an election to establish a Share Deferral Account. Base Compensation that was payable in a prior Plan Year but paid in a later Plan Year shall not be used to determine Employee Contributions or Matching Contributions in such later Plan Year.
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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.
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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.
3
Retirement or Retire. Termination of Employment on or after the earlier of the following dates, unless otherwise provided by the Committee: (a) for Officer Level Employees, the date the Participant is at least age 55 and has five (5) years of Net Credited Service; or (b) the date the Participant has attained one of the following combinations of age and Net Credited Service:
Net Credited Service Age
10 years or more 65 or older
20 years or more 55 or older
25 years or more 50 or older
30 years or more Any age
For purposes of this Plan only, Net Credited Service shall be calculated in the same manner as "Pension Eligibility Service" under the AT&T Pension Benefit Plan - Nonbargained Program ("Pension Plan"), as amended from time to time, except that service with an Employer shall be counted as though the Employer were a "Participating Company" under the Pension Plan and the Employee was a participant in the Pension Plan.
Senior Manager. Any Employee who is a "senior manager" for compensation purposes as shown on the records of AT&T.
Shares or Share Units. An accounting entry representing the right to receive an equivalent number of shares of Stock.
Share Deferral Account or Account. The Account or Accounts established annually by an election by a Participant to make Employee Contributions to the Plan, with each Account relating to a Plan Year. For each Plan Year after 2008, there shall be (1) a separate Share Deferral Account for Share Units purchased with Employee Contributions of Base Compensation (excluding Annual Bonus) and related Matching Share Units and (2) a separate Share Deferral Account for Share Units purchased with Employee Contributions of Short Term Incentive Award and/or Annual Bonus and any related Matching Share Units. Earnings on Share Units and Matching Share Units shall accrue to the respective Share Deferral Accounts where they are earned.
Short Term Incentive Award. A cash award paid by an Employer (and not by a non-Employer, such as state disability payments) under the Short Term Incentive Plan or any successor plan, together with any individual discretionary award made in connection therewith; an award under a similar plan intended by the Committee to be in lieu of an award under such Short Term Incentive Plan, including, but not limited to, Performance Units granted under the 2006 Incentive Plan or any successor plan. It shall also include any other award that the Committee designates as a Short Term Incentive Award specifically for purposes of this Plan (regardless of the purpose of the award) provided the deferral election is made in accordance with Section 409A.
4
Specified Employee. Any Participant who is a "Key Employee" (as defined in Code Section 416(i) without regard to paragraph (5) thereof), as determined by AT&T in accordance with its uniform policy with respect to all arrangements subject to Code Section 409A, based upon the 12-month period ending on each December 31st (such 12-month period is referred to below as the "identification period"). All Participants who are determined to be Key Employees under Code Section 416(i) (without regard to paragraph (5) thereof) during the identification period shall be treated as Key Employees for purposes of the Plan during the 12-month period that begins on the first day of the 4th month following the close of such identification period.
Stock. The common stock of AT&T Inc.
Subsidiary. Any corporation, partnership, venture or other entity or business with which AT&T would be considered a single employer under Sections 414(a) and (c) of the Code, using 50% as the ownership threshold as provided under Section 409A of the Code.
Termination of Employment. References herein to "Termination of Employment," "Terminate Employment" or a similar reference, shall mean the event where the Employee has a "separation from service," as defined under Section 409A, with all Employers. For purposes of this Plan, a Termination of Employment with respect to an Employer shall be deemed to also occur when such Employer incurs a Change in Control.
Article 3 - Administration of the Plan
3.1 The Committee.
Except as delegated by this Plan or by the Committee, the Committee shall be the administrator of the Plan and will administer the Plan, interpret, construe and apply its provisions and determine all questions of administration, interpretation and application of the Plan, including, without limitation, questions and determinations of eligibility, entitlement to benefits and payment of benefits, all in its sole and absolute discretion. The Committee may further establish, adopt or revise such rules and regulations and such additional terms and conditions regarding participation in the Plan as it may deem necessary or advisable for the administration of the Plan. References in this Plan to determinations or other actions by AT&T, herein, shall mean actions authorized by the Committee, the Chief Executive Officer, the Senior Executive Vice President of AT&T in charge of Human Resources, or their respective successors or duly authorized delegates, in each case in the discretion of such person. All decisions by the Committee, its delegate or AT&T, as applicable, shall be final and binding.
3.2 Authorized Shares of Stock.
(a) Except as provided below, the number of shares of Stock which may be distributed pursuant to the Plan, exclusive of Article 8 - Options, is 46,000,000. The number of shares of Stock which may be issued pursuant to the exercise of Stock Options is 34,000,000 (together with an equal number of Stock Options). In determining the number of authorized shares remaining available for issuance, shares withheld for taxes in a distribution shall not be considered issued and shall not reduce the number of authorized shares. When an Option is exercised, the authorized shares of Stock that may be issued pursuant to an Option exercise shall
5
be reduced by the number of Options so exercised. To the extent an Option issued under this Plan is canceled, terminates, expires, or lapses for any reason, such Option shall again be available for issuance under the Plan. Conversions of Stock awards into Share Units and their eventual distribution (excluding the effects of any dividends on such Share Units) shall count only against the limits of the plans from which they originated and shall not be applied against the limits in this Plan. To the extent Share Units are credited through deferrals of Stock or Employee Contributions where the distribution of which would be deductible by AT&T under Section 162(m) of the Code without regard to the size of the distribution, and such deductible Share Units are available for distribution, such Share Units shall be distributed first.
(b) In the event the Committee determines that continuing the issuance of Share Units under the Plan or Stock Options under the Plan may cause the number of shares of Stock that are to be distributed under this Plan or the number of Stock Options (as determined pursuant to subsection (a), above) to exceed the number of authorized shares of Stock, then in lieu of distributing Stock, the Committee may provide after such determination and only with respect to Share Units that have not theretofore been credited to a Share Deferral Account, that such Share Units may be settled in cash equal to the value of the Stock that would otherwise be distributed based on the FMV of the Stock on the date of the distribution of such Share Unit. The Committee may also provide after such determination and only with respect to Stock Options that have not theretofore been issued that such Stock Options may only be settled on a Net-Settled basis in cash equal to the value of the Stock that would otherwise be distributed based on the FMV of the Stock on the day of exercise.
(c) In the event of a merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, stock split, share combination, or other change in the corporate structure of AT&T affecting the shares of Stock (including a conversion of Stock into cash or other property), such adjustment shall be made to the number and class of the shares of Stock which may be delivered under the Plan (including but not limited to individual limits), and in the number and class of and/or price of shares of Stock subject to outstanding Options granted under the Plan, and/or in the number of outstanding Options and Share Units, or such other adjustment determined by the Committee, in each case as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights.
3.3 Claims and Appeals.
(a) Claims. A person who believes that he or she is being denied a benefit to which he or she is entitled under this Plan (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Executive Compensation Administration Department, setting forth his or her claim. The request must be addressed to the AT&T Executive Compensation Administration Department at its then principal place of business.
(b) Claim Decision. Upon receipt of a claim, the AT&T Executive Compensation Administration Department shall review the claim and provide the Claimant with a written notice of its decision within a reasonable period of time, not to exceed ninety (90) days, after the claim is received. If the AT&T Executive Compensation Administration Department determines that special circumstances require an extension of time beyond the initial ninety (90)- day claim review period, the AT&T Executive Compensation Administration Department shall
6
notify the Claimant in writing within the initial ninety (90)-day period and explain the special circumstances that require the extension and state the date by which the AT&T Executive Compensation Administration Department expects to render its decision on the claim. If this notice is provided, the AT&T Executive Compensation Administration Department may take up to an additional ninety (90) days (for a total of one hundred eighty (180) days after receipt of the claim) to render its decision on the claim.
If the claim is denied by the AT&T Executive Compensation Administration Department, in whole or in part, the AT&T Executive Compensation Administration Department shall provide a written decision using language calculated to be understood by the Claimant and setting forth: (i) the specific reason or reasons for such denial; (ii) specific references to pertinent provisions of this Plan on which such denial is based; (iii) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation of why such material or such information is necessary; (iv) a description of the Plan's procedures for review of denied claims and the steps to be taken if the Claimant wishes to submit the claim for review; (v) the time limits for requesting a review of a denied claim under this section and for conducting the review under this section; and (vi) a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA if the claim is denied following review under this section .
(c) Request for Review. Within sixty (60) days after the receipt by the Claimant of the written decision on the claim provided for in this section, the Claimant may request in writing that the Committee review the determination of the AT&T Executive Compensation Administration Department. Such request must be addressed to the Committee at the address for giving notice in this Plan. To assist the Claimant in deciding whether to request a review of a denied claim or in preparing a request for review of a denied claim, a Claimant shall be provided, upon written request to the Committee and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claim. The Claimant or his or her duly authorized representative may, but need not, submit a statement of the issues and comments in writing, as well as other documents, records or other information relating to the claim for consideration by the Committee. If the Claimant does not request a review by the Committee of the AT&T Executive Compensation Administration Department's decision within such sixty (60)-day period, the Claimant shall be barred and stopped from challenging the determination of the AT&T Executive Compensation Administration Department.
(d) Review of Decision. Within sixty (60) days after the Committee's receipt of a request for review, the Administrator will review the decision of the AT&T Executive Compensation Administration Department. If the Committee determines that special circumstances require an extension of time beyond the initial sixty (60)-day review period, the Committee shall notify the Claimant in writing within the initial sixty (60)-day period and explain the special circumstances that require the extension and state the date by which the Committee expects to render its decision on the review of the claim. If this notice is provided, the Committee may take up to an additional sixty (60) days (for a total of one hundred twenty (120) days after receipt of the request for review) to render its decision on the review of the claim.
7
During its review of the claim, the Committee shall:
(1) Take into account all comments, documents, records, and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial review of the claim conducted pursuant to this section;
(2) Follow reasonable procedures to verify that its benefit determination is made in accordance with the applicable Plan documents; and
(3) Follow reasonable procedures to ensure that the applicable Plan provisions are applied to the Participant to whom the claim relates in a manner consistent with how such provisions have been applied to other similarly-situated Participants.
After considering all materials presented by the Claimant, the Committee will render a decision, written in a manner designed to be understood by the Claimant. If the Committee denies the claim on review, the written decision will include (i) the specific reasons for the decision; (ii) specific references to the pertinent provisions of this Plan on which the decision is based; (iii) a statement that the Claimant is entitled to receive, upon request to the Committee and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claim; and (iv) a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA.
The Committee shall serve as the final review committee under the Plan and shall have sole and complete discretionary authority to administer, interpret, construe and apply the Plan provisions, and determine all questions of administration, interpretation, construction, and application of the Plan, including questions and determinations of eligibility, entitlement to benefits and the type, form and amount of any payment of benefits, all in its sole and absolute discretion. The Committee shall further have the authority to determine all relevant facts and related issues, and all documents, records and other information relevant to a claim conclusively for all parties, and in accordance with the terms of the documents or instruments governing the Plan. Decisions by the Committee shall be conclusive and binding on all parties and not subject to further review.
In any case, a Participant or Beneficiary may have further rights under ERISA. The Plan provisions require that Participants or Beneficiary pursue all claim and appeal rights described in this section before they seek any other legal recourse regarding claims for benefits.
Article 4 - Contributions
4.1 Election to Make Contributions.
(a) The Committee shall establish dates and other conditions for participation in the Plan and making contributions as it deems appropriate. Except as otherwise provided by the Committee, each year an Employee who is an Eligible Employee as of September 30 may thereafter make an election on or prior to the last Business Day of the immediately following November (such election shall be cancelled if the Employee is not an Eligible Employee on the
8
last day such an election may be made) to contribute on a pre-tax basis, through payroll deductions, any combination of the following:
(1) From 6% to 30% (in whole percentage increments) of the Participant's monthly Base Compensation, other than Annual Bonus, during the calendar year (the Plan Year for such contributions) following the calendar year of such election. The Employee Contributions shall be used to acquire Share Units to be credited to the Share Deferral Account for that Plan Year.
(2) Up to 95% (in whole percentage increments or limited to the target amount) of a Short Term Incentive Award, or from 6% to 30% (in whole percentage increments) of Annual Bonus, in each case such contributions shall be made during the second calendar year (which is the Plan Year for such contributions) following the year of such election, except that in 2008 a separate election may be made with respect to contributions to be made in 2009. An Employee may make such an election with respect to the type of Award (Short Term Incentive Award or Annual Bonus) that the Employee is under as of the time the Employee's eligibility to make such election is determined. If because of a promotion or otherwise, the Employee receives a different type of Award instead of, or in partial or full replacement for, the type of Award subject to the Employee's election for the relevant Plan Year, the election will apply to the other Award as well, including but not limited to any individual discretionary award related thereto.
(b) The Committee may permit an Eligible Employee to make an election to purchase Share Units under this Plan with compensation other than Base Compensation or Short Term Incentive Awards on such terms and conditions as such Committee may permit from time to time, provided that any such election is made in accordance with Section 409A of the Code. In no event shall an acquisition of Share Units pursuant to this paragraph (b) or pursuant to the conversion of a right to receive Stock into Share Units (such as through a distribution of Stock under the 2001 Incentive Plan) result in the crediting of an AT&T Matching Contribution or Options.
(c) Notwithstanding anything to the contrary in this Plan, no election shall be effective to the extent it would permit an Employee Contribution or distribution to be made that is not in compliance with Section 409A of the Code. To the extent such election related to Employee Contributions that complied with such statute and regulations thereunder, that portion of the election shall remain valid, except as otherwise provided under this Plan.
(d) To the extent permitted by Section 409A of the Code, AT&T may refuse or terminate, in whole or in part, any election to purchase Share Units in the Plan at any time; provided, however, that only the Committee may take such action with respect to persons who are Officer Level Employees.
(e) In the event the Participant takes a hardship withdrawal pursuant to Treasury Regulation --1.401(k)-1 from a benefit plan qualified under the Code and sponsored by an Employer, any election to make Employee Contributions by such Participant shall be cancelled on a prospective basis, and the Participant shall not be permitted to make a new election with respect to Employee Contributions that would be contributed during the then current and immediately following calendar year.
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4.2 Purchase of Share Units.
(a) Employee Contributions (as well as any corresponding AT&T Matching Contributions) shall be made pursuant to a proper election, only during the Participant's lifetime; provided, however, with respect to Employee Contribution elections made prior to 2007, the Employee must remain an Eligible Employee while making any such contributions. In the event of a Change in Control of an Employer, subsequent compensation from the Employer may not be contributed to the Plan. The Employer may continue the then current elections of the participants under a subsequent plan in order to comply with applicable tax laws.
(b) The number of Share Units purchased by a Participant during a calendar month shall be found by dividing the Participant's Employee Contributions during the month by the FMV of a share of Stock on the last day of such month.
(c) A contribution to the Plan shall be made when the compensation - from which the contribution is to be deducted - is to be paid ("paid," as used in this Plan, includes amounts contributed to the Plan that would have been paid were it not for an election under this Plan), as determined by the relevant Employer. The Committee may modify or change this paragraph (c) from time to time.
4.3 Reinvestment of Dividends.
In the month containing a record date for a cash dividend on Stock, each Share Deferral Account shall be credited with that number of Share Units equal to the declared dividend per share of Stock, multiplied by the number of Share Units held in such Share Deferral Account as of such record date, and dividing the product by the FMV of a share of Stock on the last day of such month.
Article 5 - AT&T Matching Contributions
5.1 AT&T Match.
(a) Each month AT&T shall credit the Participant's relevant Share Deferral Account with the number of "Matching Share Units" found by taking eighty percent (80%) of the Participant's Employee Contributions from Base Compensation made to this Plan and to the Cash Deferral Plan during the month with respect to the first six percent (6%) of the Participant's monthly Match Eligible Compensation (as defined below) and dividing the resulting figure by the FMV of the Stock on the last day of such month (such resulting amount shall be the "Matching Contribution"). The monthly "Match Eligible Compensation" shall be the sum of:
(1) the monthly Employee Contributions from Base Compensation to this Plan and the Cash Deferral Plan (in the aggregate, "Deferred BC"), plus
(2) the amount of the Participant's monthly Base Compensation in excess of the Deferred BC ("Non-Deferred BC") but only to the extent such monthly Non-Deferred BC, when aggregated with the Participant's total Non-Deferred BC for prior months in such Plan Year, as determined by the relevant Employer, exceeds the limit in effect under Section 401(a)(17) of the Code applicable with respect to such Plan Year.
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The foregoing formula shall apply regardless of whether or not the Participant makes contributions to a 401(k) plan.
A Participant may receive Matching Share Units in a Share Deferral Account for a particular form of compensation only if the Participant is then making contributions to the same Share Deferral Account; provided, however, this condition shall not apply for purposes of determining under Section 5.1(a)(2) whether the limit described therein has been reached.
As provided in the definition of Share Deferral Account, Matching Share Units shall be credited to the respective Share Deferral Account that is related to the same form of Employee Contributions (either (1) Base Compensation excluding Annual Bonus or (2) Annual Bonus).
(b) In the event the Participant is not eligible to earn pension accruals under a pension plan offered by AT&T or a Subsidiary and either (1) first becomes an Employee on or after January 1, 2015, or (2) the Participant Terminates Employment on or after January 1, 2015, and the Participant is subsequently rehired as an Employee, then the "eighty percent (80%)" reference in section 5.1(a) shall be replaced with "one hundred percent (100%)" for purposes of determining the number of Matching Share Units to which the Participant would be entitled pursuant to contribution elections made after such hiring or rehiring.
(c) In the sole discretion of the Committee, in the event the Committee reduces the number of Options that AT&T issues for each Share Unit purchased, the Committee may provide for the contribution of a Bonus Matching Contribution on such terms as the Committee determines. Such Bonus Matching Contribution may not exceed 20% of the Participant's Employee Contributions for the month. The Bonus Matching Contribution shall be subject to such terms and conditions as required by the Committee and, unless otherwise provided by the Committee, to the same distribution requirements as Matching Contributions. Pursuant to the foregoing authority and until otherwise provided by the Committee, effective for Share Accounts created pursuant to Employee Contribution elections where such elections are made after January 1, 2010, AT&T shall make Bonus Matching Contributions equal to 20% of the Participant's monthly Employee Contributions from each of Base Compensation and Short Term Incentive Award (not to exceed the target amount of such award, which limit shall be pro rated for any partial year award). Such Bonus Matching Contribution shall be used to purchase that number of Matching Share Units found by dividing the relevant Bonus Matching Contribution for the month by the FMV of the Stock on the last day of such month.
5.2 Distribution of Share Units Acquired with Matching Contributions.
A Participant's Matching Share Units shall be distributed in a lump sum, in accordance with the Plan's distribution provisions, in the earlier of: (a) the calendar year following the calendar year of the Termination of Employment of the Participant, or (b) the calendar year in which the Participant reaches age 55, in each case only with respect to Matching Share Units relating to Share Deferral Accounts for Plan Years before such distribution calendar year.
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Matching Share Units acquired as part of a Share Deferral Account that commences in or after the calendar year the Employee reaches age 55 or after the calendar year in which the Employee Terminates Employment will be distributed in the same manner and time as other Share Units in such Share Deferral Account.
Notwithstanding anything to the contrary in this section, Matching Share Units acquired in 2008 and later shall be distributed at the same time as other Share Units (including those acquired with Employee Contributions) in the same Share Deferral Account.
Article 6 - Distributions
6.1 Distributions of Share Units.
(a) Initial Election with Respect to a Share Deferral Account. At the time the Participant makes an election to make Employee Contributions with respect to a Share Deferral Account, the Participant shall also elect the calendar year the Share Deferral Account shall be distributed, which may be from the first through fifth calendar years after the Plan Year the Account commenced (except as otherwise provided in this Plan with respect to Matching Share Units). For example, if an Account commenced in 2005, the Participant may elect to commence the distribution in any calendar year from and including 2006 to and including 2010. If no timely distribution election is made by the Participant, then the Participant will be deemed to have made an election to have the Share Deferral Account distributed in a single installment in the first calendar year after the calendar year the Account commenced.
(b) Election to Delay a Scheduled Distribution. A Participant may elect to defer a scheduled distribution of a Share Deferral Account for five (5) additional calendar years beyond that previously elected (except as otherwise provided in this Plan with respect to Matching Share Units). Unless otherwise provided by the Committee, the election to defer the distribution must be made on or after October 1, and on or before the last Business Day of the next following December, of the calendar year that is the second calendar year preceding the calendar year of the relevant scheduled distribution. To make this election, the Participant must be an Eligible Employee both on the September 30 immediately preceding such election and on the last day such an election may be made. For example, an election to defer a scheduled distribution in 2010 must be made during the period from October 1, 2008, through the last business day of December 2008, and the Participant must be an Eligible Employee both on September 30, 2008, and the last business day of December 2008. An election to defer the distribution of a Share Deferral Account may not be made in the same calendar year that the election to establish the Share Deferral Account is made. Notwithstanding anything to the contrary in this Plan, (1) an election to defer the distribution of a Share Deferral Account must be made at least 12 months prior to the date of the first scheduled payment under the prior distribution election and (2) the election shall not take effect until at least 12 months after the date on which the election is made.
(c) A Participant's Share Deferral Account shall be distributed to the Participant on March 10 (or as soon thereafter as administratively practicable as determined by AT&T) of the calendar year elected by the Participant for that Account. In the event the distribution is to be made to a "Specified Employee" as a result of the Participant's Termination of Employment
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(other than as a result of a Change in Control), the distribution shall not occur until the later of such March 10 or six (6) months after the Termination of Employment, except it shall be distributed upon the Participant's earlier death in accordance with this Plan.
6.2 Death of the Participant.
In the event of the death of a Participant, notwithstanding anything to the contrary in this Plan, all undistributed Share Deferral Accounts shall be distributed to the Participant's beneficiary in accordance with the AT&T Rules for Employee Beneficiary Designations, as the same may be amended from time to time, within the later of 90 days following such determination or the end of the calendar year in which determination was made.
6.3 Unforeseeable Emergency Distribution.
If a Participant experiences an "Unforeseeable Emergency," the Participant may submit a written petition to AT&T (the Committee in the case of Officer Level Employees), to receive a partial or full distribution of his Share Deferral Account(s). In the event that AT&T (the Committee in the case of Officer Level Employees), upon review of the written petition of the Participant, determines in its sole discretion that the Participant has suffered an "Unforeseeable Emergency," AT&T shall make a distribution to the Participant from the Participant's Share Deferral Accounts (other than Matching Share Units), on a pro-rata basis, within the later of 90 days following such determination or the end of the calendar year in which determination was made, subject to the following:
(a) "Unforeseeable Emergency" shall mean a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant's legal spouse, the Participant's beneficiary, or the Participant's dependent (as defined in Code Section 152, without regard to Code Section 152(b)(1), (b)(2), and (d)(1)(B)); loss of the Participant's property due to casualty; or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee. Whether a Participant is faced with an Unforeseeable Emergency permitting a distribution is to be determined based on the relevant facts and circumstances of each case, but, in any case, a distribution on account of Unforeseeable Emergency shall not be made to the extent that such emergency is or may be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the Participant's assets, to the extent the liquidation of such assets would not cause severe financial hardship, or by cessation of deferrals under the Plan.
(b) The amount of a distribution to be made because of an Unforeseeable Emergency shall not exceed the lesser of (i) the FMV of the Participant's vested Share Deferral Account, calculated as the date on which the amount becomes payable, as determined by AT&T (the Committee in the case of Officer Level Employees) in its sole discretion, and (ii) the amount reasonably necessary, as determined by the AT&T (the Committee in the case of Officer Level Employees) in its sole discretion, to satisfy the emergency need (which may include amounts necessary to pay any Federal, state, local, or foreign income taxes or penalties reasonably anticipated to result from the distribution). Determinations of the amount reasonably necessary to satisfy the emergency need shall take into account any additional compensation that is available if the plan provides for cancellation of a deferral election upon a payment due to an
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Unforeseeable Emergency. The determination of amounts reasonably necessary to satisfy the Unforeseeable Emergency need is not required to, but may, take into account any additional compensation that, due to the Unforeseeable Emergency, is available under another nonqualified deferred compensation plan but has not actually been paid, or that is available due to the Unforeseeable Emergency under another plan that would provide for deferred compensation except due to the application of the effective date provisions under Treasury Regulation --1.409A-6.
(c) Upon such distribution on account of an Unforeseeable Emergency under this Plan, any election to make Employee Contributions by such Participant shall be immediately cancelled, and the Participant shall not be permitted to make a new election with respect to Employee Contributions that would be contributed during the then current and immediately following calendar year.
6.4 Ineligible Participant.
Notwithstanding any other provisions of this Plan to the contrary, if AT&T receives an opinion from counsel selected by AT&T, or a final determination is made by a Federal, state or local government or agency, acting within its scope of authority, to the effect that an individual's continued participation in the Plan would violate applicable law, then such person shall not make further contributions to the Plan to the extent permitted by Section 409A of the Code.
6.5 Conflict of Interest Distribution.
AT&T may in its sole discretion accelerate a distribution(s) to the Participant, provided he or she is no longer actively employed by AT&T: (a) to the extent necessary for any Federal officer or employee in the executive branch to comply with an ethics agreement with the Federal government or (b) to the extent reasonably necessary to avoid the violation of an applicable Federal, state, local, or foreign ethics law or conflicts of interest law (including where such payment is reasonably necessary to permit the service provider to participate in activities in the normal course of his or her position in which the service provider would otherwise not be able to participate under an applicable rule). Any such distribution may only be made in accordance with Section 409A of the Code and the regulations thereunder.
6.6 Distribution Process.
A Share Deferral Account shall be distributed under this Plan by taking the number of Share Units comprising the Account to be distributed and converting them into an equal number of shares of Stock. (Once distributed, a Share Unit shall be canceled.)
Article 7 - Transition Provisions
7.1 Stockholder Approval
The Plan was approved by Stockholders at the 2005 Annual Meeting of Stockholders.
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7.2 2005 Share Deferral Accounts.
Notwithstanding Article 4 to the contrary, if an Employee is an Eligible Employee on September 30, 2004, the Employee may make an election under Article 4 on or prior to December 15, 2004, with respect to the establishment of a Share Deferral Account for the (i) contribution of Base Compensation and/or Short Term Incentive Awards paid during the period from January 1, 2005, through January 15, 2006, which shall be the Plan Year for such Share Deferral Account; and/or (ii) the conversion of a distribution of Stock that would be made during the same Plan Year pursuant to the 2001 Incentive Plan into an equal number of Share Units, so long as such conversion would not cause the recognition of income for Federal income tax purposes in respect of such distribution of Stock prior to distribution of Share Units under this Plan.
7.3 2007 Amendments.
(a) Amendments made to the Plan on November 15, 2007, shall be effective January 1, 2008. except for amendments to this Article 7, which shall be effective upon adoption. Any Participants electing prior to November 15, 2007, to make Employee Contributions in 2008 shall have their elections canceled if they do not consent by December 14, 2007, to all prior amendments to this Plan and to the Cash Deferral Plan. Subject to the foregoing consent requirements, all Employee Contribution elections made prior to 2008, including but not limited to elections to contribute Stock that would be distributed under the 2001 Incentive Plan or a successor plan, shall remain in force, subject to all other terms of the amended Plan. In addition, all unvested but not forfeited Matching Share Units shall vest on November 15, 2007. Matching Shares that have been forfeited shall not be reinstated, and no amendment to this Plan shall be interpreted as reinstating such forfeitures.
(b) Not withstanding anything to the contrary in this Plan, a Participant who as of December 29, 2006, was eligible for an additional payment pursuant to Section 4A of the BellSouth Corporation Executive Incentive Award Deferral Plan shall not, with respect to the 2008 Plan Year, receive Matching Share Units on Base Compensation that exceeds $230,000.
7.4 2008 Amendments.
For Plan Years prior to 2009, Participants who, at the time of the determination of their eligibility to participate in an Account, are paid through a "sales plan" involving the use of commissions may elect to contribute up to 40% of Base Compensation. For the 2008 Plan Year, only Salary and Short Term Incentive Awards paid after Termination of Employment may be contributed to the Plan.
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Article 8 - Options
8.1 Grants.
Options may be issued in definitive form or recorded on the books and records of AT&T for the account of the Participant, at the discretion of AT&T. If AT&T elects not to issue the Options in definitive form, they shall be deemed issued, and the Participants shall have all rights incident thereto as if they were issued on the dates provided herein, without further action on the part of AT&T or the Participant. In addition to the terms herein, all Options shall be subject to such additional provisions and limitations as provided in any Administrative Procedures adopted by the Committee prior to the issuance of such Options. The number of Options issued to a Participant shall be reflected on the Participant's annual statement of account.
8.2 Term of Options.
The Options may only be exercised: (a) after the earlier of (i) the expiration of one (1) year from date of issue or (ii) the Participant's Termination of Employment, and (b) no later than the tenth (10 (th) ) anniversary of their issue; and Options shall be subject to earlier termination as provided herein.
8.3 Exercise Price.
The Exercise Price of an Option shall be the FMV of the Stock on the date of issuance of the Option, and an Option may not be repriced.
8.4 Issuance of Options.
(a) For each Share Deferral Account established by a Participant pursuant to an Employee Contribution election where such election was made prior to January 1, 2010:
(1) on June 15 of the Plan Year for the Share Deferral Account, the Participant shall receive two (2) Options for each Share Unit acquired by the Participant as part of such Share Deferral Account during the immediately preceding January through May period with Employee Contributions of Base Compensation and/or Short Term Incentive Award. A fractional number of Options shall be rounded up to the next whole number.
(2) on the February 15 immediately following the Plan Year for the Share Deferral Account, a Participant shall receive:
(i) two (2) Options for each Share Unit acquired by the
Participant as part of such Share Deferral Account during
the immediately preceding June through the remainder
of the relevant Plan Year with Employee Contributions
of Base Compensation and/or Short Term Incentive Award;
and
(ii) two (2) Options for each Share Unit acquired prior to such date by the Participant with dividend equivalents that were derived, directly or indirectly (such as dividend equivalents paid on Share Units acquired with dividend equivalents), from Share Units acquired with Employee Contributions as part of such Share Deferral Account.
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(b) A fractional number of Options shall be rounded up to the next whole number.
(c) If Stock is not traded on the NYSE on any of the foregoing Option issuance dates, then the Options shall not be issued until the next such day on which Stock is so traded.
(d) If a Participant Terminates Employment other than (i) while Retirement eligible or (ii) because of death or Disability, no further Options shall be issued to or with respect to such Participant. In the event of re-Employment following a Termination of Employment, the preceding sentence shall not apply to those Options resulting from participation in the Plan after such re-Employment until a subsequent Termination of Employment.
(e) No more than 400,000 Options shall be issued to any individual under this Plan during a calendar year. No Share Unit may be counted more than once for the issuance of Options.
(f) The Committee may, in its sole discretion, at any time, increase or lower the number of Options that are to be issued for each Share Unit acquired, not to exceed two (2) Options per Share Unit purchased. However, if the Committee lowers the number of Options, then such change shall only be effective with respect to the next Share Deferral Account a Participant may elect to establish.
(g) The Committee may also, at any time and in any manner, limit the number of Options which may be acquired as a result of the Short Term Incentive Award being contributed to the Plan. Further, except as otherwise provided by the Committee, in determining the number of Options to be issued to a Participant with respect to a Participant's contribution of a Short Term Incentive Award to the Plan and subsequent crediting of Share Units, Options may be issued only with respect to an amount which does not exceed the target amount of such award (or such other portion of the award as may be determined by the Committee). Where a Participant's election to contribute a Short Term Incentive Award to the Plan becomes applicable to Annual Bonus, the above limitation on options shall apply to the contribution of Annual Bonus as though it were a Short Term Incentive Award.
(h) No options shall be issued to or in respect of a Participant for a particular issuance, unless at least ten (10) Options will be issued to that Participant.
8.5 Exercise and Payment of Options.
Options shall be exercised by providing notice to the designated agent selected by AT&T (if no such agent has been designated, then to AT&T), in the manner and form determined by AT&T, which notice shall be irrevocable, setting forth the exact number of shares of Stock with respect to which the Option is being exercised and including with such notice payment of the Exercise Price. When Options have been transferred, AT&T or its designated agent may require appropriate documentation that the person or persons exercising the Option, if other than the Participant, has the right to exercise the Option. No Option may be exercised with respect to a fraction of a share of Stock.
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Exercises of Options may be effected only on days and during the hours that the New York Stock Exchange is open for regular trading or as otherwise provided or limited by AT&T. If an Option expires on a day or at a time when exercises are not permitted, then the Options may be exercised no later than the immediately preceding date and time that the Options were exercisable.
The Exercise Price shall be paid in full at the time of exercise. No Stock shall be issued or transferred until full payment has been received therefore.
Payment may be made:
(a) in cash, or
(b) unless otherwise provided by the Committee at any time, and subject to such additional terms and conditions and/or modifications as AT&T may impose from time to time, and further subject to suspension or termination of this provision by AT&T at any time, by:
(i) electing a Stock-Settled Exercise on or after February 1, 2013. Upon exercise of Options through a Stock-Settled Exercise, the Participant shall receive that number of shares of Stock found by (1) subtracting the Exercise Price of an Option being exercised (on a per share basis) from the FMV of the Stock as of the immediately preceding day that the Stock was traded on the NYSE, (2) multiplying the difference by the number of Options being exercised, and (3) dividing the result by the same FMV. For example, a Participant exercises 1,000 Options with an Exercise Price of $30 (exercises may only occur on a day when the NYSE is open for regular trading) and the FMV for the immediately preceding trading day was $40. In that case, the Participant would receive his $10,000 profit in the form of 250 shares of Stock, subject to tax withholding and any other costs provided under this Plan.
or;
(ii) if AT&T has designated a stockbroker to act as AT&T's agent to process Option exercises, issuance of an exercise notice to such stockbroker together with instructions irrevocably instructing the stockbroker: (A) to immediately sell (which shall include an exercise notice that becomes effective upon execution of a sell order) a sufficient portion of the Stock to pay the Exercise Price of the Options being exercised and the required tax withholding, and (B) to deliver on the settlement date the portion of the proceeds of the sale equal to the Exercise Price and tax withholding to AT&T. In the event the stockbroker sells any Stock on behalf of a Participant, the stockbroker shall be acting solely as the agent of the Participant, and AT&T disclaims any responsibility for the actions of the stockbroker in making any such sales. No Stock shall be issued until the settlement date and until the proceeds (equal to the Exercise Price and tax withholding) are paid to AT&T.
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8.6 Restrictions on Exercise and Transfer.
No Option shall be transferable except: (a) upon the death of a Participant in accordance with AT&T's Rules for Employee Beneficiary Designations, as the same may be amended from time to time; and (b) in the case of any holder after the Participant's death, only by will or by the laws of descent and distribution. During the Participant's lifetime, the Participant's Options shall be exercisable only by the Participant or by the Participant's guardian or legal representative. After the death of the Participant, an Option shall only be exercised by the holder thereof (including but not limited to an executor or administrator of a decedent's estate) or his or her guardian or legal representative. In each such case the Option holder shall be considered a Participant for the limited purpose of exercising such Options.
8.7 Termination of Employment.
(a) Not Retirement Eligible. Unless otherwise provided by the Committee, if a Participant Terminates Employment while not Retirement eligible, a Participant's Options may be exercised, to the extent then exercisable:
(i) if such Termination of Employment is by reason of death or Disability, then for a period of three (3) years from the date of such Termination of Employment or until the expiration of the stated term of such Option, whichever period is shorter; or
(ii) if such Termination of Employment is for any other reason, then for a period of one (1) year from the date of such Termination of Employment or until the expiration of the stated term of such Option, whichever period is shorter.
(b) Retirement Eligible. Unless otherwise provided by the Committee, if a Participant Terminates Employment while Retirement eligible, the Participant's Option may be exercised, to the extent then exercisable: (i) for a period of five (5) years from the date of Retirement or (ii) until the expiration of the stated term of such Option, whichever period is shorter.
(c) Re-Employment of a Participant after a Termination of Employment shall have no effect on the periods during which Options resulting from the prior Employment may be exercised. For example, if the Option exercise period has been shortened because of the prior Termination of Employment, it shall not be extended because of the re-Employment.
(d) Notwithstanding any other definition of Termination of Employment under this Plan, for purposes of this Article 8 - Options only, a Termination of Employment shall mean the cessation of the Employee being employed by any corporation, partnership, venture or other entity in which AT&T holds, directly or indirectly, a 50% or greater ownership interest, including but not limited to where AT&T ceases to hold such interest in the employing company. In addition, the definition of Retirement for purposes of this Article 8 shall use the immediately foregoing definition of Termination of Employment in lieu of any other definition.
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Article 9 - Discontinuation, Termination, Amendment.
9.1 AT&T's Right to Discontinue Offering Share Units.
The Committee may at any time discontinue offerings of Share Units under the Plan. Any such discontinuance shall have no effect upon existing Share Units or the terms or provisions of this Plan as applicable to such Share Units.
9.2 AT&T's Right to Terminate Plan.
The Committee may terminate the Plan at any time. Upon termination of the Plan, contributions shall no longer be made under the Plan.
After termination of the Plan, Participants shall continue to earn dividend equivalents in the form of Share Units on undistributed Share Units and shall continue to receive all distributions under this Plan at such time as provided in and pursuant to the terms and conditions of Participant's elections and this Plan. Notwithstanding the foregoing, the termination of the Plan shall be made solely in accordance with Section 409A of the Code and in no event shall cause the accelerated distribution of any Account unless such termination is effected in accordance with Section 409A of the Code.
9.3 Amendment.
The Committee may at any time amend the Plan in whole or in part including but not limited to changing the formulas for determining the amount of AT&T Matching Contributions under Article 5 or decreasing the number of Options to be issued under Article 8; provided, however, that no amendment, including but not limited to an amendment to this section, shall be effective, without the consent of a Participant, to alter, to the material detriment of such Participant, a Share Deferral Account of the Participant, other than as provided elsewhere in this section. For purposes of this section, an alteration to the material detriment of a Participant shall include, but not be limited to, a material reduction in the period of time over which Stock may be distributed to a Participant, any reduction in the Participant's number of vested Share Units or Options, or an increase in the Exercise Price or decrease in the term of an Option. Any such consent may be in a writing, telecopy, or e-mail or in another electronic format. An election to acquire Share Units with Employee Contributions shall be conclusively deemed to be the consent of the Participant to any and all amendments to the Plan prior to such election, and such consent shall be a condition to making any election with respect to Employee Contributions.
Notwithstanding anything to the contrary contained in this section of the Plan, the Committee may modify this Plan with respect to any person subject to the provisions of Section 16 of the Securities Exchange Act of 1934, as amended ("Exchange Act") to place additional restrictions on the exercise of any Option or the transfer of any Stock not yet issued under the Plan.
The Plan is established in order to provide deferred compensation to a select group of management and highly compensated employees with in the meaning of Sections 201(2) and 301(a)(3) of ERISA. To the extent legally required, the Code and ERISA shall govern the Plan, and if any provision hereof is in violation of an applicable requirement thereof, the Company reserves the right to retroactively amend the Plan to comply therewith to the extent permitted
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under the Code and ERISA. The Company also reserves the right to make such other changes as may facilitate implementation of Section 409A of the Code. Provided, however, that in no event shall any such amendments be made in violation of the requirements of Section 409A of the Code.
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 on forms prepared by AT&T or the General Counsel, Secretary or Assistant Secretary, or their respective delegates or shall be made in such other manner as permitted or required by AT&T or the General Counsel, Secretary or Assistant Secretary, or their respective delegates, including 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 to make such election. AT&T may limit the time an election may be made in advance of any deadline.
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.
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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.
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.
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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.
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.
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(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
24
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,
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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.
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Exhibit 10-b
AT&T INC.
CASH DEFERRAL PLAN
Adopted November 19, 2004
As amended through March 30, 2017
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.
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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.
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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.
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:
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 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(a) and (c) of the Code, using 50% as the ownership threshold as provided under Section 409A of the Code.
Termination of Employment. References herein to "Termination of Employment," "Terminate Employment" or a similar reference, shall mean the event where the Employee has a "separation from service," as defined under Section 409A, with all Employers. For purposes of this Plan, a Termination of Employment with respect to an Employer 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.
(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.
7
(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.
(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.
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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:
(1) 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.
(2) 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.
(b) 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 the Committee, the election of a new distribution commencement date for a Cash Deferral Account must be made on or after October 1, and on or before the last Business Day of the next following December, of the calendar year that is the second calendar year preceding the calendar year in which the distribution would otherwise commence. To make this election, the Participant must be an Eligible Employee both on the September 30 immediately preceding such election and on the last day such an election may be made. For example, an election to defer a scheduled distribution that would otherwise commence in 2010 must be made
9
during the period from October 1, 2008, through the last business day of December 2008, and the Participant must be an Eligible Employee both on September 30, 2008, and the last business day of December 2008. The new distribution election must delay commencement of the distribution by five (5) years. 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, (1) such 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 (2) the election shall not take effect until at least 12 months after the date on which the election is made.
(c) A Participant's 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.
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:
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(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.
(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
11
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.
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.
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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.
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.
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(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
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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.
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(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 on forms prepared by AT&T or the General Counsel, Secretary or Assistant Secretary, or their respective delegates or shall be made in such other manner as permitted or required by AT&T or the General Counsel, Secretary or Assistant Secretary, or their respective delegates, including 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 to make such election. AT&T may limit the time an election may be made in advance of any deadline.
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.
16
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.
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
17
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.
18
EXHIBIT
12
AT&T INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
Three Months
Ended
March 31,
(Unaudited) Year Ended December 31,
2017 2016 2016 2015 2014 2013 2012
Earnings:
Income from continuing
operations before
income
taxes $5,378 $6,007 $19,812 $20,692 $10,355 $28,050 $10,496
Equity in net income
of
affiliates included
above 173 (13) (98) (79) (175) (642) (752)
Fixed charges 1,906 1,799 7,296 6,592 5,295 5,452 4,876
Distributed income of
equity affiliates 8 8 61 30 148 318 137
Interest capitalized (231) (218) (892) (797) (234) (284) (263)
Earnings, as adjusted $7,234 $7,583 $26,179 $26,438 $15,389 $32,894 $14,494
Fixed Charges:
Interest expense $1,293 $1,207 $ 4,910 $ 4,120 $ 3,613 $ 3,940 $ 3,444
Interest capitalized 231 218 892 797 234 284 263
Portion of rental
expense
representative of
interest
factor 382 374 1,494 1,675 1,448 1,228 1,169
Fixed Charges $1,906 $1,799 $ 7,296 $ 6,592 $ 5,295 $ 5,452 $ 4,876
Ratio of Earnings to
Fixed
Charges 3.80 4.22 3.59 4.01 2.91 6.03 2.97
CERTIFICATION
I, Randall Stephenson, certify that:
1. I have reviewed this report on Form 10-Q of AT&T Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 4, 2017
/s/ Randall Stephenson
Randall Stephenson
Chairman of the Board,
Chief Executive Officer and President
CERTIFICATION
I, John J. Stephens, certify that:
1. I have reviewed this report on Form 10-Q of AT&T Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 4, 2017
/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
Certification of Periodic Financial Reports
Pursuant to 18 U.S.C. Section 1350, each of the undersigned officers of AT&T Inc. (the "Company") hereby certifies that the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 2017 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
May 4, 2017 May
4,
2017
By: /s/ Randall Stephenson By: /s/
Randall Stephenson John
Chairman of the Board, Chief Executive J. Stephens
Officer John
and President J. Stephens
Senior
Executive
Vice
President
and
Chief
Financial
Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. This certification shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 ("Exchange Act") or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act except to the extent this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to AT&T Inc. and will be retained by AT&T Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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(END) Dow Jones Newswires
May 23, 2017 10:37 ET (14:37 GMT)
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