TIDM58KN
RNS Number : 7286H
AT & T Inc.
19 August 2016
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
QUARTERLY REPORT PURSUANT
x TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period
ended 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.
32
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.
33
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.
34
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.
35
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.
36
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.
37
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
IR AKCDBBBKBDFD
(END) Dow Jones Newswires
August 22, 2016 02:00 ET (06:00 GMT)
At&t Inc 5.500% (LSE:58KN)
과거 데이터 주식 차트
부터 10월(10) 2024 으로 11월(11) 2024
At&t Inc 5.500% (LSE:58KN)
과거 데이터 주식 차트
부터 11월(11) 2023 으로 11월(11) 2024
