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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 : 7286H
AT & T Inc.
19 August 2016
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Hot Features
Premium
(Mark
One)
QUARTERLY REPORT PURSUANT
x TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period
ended June 30, 2016
or
o TRANSITION REPORT
PURSUANT TO SECTION
13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 1-8610
AT&T INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated [X] Accelerated filer [ ] filer Non-accelerated [ ] (Do not check if a smaller Smaller reporting [ ] filer reporting company) company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
At July 31, 2016 there were 6,152 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 Six months ended
June 30, June 30,
2016 2015 2016 2015
-------------------------------------- ------- ------- ---------- -------
Operating Revenues
Service $37,142 $29,541 $ 74,243 $58,503
Equipment 3,378 3,474 6,812 7,088
Total operating revenues 40,520 33,015 81,055 65,591
--------------------------------------- ------ ------ ------ ------
Operating Expenses
Cost of services and sales
Equipment 4,260 4,353 8,635 8,899
Broadcast, programming and
operations 4,701 1,148 9,330 2,270
Other cost of services (exclusive
of depreciation and
amortization shown separately
below) 9,514 9,578 18,910 18,390
Selling, general and administrative 8,909 7,467 17,350 15,428
Depreciation and amortization 6,576 4,696 13,139 9,274
Total operating expenses 33,960 27,242 67,364 54,261
--------------------------------------- ------ ------ ------ ------
Operating Income 6,560 5,773 13,691 11,330
--------------------------------------- ------ ------ ------ ------
Other Income (Expense)
Interest expense (1,258) (932) (2,465) (1,831)
Equity in net income of affiliates 28 33 41 33
Other income (expense) - net 91 48 161 118
Total other income (expense) (1,139) (851) (2,263) (1,680)
--------------------------------------- ------ ------ ------ ------
Income Before Income Taxes 5,421 4,922 11,428 9,650
Income tax expense 1,906 1,738 4,028 3,127
Net Income 3,515 3,184 7,400 6,523
--------------------------------------- ------ ------ ------ ------
Less: Net Income Attributable
to Noncontrolling Interest (107) (102) (189) (178)
Net Income Attributable to
AT&T $ 3,408 $ 3,082 $ 7,211 $ 6,345
======================================= ====== ====== ====== ======
Basic Earnings Per Share Attributable
to AT&T $ 0.55 $ 0.59 $ 1.17 $ 1.22
Diluted Earnings Per Share
Attributable to AT&T $ 0.55 $ 0.59 $ 1.17 $ 1.22
--------------------------------------- ------ ------ ------ ------
Weighted Average Number of
Common Shares
Outstanding - Basic (in millions) 6,174 5,204 6,173 5,204
Weighted Average Number of
Common Shares
Outstanding - with Dilution
(in millions) 6,195 5,220 6,193 5,220
Dividends Declared Per Common
Share $ 0.48 $ 0.47 $ 0.96 $ 0.94
======================================= ====== ====== ====== ======
See Notes to Consolidated
Financial Statements.
2
AT&T INC.
--------------------------------------- ------ ------ ---------- -------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
Dollars in millions
(Unaudited)
--------------------------------------- ------ ------ ---------- -------
Three months
ended Six months ended
June 30, June 30,
2016 2015 2016 2015
--------------------------------------- ------ ------ ---------- -------
Net income $3,515 $3,184 $ 7,400 $ 6,523
Other comprehensive income
(loss), net of tax:
Foreign Currency:
Foreign currency translation
adjustment, net of taxes
of
$136, $1, $126 and $(103) 218 1 174 (185)
Available-for-sale securities:
Net unrealized gains (losses),
net of taxes of $2, $0,
$(13) and $19 5 1 (21) 34
Reclassification adjustment
included in net income,
net of taxes of $2, $(2),
$0 and $(5) 3 (4) - (9)
Cash flow hedges:
Net unrealized gains (losses),
net of taxes of $(208),
$(52), $(141) and $(242) (387) (95) (263) (449)
Reclassification adjustment
included in net income,
net of taxes of $5, $5,
$10 and $9 9 10 19 17
Defined benefit postretirement
plans:
Amortization of net prior
service credit included in
net income, net of taxes
of $(131), $(131), $(262)
and $(262) (214) (214) (429) (429)
---------------------------------------- ----- ----- ------ ------
Other comprehensive income
(loss) (366) (301) (520) (1,021)
---------------------------------------- ----- ----- ------ ------
Total comprehensive income 3,149 2,883 6,880 5,502
Less: Total comprehensive
income attributable to
noncontrolling interest (107) (102) (189) (178)
---------------------------------------- ----- ----- ------ ------
Total Comprehensive Income
Attributable to AT&T $3,042 $2,781 $ 6,691 $ 5,324
======================================== ===== ===== ====== ======
See Notes to Consolidated
Financial Statements.
3
AT&T INC.
------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
------------------------------------------------------------------------
December
June 30, 31,
2016 2015
-------------------------------------------- ------------- ---------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 7,208 $ 5,121
Accounts receivable - net of allowances
for doubtful accounts of $642 and $704 15,830 16,532
Prepaid expenses 1,197 1,072
Other current assets 11,770 13,267
--------------------------------------------- --------- --------
Total current assets 36,005 35,992
--------------------------------------------- --------- --------
Property, plant and equipment 313,018 306,227
Less: accumulated depreciation and
amortization (189,481) (181,777)
--------------------------------------------- --------- --------
Property, Plant and Equipment - Net 123,537 124,450
--------------------------------------------- --------- --------
Goodwill 105,252 104,568
Licenses 94,098 93,093
Customer Lists and Relationships - Net 16,259 18,208
Other Intangible Assets - Net 9,107 9,409
Investments in Equity Affiliates 1,677 1,606
Other Assets 15,873 15,346
--------------------------------------------- --------- --------
Total Assets $ 401,808 $ 402,672
============================================= ========= ========
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year $ 9,528 $ 7,636
Accounts payable and accrued liabilities 26,746 30,372
Advanced billing and customer deposits 4,465 4,682
Accrued taxes 2,773 2,176
Dividends payable 2,953 2,950
--------------------------------------------- --------- --------
Total current liabilities 46,465 47,816
--------------------------------------------- --------- --------
Long-Term Debt 117,308 118,515
--------------------------------------------- --------- --------
Deferred Credits and Other Noncurrent
Liabilities
Deferred income taxes 58,216 56,181
Postemployment benefit obligation 34,023 34,262
Other noncurrent liabilities 21,425 22,258
--------------------------------------------- --------- --------
Total deferred credits and other noncurrent
liabilities 113,664 112,701
--------------------------------------------- --------- --------
Stockholders' Equity
Common stock ($1 par value, 14,000,000,000
authorized at June 30, 2016 and
December 31, 2015: issued 6,495,231,088
at June 30, 2016 and December 31, 2015) 6,495 6,495
Additional paid-in capital 89,486 89,763
Retained earnings 34,950 33,671
Treasury stock (343,397,505 at June
30, 2016 and 350,291,239
at December 31, 2015, at cost) (12,343) (12,592)
Accumulated other comprehensive income 4,814 5,334
Noncontrolling interest 969 969
--------------------------------------------- --------- --------
Total stockholders' equity 124,371 123,640
--------------------------------------------- --------- --------
Total Liabilities and Stockholders'
Equity $ 401,808 $ 402,672
============================================= ========= ========
See Notes to Consolidated Financial
Statements.
4
AT&T INC.
-------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
--------------------------------------------- -------- --------
Six months ended
June 30,
2016 2015
--------------------------------------------- -------- --------
Operating Activities
Net income $ 7,400 $ 6,523
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 13,139 9,274
Undistributed earnings from investments
in equity affiliates (22) (23)
Provision for uncollectible accounts 705 535
Deferred income tax expense 1,767 1,244
Net gain from sale of investments, net
of impairments (85) (50)
Changes in operating assets and liabilities:
Accounts receivable 543 434
Other current assets 1,069 732
Accounts payable and accrued liabilities (3,059) (1,125)
Retirement benefit funding (280) (455)
Other - net (2,970) (1,191)
---------------------------------------------- ------- -------
Total adjustments 10,807 9,375
---------------------------------------------- ------- -------
Net Cash Provided by Operating Activities 18,207 15,898
---------------------------------------------- ------- -------
Investing Activities
Capital expenditures:
Purchase of property and equipment (9,702) (8,328)
Interest during construction (437) (339)
Acquisitions, net of cash acquired (485) (20,954)
Dispositions 107 72
Sale of securities, net 500 1,890
Other - (1)
---------------------------------------------- ------- -------
Net Cash Used in Investing Activities (10,017) (27,660)
---------------------------------------------- ------- -------
Financing Activities
Issuance of long-term debt 10,140 33,958
Repayment of long-term debt (9,129) (2,919)
Purchase of treasury stock (197) -
Issuance of treasury stock 119 20
Dividends paid (5,899) (4,873)
Other (1,137) (2,071)
---------------------------------------------- ------- -------
Net Cash (Used in) Provided by Financing
Activities (6,103) 24,115
---------------------------------------------- ------- -------
Net increase in cash and cash equivalents 2,087 12,353
Cash and cash equivalents beginning of
year 5,121 8,603
---------------------------------------------- ------- -------
Cash and Cash Equivalents End of Period $ 7,208 $ 20,956
============================================== ======= =======
Cash paid (received) during the six months
ended June 30 for:
Interest $ 2,914 $ 2,178
Income taxes, net of refunds $ 2,468 $ (71)
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)
---------------------------------------------------------------------
June 30, 2016
------------------
Shares Amount
------------------------------------------------ ------- --------
Common Stock
Balance at beginning of year 6,495 $ 6,495
Issuance of stock - -
------------------------------------------------ ------ -------
Balance at end of period 6,495 $ 6,495
================================================== ====== =======
Additional Paid-In Capital
Balance at beginning of year $ 89,763
Issuance of treasury stock (43)
Share-based payments (258)
Change related to acquisition of interests
held by noncontrolling owners 24
-------------------------------------------------- ------ -------
Balance at end of period $ 89,486
================================================== ====== =======
Retained Earnings
Balance at beginning of year $ 33,671
Net income attributable to AT&T ($1.17
per diluted share) 7,211 Dividends to stockholders ($0.96 per share) (5,932) -------------------------------------------------- ------ ------- Balance at end of period $ 34,950 ================================================== ====== ======= Treasury Stock Balance at beginning of year (350) $(12,592) Repurchase and acquisition of common stock (7) (294) Issuance of treasury stock 14 543 -------------------------------------------------- ------ ------- Balance at end of period (343) $(12,343) ================================================== ====== ======= Accumulated Other Comprehensive Income Attributable to AT&T, net of tax Balance at beginning of year $ 5,334 Other comprehensive loss attributable to AT&T (520) -------------------------------------------------- ------ ------- Balance at end of period $ 4,814 ================================================== ====== ======= Noncontrolling Interest Balance at beginning of year $ 969 Net income attributable to noncontrolling interest 189 Distributions (164) Acquisition of interest held by noncontrolling owners (25) -------------------------------------------------- ------ ------- Balance at end of period $ 969 ================================================== ====== ======= Total Stockholders' Equity at beginning of year $123,640 ================================================== ====== ======= Total Stockholders' Equity at end of period $124,371 ================================================== ====== ======= See Notes to Consolidated Financial Statements.
6
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS
Basis of Presentation Throughout this document, AT&T Inc. is referred to as "AT&T," "we" or the "Company." These consolidated financial statements include all adjustments that are necessary to present fairly the results for the presented interim periods, consisting of normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of those for the full year. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2015.
The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates, including the results of DIRECTV and wireless properties in Mexico for the period from acquisition to the reporting date. Our subsidiaries and affiliates operate in the communications and digital entertainment services industry, providing services and equipment that deliver voice, video and broadband services domestically and internationally.
All significant intercompany transactions are eliminated in the consolidation process. Investments in less than majority-owned subsidiaries and partnerships where we have significant influence are accounted for under the equity method. Earnings from certain investments accounted for using the equity method are included for periods ended within up to one quarter of our period end. We also record our proportionate share of our equity method investees' other comprehensive income (OCI) items, including cumulative translation adjustments.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. Certain prior period amounts have been conformed to the current period's presentation, including our 2015 change in accounting to capitalize customer set-up and installation costs and amortize them over the expected economic life of the customer relationship. The consolidated statements of income also include revisions to present "Equipment" and "Broadcast, programming and operations" costs separately from "Other cost of services."
Leases In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, "Leases (Topic 842)" (ASU 2016-02), which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASU 2016-02 will require lessees to recognize most leases on their balance sheets as liabilities, with corresponding "right-of-use" assets. Leases will be classified as either a finance or an operating lease without relying upon the bright-line tests under current GAAP.
Upon initial evaluation, we believe the key change upon adoption will be the balance sheet recognition. The income statement recognition appears similar to our current methodology.
ASU 2016-02 becomes effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. We have just begun our evaluation of the impact on our financial statements, as well as available adoption methods, but we believe our implementation of the revenue recognition standard discussed below could influence the timing of our adoption of ASU 2016-02.
Revenue Recognition In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09) and has since modified the standard four times. These standards replace existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASU 2014-09, as amended, becomes effective for annual reporting periods beginning after December 15, 2017, at which point we plan to adopt the standard.
The FASB allows two adoption methods under ASU 2014-09. Under one method, a company will apply the rules to contracts in all reporting periods presented, subject to certain allowable exceptions. Under the other method, a company will apply the rules to all contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous rules ("modified retrospective method"). We continue to evaluate the available adoption methods.
7
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Upon initial evaluation, we believe the key changes in the standard that impact our revenue recognition relate to the allocation of contract revenues between various services and equipment, and the timing of when those revenues are recognized. We are still in the process of evaluating these impacts. As a result of our accounting policy change for customer set-up and installation costs in 2015, we believe under the new standard that the requirement to defer such costs will not result in a significant change to our results. However, the requirement to defer incremental contract acquisition costs and recognize them over the contract period or expected customer life will result in the recognition of a deferred charge on our balance sheets. We cannot currently estimate the impact of this change upon adoption, as the industry continues to undergo changes in how devices and services are sold to customers.
Customer Fulfillment Costs During the second quarter of 2016, we updated our analysis of the economic lives of customer relationships, which included a review of satellite customer data following the DIRECTV acquisition. As of April 1, 2016, to better reflect the estimated economic lives of satellite and certain business customer relationships, we extended the period to approximately 4.5 years. This change in accounting estimate decreased other cost of services and impacted net income $82, or $0.01 per diluted share, in the second quarter of 2016.
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three and six months ended June 30, 2016 and 2015, is shown in the table below:
Three months
ended Six months ended
June 30, June 30,
2016 2015 2016 2015
-------------------------------------- ------ ------ ---------- -------
Numerators
Numerator for basic earnings
per share:
Net Income $3,515 $3,184 $ 7,400 $ 6,523
Less: Net income attributable
to noncontrolling interest (107) (102) (189) (178)
--------------------------------------- ----- ----- ------ ------
Net Income attributable to
AT&T 3,408 3,082 7,211 6,345
Dilutive potential common
shares:
Share-based payment 2 2 6 6
--------------------------------------- ----- ----- ------ ------
Numerator for diluted earnings
per share $3,410 $3,084 $ 7,217 $ 6,351
======================================= ===== ===== ====== ======
Denominators (000,000)
Denominator for basic earnings
per share:
Weighted average number of
common shares outstanding 6,174 5,204 6,173 5,204
Dilutive potential common
shares:
Share-based payment (in shares) 21 16 20 16
--------------------------------------- ----- ----- ------ ------
Denominator for diluted earnings
per share 6,195 5,220 6,193 5,220
======================================= ===== ===== ====== ======
Basic earnings per share attributable
to AT&T $ 0.55 $ 0.59 $ 1.17 $ 1.22
Diluted earnings per share
attributable to AT&T $ 0.55 $ 0.59 $ 1.17 $ 1.22
======================================= ===== ===== ====== ======
NOTE 3. OTHER COMPREHENSIVE INCOME
Changes in the balances of each component included in accumulated other comprehensive income (accumulated OCI) are presented below. All amounts are net of tax and exclude noncontrolling interest.
Following our 2015 acquisitions of DIRECTV and wireless businesses in Mexico, we have additional foreign operations that are exposed to fluctuations in the exchange rates used to convert operations, assets and liabilities into U.S. dollars. Since December 31, 2015, when compared to the U.S. dollar, the Brazilian real exchange rate has appreciated 18.9%, the Argentine peso exchange rate has depreciated 16.4% and the Mexican peso exchange rate has depreciated 6.2%.
8
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Net
Unrealized Net
Gains Unrealized
(Losses) Gains
Foreign on (Losses) Defined Accumulated
Currency Available- on Cash Benefit Other
Translation for-Sale Flow Postretirement Comprehensive
Adjustment Securities Hedges Plans Income
Balance as of
December 31,
2015 $ (1,198) $ 484 $ 16 $ 6,032 $ 5,334
Other comprehensive
income
(loss) before
reclassifications 174 (21) (263) - (110)
Amounts
reclassified
from accumulated
OCI - (1) - (2) 19 (3) (429) (4) (410)
Net other
comprehensive
income (loss) 174 (21) (244) (429) (520)
------------------- ---------- ---- ---------- ---- ---------- ---- ------------ ---- ------------
Balance as of
June 30, 2016 $ (1,024) $ 463 $ (228) $ 5,603 $ 4,814
Net
Unrealized Net
Gains Unrealized
(Losses) Gains
Foreign on (Losses) Defined Accumulated
Currency Available- on Cash Benefit Other
Translation for-Sale Flow Postretirement Comprehensive
Adjustment Securities Hedges Plans Income
------------------- ----------- ---- ----------- ---- ----------- ---- ---------------- ---- -------------
Balance as of
December 31,
2014 $ (26) $ 499 $ 741 $ 6,847 $ 8,061
Other comprehensive
income
(loss) before
reclassifications (185) 34 (449) - (600)
Amounts
reclassified
from accumulated
OCI - (1) (9) (2) 17 (3) (429) (4) (421)
Net other
comprehensive
income (loss) (185) 25 (432) (429) (1,021)
------------------- ---------- ---- ---------- ---- ---------- ---- ------------ ---- ------------
Balance as of
June 30, 2015 $ (211) $ 524 $ 309 $ 6,418 $ 7,040
(1) Translation (gain) loss reclassifications are included
in Other income (expense) - net in the consolidated statements
of income.
(2) (Gains) losses are included in Other income (expense)
- net in the consolidated statements of income.
(3) (Gains) losses are included in Interest expense in
the consolidated statements of income. See Note 6 for
additional information.
(4) The amortization of prior service credits associated
with postretirement benefits, net of amounts capitalized
as part of construction labor, are included in Cost of
services and sales and Selling, general and administrative
in the consolidated statements of income (see Note 5).
NOTE 4. SEGMENT INFORMATION
Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. Due to organizational changes and our July 24, 2015 acquisition of DIRECTV, effective for the quarter ended September 30, 2015, we revised our operating segments to align with our new management structure and organizational responsibilities. We analyze our operating segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items (as discussed below), and equity in net income (loss) of affiliates for investments managed within each operating segment. We have four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.
We also evaluate segment performance based on Segment Contribution, excluding equity in net income (loss) of affiliates and depreciation and amortization, which we refer to as EBITDA and/or EBITDA margin. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate segment operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.
9
AT&T INC.
JUNE 30, 2016
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 strategic business services; as well as traditional data and voice products. We utilize our wireless and wired networks (referred to as "wired" or "wireline") to provide a complete communications solution to our business customers.
The Entertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the U.S. or in U.S. territories. We utilize our copper and IP-based wired network and/or our satellite technology.
The Consumer Mobility segment provides nationwide wireless service to consumers and wholesale and resale wireless subscribers located in the U.S. or in U.S. territories. We utilize our U.S. wireless network to provide voice and data services, including high-speed internet, video, and home monitoring services.
The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national wireless networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates.
In reconciling items to consolidated operating income and income before income taxes, Corporate and Other includes: (1) operations that are not considered reportable segments and that are no longer integral to our operations or which we no longer actively market, and (2) impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.
Certain operating items are not allocated to our business segments, and those include:
-- Acquisition-related items which consist of (1) operations
and support items associated with the merger and
integration of newly acquired businesses and (2)
the noncash amortization of intangible assets acquired
in acquisitions.
-- Certain significant items which consist 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 an international satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by operating segment, and, therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on network usage or asset utilization by segment.
10
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
For the three months ended June 30, 2016
---------------------------------------------------------------------------------------------------------------
Equity
in Net
Income
Operations Depreciation Operating (Loss)
and Support and Income of Segment
Revenue Expenses EBITDA Amortization (Loss) Affiliates Contribution
-------------------- ------- ----------- ------- ------------ ----------- ------------ ------------
Business
Solutions $17,579 $ 10,857 $ 6,722 $ 2,521 $ 4,201 $ - $ 4,201
Entertainment
Group 12,711 9,569 3,142 1,489 1,653 (2) 1,651
Consumer
Mobility 8,186 4,680 3,506 932 2,574 - 2,574
International 1,828 1,723 105 298 (193) 9 (184 )
--------------------- ------ ---------- ------ ----------- ------- -------- -----------
Segment
Total 40,304 26,829 13,475 5,240 8,235 $ 7 $ 8,242
--------------------- ------ ---------- ------ ----------- ------- -------- -----------
Corporate
and Other 216 293 (77) 20 (97)
Acquisition-related
items - 233 (233) 1,316 (1,549)
Certain
significant
items - 29 (29) - (29)
--------------------- ------ ---------- ------ ----------- -------
AT&T Inc. $40,520 $ 27,384 $13,136 $ 6,576 $ 6,560
===================== ====== ========== ====== =========== =======
For the six months ended June 30, 2016
---------------------------------------------------------------------------------------------------------------
Equity
in Net
Income
Operations Depreciation Operating (Loss)
and Support and Income of Segment
Revenue Expenses EBITDA Amortization (Loss) Affiliates Contribution
-------------------- ------- ----------- ------- ------------ ----------- ------------ ------------
Business
Solutions $35,188 $ 21,659 $13,529 $ 5,029 $ 8,500 $ - $ 8,500
Entertainment
Group 25,369 19,147 6,222 2,977 3,245 1 3,246
Consumer
Mobility 16,514 9,592 6,922 1,854 5,068 - 5,068
International 3,495 3,311 184 575 (391) 23 (368 )
--------------------- ------ ---------- ------ ----------- ------- -------- -----------
Segment
Total 80,566 53,709 26,857 10,435 16,422 $ 24 $ 16,446
--------------------- ------ ---------- ------ ----------- ------- -------- -----------
Corporate
and Other 489 670 (181) 37 (218)
Acquisition-related
items - 528 (528) 2,667 (3,195)
Certain
significant
items - (682) 682 - 682
--------------------- ------ ---------- ------ ----------- -------
AT&T Inc. $81,055 $ 54,225 $26,830 $ 13,139 $ 13,691
===================== ====== ========== ====== =========== =======
11
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
For the three months ended June 30, 2015
----------------------------------------------------------------------------------------------------------------
Equity
in Net
Income
Operations Depreciation Operating (Loss)
and Support and Income of Segment
Revenue Expenses EBITDA Amortization (Loss) Affiliates Contribution
-------------------- ------- ----------- ------- -------------- ----------- ------------ ------------
Business
Solutions $17,664 $ 10,972 $ 6,692 $ 2,460 $ 4,232 $ - $ 4,232
Entertainment
Group 5,782 4,913 869 1,065 (196) (12) (208 )
Consumer
Mobility 8,755 5,202 3,553 934 2,619 - 2,619
International 491 529 (38) 93 (131) - (131 )
--------------------- ------ ---------- ------ ---------- ------- -------- -----------
Segment
Total 32,692 21,616 11,076 4,552 6,524 $ (12) $ 6,512
--------------------- ------ ---------- ------ ---------- ------- -------- -----------
Corporate
and Other 323 236 87 24 63
Acquisition-related
items - 694 (694) 120 (814)
Certain
significant
items - - - - -
-------------------- ------ ---------- ------ ---------- -------
AT&T Inc. $33,015 $ 22,546 $10,469 $ 4,696 $ 5,773
===================== ====== ========== ====== ========== =======
For the six months ended June 30, 2015
----------------------------------------------------------------------------------------------------------------
Equity
in Net
Income
Operations Depreciation Operating (Loss)
and Support and Income of Segment
Revenue Expenses EBITDA Amortization (Loss) Affiliates Contribution
-------------------- ------- ----------- ------- -------------- ----------- ------------ ------------
Business
Solutions $35,221 $ 22,045 $13,176 $ 4,802 $ 8,374 $ - $ 8,374
Entertainment
Group 11,442 9,772 1,670 2,130 (460) (18) (478 )
Consumer
Mobility 17,533 10,743 6,790 1,936 4,854 - 4,854
International 727 747 (20) 121 (141) - (141 )
--------------------- ------ ---------- ------ ---------- ------- -------- -----------
Segment
Total 64,923 43,307 21,616 8,989 12,627 $ (18) $ 12,609
--------------------- ------ ---------- ------ ---------- ------- -------- ----------- Corporate and Other 668 470 198 44 154 Acquisition-related items - 993 (993) 241 (1,234) Certain significant items - 217 (217) - (217) --------------------- ------ ---------- ------ ---------- ------- AT&T Inc. $65,591 $ 44,987 $20,604 $ 9,274 $ 11,330 ===================== ====== ========== ====== ========== =======
12
AT&T INC.
JUNE 30, 2016
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.
Second Quarter Six-Month Period
---------------- --------------------
2016 2015 2016 2015
----------------------------------- ------- ------ ---------- -------
Business Solutions $ 4,201 $4,232 $ 8,500 $ 8,374
Entertainment Group 1,651 (208) 3,246 (478)
Consumer Mobility 2,574 2,619 5,068 4,854
International (184) (131) (368) (141)
------------------------------------ ------ ----- ------ ------
Segment Contribution 8,242 6,512 16,446 12,609
------------------------------------ ------ ----- ------ ------
Reconciling Items:
Corporate and Other (97) 63 (218) 154
Merger and integration charges (233) (694) (528) (993)
Amortization of intangibles
acquired (1,316) (120) (2,667) (241)
Employee separation charges (29) - (54) (217)
Gain on wireless spectrum
transactions - - 736 -
Segment equity in net (income)
loss
of affiliates (7) 12 (24) 18
------------------------------------ ------ ----- ------ ------
AT&T Operating Income 6,560 5,773 13,691 11,330
------------------------------------ ------ ----- ------ ------
Interest expense 1,258 932 2,465 1,831
Equity in net income of affiliates 28 33 41 33
Other income (expense) - net 91 48 161 118
------------------------------------ ------ ----- ------ ------
Income Before Income Taxes $ 5,421 $4,922 $ 11,428 $ 9,650
==================================== ====== ===== ====== ======
NOTE 5. PENSION AND POSTRETIREMENT BENEFITS
Substantially all of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental, life insurance and death benefits to certain retired employees under various plans and accrue actuarially determined postretirement benefit costs. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits described in the plans to employees upon their retirement.
In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $8,704 at June 30, 2016. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly in equal amounts and accounted for as contributions. We distributed $280 to the trust during the six months ended June 30, 2016. So long as we make the distributions, we will have no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan's separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation. We also agreed to make a cash contribution to the trust of $175 no later than the due date of our federal income tax return for 2015.
We recognize actuarial gains and losses on pension and postretirement plan assets in our operating results at our annual measurement date of December 31, unless earlier remeasurements are required. The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income. A portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded. Service costs and prior service credits are reported in our segment results while interest costs and expected return on plan assets are included within Corporate and Other (see Note 4).
13
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Three months
ended Six months ended
June 30, June 30,
2016 2015 2016 2015
-------------------------------------- -------- ----- ---------- -------
Pension cost:
Service cost - benefits earned
during the period $ 278 $ 300 $ 556 $ 599
Interest cost on projected
benefit obligation 495 473 990 947
Expected return on assets (780) (826) (1,558) (1,652)
Amortization of prior service
credit (25) (26) (51) (52)
--------------------------------------- ---- ---- ------ ------
Net pension (credit) cost $ (32) $ (79) $ (63) $ (158)
======================================= ==== ==== ====== ======
Postretirement cost:
Service cost - benefits earned
during the period $ 48 $ 56 $ 96 $ 111
Interest cost on accumulated
postretirement benefit obligation 243 241 486 483
Expected return on assets (89) (105) (178) (210)
Amortization of prior service
credit (319) (319) (638) (639)
--------------------------------------- ---- ---- ------ ------
Net postretirement (credit)
cost $ (117) $(127) $ (234) $ (255)
======================================= ==== ==== ====== ======
Combined net pension and
postretirement (credit) cost $ (149) $(206) $ (297) $ (413)
======================================= ==== ==== ====== ======
The decrease in the combined net pension and postretirement credit of $57 in the second quarter and $116 for the first six months of 2016 is primarily due to a lower expected return on assets resulting from a decrease in the value in the plan assets.
We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the second quarter ended 2016 and 2015, net supplemental pension benefits costs not included in the table above were $24 and $21. For the first six months of 2016 and 2015, net supplemental pension benefit costs were $47 and $41.
NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level Inputs to the valuation methodology are unadjusted
1 quoted prices for identical assets or liabilities
in active markets that we have the ability to access.
Level Inputs to the valuation methodology
2 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 Inputs to the valuation methodology are unobservable
3 and significant to the fair value measurement.
-- Fair value is often based on developed models
in which there are few, if any, external
observations.
The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
14
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2015.
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities, and other financial instruments, are summarized as follows:
June 30, 2016 December 31, 2015
------------------ ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------ -------- -------- ----------- --------
Notes and debentures(1) $125,568 $137,112 $ 124,847 $128,993
Bank borrowings 4 4 4 4
Investment securities 2,550 2,550 2,704 2,704
============================== ======= ======= ======= =======
(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 June 30, 2016 and December 31, 2015:
June 30, 2016
-----------------------------------------
Level Level Level
1 2 3 Total
----------------------------------- ---------- ---------- ------- -------
Available-for-Sale Securities
Domestic equities $ 1,111 $ - $ - $ 1,111
International equities 547 - - 547
Fixed income bonds - 621 - 621
Asset Derivatives(1)
Interest rate swaps - 202 - 202
Cross-currency swaps - 100 - 100
Liability Derivatives(1)
Cross-currency swaps - (3,821) - (3,821)
=================================== ====== ====== === ======
(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.
15
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
December 31, 2015
-----------------------------------------
Level Level Level
1 2 3 Total
----------------------------------- ---------- ---------- ------- -------
Available-for-Sale Securities
Domestic equities $ 1,132 $ - $ - $ 1,132
International equities 569 - - 569
Fixed income bonds - 680 - 680
Asset Derivatives(1)
Interest rate swaps - 136 - 136
Cross-currency swaps - 556 - 556
Foreign exchange contracts - 3 - 3
Liability Derivatives(1)
Cross-currency swaps - (3,466) - (3,466 )
=================================== ====== ====== === ======
(1) Derivatives designated as hedging instruments are
reflected as "Other assets," "Other noncurrent liabilities"
and, for a portion of interest rate swaps, "Other current
assets" in our consolidated balance sheets.
Investment Securities
Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in "Other income (expense) - net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in "Other income (expense) - net" with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $95 have maturities of less than one year, $287 within one to three years, $62 within three to five years and $177 for five or more years.
Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments and customer deposits are recorded in "Other current assets" and our investment securities are recorded in "Other Assets" on the consolidated balance sheets.
Derivative Financial Instruments
We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.
Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the six months ended June 30, 2016 and June 30, 2015, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.
16
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Cash Flow Hedging We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro, British pound sterling, Canadian dollar and Swiss franc denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency denominations to fixed U.S. dollar denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign currency-denominated rate to a fixed U.S. dollar denominated interest rate.
Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as "Other income (expense) - net" in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the six months ended June 30, 2016 and June 30, 2015, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.
Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) - net" in the consolidated statements of income. Over the next 12 months, we expect to reclassify $59 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.
We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) - net" in the consolidated statements of income. In the six months ended June 30, 2016 and June 30, 2015, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.
Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At June 30, 2016, we had posted collateral of $3,154 (a deposit asset) and held collateral of $8 (a receipt liability). Under the agreements, if AT&T's credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in June, we would have been required to post additional collateral of $151. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- (S&P) and below Baa3 (Moody's), we would owe an additional $275. At December 31, 2015, we had posted collateral of $2,343 (a deposit asset) and held collateral of $124 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.
Following are the notional amounts of our outstanding derivative positions:
June December
30, 31,
2016 2015
--------------------------- ------- ----------
Interest rate swaps $ 7,050 $ 7,050
Cross-currency swaps 29,642 29,642
Foreign exchange contracts - 100
---------------------------- ------ ------
Total $36,692 $ 36,792
============================ ====== ======
17
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Following are the related hedged items affecting our
financial position and performance:
Effect of Derivatives on the Consolidated
Statements of Income
--------------------------------------------------- ---------- ------------- ----------
Three months
ended Six months ended
--------------------------------------- ----------------------- --------------------------
June 30, June 30, June 30, June 30,
Fair Value Hedging Relationships 2016 2015 2016 2015
--------------------------------------- ---------- ---------- ------------- ----------
Interest rate swaps (Interest
expense):
Gain (Loss) on interest rate
swaps $ 5 $ (30) $ 71 $ 11
Gain (Loss) on long-term
debt (5) 30 (71) (11)
======================================= === ===== ====== === ======== ======
In addition, the net swap settlements that accrued and settled in the quarter ended June 30 were offset against interest expense.
Three months
ended Six months ended
------------------------- --------------------------
June June June June
Cash Flow Hedging Relationships 30, 2016 30, 2015 30, 2016 30, 2015
---------------------------------- ----------- ----------- ------------ -----------
Cross-currency swaps:
Gain (Loss) recognized in
accumulated OCI $ (595) $ (102) $ (404) $ (330)
Interest rate locks:
Gain (Loss) recognized in
accumulated OCI - (45) - (361)
Interest income (expense)
reclassified from
accumulated OCI into income (14) (15) (29) (26)
=================================== ======= ======= === ======= =======
NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
DIRECTV In July 2015, we completed our acquisition of DIRECTV, a leading provider of digital television entertainment services in both the United States and Latin America. For accounting purposes, the transaction was valued at $47,409. Our operating results include the results of DIRECTV following the acquisition date.
The fair values of the assets acquired and liabilities assumed were determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 under the Fair Value Measurement and Disclosure framework, other than long-term debt assumed in the acquisition (see Note 6). The income approach was primarily used to value the intangible assets, consisting of acquired customer relationships, orbital slots and trade names. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used primarily for property, plant and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation.
Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition.
18
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The following table summarizes the fair values of the DIRECTV assets acquired and liabilities assumed and related deferred income taxes that existed as of the acquisition date.
Assets acquired Cash $ 4,797 Accounts receivable 2,038 All other current assets 1,534 Property, plant and equipment 9,320 Intangible assets not subject to amortization Orbital slots 11,946 Trade name 1,371 Intangible assets subject to amortization Customer lists and relationships 19,508 Trade name 2,915 Other 445 Investments and other assets 2,375 Goodwill 34,619 ------------------------------------------------ ------ Total assets acquired 90,868 ------------------------------------------------ ------ Liabilities assumed Current liabilities, excluding current portion of long-term debt 5,645 Long-term debt 20,585 Other noncurrent liabilities 16,875 ------------------------------------------------ ------ Total liabilities assumed 43,105 ------------------------------------------------ ------ Net assets acquired 47,763 ------------------------------------------------ ------ Noncontrolling interest (354) ------------------------------------------------ ------ Aggregate value of consideration paid $47,409 ================================================ ======
Purchased goodwill is not expected to be deductible for tax purposes. The goodwill was allocated to our Entertainment Group and International segments.
Nextel Mexico In April 2015, we completed our acquisition of the subsidiaries of NII Holdings Inc., operating its wireless business in Mexico, for $1,875, including approximately $427 of net debt and other adjustments. The subsidiaries offered service under the name Nextel Mexico.
The purchase price allocation of assets acquired was: $376 in licenses, $1,167 in property, plant and equipment, $128 in customer lists and $193 of goodwill. The goodwill was allocated to our International segment.
GSF Telecom In January 2015, we acquired Mexican wireless company GSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom) for $2,500, including net debt of approximately $700. GSF Telecom offered service under both the Iusacell and Unefon brand names in Mexico.
The purchase price allocation of assets acquired was: $735 in licenses, $658 in property, plant and equipment, $378 in customer lists, $26 in trade names and $956 of goodwill. The goodwill was allocated to our International segment.
AWS-3 Auction In January 2015, we submitted winning bids of $18,189 in the Advanced Wireless Service (AWS)-3 Auction (FCC Auction 97), a portion of which represented spectrum clearing and First Responder Network Authority funding. We provided the Federal Communications Commission (FCC) an initial down payment of $921 in October 2014 and paid the remaining $17,268 in the first quarter of 2015.
19
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES
We offer our customers the option to purchase certain wireless devices in installments over a period of up to 30 months 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 June 30, 2016 and December 31, 2015, gross equipment installment receivables of $4,427 and $5,719 were included on our consolidated balance sheets, of which $2,512 and $3,239 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 the receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. To date, cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $3,673.
The following table sets forth a summary of equipment installment receivables sold during the three months and six months ended June 30, 2016 and 2015:
Three months
ended Six months ended
June 30, June 30,
2016 2015 2016 2015
--------------------------------- ------- ------ ----------- -------
Gross receivables sold $1,845 $1,728 $ 4,327 $ 4,363
Net receivables sold(1) 1,671 1,555 3,927 3,936
Cash proceeds received 1,126 1,049 2,647 2,573
Deferred purchase price recorded 563 505 1,282 1,363
================================== ===== ===== ======= ======
(1) Receivables net of allowance, imputed interest and
trade-in right guarantees.
The deferred purchase price is initially recorded at estimated fair value, which is based on remaining installment payments expected to be collected, adjusted by the expected timing and value of device trade-ins, and subsequently carried at the lower of cost or net realizable value. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).
During the first quarter of 2016, we repurchased equipment installment receivables previously sold to the Purchasers, with a fair value of $532. These transactions reduced our current deferred purchase price receivable by $539, resulting in a loss of $7 during the first quarter. This loss is included in "Selling, general and administrative" in the consolidated statements of income.
At June 30, 2016 and December 31, 2015, our deferred purchase price receivable was $3,426 and $2,961, respectively, of which $1,901 and $1,772 is included in "Other current assets" on our consolidated balance sheets, with the remainder in "Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the amount of our deferred purchase price at any point in time.
The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate risk.
20
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share and per subscriber amounts
RESULTS OF OPERATIONS
For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. During 2015, we completed our acquisitions of DIRECTV and wireless properties in Mexico, and the following discussion of changes in our operating revenues and expenses is affected by the timing of these acquisitions. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from acquired businesses prior to acquisition are excluded. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period's presentation.
Consolidated Results Our financial results in the second quarter and for the first six months of 2016 and 2015 are summarized as follows:
Second Quarter Six-Month Period
------------------------- ------------------------- ----
Percent Percent
2016 2015 Change 2016 2015 Change
--------------------- ------- ------- ------- ------- ------- -------
Operating
Revenues
Service $37,142 $29,541 25.7% $74,243 $58,503 26.9%
Equipment 3,378 3,474 (2.8) 6,812 7,088 (3.9)
Total Operating
Revenues 40,520 33,015 22.7 81,055 65,591 23.6
---------------------- ------ ------ ------ ------
Operating
expenses
Cost of
services
and sales
Equipment 4,260 4,353 (2.1) 8,635 8,899 (3.0)
Broadcast,
programming
and
operations 4,701 1,148 - 9,330 2,270 -
Other cost
of services 9,514 9,578 (0.7) 18,910 18,390 2.8
Selling,
general and
administrative 8,909 7,467 19.3 17,350 15,428 12.5
Depreciation
and amortization 6,576 4,696 40.0 13,139 9,274 41.7
Total Operating
Expenses 33,960 27,242 24.7 67,364 54,261 24.1
---------------------- ------ ------ ------ ------
Operating
Income 6,560 5,773 13.6 13,691 11,330 20.8
Income Before
Income Taxes 5,421 4,922 10.1 11,428 9,650 18.4
Net Income 3,515 3,184 10.4 7,400 6,523 13.4
Net Income
Attributable
to AT&T $ 3,408 $ 3,082 10.6% $ 7,211 $ 6,345 13.6%
====================== ====== ======
Overview
Operating revenues increased $7,505, or 22.7%, in the second quarter and $15,464, or 23.6%, for the first six months of 2016.
Service revenues increased $7,601, or 25.7%, in the second quarter and $15,740, or 26.9%, for the first six months of 2016. The increases were primarily due to our 2015 acquisition of DIRECTV and increases in IP broadband and fixed strategic business services. These were partially offset by continued declines in our legacy wireline voice and data products and a true-up that increased the discounts recorded on Ethernet services. The second quarter revenues were also lower as a result of more customers choosing to purchase devices through installment payment agreements, which entitle them to lower monthly service rates under our wireless Mobile Share plans.
21
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Equipment revenues decreased $96, or 2.8%, in the second quarter and $276, or 3.9%, for the first six months of 2016. These declines reflect fewer wireless handset sales and additional promotional offers during 2016. Revenue declines were partially offset by the continuing trend of our wireless customers choosing to purchase higher priced devices and an increase in customers choosing to purchase devices on installment when compared to the prior year.
Operating expenses increased $6,718, or 24.7%, in the second quarter and $13,103, or 24.1%, for the first six months of 2016.
Equipment expenses decreased $93, or 2.1%, in the second quarter and $264, or 3.0%, for the first six months of 2016. The decreases were primarily due to the decline in devices sold to postpaid subscribers and vendor incentives, partially offset by increased sales volumes to our prepaid and international wireless customers.
Broadcast, programming and operations expenses increased $3,553 in the second quarter and $7,060 for the first six months of 2016 due to our acquisition of DIRECTV, slightly offset by fewer AT&T U-verse (R) (U-verse) subscribers.
Other cost of services expenses decreased $64, or 0.7%, in the second quarter and increased $520, or 2.8%, for the first six months of 2016. The decrease in the second quarter was primarily attributable to higher 2015 expenses of $364 of network rationalization charges and merger-related expenses, combined with lower network and access charges in 2016 and our change in accounting estimate related to customer fulfillment costs (see Note 1). The decrease was mostly offset by higher expenses resulting from our acquisition of DIRECTV, higher compensation- related costs for programs tied to our stock price and an increase in noncash financing-related costs associated with our pension and postretirement benefits.
The increase for the first six months was primarily due to our acquisitions of DIRECTV and Mexican wireless properties. Also contributing to higher expenses was an increase in noncash financing-related costs associated with our pension and postretirement benefits. These increases were partially offset by prior year network rationalization charges, a decline in network and access charges and lower employee separation charges.
Selling, general and administrative expenses increased $1,442, or 19.3%, in the second quarter and $1,922, or 12.5%, for the first six months of 2016. The increases were primarily due to our acquisitions in 2015 and increased advertising activity in 2016, partially offset by lower wireless commission expenses. The increase for the first six months was also offset by a $736 noncash gain on wireless spectrum transactions and lower employee separation charges.
Depreciation and amortization expense increased $1,880, or 40.0%, in the second quarter and $3,865, or 41.7%, for the first six months of 2016. Amortization expense increased $1,197 in the second quarter and $2,425 for the first six months of 2016 due to the amortization of intangibles from recent acquisitions.
Depreciation expense increased $683, or 14.9%, in the second quarter and $1,440, or 15.9%, for the first six months of 2016. The increase was primarily due to previously mentioned acquisitions and ongoing capital spending for network upgrades.
Operating income increased $787, or 13.6%, in the second quarter and $2,361, or 20.8%, for the first six months of 2016. Our operating income margin in the second quarter decreased from 17.5% in 2015 to 16.2% in 2016, and the first six months decreased from 17.3% in 2015 to 16.9% in 2016.
Interest expense increased $326, or 35.0%, in the second quarter and $634, or 34.6%, for the first six months of 2016. The increases were primarily due to higher average debt balances, including debt issued and debt acquired in connection with our acquisition of DIRECTV. The increase for the first six months was slightly offset by higher capitalized interest resulting from the spectrum acquired in the Advanced Wireless Service (AWS)-3 Auction (see Note 7).
22
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Equity in net income of affiliates decreased $5, or 15.2%, in the second quarter and increased $8, or 24.2%, for the first six months of 2016. Equity in net income of affiliates is primarily attributable to the results from our investments in the Game Show Network, SKY Mexico, YP Holdings LLC and Otter Media Holdings.
Other income (expense) - net We had other income of $91 in the second quarter and $161 for the first six months of 2016, compared to other income of $48 in the second quarter and $118 for the first six months of 2015. Results in the second quarter and for the first six months of 2016 included net gains on the sale of non-strategic assets and investments of $41 and $85 and interest and dividend income of $38 and $67.
Other income in the second quarter and for the first six months of 2015 included net gains on the sale of non-strategic assets and investments of $17 and $50 and interest and dividend income of $26 and $45.
Income taxes increased $168, or 9.7%, in the second quarter and $901, or 28.8%, for the first six months of 2016. Our effective tax rate was 35.2% for both the second quarter and first six months of 2016, as compared to 35.3% for the second quarter and 32.4% for the first six months of 2015. The increases in income tax expense for the second quarter and the first six months of 2016 were primarily due to higher income before income taxes in 2016. In 2015, we recognized tax benefits related to the restructuring of a portion of our Business Solutions segment, which contributed to lower tax expense and the effective tax rate for the first six months of 2015.
Selected Financial and Operating Data
-------- -------
June 30,
Subscribers and connections in (000s) 2016 2015
-------- -------
Domestic wireless subscribers 131,805 123,902
Mexican wireless subscribers 9,955 8,550
North American wireless subscribers 141,760 132,452
North American branded subscribers 99,557 95,049
North American branded net additions (1) 2,596 1,280
Domestic satellite video subscribers 20,454 -
U-verse video subscribers 4,869 5,971
Latin America satellite video subscribers (2) 12,523 -
Total video subscribers 37,846 5,971
Total domestic broadband connections 15,641 15,961
Network access lines in service 15,285 18,116
U-verse VoIP connections 5,593 5,381
Debt ratio (3) 50.5% 55.5%
Net Debt Ratio (4) 47.6% 45.2%
Ratio of earnings to fixed charges (5) 4.01 4.18
Number of AT&T employees 277,200 250,730
(1) At June 30, 2015, our Mexican wireless subscribers have been excluded.
(2) Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At March 31, 2016, SKY Mexico had 7.7 million subscribers.
(3) 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.
(4) 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).
(5) See Exhibit 12.
23
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Segment Results
Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our operating segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our operating segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items, and equity in net income (loss) of affiliate for investments managed within each operating segment. We have four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.
We also evaluate segment performance based on Segment Contribution, excluding equity in net income (loss) of affiliates and depreciation and amortization, which we refer to as EBITDA and/or EBITDA margin. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.
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 strategic business services; as well as traditional data and voice products. We utilize our wireless and wired networks (referred to as "wired" or "wireline") to provide a complete communications solution to our business customers.
The Entertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the U.S. or in U.S. territories. We utilize our copper and IP-based wired network and/or our satellite technology.
The Consumer Mobility segment provides nationwide wireless service to consumers and wholesale and resale wireless subscribers located in the U.S. or in U.S. territories. We utilize our U.S. wireless network to provide voice and data services, including high-speed internet, video, and home monitoring services.
The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national wireless networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.
Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as an international satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by operating segment, and therefore asset information and capital expenditures by operating segment are not presented. Depreciation is allocated based on network usage or asset utilization by segment.
We discuss capital expenditures in "Liquidity and Capital Resources."
24
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Business Solutions
Segment Results
Second Quarter Six-Month Period
----
Percent Percent
2016 2015 Change 2016 2015 Change
Segment operating revenues
Wireless service $ 7,963 $ 7,756 2.7 % $15,818 $15,271 3.6 %
Fixed strategic
services 2,797 2,580 8.4 5,559 5,099 9.0
Legacy voice and
data services 4,158 4,681 (11.2) 8,521 9,465 (10.0)
Other service
and equipment 886 854 3.7 1,744 1,700 2.6
Wireless
equipment 1,775 1,793 (1.0) 3,546 3,686 (3.8)
Total Segment
Operating Revenues 17,579 17,664 (0.5) 35,188 35,221 (0.1)
Segment operating
expenses
Operations and
support 10,857 10,972 (1.0) 21,659 22,045 (1.8)
Depreciation and
amortization 2,521 2,460 2.5 5,029 4,802 4.7
Total Segment
Operating Expenses 13,378 13,432 (0.4) 26,688 26,847 (0.6)
Segment Operating
Income 4,201 4,232 (0.7) 8,500 8,374 1.5
Equity in Net Income
of Affiliates - - - - - -
Segment Contribution $ 4,201 $ 4,232 (0.7 ) % $ 8,500 $ 8,374 1.5 %
The following tables highlight other key measures of performance for the Business Solutions segment:
June 30, June 30, Percent
(in 000s) 2016 2015 Change
Business Wireless Subscribers
Postpaid/Branded 49,432 46,697 5.9 %
Reseller 52 19 -
Connected devices (1) 28,061 22,462 24.9
Total Business Wireless Subscribers 77,545 69,178 12.1
Business IP Broadband Connections 948 872 8.7 %
(1) Includes data-centric devices such as monitoring devices and automobile systems. Excludes
postpaid tablets.
25
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Second Quarter Six-Month Period
Percent Percent
(in 000s) 2016 2015 Change 2016 2015 Change
Business Wireless Net Additions (1, 4)
Postpaid/Branded 185 288 (35.8 ) % 318 585 (45.6 ) %
Reseller (13) 3 - (35) 6 -
Connected devices
(2) 1,199 1,478 (18.9) 2,777 2,502 11.0
Business Wireless Net
Subscriber Additions 1,371 1,769 (22.5) 3,060 3,093 (1.1)
Business Wireless
Postpaid Churn (1, 3,
4) 0.91% 0.91% - 0.97% 0.90% 7 BP
Business IP Broadband
Net Additions 20 23 (13.0 ) % 37 50 (26.0 ) %
(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 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) Includes the impacts of the expected shutdown of our U.S. 2G network.
Operating Revenues decreased $85, or 0.5%, in the second quarter and $33, or 0.1%, for the first six months of 2016. Revenue decreases were due to continued declines in our legacy voice and data products, lower equipment revenue, the sale of certain hosting operations and foreign exchange pressures. These decreases were partially offset by increased wireless service revenues and fixed strategic services.
Wireless service revenues increased $207, or 2.7%, in the second quarter and $547, or 3.6%, for the first six months of 2016. The revenue increase is primarily due to customer migrations from our Consumer Mobility segment and reflects smartphone and tablet gains.
At June 30, 2016, we served 77.5 million subscribers, an increase of 12.1% from the prior year. Postpaid subscribers increased 5.9% 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 and losses attributable to the expected shutdown of our U.S. 2G network. Connected devices, which have lower average revenue per average subscriber (ARPU), increased 24.9% from the prior year reflecting growth in business customers using tracking, monitoring and other sensor-embedded devices on their equipment. We expect that churn and net additions of connected devices could be negatively impacted by the shutdown of the 2G network if these subscribers do not migrate to another device.
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. In the second quarter, business wireless postpaid churn was 0.91% in both 2016 and 2015, and for the first six months increased to 0.97% in 2016 from 0.90% in 2015.
Fixed strategic services revenues increased $217, or 8.4%, in the second quarter and $460, or 9.0%, for the first six months of 2016. Our revenues, which were negatively impacted by foreign exchange rates, increased in the second quarter and for the first six months of 2016 due to: AT&T Dedicated Internet (formally known as Ethernet access to Managed Internet Services) of $61 and $115, Ethernet of $34 and $99, U-verse services of $40 and $90, and VPN of $30 and $56.
Legacy wired voice and data service revenues decreased $523, or 11.2%, in the second quarter and $944, or 10.0%, for the first six months of 2016. Traditional data revenues in the second quarter and for the first six months of 2016 decreased $327 and $562 and long-distance and local voice revenues decreased $193 and $376. The decreases were primarily due to lower demand as customers continue to migrate to fixed strategic services or shift to competitors, and the sale of certain hosting operations.
26
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Other service and equipment revenues increased $32, or 3.7%, in the second quarter and $44, or 2.6%, for the first six months of 2016. Other service revenues include project-based revenue, which is nonrecurring in nature, as well as revenues from other managed services, outsourcing, government professional service and customer premises equipment.
Wireless equipment revenues decreased $18, or 1.0%, in the second quarter and $140, or 3.8%, for the first six months of 2016. The decrease in equipment revenues resulted from a decrease in handsets sold to postpaid customers and increased promotional offers. The decreases were partially offset by an increase in purchases of devices on installment payment agreements rather than the device subsidy model.
Operations and support expenses decreased $115, or 1.0%, in the second quarter and $386, or 1.8%, for the first six months of 2016. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.
The second quarter decrease was primarily due to declines in wireless commissions costs resulting from lower sales volumes, lower amortization of customer fulfillment costs (see Note 1) and the sale of certain hosting operations. Partially offsetting these decreases were higher wireless handset insurance claims due to an increase in the volume and cost of replacement phones, advertising costs, bad debt expense driven by a higher
AT&T Next (SM) (AT&T Next) subscriber base and wireless equipment expense.
The decrease for the first six months was primarily due to declines of $157 in wireless equipment and $252 in wireless commissions costs, reflecting a decrease in sales volumes. Access costs also declined $84, largely resulting from lower interconnect costs. Lower employee-related costs and the sale of certain hosting operations also contributed to the decrease. Partially offsetting these decreases were higher advertising expenses, wireless handset insurance claims and bad debt expense driven by a higher AT&T Next subscriber base.
Depreciation expense increased $61, or 2.5%, in the second quarter and $227, or 4.7%, for the first six months of 2016. The increases were primarily due to ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets.
Operating income decreased $31, or 0.7%, in the second quarter and increased $126, or 1.5%, for the first six months of 2016. Our Business Solutions segment operating income margin in the second quarter decreased from 24.0% in 2015 to 23.9% in 2016, and for the first six months increased from 23.8% in 2015 to 24.2% in 2016. Our Business Solutions EBITDA margin in the second quarter increased from 37.9% in 2015 to 38.2% in 2016, and for the first six months increased from 37.4% in 2015 to 38.4% in 2016.
27
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Entertainment Group
Segment Results
Second Quarter Six-Month Period
Percent Percent
2016 2015 Change 2016 2015 Change
Segment operating revenues
Video
entertainment $ 8,963 $1,991 - % $17,867 $ 3,862 - %
High-speed
internet 1,867 1,623 15.0 3,670 3,176 15.6
Legacy voice
and data
services 1,244 1,516 (17.9) 2,557 3,128 (18.3 )
Other service
and equipment 637 652 (2.3) 1,275 1,276 (0.1 )
Total Segment
Operating Revenues 12,711 5,782 - 25,369 11,442 -
Segment operating
expenses
Operations and
support 9,569 4,913 94.8 19,147 9,772 95.9
Depreciation
and
amortization 1,489 1,065 39.8 2,977 2,130 39.8
Total Segment
Operating Expenses 11,058 5,978 85.0 22,124 11,902 85.9
Segment Operating
Income (Loss) 1,653 (196) - 3,245 (460) -
Equity in Net Income
(Loss)
of Affiliates (2) (12) 83.3 1 (18) -
Segment Contribution $ 1,651 $(208) - % $ 3,246 $ (478) - %
The following tables highlight other key measures of performance for the Entertainment Group segment:
June 30, June 30, Percent
(in 000s) 2016 2015 Change
Video Connections
Satellite 20,454 - - %
U-verse 4,841 5,946 (18.6)
Total Video Connections 25,295 5,946 -
Broadband Connections
IP 12,596 12,013 4.9
DSL 1,585 2,415 (34.4)
Total Broadband Connections 14,181 14,428 (1.7)
Retail Consumer Switched Access Lines 6,515 8,142 (20.0)
U-verse Consumer VoIP Connections 5,300 5,170 2.5
Total Retail Consumer Voice Connections 11,815 13,312 (11.2 ) %
=======
28
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Second Quarter Six-Month Period
Percent Percent
(in 000s) 2016 2015 Change 2016 2015 Change
Video Net Additions
Satellite 342 - - % 670 - - %
U-verse (391) (23) - (773) 26 -
Net Video Additions (49) (23) - (103) 26 -
Broadband Net Additions
IP 54 217 (75.1) 240 630 (61.9)
DSL (164) (324) 49.4 (345) (644) 46.4
Net Broadband Additions (110) (107) (2.8 ) % (105) (14) - %
Operating revenues increased $6,929 in the second quarter and $13,927 for the first six months of 2016, largely due to our acquisition of DIRECTV in the third quarter of 2015. Also contributing to the increases was continued growth in consumer IP broadband, which more than offset lower revenues from legacy voice and data products.
Video entertainment revenues increased $6,972 in the second quarter and $14,005 for the first six months of 2016, primarily related to our acquisition of DIRECTV. We are now focusing our sales efforts on satellite service as there are lower content costs for satellite subscribers. U-verse video revenue was lower in the second quarter and the first six months of 2016, primarily due to an 18.6% decrease in U-verse video connections, when compared to 2015. At June 30, 2016, more than 80% of our video subscribers were on the DIRECTV platform.
High-speed internet revenues increased $244, or 15.0%, in the second quarter and $494, or 15.6%, for the first six months of 2016. When compared to 2015, IP broadband subscribers increased 4.9%, to 12.6 million subscribers at June 30, 2016; however, second-quarter and year-to-date net additions were lower due to fewer U-verse sales promotions in the year. The churn of video customers also contributed to lower net additions, as a portion of these video subscribers also chose to disconnect their IP broadband service.
Legacy voice and data service revenues decreased $272, or 17.9%, in the second quarter and $571, or 18.3%, for the first six months of 2016. At June 30, 2016, legacy voice and data services represented approximately 10% of our total Entertainment Group revenue, and reflect decreases of $161 and $340 in long-distance, and $111 and $231 in traditional data revenues. The decreases reflect the continued migration of customers to our more advanced IP-based offerings or to competitors. At June 30, 2016, approximately 11% of our broadband connections were DSL compared to nearly 17% at June 30, 2015.
Operations and support expenses increased $4,656, or 94.8%, in the second quarter and $9,375, or 95.9%, for the first six months of 2016. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and providing video content, as well as personnel charges for compensation and benefits.
Increased expenses were primarily due to our acquisition of DIRECTV, which increased our second quarter and year-to-date Entertainment Group expenses by $5,100 and $9,923. The DIRECTV related second quarter and year-to-date increases were primarily due to the recognition of additional content costs for satellite subscribers, customer support and service related charges and advertising expenses. Partially offsetting these increases were lower employee charges resulting from ongoing workforce reductions and our focus on cost initiatives.
Depreciation expenses increased $424, or 39.8%, in the second quarter and $847, or 39.8%, for the first six months of 2016. The increases were primarily due to our acquisition of DIRECTV and ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets.
29
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Operating income increased $1,849 in the second quarter and $3,705 for the first six months of 2016. Our Entertainment Group segment operating income margin in the second quarter increased from (3.4)% in 2015 to 13.0% in 2016, and for the first six months increased from (4.0)% in 2015 to 12.8% in 2016. Our Entertainment Group segment EBITDA margin in the second quarter increased from 15.0% in 2015 to 24.7% in 2016, and the first six months increased from 14.6% in 2015 to 24.5% in 2016.
Consumer Mobility
Segment Results
Second Quarter Six-Month Period
Percent Percent
2016 2015 Change 2016 2015 Change
Segment operating revenues
Service $6,948 $7,359 (5.6 ) % $13,891 $14,656 (5.2 ) %
Equipment 1,238 1,396 (11.3) 2,623 2,877 (8.8)
Total Segment
Operating Revenues 8,186 8,755 (6.5) 16,514 17,533 (5.8)
Segment operating
expenses
Operations and
support 4,680 5,202 (10.0) 9,592 10,743 (10.7)
Depreciation and
amortization 932 934 (0.2) 1,854 1,936 (4.2)
Total Segment
Operating Expenses 5,612 6,136 (8.5) 11,446 12,679 (9.7)
Segment Operating
Income 2,574 2,619 (1.7) 5,068 4,854 4.4
Equity in Net Income
(Loss)
of Affiliates - - - - - -
Segment Contribution $2,574 $2,619 (1.7 ) % $ 5,068 $ 4,854 4.4 %
The following tables highlight other key measures of performance for the Consumer Mobility segment:
June 30, June 30, Percent
(in 000s) 2016 2015 Change
Consumer Mobility Subscribers
Postpaid 27,862 29,844 (6.6 ) %
Prepaid 12,633 10,438 21.0
Branded 40,495 40,282 0.5
Reseller 12,869 13,487 (4.6)
Connected devices (1) 896 955 (6.2)
Total Consumer Mobility Subscribers 54,260 54,724 (0.8 ) %
(1) Includes data-centric devices such as session-based tablets, monitoring devices and automobile
systems. Excludes postpaid tablets.
30
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Second Quarter Six-Month Period
Percent Percent
(in 000s) 2016 2015 Change 2016 2015 Change
Consumer Mobility Net Additions (1, 4)
Postpaid 72 122 (41.0 ) % 68 266 (74.4 ) %
Prepaid 365 331 10.3 865 429 -
Branded Net Additions 437 453 (3.5) 933 695 34.2
Reseller (446) (98) - (824) (367) -
Connected devices (2) (1) (30) 96.7 (27) (109) 75.2
Consumer Mobility Net
Subscriber Additions (10) 325 - % 82 219 (62.6 ) %
Total Churn (1, 3, 4) 1.96% 1.86% 10 BP 2.04% 1.95% 9 BP
Postpaid Churn (1, 3,
4) 1.09% 1.16% (7) BP 1.16% 1.18% (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 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) Includes the impacts of the expected shutdown of our U.S. 2G network.
Operating Revenues decreased $569, or 6.5%, in the second quarter and $1,019, or 5.8%, for the first six months of 2016. Decreased revenues reflect declines in postpaid service revenues due to customers choosing Mobile Share plans and migrating to our Business Solutions segment, partially offset by higher prepaid service revenues. Our business wireless offerings allow for individual subscribers to purchase wireless services through employer-sponsored plans for a reduced price. The migration of these subscribers to the Business Solutions segment negatively impacted our consumer postpaid subscriber total and service revenue growth.
Service revenue decreased $411, or 5.6%, in the second quarter and $765, or 5.2%, for the first six months of 2016. The decreases were largely due to postpaid customers continuing to shift to no-device-subsidy plans that allow for discounted monthly service charges under our Mobile Share plans, and the migration of subscribers to Business Solutions. Revenues from postpaid customers declined $627, or 11.1%, in the second quarter and $1,143, or 10.2%, for the first six months. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 6.2% and 5.2%, respectively. The decreases were partially offset by higher prepaid service revenues of $249 in the second quarter and $453 for the first six months and include services sold under the Cricket brand.
Equipment revenue decreased $158, or 11.3%, in the second quarter and $254, or 8.8%, for the first six months of 2016. The decreases in equipment revenues resulted from lower postpaid handset volumes and increased promotional activities, partially offset by increases in handsets sold to prepaid customers and devices purchased on installment payment agreements rather than the device subsidy model.
31
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Operations and support expenses decreased $522, or 10.0%, in the second quarter and $1,151, or 10.7%, for the first six months of 2016. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel expenses, such as compensation and benefits.
Decreased operations and support expenses in the second quarter were primarily due to the following:
-- Equipment costs decreased $223 primarily due to
lower postpaid handset volumes partially offset
by the sale of more devices to prepaid subscribers.
-- Selling and commission expenses decreased $113 primarily
due to lower sales volumes and lower average commission
rates, including those paid under the AT&T Next
program, combined with fewer upgrade transactions.
-- Network costs decreased $81 primarily due to lower
interconnect costs resulting from our ongoing network
transition to more efficient Ethernet/IP-based technologies.
-- Customer service costs decreased $69 primarily due
to reduced salaries and benefits and lower vendor
and professional services from reduced call volumes.
Decreased operations and support expenses for the first six months were primarily due to the following:
-- Equipment costs decreased $343 primarily due to
lower postpaid handset volumes partially offset
by the sale of more devices to prepaid subscribers.
-- Selling and commission expenses decreased $318 primarily
due to lower sales volumes and lower average commission
rates, including those paid under the AT&T Next
program, combined with fewer upgrade transactions.
-- Network costs decreased $196 primarily due to lower
interconnect costs resulting from our ongoing network
transition to more efficient Ethernet/IP-based technologies.
-- Customer service costs decreased $113 primarily
due to reduced salaries and benefits and lower vendor
and professional services from reduced call volumes.
Depreciation expense decreased $2, or 0.2%, in the second quarter and $82, or 4.2%, for the first six months of 2016. The decrease was primarily due to fully depreciated assets, partially offset by the ongoing capital spending for network upgrades and expansion.
Operating income decreased $45, or 1.7%, in the second quarter and increased $214, or 4.4%, in the first six months of 2016. Our Consumer Mobility segment operating income margin in the second quarter increased from 29.9% in 2015 to 31.4% in 2016, and for the first six months increased from 27.7% in 2015 to 30.7% in 2016. Our Consumer Mobility EBITDA margin in the second quarter increased from 40.6% in 2015 to 42.8% in 2016, and for the first six months increased from 38.7% in 2015 to 41.9% in 2016.
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AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
International
Segment Results
Second Quarter Six-Month Period
Percent Percent
2016 2015 Change 2016 2015 Change
Segment operating
revenues
Video entertainment $1,222 $ - - % $2,352 $ - - %
Wireless 489 444 10.1 944 659 43.2
Equipment 117 47 - 199 68 -
Total Segment Operating
Revenues $1,828 $ 491 - $3,495 $ 727 -
Segment operating
expenses
Operations and
support $1,723 $ 529 - $3,311 $ 747 -
Depreciation and
amortization 298 93 - 575 121 -
Total Segment Operating
Expenses 2,021 622 - 3,886 868 -
Segment Operating Income
(Loss) (193) (131) (47.3) (391) (141) -
Equity in Net Income of
Affiliates 9 - - 23 - -
Segment Contribution $ (184) $(131) (40.5 ) % $ (368) $(141) - %
The following tables highlight other key measures of performance for the International segment:
June 30, June 30, Percent
(in 000s) 2016 2015 Change
Mexican Wireless Subscribers
Postpaid 4,570 4,144 10.3 %
Prepaid 5,059 3,926 28.9
--------
Branded 9,629 8,070 19.3
Reseller 326 480 (32.1)
Total Mexican Wireless Subscribers 9,955 8,550 16.4
Latin America Satellite Subscribers
PanAmericana 7,175 - -
SKY Brazil 5,348 - -
--------
Total Latin America
Satellite Subscribers (1) 12,523 - - %
(1) Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At March 31, 2016, SKY Mexico had 7.7 million subscribers.
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AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Second Quarter Six-Month Period
Percent Percent
(in 000s) 2016 2015 Change 2016 2015 Change
Mexican Wireless Net
Additions
Postpaid 165 2 - % 281 32 - %
Prepaid 614 (161) - 1,064 (467) -
Branded Net Additions 779 (159) - 1,345 (435) -
Reseller (37) (11) - (74) (23) -
Mexican Wireless
Net Subscriber
Additions 742 (170) - 1,271 (458) -
Latin America
Satellite Net
Additions
PanAmericana 81 - - 109 - -
SKY Brazil 6 - - (95) - -
Latin America
Satellite
Net Subscriber
Additions (1) 87 - - % 14 - - %
(1) Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At March 31, 2016, SKY Mexico had 7.7 million subscribers and net subscriber additions of 398,000 in the first quarter of 2016.
Operating Results
Our International segment consists of the Latin American operations acquired in our July 2015 acquisition of DIRECTV as well as the Mexican wireless operations acquired earlier in 2015 (see Note 7). Video entertainment services are provided to primarily residential customers using satellite technology. Our international subsidiaries conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.
Operating revenues increased $1,337 in the second quarter and $2,768 for the first six months of 2016. The increase in the second quarter and for the first six months includes $1,222 and $2,352 from video services in Latin America and increases of $115 and $416 attributable to additional wireless revenues in Mexico.
Operations and support expenses increased $1,194 in the second quarter and $2,564 for the first six months of 2016. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and providing video content and personnel expenses, such as compensation and benefits.
Depreciation expense increased $205 in the second quarter and $454 for the first six months of 2016. The increase was primarily due to the acquisition of DIRECTV.
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AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Operating income decreased $62 in the second quarter and $250 for the first six months of 2016. Our International segment operating income margin in the second quarter was (10.6)% in 2016 and (26.7)% in 2015, and for the first six months was (11.2)% in 2016 and (19.4)% in 2015. Our International EBITDA margin in the second quarter was 5.7% in 2016 and (7.7)% in 2015 and the first six months was 5.3% in 2016 and (2.8)% for 2015.
Supplemental Operating Information
As a supplemental discussion of our operating results, for comparison purposes, we are providing a view of our combined domestic wireless operations (AT&T Mobility).
AT&T Mobility Results
------- -------
Second Quarter Six-Month Period
Percent Percent
2016 2015 Change 2016 2015 Change
Operating revenues
Service $14,912 $15,115 (1.3 ) % $29,710 $29,927 (0.7 ) %
Equipment 3,013 3,189 (5.5) 6,169 6,563 (6.0)
Total Operating
Revenues 17,925 18,304 (2.1) 35,879 36,490 (1.7)
Operating expenses
Operations and
support 10,502 10,973 (4.3) 21,126 22,445 (5.9)
EBITDA 7,423 7,331 1.3 14,753 14,045 5.0
Depreciation and
amortization 2,081 2,031 2.5 4,137 4,036 2.5
Total Operating
Expenses 12,583 13,004 (3.2) 25,263 26,481 (4.6)
Operating Income $ 5,342 $ 5,300 0.8 % $10,616 $10,009 6.1 %
The following tables highlight other key measures of performance for AT&T Mobility:
June 30, June 30, Percent
(in 000s) 2016 2015 Change
Wireless Subscribers (1)
Postpaid smartphones 58,508 57,536 1.7%
Postpaid feature phones and data-centric devices 18,787 19,005 (1.1)
Postpaid 77,295 76,541 1.0
Prepaid 12,633 10,438 21.0
Branded 89,928 86,979 3.4
Reseller 12,920 13,506 (4.3)
Connected devices (2) 28,957 23,417 23.7
Total Wireless Subscribers 131,805 123,902 6.4
Branded Smartphones 69,058 65,243 5.8
Mobile Share connections 58,246 57,813 0.7
Smartphones under our installment program at
end of period 29,026 21,106 37.5%
(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.
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AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Second Quarter Six-Month Period
Percent Percent
(in 000s) 2016 2015 Change 2016 2015 Change
Wireless Net Additions (1, 4)
Postpaid 257 410 (37.3 ) % 386 851 (54.6 ) %
Prepaid 365 331 10.3 865 429 -
Branded Net Additions 622 741 (16.1) 1,251 1,280 (2.3 )
Reseller (459) (95) - (859) (361) -
Connected devices (2) 1,198 1,448 (17.3) 2,750 2,393 14.9
Wireless Net
Subscriber Additions 1,361 2,094 (35.0) 3,142 3,312 (5.1 )
Smartphones sold
under our
installment program
during period 3,960 3,859 2.6 8,095 7,924 2.2
Total Churn (3, 4) 1.35% 1.31% 4 BP 1.38% 1.36% 2 BP
Branded Churn (3, 4) 1.47% 1.52% (5) BP 1.55% 1.55% -
Postpaid Churn (3, 4) 0.97% 1.01% (4) BP 1.04% 1.01% 3 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 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) Includes the impacts of the expected shutdown of our U.S. 2G network.
Operating income increased $42, or 0.8%, in the second quarter and $607, or 6.1%, for the first six months of 2016. The operating income margin of AT&T Mobility in the second quarter increased from 29.0% in 2015 to 29.8% in 2016, and increased for the first six months from 27.4% in 2015 to 29.6% in 2016. AT&T Mobility's EBITDA margin in the second quarter increased from 40.1% in 2015 to 41.4% in 2016, and increased for the first six months from 38.5% in 2015 to 41.1% in 2016. AT&T Mobility's EBITDA service margin in the second quarter increased from 48.5% in 2015 to 49.8% in 2016, and increased for the first six months from 46.9% in 2015 to 49.7% in 2016. (EBITDA service margin is operating income before depreciation and amortization, divided by total service revenues.)
Subscriber Relationships
As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative services, plans and devices and a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. To attract and retain subscribers in a maturing market, we have launched a wide variety of plans, including Mobile Share and AT&T Next. Additionally, beginning in the first quarter of 2016, we introduced an integrated offer that allows for unlimited wireless data when combined with our video services, ending the second quarter with more than 5.0 million subscribers on these packages.
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AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
The expected year-end 2016 shutdown of our U.S. 2G network is beginning to contribute to higher disconnections and churn of subscribers. We expect that churn and net additions could be negatively impacted by the shutdown of this network if these subscribers do not choose to migrate to another device. Our 2G subscribers and connections at June 30 are as follows:
June 30, June 30, Percent
(in 000s) 2016 2015 Change
Postpaid (primarily phones) 626 1,252 (50.0 ) %
Prepaid 254 405 (37.3)
Reseller (1) 1,287 3,768 (65.8)
Connected devices (2) 3,983 7,449 (46.5)
Total 2G Subscribers and Connections 6,150 12,874 (52.2 ) %
(1) Primarily included in our Consumer Mobility segment.
(2) Primarily included in our Business Solutions segment.
ARPU
Postpaid phone-only ARPU (average revenue per average wireless subscriber) was $59.80 for the second quarter and $59.66 for the first six months of 2016, compared to $61.26 and $60.62 in 2015. Postpaid phone-only ARPU plus AT&T Next subscriber installment billings increased 2.5% compared to the second quarter of 2015 and 3.8% compared to the first six months of 2015 due to the continuing growth of the AT&T Next program.
Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total churn was higher for the second quarter and first six months of 2016, but could be negatively impacted in the future by the loss of 2G reseller subscribers and connected devices on our 2G network. While postpaid churn was lower in the second quarter, it was higher for the six months, reflecting continuing competitive pressure in the industry.
Branded Subscribers
Branded subscribers increased 0.7% when compared to March 31, 2016 and 3.4% when compared to June 30, 2015. These increases included a 3.8% and 21.0% increase in prepaid subscribers and a 0.2% and 1.0% increase in postpaid subscribers, respectively. At June 30, 2016, 89% of our postpaid phone subscriber base used smartphones, compared to 85% at June 30, 2015. Virtually all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. Device connections on our Mobile Share plans now represent 75% of our postpaid customer base. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract new subscribers from other providers and minimize churn.
During the first quarter of 2016, we discontinued offering subsidized smartphones to most of our customers. Under this no-subsidy model, subscribers must purchase a device on installments under an equipment installment program or choose to bring their own device, with no annual service contract. At June 30, 2016, about 50% of the postpaid smartphone base is on an installment program compared to nearly 37% at June 30, 2015. Of the postpaid smartphone gross adds and upgrades during the second quarter and first six months of 2016, 93% and 92% were either equipment installment plans or BYOD. While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins. During the second quarter and first six months of 2016, we added approximately 477,000 and 1,033,000 BYOD customers, compared to 334,000 and 647,000 in 2015.
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.
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AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Connected Devices
Connected Devices includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Connected device subscribers increased 4.3% during the second quarter when compared to March 31, 2016 and 23.7% when compared to June 30, 2015. During the second quarter and first six months of 2016, we added approximately 1.3 million and 2.4 million "connected" cars through agreements with various carmakers. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.
OTHER BUSINESS MATTERS
Litigation Challenging DIRECTV's NFL Sunday Ticket More than two dozen putative class actions 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. On June 24, 2016, the plaintiffs filed a consolidated amended complaint. We vigorously dispute the
allegations the complaints have asserted.
Federal Trade Commission Litigation Involving DIRECTV In March 2015, the Federal Trade Commission (FTC) filed a civil suit in the U.S. District Court for the Northern District of California against DIRECTV seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act and Section 4 of the Restore Online Shoppers' Confidence Act. The FTC's allegations concern DIRECTV's advertising, marketing and sale of programming packages. The FTC alleges that DIRECTV did not adequately disclose all relevant terms. We are disputing these allegations vigorously.
Unlimited Data Plan Claims In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The FTC's allegations concern the application of AT&T's Maximum Bit Rate (MBR) program to customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces in certain instances the download speeds of a small portion of our legacy Unlimited Data Plan customers each month after the customer exceeds a designated amount of data during the customer's billing cycle. MBR is an industry-standard practice that is designed to affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media posts, internet browsing and many other applications are typically unaffected. Contrary to the FTC's allegations, which we vigorously dispute, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers. In March 2015, our motion to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court granted our motion to certify its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit subsequently granted our petition to accept the appeal, and the appeal is now pending before that Court while limited discovery proceeds in the District Court. Oral argument on the appeal was heard on June 17, 2016, and we are now waiting for the appellate court to issue its decision. 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.
38
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
In June 2015, the Federal Communications Commission (FCC) issued a Notice of Apparent Liability and Order (NAL) to AT&T Mobility, LLC concerning our MBR policy that applies to Unlimited Data Plan customers described above. The NAL alleges that we violated the FCC's Open Internet Transparency Rule by using the term "unlimited" in connection with the offerings subject to the MBR policy and by failing adequately to disclose the speed reductions that apply once a customer reaches a specified data threshold. The NAL proposes a forfeiture penalty of $100, and further proposes to order us to correct any misleading and inaccurate statements about our unlimited plans, inform customers of the alleged violation, revise our disclosures to address the alleged violation and inform these customers that they may cancel their plans without penalty after reviewing the revised disclosures. In July 2015, we filed our response to the NAL. We believe that the NAL is unlawful and should be withdrawn, because we have fully complied with the Open Internet Transparency Rule and the FCC has no authority to impose the proposed remedies. The matter is currently pending before the FCC.
Labor Contracts A contract covering approximately 9,000 mobility employees in the Southwest region, which expired in February 2016, was ratified on April 14, 2016. A contract covering nearly 16,000 traditional wireline employees in our West region expired in April 2016 and employees are working under the terms of the prior contract, including benefits, while negotiations continue. After expiration of the current agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.
For our U.S. mobility employees, contracts covering wages and other non-benefit working terms are structured on a regional basis, with a separate national contract primarily covering medical benefits. Approximately 40,000 employees are covered in this separate contract that has a no strike/no lock-out clause. On August 3, 2016, we reached a tentative agreement on this contract that was due to expire on December 31, 2016.
COMPETITIVE AND REGULATORY ENVIRONMENT
Overview AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided.
In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. However, since the Telecom Act was passed, the FCC and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. We are pursuing, at both the state and federal levels, additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers, including initiatives to transition services from traditional networks to all IP-based networks. At the same time, we also seek to ensure that legacy regulations are not further extended to broadband or wireless services, which are subject to vigorous competition.
In February 2015, the FCC released an order reclassifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to comprehensive regulation under the Telecom Act. The FCC's decision significantly expands the FCC's existing authority to regulate the provision of fixed and mobile broadband internet access services. AT&T and other providers of broadband internet access services challenged the FCC's decision before the U.S. Court of Appeals for the D.C. Circuit. On June 14, 2016, a panel of the Court of Appeals upheld the FCC's rules by a 2-1 vote. On July 29, 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. Those petitions remain pending.
The FCC is in the process of adopting new rules that could restrict our commercial flexibility in the provision of video, special access, business and advertising services. New rules are expected before the end of 2016. If new rules are adopted, we expect to appeal any rule that we believe to restrain on our business unlawfully.
39
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
We provide satellite video service through our subsidiary DIRECTV, whose satellites are licensed by the FCC. The Communications Act of 1934 and other related acts give the FCC broad authority to regulate the U.S. operations of DIRECTV. In addition, states representing a majority of our local service access lines have adopted legislation that enables us to provide U-verse service through a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or even thousands of municipal-approved franchises) to offer a competitive video product. We also are supporting efforts to update and improve regulatory treatment for retail services. Regulatory reform and passage of legislation is uncertain and depends on many factors.
We provide wireless services in robustly competitive markets, but are subject to substantial and increasing governmental regulation. Wireless communications providers must obtain licenses from the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of the spectrum. While wireless communications providers' prices and offerings are generally not subject to state regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer protection.
The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. Government to make more spectrum available. In February 2012, Congress set forth specific spectrum blocks to be auctioned and licensed by February 2015 (the "AWS-3 Auction") and also authorized the FCC to conduct an "incentive auction," to make available for wireless broadband use certain spectrum that is currently used by broadcast television licensees (the "600 MHz Auction"). We participated in the AWS-3 Auction. The 600 MHz Auction (Auction 1000) began on March 29, 2016, and the multiple phases of Auction 1000 are expected to progress over the next several months.
We have also submitted a bid to provide a nationwide mobile broadband network for first responders (FirstNet). Should our bid be accepted, the actual reach of the network will depend on participation by the individual States.
In May 2014, in a separate proceeding, the FCC issued an order revising its policies governing mobile spectrum holdings. The FCC rejected the imposition of caps on the amount of spectrum any carrier could acquire, retaining its case-by-case review policy. Moreover, it increased the amount of spectrum that could be acquired before exceeding an aggregation "screen" that would automatically trigger closer scrutiny of a proposed transaction. On the other hand, it indicated that it will separately consider an acquisition of "low band" spectrum that exceeds one-third of the available low band spectrum as presumptively harmful to competition. In addition, the FCC imposed limits on certain bidders in the 600 MHz Auction, including AT&T, restricting them from bidding on up to 40 percent of the available spectrum in markets that cover as much as 70-80 percent of the U.S. population. On balance, the order and the new spectrum screen should allow AT&T to obtain additional spectrum to meet our customers' needs, but because AT&T uses more "low band" spectrum in its network than some other national carriers, the separate consideration of low band spectrum acquisitions might affect AT&T's ability to expand capacity in these bands (low band spectrum has better propagation characteristics than "high band" spectrum). We seek to ensure that we have the opportunity, through the auction process and otherwise, to obtain the spectrum we need to provide our customers with high-quality service in the future.
As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative video and data services and a wireless network that has sufficient spectrum and capacity to support these innovations. We continue to face spectrum and capacity constraints on our wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. While we are continuing to invest significant capital in expanding our network capacity, our capacity constraints could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services, unless we are able to obtain more spectrum. Any long-term spectrum solution will require that the FCC make additional spectrum available to the wireless industry to meet the expanding needs of our subscribers. We will continue to attempt to address spectrum and capacity constraints on a market-by-market basis.
40
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
LIQUIDITY AND CAPITAL RESOURCES
We had $7,208 in cash and cash equivalents available at June 30, 2016. Cash and cash equivalents included cash of $2,408 and money market funds and other cash equivalents of $4,800. Approximately $600 of our cash and cash equivalents resided in foreign jurisdictions, some of which are subject to restrictions on repatriation. Cash and cash equivalents increased $2,087 since December 31, 2015. In the first six months of 2016, cash inflows were primarily provided by cash receipts from operations, including cash from our sale and transfer of certain wireless equipment installment receivables to third parties, and long-term debt issuances. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses; funding capital expenditures; debt repayments; dividends to stockholders; and the acquisition of wireless spectrum and other operations. We discuss many of these factors in detail below.
Cash Provided by or Used in Operating Activities
During the first six months of 2016, cash provided by operating activities was $18,207, compared to $15,898 for the first six months of 2015. Higher operating cash flows in 2016 were primarily due to our acquisition of DIRECTV offset by the timing of working capital payments.
Cash Used in or Provided by Investing Activities
For the first six months of 2016, cash used in investing activities totaled $10,017 and consisted primarily of $9,702 for capital expenditures, excluding interest during construction, and $485 for the acquisition of wireless spectrum, Quickplay Media, Inc. and other operations. These expenditures were partially offset by net cash receipts of $500 from the sale of securities.
Virtually all of our capital expenditures are spent on our wireless and wireline networks, our video services and related support systems. Capital expenditures, excluding interest during construction, increased $1,374 in the first six months. The increase was primarily due to our wireless network expansion in Mexico, DIRECTV operations and continued fiber buildout. In connection with capital improvements to our wireless network in Mexico, we also negotiated favorable payment terms (referred to as vendor financing). For the first six months of 2016, we excluded $138 of vendor financing related to capital investments. We do not report capital expenditures at the segment level.
We continue to expect our 2016 capital investment, which includes our capital expenditures plus vendor financing payments related to our Mexico network, for our existing businesses to be in the $22,000 range, and we expect our capital investment to be in the 15 percent range of service revenues or lower for each of the years 2016 through 2018. The amount of capital investment is influenced by demand for services and products, capacity needs and network enhancements. We are also focused on ensuring merger commitments are met.
Cash Provided by or Used in Financing Activities
For the first six months of 2016, cash used in financing activities totaled $6,103 and included net proceeds of $10,140 primarily from the following long-term debt issuances:
-- February issuance of $1,250 of 2.800% global notes due 2021.
-- February issuance of $1,500 of 3.600% global notes due 2023.
-- February issuance of $1,750 of 4.125% global notes due 2026.
-- February issuance of $1,500 of 5.650% global notes due 2047.
-- May issuance of $750 of 2.300% global notes due 2019.
-- May issuance of $750 of 2.800% global notes due 2021.
-- May issuance of $1,100 of 3.600% global notes due 2023.
-- May issuance of $900 of 4.125% global notes due 2026.
-- May issuance of $500 of 4.800% global notes due 2044.
41
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
During the first six months of 2016, we redeemed $9,129 of debt, primarily consisting of the following:
-- February redemption of $1,250 of AT&T Floating Rate Notes due 2016.
-- March prepayment of the remaining $1,000 outstanding
under a $2,000 18-month credit agreement by and
between AT&T and Mizuho.
-- May redemption of $1,750 of 2.950% global notes due 2016.
-- June prepayment of $5,000 of outstanding advances
under our $9,155 Syndicated Credit Agreement (See
"Credit Facilities" below).
In July 2016, we made a refundable deposit with the FCC for the upcoming Auction 1000.
Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.2% as of June 30, 2016, compared to 4.1% as of March 31, 2016, and 4.0% as of December 31, 2015. We had $125,568 of total notes and debentures outstanding at June 30, 2016, which included Euro, British pound sterling, Swiss Franc, Brazilian real and Canadian dollar denominated debt of approximately $25,826.
As of June 30, 2016, we had approximately 402 million shares remaining from 2013 and 2014 authorizations from our Board of Directors to repurchase shares of our common stock. During the first six months of 2016, we repurchased approximately 5 million shares for $197. In 2016, 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 $5,899 during the first six months of 2016, compared with $4,873 for the first six months of 2015, primarily reflecting the increase in shares outstanding resulting from our acquisition of DIRECTV. Dividends declared by our Board of Directors totaled $0.48 per share in the second quarter and $0.96 per share for the first six months of 2016 and $0.47 per share in the second quarter and $0.94 per share for the first six months of 2015. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.
At June 30, 2016, we had $9,528 of debt maturing within one year, $9,004 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.
-- 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
On December 11, 2015, we entered into a five-year, $12,000 credit agreement (the "Revolving Credit Agreement") with Citibank, N.A. (Citibank), as administrative agent, replacing our $5,000 credit agreement that would have expired in December 2018. At the same time, AT&T and the lenders terminated their obligations under the existing revolving $3,000 credit agreement with Citibank that would have expired in December 2017.
In January 2015, we entered into a $9,155 credit agreement (the "Syndicated Credit Agreement") containing (i) a $6,286 term loan facility (the "Tranche A Facility") and (ii) a $2,869 term loan facility (the "Tranche B Facility"), with certain investment and commercial banks and Mizuho Bank, Ltd. ("Mizuho"), as administrative agent.
42
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Revolving Credit Agreement
In the event advances are made under the Revolving Credit Agreement, those advances would be used for general corporate purposes. Advances are not conditioned on the absence of a material adverse change. All advances must be repaid no later than the date on which lenders are no longer obligated to make any advances under the agreement. We can terminate, in whole or in part, amounts committed by the lenders in excess of any outstanding advances; however, we cannot reinstate any such terminated commitments. We also may request that the total amount of the lender's commitments be increased by an integral multiple of $25 effective on a date that is at least 90 days prior to the scheduled termination date then in effect, provided that no event of default has occurred and in no event shall the total amount of the lender's commitments at any time exceed $14,000. At June 30, 2016, we had no advances outstanding under the Revolving Credit Agreement and we have complied with all covenants.
The obligations of the lenders to provide advances will terminate on December 11, 2020, unless prior to that date either: (i) AT&T reduces to $0 the commitments of the lenders, or (ii) certain events of default occur. We and lenders representing more than 50% of the facility amount may agree to extend their commitments for two one-year periods beyond the December 11, 2020 termination date, under certain circumstances.
Advances under the Revolving Credit Agreement would bear interest, at AT&T's option, either:
-- at a variable annual rate equal to (i) the highest of: (a) the base rate of the bank affiliate
of Citibank, N.A. which is serving as administrative agent under the Agreement, (b) 0.50%
per annum above the Federal Funds Rate, and (c) the London Interbank Offered Rate (LIBOR)
applicable to U.S. dollars for a period of one month plus 1.00% per annum, plus (ii) an applicable
margin, as set forth in the Revolving Credit Agreement ("Applicable Margin for Base Advances");
or
-- at a rate equal to: (i) LIBOR for a period of one, two, three or six months, as applicable,
plus (ii) the Applicable Margin ("Applicable Margin for Eurocurrency Rate Advances").
The Applicable Margin for Eurocurrency Rate Advances will equal 0.680%, 0.910%, 1.025% or 1.125% per annum, depending on AT&T's credit rating. The Applicable Margin for Base Rate Advances will be equal to the greater of 0.00% and the relevant Applicable Margin for Eurocurrency Rate Advances minus 1.00% per annum depending on AT&T's credit rating.
We will pay a facility fee of 0.070%, 0.090%, 0.100% or 0.125% per annum, depending on AT&T's credit rating, of the amount of lender commitments.
The Revolving Credit Agreement contains covenants that are customary for an issuer with an investment grade senior debt credit rating, as well as a net debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization, and other modifications described in the Revolving Credit Agreement) financial ratio covenant that AT&T will maintain, as of the last day of each fiscal quarter of not more than 3.5-to-1.
The events of default contained in the Revolving Credit Agreement are customary for an agreement of this type and such events would result in the acceleration or permit the lenders to accelerate, as applicable, required payments and would increase the Applicable Margin by 2.00% per annum.
The Syndicated Credit Agreement
In March 2015, AT&T borrowed all amounts available under the Tranche A Facility and the Tranche B Facility. Amounts borrowed under the Tranche A Facility will be due on March 2, 2018. Amounts borrowed under the Tranche B Facility will be subject to amortization from March 2, 2018, with 25 percent of the aggregate principal amount thereof being payable prior to March 2, 2020, and all remaining principal amount due on March 2, 2020. In June 2016, we repaid $4,000 of the outstanding debt under the Tranche A Facility and $1,000 of the outstanding debt under the Tranche B Facility. After repayment, the amortization in the Tranche B Facility has been satisfied.
43
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Advances bear interest at a rate equal to: (i) the LIBOR for deposits in dollars (adjusted upwards to reflect any bank reserve costs) for a period of three or six months, as applicable, plus (ii) the Applicable Margin (each such Advance, a Eurodollar Rate Advance). The Applicable Margin under the Tranche A Facility will equal 1.000%, 1.125% or 1.250% per annum depending on AT&T's credit rating. The Applicable Margin under the Tranche B Facility will equal 1.125%, 1.250% or 1.375% per annum, depending on AT&T's credit rating.
The Syndicated Credit Agreement contains covenants that are customary for an issuer with an investment grade senior debt credit rating, as well as a net debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization, and other modifications described in the Syndicated Credit Agreement) financial ratio covenant that AT&T will maintain, as of the last day of each fiscal quarter of not more than 3.5-to-1.
The events of default contained in the Syndicated Credit Agreement are customary for an agreement of this type and such events would result in the acceleration or permit the lenders to accelerate, as applicable, required payments and would increase the Applicable Margin by 2.00% per annum.
Collateral Arrangements
During the first six months of 2016, we posted $928 of additional cash collateral, on a net basis, to banks and other participants in our derivative arrangements, due mainly to the U.S. dollar strengthening versus the British pound sterling. 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 June 30, 2016, our debt ratio was 50.5%, compared to 55.5% at June 30, 2015, and 50.5% at December 31, 2015. Our net debt ratio was 47.6% at June 30, 2016, compared to 45.2% at June 30, 2015, and 48.5% at December 31, 2015. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments.
During the first six months of 2016, we received $2,773 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 $8,704 as of June 30, 2016, and $8,714 as of December 31, 2015, does not have any voting rights and has a liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly in equal amounts. We distributed $280 to the trust during the first six months of 2016. So long as we make the distributions, the terms of the preferred equity interest will not impose any limitations on our ability to declare a dividend or repurchase shares. At the time of the contribution of the preferred equity interest, we agreed to annual cash contributions to the trust of $175 no later than the due date for our federal income tax return for each of 2015 and 2016.
44
AT&T INC.
JUNE 30, 2016
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
At June 30, 2016, we had interest rate swaps with a notional value of $7,050 and a fair value of $202.
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 $(3,721) at June 30, 2016.
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 June 30, 2016. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant's disclosure controls and procedures were effective as of June 30, 2016.
45
AT&T INC.
JUNE 30, 2016
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the "Risk Factors" section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.
The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:
-- Adverse economic and/or capital access changes in the markets served by us or in countries
in which we have significant investments, including the impact on customer demand and our
ability and our suppliers' ability to access financial markets at favorable rates and terms.
-- Changes in available technology and the effects of such changes, including product substitutions
and deployment costs.
-- Increases in our benefit plans' costs, including increases due to adverse changes in the United
States and foreign securities markets, resulting in worse-than-assumed investment returns
and discount rates; adverse changes in mortality assumptions; adverse medical cost trends,
and unfavorable or delayed implementation of healthcare legislation, regulations or related
court decisions.
-- The final outcome of FCC and other federal, 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, intercarrier compensation; interconnection
obligations; pending Notices of Apparent Liability; the transition from legacy technologies
to IP-based infrastructure including the withdrawal of legacy TDM-based services; universal
service; broadband deployment; E911 services; competition policy; net neutrality; including
the FCC's order reclassifying broadband as Title II services subject to much more fulsome
regulation; unbundled network elements and other wholesale obligations; multi-channel video
programming distributor services and equipment; availability of new spectrum, on fair and
balanced terms, and wireless and satellite license awards and renewals.
-- The final outcome of state and federal legislative efforts involving issues that are important
to our business, including deregulation of IP-based services, relief from Carrier of Last
Resort obligations and elimination of state commission review of the withdrawal of services.
-- Enactment of additional state, local, federal and/or foreign regulatory and tax laws and regulations,
or changes to existing standards and actions by tax agencies and judicial authorities including
the resolution of disputes with any taxing jurisdictions, pertaining to our subsidiaries and
foreign investments, including laws and regulations that reduce our incentive to invest in
our networks, resulting in lower revenue growth and/or higher operating costs.
-- Our ability to absorb revenue losses caused by increasing competition, including offerings
that use alternative technologies or delivery methods (e.g., cable, wireless, VoIP and Over
The Top Video service) and our ability to maintain capital expenditures.
-- The extent of competition including from governmental networks and other providers and the
resulting pressure on customer and access line totals and segment operating margins.
-- Our ability to develop attractive and profitable product/service offerings to offset increasing
competition.
-- The ability of our competitors to offer product/service offerings at lower prices due to lower
cost structures and regulatory and legislative actions adverse to us, including state regulatory
proceedings relating to unbundled network elements and nonregulation of comparable alternative
technologies (e.g., VoIP).
-- The continued development and delivery of attractive and profitable video offerings through
satellite and U-verse; the extent to which regulatory and build-out requirements apply to
our offerings; and the availability, cost and/or reliability of the various technologies and/or
content required to provide such offerings.
-- Our continued ability to maintain margins, attract and offer a diverse portfolio of wireless
service and devices and device financing plans.
-- The availability and cost of additional wireless spectrum and regulations and conditions relating
to spectrum use, licensing, obtaining additional spectrum, technical standards and deployment
and usage, including network management rules.
-- Our ability to manage growth in wireless data services, including network quality and acquisition
of adequate spectrum at reasonable costs and terms.
-- The outcome of pending, threatened or potential litigation, including, without limitation,
patent and product safety claims by or against third parties.
-- The impact from major equipment failures on our networks, including satellites operated by
DIRECTV; the effect of security breaches related to the network or customer information; our
inability to obtain handsets, equipment/software or have handsets, equipment/software serviced
in a timely and cost-effective manner from suppliers; and in the case of satellites launched,
timely provisioning of services from vendors; or severe weather conditions, natural disasters,
pandemics, energy shortages, wars or terrorist attacks.
-- The issuance by the Financial Accounting Standards Board or other accounting oversight bodies
of new accounting standards or changes to existing standards.
-- Our ability to integrate our acquisition of DIRECTV.
-- Our ability to adequately fund our wireless operations, including payment for additional spectrum,
network upgrades and technological advancements.
-- Our increased exposure to video competition and foreign economies due to our recent acquisitions
of DIRECTV and Mexican wireless properties, including foreign exchange fluctuations as well
as regulatory and political uncertainty in Latin America.
-- Changes in our corporate strategies, such as changing network requirements or acquisitions
and dispositions, which may require significant amounts of cash or stock, to respond to competition
and regulatory, legislative and technological developments.
-- The uncertainty surrounding further congressional action to address spending reductions, which
may result in a significant decrease in government spending and reluctance of businesses and
consumers to spend in general.
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.
46
AT&T INC.
JUNE 30, 2016
PART II - OTHER INFORMATION
Dollars in millions except per share amounts
Item 1A. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the second quarter 2016, there were no such material developments.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) A summary of our repurchases of common stock during the second quarter of 2016 is as
follows:
(d)
(c) Maximum Number
(or
Approximate
(a) Total Number of Dollar
(b) Shares (or Value) of
Units) Shares (or
Purchased as Units) That May
Part of Yet Be
Total Number of Publicly Purchased Under
Shares (or Units) Announced The
Purchased (1, 2, Average Price Paid Plans or Plans or
Period 3) Per Share (or Unit) Programs(1) Programs
April 1, 2016 -
April 30, 2016 14,308 $ - - 406,550,000
May 1, 2016 -
May 31, 2016 3,001,139 38.43 3,000,000 403,550,000
June 1, 2016 -
June 30, 2016 2,658,815 40.87 2,000,000 401,550,000
Total 5,674,262 $ 39.40 5,000,000
(1) In March 2014, our Board of Directors approved an additional authorization to repurchase up to 300 million shares of our common stock. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock. The authorizations have no expiration date. (2) Of the shares repurchased, 32,522 shares were acquired through the withholding of taxes on the vesting of restricted stock or through the payment in stock of taxes on the exercise price of options. (3) Of the shares repurchased, 641,740 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit Association (VEBA) trusts.
47
AT&T INC.
JUNE 30, 2016
Item 6. Exhibits
Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610.
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
48
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.
August 4, 2016 /s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
49
EXHIBIT
12
AT&T INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
Six Months Ended
June 30,
(Unaudited) Year Ended December 31,
2016 2015 2015 2014 2013 2012 2011
Earnings:
Income from
continuing
operations
before income
taxes $11,428 $ 9,650 $20,692 $10,355 $28,050 $10,496 $ 6,998
Equity in net
income of
affiliates
included above (41) (33) (79) (175) (642) (752) (784 )
Fixed charges 3,644 2,924 6,592 5,295 5,452 4,876 4,835
Distributed
income of
equity
affiliates 19 10 30 148 318 137 161
Interest
capitalized (437) (339) (797) (234) (284) (263) (162 )
Earnings, as
adjusted $14,613 $12,212 $26,438 $15,389 $32,894 $14,494 $ 11,048
Fixed Charges:
Interest expense $ 2,465 $ 1,831 $ 4,120 $ 3,613 $ 3,940 $ 3,444 $ 3,535
Interest
capitalized 437 339 797 234 284 263 162
Portion of
rental expense
representative
of interest
factor 742 754 1,675 1,448 1,228 1,169 1,138
Fixed Charges $ 3,644 $ 2,924 $ 6,592 $ 5,295 $ 5,452 $ 4,876 $ 4,835
Ratio of
Earnings to
Fixed Charges 4.01 4.18 4.01 2.91 6.03 2.97 2.29
CERTIFICATION
I, Randall Stephenson, certify that:
1. I have reviewed this report on Form 10-Q of AT&T Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant's auditors and
the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: August 4, 2016
/s/ Randall Stephenson
Randall Stephenson
Chairman of the Board,
Chief Executive Officer and President
CERTIFICATION
I, John J. Stephens, certify that:
1. I have reviewed this report on Form 10-Q of AT&T Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant's auditors and
the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: August 4, 2016
/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
Certification of Periodic Financial Reports
Pursuant to 18 U.S.C. Section 1350, each of the undersigned officers of AT&T Inc. (the "Company") hereby certifies that the Company's Quarterly Report on Form 10-Q for the three months ended June 30, 2016 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
August 4, 2016 August 4, 2016 By: /s/ Randall Stephenson By: /s/ John J. Stephens Randall Stephenson John J. Stephens Chairman of the Board, Chief Executive Officer Senior Executive Vice President and President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. This certification shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 ("Exchange Act") or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act except to the extent this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to AT&T Inc. and will be retained by AT&T Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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