TIDM58KN
RNS Number : 5061P
AT & T Inc.
17 November 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 September 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 October 31, 2016 there were 6,141 million common shares
outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AT&T INC.
-------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
-------------------------------------------------------------------------------
Three months
ended Nine months ended
September 30, September 30,
2016 2015 2016 2015
------------------------------------- ------- ------- -------- --------
Operating Revenues
Service $37,272 $35,539 $111,515 $ 94,042
Equipment 3,618 3,552 10,430 10,640
-------------------------------------- ------ ------ ------- -------
Total operating revenues 40,890 39,091 121,945 104,682
-------------------------------------- ------ ------ ------- -------
Operating Expenses
Cost of services and sales
Equipment 4,455 4,501 13,090 13,400
Broadcast, programming and
operations 4,909 4,081 14,239 6,351
Other cost of services (exclusive
of depreciation and
amortization shown separately
below) 9,526 9,214 28,436 27,604
Selling, general and administrative 9,013 9,107 26,363 24,535
Depreciation and amortization 6,579 6,265 19,718 15,539
-------------------------------------- ------ ------ ------- -------
Total operating expenses 34,482 33,168 101,846 87,429
-------------------------------------- ------ ------ ------- -------
Operating Income 6,408 5,923 20,099 17,253
-------------------------------------- ------ ------ ------- -------
Other Income (Expense)
Interest expense (1,224) (1,146) (3,689) (2,977)
Equity in net income of affiliates 16 15 57 48
Other income (expense) -
net (7) (57) 154 61
-------------------------------------- ------ ------ ------- -------
Total other income (expense) (1,215) (1,188) (3,478) (2,868)
-------------------------------------- ------ ------ ------- -------
Income Before Income Taxes 5,193 4,735 16,621 14,385
Income tax expense 1,775 1,657 5,803 4,784
-------------------------------------- ------ ------ ------- -------
Net Income 3,418 3,078 10,818 9,601
-------------------------------------- ------ ------ ------- -------
Less: Net Income Attributable
to Noncontrolling Interest (90) (84) (279) (262)
-------------------------------------- ------ ------ ------- -------
Net Income Attributable to
AT&T $ 3,328 $ 2,994 $ 10,539 $ 9,339
====================================== ====== ====== ======= =======
Basic Earnings Per Share
Attributable to AT&T $ 0.54 $ 0.50 $ 1.70 $ 1.71
Diluted Earnings Per Share
Attributable to AT&T $ 0.54 $ 0.50 $ 1.70 $ 1.71
-------------------------------------- ------ ------ ------- -------
Weighted Average Number of
Common Shares
Outstanding - Basic (in
millions) 6,168 5,924 6,171 5,447
Weighted Average Number of
Common Shares
Outstanding - with Dilution
(in millions) 6,189 5,943 6,191 5,463
Dividends Declared Per Common
Share $ 0.48 $ 0.47 $ 1.44 $ 1.41
====================================== ====== ====== ======= =======
See Notes to Consolidated
Financial Statements.
2
AT&T INC.
------------------------------------------- ------ ------- ------- -------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
Dollars in millions
(Unaudited)
------------------------------------------- ------ ------- ------- -------
Three months Nine months
ended ended
September 30, September 30,
2016 2015 2016 2015
------------------------------------------- ------ ------- ------- -------
Net income $3,418 $ 3,078 $10,818 $ 9,601
Other comprehensive income
(loss), net of tax:
Foreign Currency:
Foreign currency translation
adjustment (includes $21,
$(20), $21 and $(20) attributable
to noncontrolling
interest), net of taxes
of $(91), $(535), $35 and
$(638) (225) (1,039) (51) (1,224)
Available-for-sale securities:
Net unrealized gains (losses),
net of taxes of $28, $(49),
$15
and $(30) 46 (85) 25 (51)
Reclassification adjustment
included in net income,
net of
taxes of $(3), $2, $(3),
and $(3) (5) 3 (5) (6)
Cash flow hedges:
Net unrealized gains (losses),
net of taxes of $240, $(237),
$99 and $(479) 446 (441) 183 (890)
Reclassification adjustment
included in net income,
net of
taxes of $5, $6, $15 and
$15 10 11 29 28
Defined benefit postretirement
plans:
Amortization of net prior
service credit included
in net
income, net of taxes of
$(131), $(131), $(393) and
$(393) (215) (215) (644) (644)
Other comprehensive income
(loss) 57 (1,766) (463) (2,787)
-------------------------------------------- ----- ------ ------ ------
Total comprehensive income 3,475 1,312 10,355 6,814
Less: Total comprehensive
income attributable to
noncontrolling interest (111) (64) (300) (242)
-------------------------------------------- ----- ------ ------ ------
Total Comprehensive Income
Attributable to AT&T $3,364 $ 1,248 $10,055 $ 6,572
============================================ ===== ====== ====== ======
See Notes to Consolidated
Financial Statements.
3
AT&T INC.
------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
------------------------------------------------------------------------
September December
30, 31,
2016 2015
-------------------------------------------- ------------- ---------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 5,895 $ 5,121
Accounts receivable - net of allowances
for doubtful accounts of $650 and $704 16,855 16,532
Prepaid expenses 1,333 1,072
Other current assets 13,291 13,267
--------------------------------------------- --------- --------
Total current assets 37,374 35,992
--------------------------------------------- --------- --------
Property, plant and equipment 316,261 306,227
Less: accumulated depreciation and
amortization (192,339) (181,777)
--------------------------------------------- --------- --------
Property, Plant and Equipment - Net 123,922 124,450
--------------------------------------------- --------- --------
Goodwill 105,271 104,568
Licenses 94,241 93,093
Customer Lists and Relationships - Net 15,227 18,208
Other Intangible Assets - Net 8,734 9,409
Investments in Equity Affiliates 1,679 1,606
Other Assets 16,527 15,346
--------------------------------------------- --------- --------
Total Assets $ 402,975 $ 402,672
============================================= ========= ========
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year $ 7,982 $ 7,636
Accounts payable and accrued liabilities 28,849 30,372
Advanced billing and customer deposits 4,637 4,682
Accrued taxes 2,686 2,176
Dividends payable 2,948 2,950
--------------------------------------------- --------- --------
Total current liabilities 47,102 47,816
--------------------------------------------- --------- --------
Long-Term Debt 117,239 118,515
--------------------------------------------- --------- --------
Deferred Credits and Other Noncurrent
Liabilities
Deferred income taxes 59,649 56,181
Postemployment benefit obligation 33,483 34,262
Other noncurrent liabilities 20,899 22,258
--------------------------------------------- --------- --------
Total deferred credits and other noncurrent
liabilities 114,031 112,701
--------------------------------------------- --------- --------
Stockholders' Equity
Common stock ($1 par value, 14,000,000,000
authorized at September 30, 2016 and
December 31, 2015: issued 6,495,231,088
at September 30, 2016 and December 31,
2015) 6,495 6,495
Additional paid-in capital 89,536 89,763
Retained earnings 35,319 33,671
Treasury stock (354,467,711 at September
30, 2016 and 350,291,239
at December 31, 2015, at cost) (12,589) (12,592)
Accumulated other comprehensive income 4,850 5,334
Noncontrolling interest 992 969
--------------------------------------------- --------- --------
Total stockholders' equity 124,603 123,640
--------------------------------------------- --------- --------
Total Liabilities and Stockholders'
Equity $ 402,975 $ 402,672
============================================= ========= ========
See Notes to Consolidated Financial
Statements.
4
AT&T INC.
-------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
--------------------------------------------- -------- --------
Nine months ended
September 30,
2016 2015
--------------------------------------------- -------- --------
Operating Activities
Net income $ 10,818 $ 9,601
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 19,718 15,539
Undistributed earnings from investments
in equity affiliates (22) (36)
Provision for uncollectible accounts 1,036 895
Deferred income tax expense 3,011 1,539
Net gain from sale of investments, net
of impairments (88) (46)
Changes in operating assets and liabilities:
Accounts receivable (1,108) 737
Other current assets 1,805 546
Accounts payable and accrued liabilities (1,173) 1,332
Equipment installment receivables and
related sales 207 (1,682)
Deferred fulfillment costs (1,883) (884)
Retirement benefit funding (770) (595)
Other - net (2,349) (251)
---------------------------------------------- ------- -------
Total adjustments 18,384 17,094
---------------------------------------------- ------- -------
Net Cash Provided by Operating Activities 29,202 26,695
---------------------------------------------- ------- -------
Investing Activities
Capital expenditures:
Purchase of property and equipment (15,283) (13,356)
Interest during construction (669) (566)
Acquisitions, net of cash acquired (2,922) (30,694)
Dispositions 184 79
Sale of securities, net 501 1,490
Net Cash Used in Investing Activities (18,189) (43,047)
---------------------------------------------- ------- -------
Financing Activities
Net change in short-term borrowings with
original maturities of three months or
less - (1)
Issuance of long-term debt 10,140 33,967
Repayment of long-term debt (10,688) (9,962)
Purchase of treasury stock (444) -
Issuance of treasury stock 137 133
Dividends paid (8,850) (7,311)
Other (534) (2,875)
---------------------------------------------- ------- -------
Net Cash (Used in) Provided by Financing
Activities (10,239) 13,951
---------------------------------------------- ------- -------
Net increase (decrease) in cash and cash
equivalents 774 (2,401)
Cash and cash equivalents beginning of
year 5,121 8,603
---------------------------------------------- ------- -------
Cash and Cash Equivalents End of Period $ 5,895 $ 6,202
============================================== ======= =======
Cash paid during the nine months ended
September 30 for:
Interest $ 4,430 $ 3,462
Income taxes, net of refunds $ 3,166 $ 873
See Notes to Consolidated Financial Statements.
5
AT&T INC.
---------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
---------------------------------------------------------------------
September 30,
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 (207)
Change related to acquisition of interests
held by noncontrolling owners 23
-------------------------------------------------- ------ -------
Balance at end of period $ 89,536
================================================== ====== =======
Retained Earnings
Balance at beginning of year $ 33,671
Net income attributable to AT&T ($1.70
per diluted share) 10,539
Dividends to stockholders ($1.44 per
share) (8,891)
-------------------------------------------------- ------ -------
Balance at end of period $ 35,319
================================================== ====== =======
Treasury Stock
Balance at beginning of year (350) $(12,592)
Repurchase and acquisition of common
stock (14) (566)
Issuance of treasury stock 10 569
-------------------------------------------------- ------ -------
Balance at end of period (354) $(12,589)
================================================== ====== =======
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 (484)
-------------------------------------------------- ------ -------
Balance at end of period $ 4,850
================================================== ====== =======
Noncontrolling Interest
Balance at beginning of year $ 969
Net income attributable to noncontrolling
interest 279
Distributions (252)
Acquisition of interest held by noncontrolling
owners (25)
Translation adjustments attributable
to noncontrolling interest, net of taxes 21
-------------------------------------------------- ------ -------
Balance at end of period $ 992
================================================== ====== =======
Total Stockholders' Equity at beginning
of year $123,640
================================================== ====== =======
Total Stockholders' Equity at end of
period $124,603
================================================== ====== =======
See Notes to Consolidated Financial Statements.
6
AT&T INC.
SEPTEMBER 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. The consolidated statements of cash
flows include revisions to present "Equipment installment
receivables and related sales" and "Deferred fulfillment costs"
separately from "Other - net" and previously reported changes in
operating assets and liabilities.
Cash Flows In August 2016, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) No. 2016-15,
"Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments" (ASU 2016-15), which provides
guidance related to cash flows presentation and is effective for
annual reporting periods beginning after December 15, 2017, subject
to early adoption. The majority of the guidance in ASU 2016-15 is
consistent with our current cash flow classifications. However,
cash receipts on the deferred purchase price described in Note 8
will be classified as cash flows from investing activities instead
of our current presentation as cash flow from operations. Under ASU
2016-15, we will continue to recognize cash receipts on owned
equipment installment receivables as cash from operations.
AT&T's cash flows from operating activities included cash
receipts on the deferred purchase price of $534 for the nine months
ended September 30, 2016, and $536 for the year ended December 31,
2015.
Leases In February 2016, the 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 and is
effective for annual reporting periods beginning after December 15,
2018, subject to early adoption. For income statement recognition
purposes, leases will be classified as either a finance or an
operating lease without relying upon the bright-line tests under
current GAAP.
Upon initial evaluation, we believe the key change upon adoption
will be the balance sheet recognition. The income statement
recognition of lease expense appears similar to our current
methodology. We are continuing to evaluate other potential impacts
to our financial statements.
Revenue Recognition In May 2014, the FASB issued ASU No.
2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU
2014-09) and has modified the standard thereafter. These standards
replace existing revenue recognition rules with a comprehensive
revenue measurement and recognition standard and expanded
disclosure requirements. ASU 2014-09, as amended, becomes effective
for annual reporting periods beginning after December 15, 2017, at
which point we plan to adopt the standard.
7
AT&T INC.
SEPTEMBER 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
The FASB allows two adoption methods under ASU 2014-09. Under
one method, a company will apply the rules to contracts in all
reporting periods presented, subject to certain allowable
exceptions. Under the other method, a company will apply the rules
to all contracts existing as of January 1, 2018, recognizing in
beginning retained earnings an adjustment for the cumulative effect
of the change and providing additional disclosures comparing
results to previous rules ("modified retrospective method"). We
continue to evaluate the available adoption methods.
Upon initial evaluation, we believe the key changes in the
standard that impact our revenue recognition relate to the
allocation of contract revenues between various services and
equipment, and the timing of when those revenues are recognized. We
are still in the process of evaluating these impacts. As a result
of our accounting policy change for customer set-up and
installation costs made in 2015, we believe that the requirement to
defer such costs under the new standard 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 amortization
period to approximately 4.5 years. This change in accounting
estimate decreased other cost of services and impacted net income
$79, or $0.01 per diluted share, in the third quarter of 2016 and
$161, or $0.03 per diluted share, for the nine months ended
September 30, 2016.
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and
diluted earnings per share for the three and nine months ended
September 30, 2016 and 2015, is shown in the table below:
Three months Nine months
ended ended
September 30, September 30,
2016 2015 2016 2015
-------------------------------------- ------ ------ ------- ------
Numerators
Numerator for basic earnings
per share:
Net Income $3,418 $3,078 $10,818 $9,601
Less: Net income attributable
to noncontrolling interest (90) (84) (279) (262)
--------------------------------------- ----- ----- ------ -----
Net Income attributable to
AT&T 3,328 2,994 10,539 9,339
Dilutive potential common
shares:
Share-based payment 3 3 9 9
--------------------------------------- ----- ----- ------ -----
Numerator for diluted earnings
per share $3,331 $2,997 $10,548 $9,348
======================================= ===== ===== ====== =====
Denominators (000,000)
Denominator for basic earnings
per share:
Weighted average number of
common shares outstanding 6,168 5,924 6,171 5,447
Dilutive potential common
shares:
Share-based payment (in shares) 21 19 20 16
--------------------------------------- ----- ----- ------ -----
Denominator for diluted earnings
per share 6,189 5,943 6,191 5,463
======================================= ===== ===== ====== =====
Basic earnings per share attributable
to AT&T $ 0.54 $ 0.50 $ 1.70 $ 1.71
Diluted earnings per share
attributable to AT&T $ 0.54 $ 0.50 $ 1.70 $ 1.71
======================================= ===== ===== ====== =====
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.
8
AT&T INC.
SEPTEMBER 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Following our 2015 acquisitions of DIRECTV and wireless
properties 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 17.6%, the Argentine peso
exchange rate has depreciated 18.4% and the Mexican peso exchange
rate has depreciated 12.7%.
Net Net
Unrealized Unrealized
Gains Gains
Foreign (Losses) (Losses) Defined Accumulated
Currency on 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 (72) 25 183 - 136
Amounts
reclassified
from accumulated
OCI - (1) (5) (1) 29 (2) (644) (3) (620)
------------------- ---------- --- ---------- --- ---------- --- ------------ --- ------------
Net other
comprehensive
income (loss) (72) 20 212 (644) (484)
------------------- ---------- --- ---------- --- ---------- --- ------------ --- ------------
Balance as of
September 30,
2016 $ (1,270) $ 504 $ 228 $ 5,388 $ 4,850
=================== ========== === ========== === ========== === ============ === ============
Net Net
Unrealized Unrealized
Gains Gains
Foreign (Losses) (Losses) Defined Accumulated
Currency on 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 (1,204) (51) (890) - (2,145)
Amounts
reclassified
from accumulated
OCI - (1) (6) (1) 28 (2) (644) (3) (622)
------------------- ---------- --- ---------- --- ---------- --- ------------ --- ------------
Net other
comprehensive
income (loss) (1,204) (57) (862) (644) (2,767)
------------------- ---------- --- ---------- --- ---------- --- ------------ --- ------------
Balance as of
September 30,
2015 $ (1,230) $ 442 $ (121) $ 6,203 $ 5,294
=================== ========== === ========== === ========== === ============ === ============
(1) (Gains) losses are included in Other income (expense)
- net in the consolidated statements of income.
(2) (Gains) losses are included in Interest expense in
the consolidated statements of income. See Note 6 for
additional information.
(3) 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. 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.
9
AT&T INC.
SEPTEMBER 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
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.
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 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.
SEPTEMBER 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
For the three months ended September 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 $ 17,767 $ 10,925 $ 6,842 $ 2,539 $ 4,303 $ - $ 4,303
Entertainment
Group 12,720 9,728 2,992 1,504 1,488 - 1,488
Consumer
Mobility 8,267 4,751 3,516 944 2,572 - 2,572
International 1,879 1,640 239 293 (54) 1 (53 )
--------------------- ------- ---------- ------ ----------- ------- -------- -----------
Segment
Total 40,633 27,044 13,589 5,280 8,309 $ 1 $ 8,310
--------------------- ------- ---------- ------ ----------- ------- -------- -----------
Corporate
and Other 270 270 - 17 (17)
Acquisition-related
items - 290 (290) 1,282 (1,572)
Certain
significant
items (13) 299 (312) - (312)
--------------------- ------- ---------- ------ ----------- -------
AT&T Inc. $ 40,890 $ 27,903 $12,987 $ 6,579 $ 6,408
===================== ======= ========== ====== =========== =======
For the nine months ended September 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 $ 52,955 $ 32,584 $20,371 $ 7,568 $ 12,803 $ - $ 12,803
Entertainment
Group 38,089 28,875 9,214 4,481 4,733 1 4,734
Consumer
Mobility 24,781 14,343 10,438 2,798 7,640 - 7,640
International 5,374 4,951 423 868 (445) 24 (421 )
--------------------- ------- ---------- ------ ----------- ------- -------- -----------
Segment
Total 121,199 80,753 40,446 15,715 24,731 $ 25 $ 24,756
--------------------- ------- ---------- ------ ----------- ------- -------- -----------
Corporate
and Other 759 940 (181) 54 (235)
Acquisition-related
items - 818 (818) 3,949 (4,767)
Certain
significant
items (13) (383) 370 - 370
--------------------- ------- ---------- ------ ----------- -------
AT&T Inc. $121,945 $ 82,128 $39,817 $ 19,718 $ 20,099
===================== ======= ========== ====== =========== =======
11
AT&T INC.
SEPTEMBER 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
For the three months ended September 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 $ 17,692 $ 10,921 $ 6,771 $ 2,474 $ 4,297 $ - $ 4,297
Entertainment
Group 10,858 8,450 2,408 1,389 1,019 2 1,021
Consumer
Mobility 8,784 5,065 3,719 976 2,743 - 2,743
International 1,526 1,384 142 225 (83) (4) (87 )
--------------------- ------- ---------- ------ ----------- ------- -------- -----------
Segment
Total 38,860 25,820 13,040 5,064 7,976 $ (2) $ 7,974
--------------------- ------- ---------- ------ ----------- ------- -------- -----------
Corporate
and Other 316 315 1 3 (2)
Acquisition-related
items (85) 611 (696) 1,198 (1,894)
Certain
significant
items - 157 (157) - (157)
--------------------- ------- ---------- ------ ----------- -------
AT&T Inc. $ 39,091 $ 26,903 $12,188 $ 6,265 $ 5,923
===================== ======= ========== ====== =========== =======
For the nine months ended September 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 $ 52,913 $ 32,966 $19,947 $ 7,276 $ 12,671 $ - $ 12,671
Entertainment
Group 22,300 18,222 4,078 3,519 559 (16) 543
Consumer
Mobility 26,317 15,808 10,509 2,912 7,597 - 7,597
International 2,253 2,131 122 346 (224) (4) (228 )
--------------------- ------- ---------- ------ ----------- ------- -------- -----------
Segment
Total 103,783 69,127 34,656 14,053 20,603 $ (20) $ 20,583
--------------------- ------- ---------- ------ ----------- ------- -------- -----------
Corporate
and Other 984 785 199 47 152
Acquisition-related
items (85) 1,604 (1,689) 1,439 (3,128)
Certain
significant
items - 374 (374) - (374)
--------------------- ------- ---------- ------ ----------- -------
AT&T Inc. $104,682 $ 71,890 $32,792 $ 15,539 $ 17,253
===================== ======= ========== ====== =========== =======
12
AT&T INC.
SEPTEMBER 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.
Third Quarter Nine-Month Period
----------------- ---------------------
2016 2015 2016 2015
----------------------------------- ------- ------- ----------- -------
Business Solutions $ 4,303 $ 4,297 $ 12,803 $12,671
Entertainment Group 1,488 1,021 4,734 543
Consumer Mobility 2,572 2,743 7,640 7,597
International (53) (87) (421) (228)
------------------------------------ ------ ------ ------- ------
Segment Contribution 8,310 7,974 24,756 20,583
------------------------------------ ------ ------ ------- ------
Reconciling Items:
Corporate and Other (17) (2) (235) 152
Merger and integration items (290) (696) (818) (1,689)
Amortization of intangibles
acquired (1,282) (1,198) (3,949) (1,439)
Employee separation charges (260) (122) (314) (339)
Gain (loss) on wireless
spectrum transactions (22) - 714 -
Other (30) (35) (30) (35)
Segment equity in net (income)
loss
of affiliates (1) 2 (25) 20
------------------------------------ ------ ------ ------- ------
AT&T Operating Income 6,408 5,923 20,099 17,253
------------------------------------ ------ ------ ------- ------
Interest expense 1,224 1,146 3,689 2,977
Equity in net income of affiliates 16 15 57 48
Other income (expense) -
net (7) (57) 154 61
------------------------------------ ------ ------ ------- ------
Income Before Income Taxes $ 5,193 $ 4,735 $ 16,621 $14,385
==================================== ====== ====== ======= ======
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 $8,630 at September 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 $420 to the trust
during the nine months ended September 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 dates of our federal income tax
return for 2015 and 2016. Both such contributions, totaling $350,
were made in September 2016.
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.
SEPTEMBER 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Three months Nine months
ended ended
September 30, September 30,
2016 2015 2016 2015
-------------------------------------- --------- ----- ------- -------
Pension cost:
Service cost - benefits earned
during the period $ 278 $ 305 $ 834 $ 904
Interest cost on projected
benefit obligation 495 477 1,485 1,424
Expected return on assets (778) (832) (2,336) (2,484)
Amortization of prior service
credit (26) (25) (77) (77)
--------------------------------------- ----- ---- ------ ------
Net pension (credit) cost $ (31) $ (75) $ (94) $ (233)
======================================= ===== ==== ====== ======
Postretirement cost:
Service cost - benefits earned
during the period $ 48 $ 55 $ 144 $ 166
Interest cost on accumulated
postretirement benefit obligation 243 242 729 725
Expected return on assets (88) (105) (266) (315)
Amortization of prior service
credit (320) (320) (958) (959)
--------------------------------------- ----- ---- ------ ------
Net postretirement (credit)
cost $ (117) $(128) $ (351) $ (383)
======================================= ===== ==== ====== ======
Combined net pension and
postretirement (credit) cost $ (148) $(203) $ (445) $ (616)
======================================= ===== ==== ====== ======
The decrease in the combined net pension and postretirement
credit of $55 in the third quarter and $171 for the first nine
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 third quarter ended 2016 and 2015, net supplemental pension
benefits costs not included in the table above were $23 and $22.
For the first nine months of 2016 and 2015, net supplemental
pension benefit costs were $70 and $63.
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.
SEPTEMBER 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:
September 30,
2016 December 31, 2015
------------------ ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------ -------- -------- ----------- --------
Notes and debentures(1) $123,962 $137,894 $ 124,847 $128,993
Bank borrowings 4 4 4 4
Investment securities 2,622 2,622 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 September 30, 2016 and December
31, 2015:
September 30, 2016
-----------------------------------------
Level Level Level
1 2 3 Total
----------------------------------- ---------- ---------- ------- -------
Available-for-Sale Securities
Domestic equities $ 1,171 $ - $ - $ 1,171
International equities 571 - - 571
Fixed income bonds - 611 - 611
Asset Derivatives(1)
Interest rate swaps - 145 - 145
Cross-currency swaps - 151 - 151
Liability Derivatives(1)
Cross-currency swaps - (3,260) - (3,260 )
==================================== ====== ====== === ======
(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.
SEPTEMBER 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 $87 have maturities of less
than one year, $277 within one to three years, $65 within three to
five years and $182 for five or more years.
Our cash equivalents (money market securities), short-term
investments (certificate and time deposits) and nonrefundable
customer deposits are recorded at amortized cost, and the
respective carrying amounts approximate fair values. Short-term
investments and nonrefundable customer deposits are recorded in
"Other current assets" and our investment securities are recorded
in "Other Assets" on the consolidated balance sheets.
Derivative Financial Instruments
We enter into derivative transactions to manage certain market
risks, primarily interest rate risk and foreign currency exchange
risk. This includes the use of interest rate swaps, interest rate
locks, foreign exchange forward contracts and combined interest
rate foreign exchange contracts (cross-currency swaps). We do not
use derivatives for trading or speculative purposes. We record
derivatives on our consolidated balance sheets at fair value that
is derived from observable market data, including yield curves and
foreign exchange rates (all of our derivatives are Level 2). Cash
flows associated with derivative instruments are presented in the
same category on the consolidated statements of cash flows as the
item being hedged.
Fair Value Hedging We designate our fixed-to-floating interest
rate swaps as fair value hedges. The purpose of these swaps is to
manage interest rate risk by managing our mix of fixed-rate and
floating-rate debt. These swaps involve the receipt of fixed-rate
amounts for floating interest rate payments over the life of the
swaps without exchange of the underlying principal amount. Accrued
and realized gains or losses from interest rate swaps impact
interest expense in the consolidated statements of income.
Unrealized gains on interest rate swaps are recorded at fair market
value as assets, and unrealized losses on interest rate swaps are
recorded at fair market value as liabilities. Changes in the fair
values of the interest rate swaps are exactly offset by changes in
the fair value of the underlying debt. Gains or losses realized
upon early termination of our fair value hedges are recognized in
interest expense. In the nine months ended September 30, 2016 and
September 30, 2015, no ineffectiveness was measured on interest
rate swaps designated as fair value hedges.
16
AT&T INC.
SEPTEMBER 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 nine months ended September 30, 2016 and
September 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 nine months ended September 30, 2016
and September 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 September 30, 2016, we had posted collateral
of $2,369 (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 September, we would have been required to
post additional collateral of $162. If DIRECTV Holdings LLC's
credit rating had been downgraded below BBB- (S&P), we would
owe an additional $278. 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:
September 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.
SEPTEMBER 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
--------------------------------------------------- ---------- --------- -----
Nine months
Three months ended ended
--------------------------------------
September 30, September 30,
Fair Value Hedging Relationships 2016 2015 2016 2015
-------------------------------------- ----------- ---------- --------- -----
Interest rate swaps (Interest
expense):
Gain (Loss) on interest rate
swaps $ (54) $ 54 $ 17 $ 65
Gain (Loss) on long-term
debt 54 (54) (17) (65)
======================================= ====== ====== ===== ====
In addition, the net swap settlements that accrued and settled
in the quarter ended September 30 were offset against interest
expense.
Three months Nine months
ended ended
September 30, September 30,
Cash Flow Hedging Relationships 2016 2015 2016 2015
---------------------------------- -------- ------ ------- -------
Cross-currency swaps:
Gain (Loss) recognized in
accumulated OCI $ 686 $ (678) $ 282 $(1,008)
Interest rate locks:
Gain (Loss) recognized in
accumulated OCI - - - (361)
Interest income (expense)
reclassified from
accumulated OCI into income (15) (17) (44) (43)
=================================== ==== ===== === ======
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.
SEPTEMBER 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.
SEPTEMBER 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 September 30, 2016 and December 31, 2015,
gross equipment installment receivables of $5,015 and $5,719 were
included on our consolidated balance sheets, of which $3,053 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 $3,496.
The following table sets forth a summary of equipment
installment receivables sold during the three months and nine
months ended September 30, 2016 and 2015:
Three months Nine months
ended ended
September 30, September 30,
2016 2015 2016 2015
--------------------------------- ---------- ------ --------- ------
Gross receivables sold $ 1,485 $1,601 $ 5,812 $5,964
Net receivables sold(1) 1,336 1,431 5,263 5,367
Cash proceeds received 891 980 3,538 3,553
Deferred purchase price recorded 463 456 1,745 1,819
================================== ===== ===== ===== =====
(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).
The following table shows the equipment installment receivables,
previously sold to the Purchasers, that we repurchased in exchange
for the associated deferred purchase price during the three months
and nine months ended September 30, 2016 and 2015:
Three months Nine months
ended ended
September 30, September 30,
2016 2015 2016 2015
----------------------------------------- ---------- -------- ----------- ----
Fair value of repurchased receivables $ 749 $ 412 $ 1,281 $412
Carrying value of deferred
purchase price 722 314 1,261 314
------------------------------------------ ----- ---- ------- ---
Gain on repurchases(1) $ 27 $ 98 $ 20 $ 98
========================================== ===== ==== ======= ===
(1) These gains are included in "Selling, general and
administrative" in the consolidated statements of income.
At September 30, 2016 and December 31, 2015, our deferred
purchase price receivable was $3,022 and $2,961, respectively, of
which $1,561 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.
20
AT&T INC.
SEPTEMBER 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
The sales of equipment installment receivables did not have a
material impact on our consolidated statements of income or to
"Total Assets" reported on our consolidated balance sheets. We
reflect 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.
NOTE 9. SUBSEQUENT EVENT
Pending Acquisition
On October 22, 2016, we announced a merger agreement (Merger
Agreement) to acquire Time Warner Inc. (Time Warner) in a 50% cash
and 50% stock transaction for $107.50 per share of Time Warner
common stock, or approximately $85,400 at the date of the
announcement (Merger). Combined with Time Warner's net debt at
September 30, 2016, the total transaction value is approximately
$108,700. Each share of Time Warner common stock will be exchanged
for $53.75 per share in cash and a number of shares (exchange
ratio) of AT&T common stock based on the average stock price at
the time of closing the Merger. If the average stock price is
between (or equal to) $37.411 and $41.349 per share, the exchange
ratio will be the quotient of $53.75 divided by the average stock
price. If the average stock price is greater than $41.349, the
exchange ratio will be 1.300. If the average stock price is less
than $37.411, the exchange ratio will be 1.437. Post-transaction,
Time Warner shareholders will own between 14.4% and 15.7% of
AT&T shares on a fully-diluted basis based on the number of
AT&T shares outstanding. The cash portion of the purchase price
will be financed with new debt and cash. As further discussed
below, we have an 18-month commitment for an unsecured bridge term
facility (Bridge Loan) for $40,000.
Time Warner is a leading media and entertainment company whose
major businesses encompass an array of the most respected and
successful media brands. The deal combines Time Warner's vast
library of content and ability to create new premium content that
connects with audiences around the world, with our extensive
customer relationships, world's largest pay TV subscriber base and
leading scale in TV, mobile and broadband distribution.
The Merger Agreement must be adopted by Time Warner shareholders
and is subject to review by the U.S. Department of Justice and if
certain FCC licenses remain with Time Warner at closing, those are
subject to FCC review and approval. It is also a condition to
closing that necessary consents from certain public utility
commissions and foreign governmental entities must be obtained. The
transaction is expected to close before year end 2017. If the
Merger is terminated as a result of reaching the termination date
(and at that time one or more of the conditions relating to certain
regulatory approvals have not been satisfied) or there is a final,
non-appealable order preventing the transaction relating to
antitrust laws, communications laws, utilities laws or foreign
regulatory laws, then under certain circumstances we would be
obligated to pay Time Warner $500.
Bridge Loan
On October 22, 2016, in connection with entering into the Merger
Agreement, AT&T entered into the Bridge Loan with JPMorgan
Chase Bank, N.A., as agent, and JPMorgan Chase Bank, N.A. and Bank
of America, N.A., as lenders.
In the event advances are made under the Bridge Loan, those
advances would be used solely to finance a portion of the cash
consideration to be paid in the Merger, the refinancing of debt of
Time Warner and its subsidiaries and the payment of related fees
and expenses. We have not drawn on this facility.
The obligations of the lenders under the Bridge Loan to provide
advances will terminate on the earliest of (i) the Termination Date
(as defined in the Merger Agreement), (ii) the consummation of the
transactions contemplated by the Merger Agreement without the
borrowing of advances under the Bridge Loan and (iii) the
termination of the Merger Agreement.
21
AT&T INC.
SEPTEMBER 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Advances would bear interest, at the Company's option,
either:
-- at a variable annual rate equal to: (1) the highest
of (a) the prime rate of JPMorgan Chase Bank, N.A.,
(b) 0.5% per annum above the federal funds rate,
and (c) the London Interbank Offered Rate (LIBOR)
rate applicable to dollars for a period of one month
plus 1.00%, plus (2) an applicable margin, as set
forth in the Bridge Loan (the "Applicable Margin
for Base Advances"); or
-- at a rate equal to: (i) LIBOR (adjusted upwards
to reflect any bank reserve costs) for a period
of one, two, three or six months, as applicable,
plus (ii) an applicable margin, as set forth in
the Bridge Loan (the "Applicable Margin for Eurodollar
Rate Advances").
The Applicable Margin for Eurodollar Rate Advances will be equal
to 0.750%, 1.000%, 1.125%, 1.250% or 1.500% per annum depending on
the Company's unsecured long-term debt ratings. The Applicable
Margin for Base Advances will be equal to the greater of (x) 0.00%
and (y) the relevant Applicable Margin for Eurodollar Rate Advances
minus 1.00% per annum, depending on the Company's unsecured
long-term debt ratings.
The Applicable Margin for Eurodollar Rate Advances and the
Applicable Margin for Base Advances are scheduled to increase by an
additional 0.25% on the 90th day after the closing of the Merger
and another 0.25% every 90 days thereafter.
The Company will also pay a commitment fee (Commitment Fee) of
0.070%, 0.090%, 0.100%, 0.125% or 0.175% of the commitment amount
per annum, depending on the Company's unsecured long-term debt
ratings.
The Company is scheduled to pay a duration fee of 0.50%, 0.75%
and 1.00% on the amount of advances outstanding as of the 90th,
180th and 270th day after advances are made.
The Bridge Loan contains provisions requiring the reduction of
the commitments of the lenders and the prepayment of outstanding
advances by the amount of net cash proceeds resulting from the
incurrence of certain indebtedness by the Company or its
subsidiaries, the issuance of certain capital stock by the Company
or its subsidiaries and non-ordinary course sales or dispositions
of assets by the Company or its subsidiaries, in each case subject
to exceptions set forth in the Bridge Loan.
Advances under the Bridge Loan are conditioned on the absence of
a material adverse effect on Time Warner and certain customary
events, and repayment of all advances must be made no later than
364 days after the date on which the advances are made.
The Bridge Loan 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 Bridge Loan) financial ratio covenant that the Company 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 Bridge Loan are customary
for an agreement of this type and such events would result in the
acceleration of, or would permit the lenders to accelerate, as
applicable, required payments and would increase the Applicable
Margin by 2.00% per annum.
Prior to the closing date of the Merger, only a payment or
bankruptcy event of default would permit the lenders to terminate
their commitments under the Bridge Loan.
22
AT&T INC.
SEPTEMBER 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), our third-quarter 2015 results
include 68 days of DIRECTV-related operations compared with a full
quarter in 2016.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 third quarter
and for the first nine months of 2016 and 2015 are summarized as
follows:
Third Quarter Nine-Month Period
------------------------- --------------------------- ----
Percent Percent
2016 2015 Change 2016 2015 Change
------------------- ------- ------- ------- -------- -------- -------
Operating Revenues
Service $37,272 $35,539 4.9% $111,515 $ 94,042 18.6%
Equipment 3,618 3,552 1.9 10,430 10,640 (2.0)
-------------------- ------ ------ ------- -------
Total Operating
Revenues 40,890 39,091 4.6 121,945 104,682 16.5
-------------------- ------ ------ ------- -------
Operating expenses
Cost of services
and sales
Equipment 4,455 4,501 (1.0) 13,090 13,400 (2.3)
Broadcast,
programming
and
operations 4,909 4,081 20.3 14,239 6,351 -
Other cost of
services 9,526 9,214 3.4 28,436 27,604 3.0
Selling, general
and
administrative 9,013 9,107 (1.0) 26,363 24,535 7.5
Depreciation
and amortization 6,579 6,265 5.0 19,718 15,539 26.9
-------------------- ------ ------ ------- -------
Total Operating
Expenses 34,482 33,168 4.0 101,846 87,429 16.5
-------------------- ------ ------ ------- -------
Operating Income 6,408 5,923 8.2 20,099 17,253 16.5
Income Before
Income Taxes 5,193 4,735 9.7 16,621 14,385 15.5
Net Income 3,418 3,078 11.0 10,818 9,601 12.7
Net Income
Attributable
to AT&T $ 3,328 $ 2,994 11.2% $ 10,539 $ 9,339 12.8%
==================== ====== ====== ======= ======= ======= =======
Overview
Operating revenues increased $1,799, or 4.6%, in the third
quarter and $17,263, or 16.5%, for the first nine months of
2016.
Service revenues increased $1,733, or 4.9%, in the third quarter
and $17,473, or 18.6%, for the first nine months of 2016. The
increases were primarily due to our 2015 acquisition of DIRECTV and
increases in IP broadband and fixed strategic business service
revenues. These were partially offset by continued declines in our
legacy wireline voice and data products and lower wireless revenues
resulting from more customers choosing to purchase devices through
installment payment agreements, which entitle them to lower monthly
service rates under our wireless Mobile Share plans.
23
AT&T INC.
SEPTEMBER 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 increased $66, or 1.9%, in the third quarter
and decreased $210, or 2.0%, for the first nine months of 2016. The
increase in the third quarter was primarily due to nonrecurring
customer premises equipment contracts within our Business Solutions
segment. The decline for the first nine months reflects additional
promotional offers and fewer wireless handset sales during 2016,
partially offset by the sale of higher priced devices and an
increase in customers purchasing devices on installment.
Operating expenses increased $1,314, or 4.0%, in the third
quarter and $14,417, or 16.5%, for the first nine months of
2016.
Equipment expenses decreased $46, or 1.0%, in the third quarter
and $310, or 2.3%, for the first nine months of 2016. The decreases
were primarily driven by lower domestic wireless sales volumes. The
decrease for the first nine months was also impacted by promotional
offers and vendor incentives, partially offset by increased sales
volumes to our international wireless customers.
Broadcast, programming and operations expenses increased $828,
or 20.3%, in the third quarter and $7,888 for the first nine months
of 2016 due to our acquisition of DIRECTV and higher content costs.
These increases were
slightly offset by fewer AT&T U-verse (R) (U-verse) subscribers.
Other cost of services expenses increased $312, or 3.4%, in the
third quarter and increased $832, or 3.0%, for the first nine
months of 2016. The increase in the third quarter was primarily due
to our acquisition of DIRECTV, lower federal Connect America and
High Cost Funds' receipts in 2016 and 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, lower net expenses
associated with our deferral and amortization of customer
fulfillment costs and a decline in network and access charges.
The increase for the first nine months was primarily due to our
acquisitions of DIRECTV and Mexican wireless properties. Also
contributing to higher expenses were costs associated with
Universal Service Fund (USF) fees and financing-related benefit
costs. These increases were partially offset by prior year network
rationalization charges, lower net expenses associated with
fulfillment cost deferrals and a decline in network and access
charges.
Selling, general and administrative expenses decreased $94, or
1.0%, in the third quarter and increased $1,828, or 7.5%, for the
first nine months of 2016. The decrease in the third quarter was
primarily due to lower customer support costs and bad debt reserves
related to our wireless operations, partially offset by higher
employee separation charges.
The increase for the first nine months was primarily due to our
acquisitions in 2015 and increased advertising activity throughout
2016, partially offset by lower wireless commission expenses. The
increase for the first nine months was also offset by noncash net
gains of $714 on wireless spectrum transactions.
Depreciation and amortization expense increased $314, or 5.0%,
in the third quarter and $4,179, or 26.9%, for the first nine
months of 2016. Amortization expense increased $85, or 7.1%, in the
third quarter and $2,510 for the first nine months of 2016 due to
the amortization of intangibles from recent acquisitions.
Depreciation expense increased $229, or 4.5%, in the third
quarter and $1,669, or 11.8%, for the first nine months of 2016.
The increase was primarily due to previously mentioned acquisitions
and ongoing capital spending for network upgrades and accelerating
depreciation related to the expected year-end 2016 shutdown of our
U.S. 2G network.
Operating income increased $485, or 8.2%, in the third quarter
and $2,846, or 16.5%, for the first nine months of 2016. Our
operating income margin in the third quarter increased from 15.2%
in 2015 to 15.7% in 2016, and the first nine months was flat at
16.5% in 2015 and 2016.
Interest expense increased $78, or 6.8%, in the third quarter
and $712, or 23.9%, for the first nine 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 nine months was
slightly offset by higher capitalized interest resulting from the
spectrum acquired in the Advanced Wireless Service (AWS)-3 Auction
(see Note 7).
24
AT&T INC.
SEPTEMBER 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 increased $1, or 6.7%, in the
third quarter and $9, or 18.8%, for the first nine 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 expense of $7 in the
third quarter and other income of $154 for the first nine months of
2016, compared to other expense of $57 in the third quarter and
other income of $61 for the first nine months of 2015. Results in
the third quarter and for the first nine months of 2016 included
net gains on the sale of non-strategic assets and investments of $3
and $88 and interest and dividend income of $24 and $91.
Other income (expense) in the third quarter and for the first
nine months of 2015 included net (losses) gains on the sale of
non-strategic assets and investments of $(4) and $46, interest and
dividend income of $29 and $74 and foreign exchange losses of $73
and $68.
Income taxes increased $118, or 7.1%, in the third quarter and
$1,019, or 21.3%, for the first nine months of 2016. Our effective
tax rate was 34.2% for the third quarter and 34.9% for the first
nine months of 2016, as compared to 35.0% for the third quarter and
33.3% for the first nine months of 2015. The increases in income
tax expense for the third quarter and the first nine 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 a lower effective tax rate for the first nine
months of 2015.
25
AT&T INC.
SEPTEMBER 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
Selected Financial and Operating Data
--------------------------------------------- -------- -------
September 30,
Subscribers and connections in (000s) 2016 2015
--------------------------------------------- -------- -------
Domestic wireless subscribers 133,338 126,406
Mexican wireless subscribers 10,698 8,091
----------------------------------------------- ------- -------
North American wireless subscribers 144,036 134,497
=============================================== ======= =======
North American branded subscribers 100,821 95,305
North American branded net additions 3,881 1,405
Domestic satellite video subscribers 20,777 19,570
U-verse video subscribers 4,544 5,880
Latin America satellite video subscribers(1) 12,476 12,544
----------------------------------------------- ------- -------
Total video subscribers 37,797 37,994
=============================================== ======= =======
Total domestic broadband connections 15,618 15,832
Network access lines in service 14,603 17,352
U-verse VoIP connections 5,707 5,443
Debt ratio(2) 50.1% 50.8%
Net Debt ratio(3) 47.8% 48.3%
Ratio of earnings to fixed charges(4) 3.91 3.85
Number of AT&T employees 273,140 281,240
=============================================== ======= =======
(1) Excludes subscribers of our International segment equity
investments in SKY Mexico, in which we own a 41% stake. At June 30,
2016, SKY Mexico had 7.8 million subscribers.
(2) Debt ratios are calculated by dividing total debt (debt
maturing within one year plus long-term debt) by total capital
(total debt plus total stockholders' equity) and do not consider
cash available to pay down debt. See our "Liquidity and Capital
Resources" section for discussion.
(3) Net debt ratios are calculated by deriving total debt (debt
maturing within one year plus long-term debt) less cash available
by total capital (total debt plus total stockholders' equity).
(4) See Exhibit 12.
Segment Results
Our segments are strategic business units that offer different
products and services over various technology platforms and/or in
different geographies that are managed accordingly. Our 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.
26
AT&T INC.
SEPTEMBER 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 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."
27
AT&T INC.
SEPTEMBER 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
--------------------- ------- ------- ------- ------- ------- -------
Third Quarter Nine-Month Period
------------------------- ------------------------- ----
Percent Percent
2016 2015 Change 2016 2015 Change
--------------------- ------- ------- ------- ------- ------- -------
Segment operating
revenues
Wireless service $ 8,049 $ 7,732 4.1% $23,867 $23,003 3.8%
Fixed strategic
services 2,888 2,646 9.1 8,447 7,745 9.1
Legacy voice
and data
services 4,046 4,616 (12.3) 12,567 14,081 (10.8)
Other service
and equipment 908 885 2.6 2,652 2,585 2.6
Wireless
equipment 1,876 1,813 3.5 5,422 5,499 (1.4)
---------------------- ------ ------ ------ ------
Total Segment
Operating Revenues 17,767 17,692 0.4 52,955 52,913 0.1
---------------------- ------ ------ ------ ------
Segment operating
expenses
Operations
and support 10,925 10,921 - 32,584 32,966 (1.2)
Depreciation
and amortization 2,539 2,474 2.6 7,568 7,276 4.0
---------------------- ------ ------ ------ ------
Total Segment
Operating Expenses 13,464 13,395 0.5 40,152 40,242 (0.2)
---------------------- ------ ------ ------ ------
Segment Operating
Income 4,303 4,297 0.1 12,803 12,671 1.0
Equity in Net
Income of Affiliates - - - - - -
--------------------- ------ ------ ------ ------
Segment Contribution $ 4,303 $ 4,297 0.1% $12,803 $12,671 1.0%
====================== ====== ====== ======= ====== ====== =======
The following table highlights other key measures of performance
for the Business Solutions segment:
September
30, Percent
(in 000s) 2016 2015 Change
--------------------------------------- ------- ------ -------
Business Wireless Subscribers
Postpaid/Branded 50,014 47,414 5.5%
Reseller 58 83 (30.1)
Connected devices(1) 29,355 24,064 22.0
----------------------------------------- ------ ------
Total Business Wireless Subscribers 79,427 71,561 11.0
========================================= ====== ======
Business IP Broadband Connections 963 891 8.1%
========================================= ====== ====== =======
(1) Includes data-centric devices such as session-based
tablets, monitoring devices and automobile systems.
Excludes postpaid tablets.
28
AT&T INC.
SEPTEMBER 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
Third Quarter Nine-Month Period
----------------------
Percent Percent
(in 000s) 2016 2015 Change 2016 2015 Change
Business Wireless
Net Additions (1,4)
Postpaid/Branded 191 265 (27.9)% 509 850 (40.1)%
Reseller 1 8 (87.5) (34) 14 -
Connected
devices(2) 1,290 1,602 (19.5) 4,067 4,104 (0.9)
Business Wireless Net
Subscriber Additions 1,482 1,875 (21.0) 4,542 4,968 (8.6)
Business Wireless
Postpaid Churn (1,
3, 4) 0.97% 1.05% (8) BP 0.97% 0.95% 2 BP
Business IP Broadband
Net Additions 15 20 (25.0)% 52 70 (25.7)%
(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 increased $75, or 0.4%, in the third quarter
and $42, or 0.1%, for the first nine months of 2016. Revenue growth
was driven by wireless service revenues and increased fixed
strategic services. These increases were partially offset by
continued declines in our legacy voice and data services
revenues.
Wireless service revenues increased $317, or 4.1%, in the third
quarter and $864, or 3.8%, for the first nine months of 2016. The
revenue increase is primarily due to customer migrations from our
Consumer Mobility segment and reflects smartphone and tablet
gains.
At September 30, 2016, we served 79.4 million subscribers, an
increase of 11.0% from the prior year. Postpaid subscribers
increased 5.5% from the prior year reflecting the addition of new
customers as well as migrations from our Consumer Mobility segment,
partially offset by continuing competitive pressures in the
industry. Connected devices, which have lower average revenue per
average subscriber (ARPU) and churn, increased 22.0% from the prior
year reflecting growth in connected cars and business customers
using tracking, monitoring and other sensor-embedded devices on
their equipment.
The effective management of subscriber churn is critical to our
ability to maximize revenue growth and to maintain and improve
margins. Total churn could be negatively impacted in the future by
the loss of 2G postpaid subscribers and connected devices on our 2G
network. In the third quarter, business wireless postpaid churn
decreased to 0.97% in 2016 from 1.05% in 2015, including 2 basis
points of pressure related to the 2G network shutdown, and for the
first nine months increased to 0.97% in 2016 from 0.95% in 2015,
including 3 basis points of pressure related to the 2G network
shutdown.
Fixed strategic services revenues increased $242, or 9.1%, in
the third quarter and $702, or 9.1%, for the first nine months of
2016. Our revenues, which were negatively impacted by foreign
exchange rates, increased in the third quarter and for the first
nine months of 2016 due to: AT&T Dedicated Internet (formally
known as Ethernet access to Managed Internet Services) of $58 and
$173, Ethernet of $45 and $144, U-verse services of $42 and $132,
and VPN of $32 and $88.
Legacy wired voice and data service revenues decreased $570, or
12.3%, in the third quarter and $1,514, or 10.8%, for the first
nine months of 2016. Traditional data revenues in the third quarter
and for the first nine months of 2016 decreased $336 and $895 and
long-distance and local voice revenues decreased $224 and $600. The
decreases were primarily due to lower demand, as customers continue
to shift to our more advanced IP-based offerings or to competitors,
and the sale of certain hosting operations.
29
AT&T INC.
SEPTEMBER 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 $23, or 2.6%, in
the third quarter and $67, or 2.6%, for the first nine 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 increased $63, or 3.5%, in the third
quarter and decreased $77, or 1.4%, for the first nine months of
2016. The increase in the third quarter was primarily due to an
increase in purchases of devices on installment payment agreements
rather than the device subsidy model partially offset by a decrease
in handsets sold to postpaid customers. Additionally, fewer
customers upgraded their handsets during the period. The decrease
for the first nine months resulted from a decrease in handsets sold
to postpaid customers and increased promotional offers. The
nine-month decrease was partially offset by an increase in
purchases of devices on installment payment agreements rather than
the device subsidy model.
Operations and support expenses increased $4 in the third
quarter and decreased $382, or 1.2%, for the first nine 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 third quarter increase was primarily due to lower Connect
America and High Cost Funds' receipts in 2016, wireless handset
insurance claims due to an increase in the volume and cost of
replacement phones, and wireless equipment expense. Offsetting
these increases were lower employee-related costs, amortization of
customer fulfillment costs (see Note 1), declines in access and
advertising costs, as well as the sale of certain hosting
operations.
The decrease for the first nine months was primarily due to
declines of $115 in wireless equipment and $223 in wireless
commissions costs, primarily reflecting a decrease in sales
volumes. Also contributing to the decrease were lower
employee-related costs and amortization of customer fulfillment
costs, as well as 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, USF fees, advertising expenses, and bad debt expense
driven by a higher AT&T Next (SM) (AT&T Next) subscriber base.
Depreciation expense increased $65, or 2.6%, in the third
quarter and $292, or 4.0%, for the first nine months of 2016. The
increases were primarily due to ongoing capital spending for
network upgrades and expansion and accelerating depreciation
related to the expected year-end 2016 shutdown of our U.S. 2G
network, partially offset by fully depreciated assets.
Operating income increased $6, or 0.1%, in the third quarter and
$132, or 1.0%, for the first nine months of 2016. Our Business
Solutions segment operating income margin in the third quarter
decreased from 24.3% in 2015 to 24.2% in 2016, and for the first
nine months increased from 23.9% in 2015 to 24.2%. Our Business
Solutions EBITDA margin in the third quarter increased from 38.3%
in 2015 to 38.5% in 2016, and for the first nine months increased
from 37.7% in 2015 to 38.5% in 2016.
30
AT&T INC.
SEPTEMBER 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
Third Quarter Nine-Month Period
Percent Percent
2016 2015 Change 2016 2015 Change
------- -------
Segment operating revenues
Video
entertainment $ 9,026 $ 7,162 26.0% $26,893 $11,024 - %
High-speed
internet 1,892 1,685 12.3 5,562 4,861 14.4
Legacy voice
and data
services 1,168 1,419 (17.7) 3,725 4,547 (18.1 )
Other service
and equipment 634 592 7.1 1,909 1,868 2.2
Total Segment
Operating Revenues 12,720 10,858 17.1 38,089 22,300 70.8
------ ------
Segment operating
expenses
Operations and
support 9,728 8,450 15.1 28,875 18,222 58.5
Depreciation
and
amortization 1,504 1,389 8.3 4,481 3,519 27.3
------ ------
Total Segment
Operating Expenses 11,232 9,839 14.2 33,356 21,741 53.4
Segment Operating
Income 1,488 1,019 46.0 4,733 559 -
Equity in Net Income
(Loss)
of Affiliates - 2 - 1 (16) -
Segment Contribution $ 1,488 $ 1,021 45.7% $ 4,734 $ 543 - %
The following tables highlight other key measures of performance
for the Entertainment Group segment:
September 30, Percent
(in 000s) 2016 2015 Change
------
Video Connections
Satellite 20,777 19,570 6.2 %
U-verse 4,515 5,854 (22.9)
Total Video Connections 25,292 25,424 (0.5)
Broadband Connections
IP 12,752 12,185 4.7
DSL 1,424 2,137 (33.4)
Total Broadband Connections 14,176 14,322 (1.0)
======= ======
Retail Consumer Switched Access Lines 6,155 7,675 (19.8)
U-verse Consumer VoIP Connections 5,378 5,216 3.1
Total Retail Consumer Voice Connections 11,533 12,891 (10.5)%
======= ======
31
AT&T INC.
SEPTEMBER 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
Third Quarter Nine-Month Period
Percent Percent
(in 000s) 2016 2015 Change 2016 2015 Change
Video Net Additions
Satellite(1) 323 26 -% 993 26 -%
U-verse (326) (92) - (1,099) (66) -
Net Video Additions (3) (66) 95.5 (106) (40) -
Broadband Net Additions
IP 156 172 (9.3) 396 802 (50.6)
DSL (161) (278) 42.1 (506) (922) 45.1
Net Broadband Additions (5) (106) 95.3% (110) (120) 8.3%
(1) Excludes acquisition-related additions during the period.
Operating revenues increased $1,862, or 17.1%, in the third
quarter and $15,789, or 70.8%, for the first nine 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 offset lower revenues from legacy
voice and data products.
As consumers continue to demand more mobile access to video, we
have launched streaming access to our subscribers, including mobile
access for existing satellite and U-verse subscribers. We also have
created an option for customers to access most video programming on
a mobile device while awaiting home installation of their video
service ("walk out and watch"). At September 30, 2016, we had
approximately 100,000 "walk out and watch" individuals and
approximately 70% of such individuals complete the installation
process and become subscribers. In the fourth quarter, we will
launch our newest video streaming option that does not require
either satellite or U-verse service (commonly called "Over the Top"
service).
Video entertainment revenues increased $1,864, or 26.0%, in the
third quarter and $15,869 for the first nine 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 third quarter and the first nine months of 2016,
primarily due to a 22.9% decrease in U-verse video connections,
when compared to 2015. At September 30, 2016, more than 80% of our
video subscribers were on the DIRECTV platform.
High-speed internet revenues increased $207, or 12.3%, in the
third quarter and $701, or 14.4%, for the first nine months of
2016. When compared to 2015, IP broadband subscribers increased
4.7%, to 12.8 million subscribers at September 30, 2016; however,
third 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 $251, or 17.7%,
in the third quarter and $822, or 18.1%, for the first nine months
of 2016. For the period ended September 30, 2016, legacy voice and
data services represented approximately 10% of our total
Entertainment Group revenue compared to 13% at September 30, 2015,
and reflect decreases of $149 and $489 in local voice and
long-distance, and $102 and $333 in traditional data revenues. The
decreases reflect the continued migration of customers to our more
advanced IP-based offerings or to competitors. At September 30,
2016, approximately 10% of our broadband connections were DSL
compared to nearly 15% at September 30, 2015.
Operations and support expenses increased $1,278, or 15.1%, in
the third quarter and $10,653, or 58.5%, for the first nine 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 third quarter and year-to-date
Entertainment Group expenses by $1,457 and $11,380. The DIRECTV
related third 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.
32
AT&T INC.
SEPTEMBER 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 the fourth quarter, margins will be pressured by a full
quarter of NFL Sunday Ticket costs, annual content cost increases
and start-up costs for DIRECTV NOW.
Depreciation expenses increased $115, or 8.3%, in the third
quarter and $962, or 27.3%, for the first nine 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.
Operating income increased $469, or 46.0%, in the third quarter
and $4,174 for the first nine months of 2016. Our Entertainment
Group segment operating income margin in the third quarter
increased from 9.4% in 2015 to 11.7% in 2016, and for the first
nine months increased from 2.5% in 2015 to 12.4% in 2016. Our
Entertainment Group segment EBITDA margin in the third quarter
increased from 22.2% in 2015 to 23.5% in 2016, and the first nine
months increased from 18.3% in 2015 to 24.2% in 2016.
Consumer Mobility
Segment Results
Third Quarter Nine-Month Period
Percent Percent
2016 2015 Change 2016 2015 Change
Segment operating revenues
Service $6,914 $7,363 (6.1)% $20,805 $22,019 (5.5)%
Equipment 1,353 1,421 (4.8) 3,976 4,298 (7.5)
Total Segment Operating
Revenues 8,267 8,784 (5.9) 24,781 26,317 (5.8)
Segment operating
expenses
Operations and
support 4,751 5,065 (6.2) 14,343 15,808 (9.3)
Depreciation and
amortization 944 976 (3.3) 2,798 2,912 (3.9)
Total Segment Operating
Expenses 5,695 6,041 (5.7) 17,141 18,720 (8.4)
Segment Operating Income 2,572 2,743 (6.2) 7,640 7,597 0.6
Equity in Net Income of
Affiliates - - - - - -
Segment Contribution $2,572 $2,743 (6.2)% $ 7,640 $ 7,597 0.6 %
The following table highlights other key measures of performance for the Consumer Mobility
segment:
September 30, Percent
(in 000s) 2016 2015 Change
------------- -----------
Consumer Mobility Subscribers
Postpaid 27,374 29,257 (6.4)%
Prepaid 13,035 10,988 18.6
------------ -----------
Branded 40,409 40,245 0.4
Reseller 12,566 13,647 (7.9)
Connected devices(1) 936 953 (1.8)
------------ -----------
Total Consumer Mobility Subscribers 53,911 54,845 (1.7)%
============ =========== =======
(1) Includes data-centric devices such as session-based tablets, monitoring devices and automobile
systems. Excludes postpaid tablets.
33
AT&T INC.
SEPTEMBER 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
Third Quarter Nine-Month Period
Percent Percent
(in 000s) 2016 2015 Change 2016 2015 Change
Consumer Mobility Net Additions (1, 4)
Postpaid 21 23 (8.7)% 89 289 (69.2)%
Prepaid 304 466 (34.8) 1,169 895 30.6
Branded Net Additions 325 489 (33.5) 1,258 1,184 6.3
Reseller (316) 149 - (1,140) (218) -
Connected devices(2) 41 - - 14 (109) -
Consumer Mobility Net
Subscriber
Additions 50 638 (92.2)% 132 857 (84.6)%
Total Churn(1, 3, 4) 2.11% 1.90% 21 BP 2.06% 1.93% 13 BP
Postpaid Churn(1, 3,
4) 1.19% 1.33% (14) BP 1.17% 1.23% (6) 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 $517, or 5.9%, in the third quarter
and $1,536, or 5.8%, for the first nine 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 $449, or 6.1%, in the third quarter
and $1,214, or 5.5%, for the first nine 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 $632, or 11.4%, in the third quarter and $1,775, or 10.6%,
for the first nine months. Without the migration of customers to
Business Solutions, postpaid wireless revenues would have decreased
approximately 6.8% and 5.7%, respectively. The decreases were
partially offset by higher prepaid service revenues of $250 in the
third quarter and $703 for the first nine months and include
services sold under the Cricket brand.
Equipment revenue decreased $68, or 4.8%, in the third quarter
and $322, or 7.5%, for the first nine months of 2016. The decreases
in equipment revenues resulted from lower handset volumes and
increased promotional activities, partially offset by the sale of
higher priced devices and increases in devices purchased on
installment payment agreements rather than the device subsidy
model. We had fewer customers upgrading their handsets and more new
customers bringing their own devices.
Operations and support expenses decreased $314, or 6.2%, in the
third quarter and $1,465, or 9.3%, for the first nine 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.
34
AT&T INC.
SEPTEMBER 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
Decreased operations and support expenses in the third quarter
were primarily due to the following:
-- Equipment costs decreased $110 primarily due to
lower handset volumes partially offset by the sale
of higher priced devices.
-- Bad debt expense decreased $70 primarily due to fewer expected write-offs.
-- Marketing and advertising costs decreased $51 due to lower media and production costs.
-- Network costs decreased $29 primarily due to lower
interconnect costs resulting from our ongoing network
transition to more efficient Ethernet/IP-based technologies.
Decreased operations and support expenses for the first nine
months were primarily due to the following:
-- Equipment costs decreased $453 primarily due to
lower handset volumes partially offset by the sale
of higher priced devices.
-- Selling and commission expenses decreased $299 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 $225 primarily due to lower
interconnect costs resulting from our ongoing network
transition to more efficient Ethernet/IP-based technologies.
-- Customer service costs decreased $107 primarily
due to reduced salaries and benefits and lower vendor
and professional services from reduced call volumes.
-- Bad debt expense decreased $101 primarily due to fewer expected write-offs.
Depreciation expense decreased $32, or 3.3%, in the third
quarter and $114, or 3.9% for the first nine months of 2016. The
decrease was primarily due to fully depreciated assets, partially
offset by ongoing capital spending for network upgrades and
expansion and accelerating depreciation related to the expected
year-end 2016 shutdown of our U.S. 2G network.
Operating income decreased $171, or 6.2%, in the third quarter
and increased $43, or 0.6%, for the first nine months of 2016. Our
Consumer Mobility segment operating income margin in the third
quarter decreased from 31.2% in 2015 to 31.1% in 2016, and for the
first nine months increased from 28.9% in 2015 to 30.8% in 2016.
Our Consumer Mobility EBITDA margin in the third quarter increased
from 42.3% in 2015 to 42.5% in 2016, and for the first nine months
increased from 39.9% in 2015 to 42.1% in 2016.
International
Segment Results
Third Quarter Nine-Month Period
Percent Percent
2016 2015 Change 2016 2015 Change
Segment operating
revenues
Video entertainment $1,297 $ 945 37.2% $3,649 $ 945 - %
Wireless 484 494 (2.0) 1,428 1,153 23.9
Equipment 98 87 12.6 297 155 91.6
Total Segment Operating
Revenues $1,879 $1,526 23.1 $5,374 $2,253 -
Segment operating
expenses
Operations and
support $1,640 $1,384 18.5 $4,951 $2,131 -
Depreciation and
amortization 293 225 30.2 868 346 -
Total Segment Operating
Expenses 1,933 1,609 20.1 5,819 2,477 -
Segment Operating Income
(Loss) (54) (83) 34.9 (445) (224) (98.7)
Equity in Net Income
(Loss)
of Affiliates 1 (4) - 24 (4) -
Segment Contribution $ (53) $ (87) 39.1% $ (421) $(228) (84.6)%
35
AT&T INC.
SEPTEMBER 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 following tables highlight other key measures of performance
for the International segment:
September 30, Percent
(in 000s) 2016 2015 Change
----------
Mexican Wireless Subscribers
Postpaid 4,733 4,159 13.8 %
Prepaid 5,665 3,487 62.5
Branded 10,398 7,646 36.0
Reseller 300 445 (32.6)
Total Mexican Wireless Subscribers 10,698 8,091 32.2
Latin America Satellite Subscribers
PanAmericana 7,139 7,006 1.9
SKY Brazil 5,337 5,538 (3.6)
Total Latin America Satellite Subscribers(1) 12,476 12,544 (0.5)%
(1) Excludes subscribers of our International segment equity investments in SKY Mexico, in
which we own a 41% stake. At June 30, 2016, SKY Mexico had 7.8 million subscribers.
Third Quarter Nine-Month Period
Percent Percent
(in 000s) 2016 2015 Change 2016 2015 Change
Mexican Wireless Net
Additions
Postpaid 163 15 -% 444 47 -%
Prepaid 606 (210) - 1,670 (677) -
Branded Net Additions 769 (195) - 2,114 (630) -
Reseller (26) (36) 27.8 (100) (59) (69.5)
Mexican Wireless
Net Subscriber
Additions 743 (231) - 2,014 (689) -
Latin America
Satellite Net
Additions
PanAmericana (36) 16 - 73 16 -
SKY Brazil (12) (129) 90.7 (107) (129) 17.1
Latin America Satellite
Net Subscriber
Additions(1) (48) (113) 57.5% (34) (113) 69.9%
(1) Excludes subscribers of our International segment equity investments in SKY Mexico,
in
which we own a 41% stake. At June 30, 2016, SKY Mexico had 7.8 million subscribers and
net
subscriber additions of 121,000 in the second 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 $353, or 23.1%, in the third
quarter and $3,121 for the first nine months of 2016. The increase
in the third quarter and for the first nine months includes $352,
or 37.2%, and $2,704 from video services in Latin America. Mexico
wireless revenues increased $1, or 0.2%, in the third quarter and
$417, or 31.9%, for the first nine months of 2016, primarily due to
an increase in our subscriber base offset by lower ARPU (average
revenue per average wireless subscriber).
36
AT&T INC.
SEPTEMBER 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 increased $256, or 18.5%, in the
third quarter and $2,820 for the first nine 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. The increase in our
third-quarter 2016 expenses is partially offset by approximately
$70 in settlements and reserve adjustments for interconnect, and
operating and payroll taxes from our Mexico wireless
operations.
Depreciation expense increased $68, or 30.2%, in the third
quarter and $522 for the first nine months of 2016. The increase
was primarily due to the acquisition of DIRECTV.
Operating income increased $29, or 34.9%, in the third quarter
and decreased $221, or 98.7%, for the first nine months of 2016.
Our International segment operating income margin in the third
quarter increased from (5.4)% in 2015 to (2.9)% in 2016, and for
the first nine months increased from (9.9)% in 2015 to (8.3)% in
2016. Our International EBITDA margin in the third quarter
increased from 9.3% in 2015 to 12.7% in 2016 and the first nine
months increased from 5.4% in 2015 to 7.9% in 2016.
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
Third Quarter Nine-Month Period
Percent Percent
2016 2015 Change 2016 2015 Change
Operating revenues
Service $14,963 $15,095 (0.9)% $44,673 $45,022 (0.8)%
Equipment 3,229 3,234 (0.2) 9,398 9,797 (4.1)
Total Operating
Revenues 18,192 18,329 (0.7) 54,071 54,819 (1.4)
Operating expenses
Operations and
support 10,696 10,865 (1.6) 31,822 33,310 (4.5)
EBITDA 7,496 7,464 0.4 22,249 21,509 3.4
Depreciation and
amortization 2,107 2,046 3.0 6,244 6,082 2.7
Total Operating
Expenses 12,803 12,911 (0.8) 38,066 39,392 (3.4)
Operating Income 5,389 5,418 (0.5) 16,005 15,427 3.7
Equity in Net Income
of Affiliates - - - - - -
Operating Contribution $ 5,389 $ 5,418 (0.5)% $16,005 $15,427 3.7 %
37
AT&T INC.
SEPTEMBER 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 following tables highlight other key measures of performance for AT&T
Mobility:
September 30,
Percent
(in 000s) 2016 2015 Change
Wireless
Subscribers(1)
Postpaid
smartphones 58,688 57,733 1.7 %
Postpaid feature phones
and data-centric
devices 18,700 18,938 (1.3 )
Postpaid 77,388 76,671 0.9
Prepaid 13,035 10,988 18.6
Branded 90,423 87,659 3.2
Reseller 12,624 13,729 (8.0 )
Connected
devices(2) 30,291 25,018 21.1
Total Wireless
Subscribers 133,338 126,406 5.5
Branded
Smartphones 69,752 66,233 5.3
Mobile Share
connections 57,142 59,592 (4.1 )
Smartphones under our installment programs
at end of period 29,382 23,487 25.1 %
(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.
Third Quarter Nine-Month Period
Percent Percent
(in 000s) 2016 2015 Change 2016 2015 Change
Wireless Net
Additions (1,
4)
Postpaid 212 289 (26.6)% 598 1,140 (47.5 )%
Prepaid 304 466 (34.8) 1,169 895 30.6
Branded Net
Additions 516 755 (31.7) 1,767 2,035 (13.2 )
Reseller (315) 156 - (1,174) (205) -
Connected
devices(2) 1,331 1,602 (16.9) 4,081 3,995 2.2
Wireless Net
Subscriber
Additions 1,532 2,513 (39.0) 4,674 5,825 (19.8 )
Smartphones sold
under our
installment
programs during
period 4,283 4,074 5.1 % 12,378 11,998 3.2 %
Total Churn(3, 4) 1.45% 1.33% 12 BP 1.41% 1.35% 6 BP
Branded Churn(3,
4) 1.63% 1.68% (5) BP 1.57% 1.60% (3) BP
Postpaid Churn(3,
4) 1.05% 1.16% (11) BP 1.04% 1.06% (2) 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 decreased $29, or 0.5%, in the third quarter
and increased $578, or 3.7%, for the first nine months of 2016. The
operating income margin of AT&T Mobility in the third quarter
was 29.6% in both 2015 and 2016, and increased for the first nine
months from 28.1% in 2015 to 29.6% in 2016. AT&T Mobility's
EBITDA margin in the third quarter increased from 40.7% in 2015 to
41.2% in 2016, and increased for the first nine months from 39.2%
in 2015 to 41.1% in 2016. AT&T Mobility's EBITDA service margin
in the third quarter increased from 49.4% in 2015 to 50.1% in 2016,
and increased for the first nine months from 47.8% in 2015 to 49.8%
in 2016 (EBITDA service margin is operating income before
depreciation and amortization, divided by total service
revenues).
38
AT&T INC.
SEPTEMBER 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
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 third quarter with
more than 6.7 million subscribers on these packages.
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 fourth-quarter 2016 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 September 30 are as
follows:
September 30, Percent
(in 000s) 2016 2015 Change
-------- ------
Postpaid (primarily phones) 335 1,077 (68.9)%
Prepaid 210 442 (52.5)
Reseller(1) 673 3,317 (79.7)
Connected devices (2) 2,794 6,575 (57.5)
Total 2G Subscribers and Connections 4,012 11,411 (64.8)%
(1) Primarily included in our Consumer Mobility segment.
(2) Primarily included in our Business Solutions segment.
ARPU
Postpaid phone-only ARPU was $59.64 for the third quarter and
$59.66 for the first nine months of 2016, compared to $60.81 and
$60.68 in 2015. Postpaid phone-only ARPU plus AT&T Next
subscriber installment billings increased 1.7% compared to the
third quarter of 2015 and 3.1% compared to the first nine 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 third quarter and first
nine months of 2016 and could be negatively impacted in the fourth
quarter by the loss of 2G reseller subscribers and connected
devices on our 2G network. Loss of 2G subscribers contributed more
than 20 basis points of pressure to total churn and 2 basis points
to postpaid churn during the quarter. Postpaid churn was lower for
the third quarter and first nine months of 2016.
Branded Subscribers
Branded subscribers increased 0.6% when compared to June 30,
2016 and 3.2% when compared to September 30, 2015. These increases
included a 3.2% and 18.6% increase in prepaid subscribers and a
0.1% and 0.9% increase in postpaid subscribers, respectively. At
September 30, 2016, 90% of our postpaid phone subscriber base used
smartphones, compared to 87% at September 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 74% of
our postpaid customer base. Such offerings are intended to
encourage existing subscribers to upgrade their current services
and/or add connected devices, attract subscribers from other
providers and minimize subscriber churn.
During the first quarter of 2016, we discontinued offering
subsidized smartphones to most of our customers. Under this
no-subsidy model, subscribers must purchase a device on
installments under an equipment installment program or choose to
bring their own device, with no annual service contract. At
September 30, 2016, about 50% of the postpaid smartphone base is on
an installment program compared to nearly 41% at September 30,
2015. Of the postpaid smartphone gross adds and upgrades during the
third quarter and first nine months of 2016, 94% and 93% were
either equipment installment plans or BYOD, compared to 80% and 75%
in 2015. While BYOD customers do not generate equipment revenue or
expense, the service revenue helps improve our margins. During the
third quarter and first nine months of 2016, we added approximately
595,000 and 1,628,000 BYOD customers, compared to 510,000 and
1,157,000 in 2015.
39
AT&T INC.
SEPTEMBER 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
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.
Connected Devices
Connected Devices includes data-centric devices such as
session-based tablets, monitoring devices and automobile systems.
Connected device subscribers increased 4.6% during the third
quarter when compared to June 30, 2016 and 21.1% when compared to
September 30, 2015. During the third quarter and first nine months
of 2016, we added approximately 1.1 million and 3.5 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
Time Warner Inc. Acquisition On October 22, 2016, we announced a
merger agreement (Merger Agreement) to acquire Time Warner Inc.
(Time Warner) in a 50% cash and 50% stock transaction for $107.50
per share of Time Warner common stock, or approximately $85,400 at
the date of the announcement (Merger). Combined with Time Warner's
net debt at September 30, 2016, the total transaction value is
approximately $108,700. Each share of Time Warner common stock will
be exchanged for $53.75 per share in cash and a number of shares
(exchange ratio) of AT&T common stock based on the average
stock price at the time of closing the Merger. If the average stock
price is between (or equal to) $37.411 and $41.349 per share, the
exchange ratio will be the quotient of $53.75 divided by the
average stock price. If the average stock price is greater than
$41.349, the exchange ratio will be 1.300. If the average stock
price is less than $37.411, the exchange ratio will be 1.437.
Post-transaction, Time Warner shareholders will own between 14.4%
and 15.7% of AT&T shares on a fully-diluted basis based on the
number of AT&T shares outstanding. The cash portion of the
purchase price will be financed with new debt and cash. We have an
18-month commitment for an unsecured bridge term facility (Bridge
Loan) for $40,000.
Time Warner is a leading media and entertainment company whose
major businesses encompass an array of the most respected and
successful media brands. The deal combines Time Warner's vast
library of content and ability to create new premium content that
connects with audiences around the world, with our extensive
customer relationships, world's largest pay TV subscriber base and
leading scale in TV, mobile and broadband distribution.
The Merger Agreement must be adopted by Time Warner shareholders
and is subject to review by the U.S. Department of Justice and if
certain FCC licenses remain with Time Warner at closing, those are
subject to FCC review and approval. It is also a condition to
closing that necessary consents from certain public utility
commissions and foreign governmental entities must be obtained. The
transaction is expected to close before year end 2017. If the
Merger is terminated as a result of reaching the termination date
(and at that time one or more of the conditions relating to certain
regulatory approvals have not been satisfied) or there is a final,
non-appealable order preventing the transaction relating to
antitrust laws, communications laws, utilities laws or foreign
regulatory laws, then under certain circumstances we would be
obligated to pay Time Warner $500.
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. On August 8, 2016, DIRECTV filed a motion
to compel arbitration and the NFL defendants filed a motion to
dismiss the complaint. A hearing on both motions is currently
scheduled for December 12, 2016.
40
AT&T INC.
SEPTEMBER 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
SportsNet LA Litigation On November 2, 2016, the U.S. Department
of Justice filed a civil antitrust complaint in federal court
(Central District of California) against DIRECTV Group Holdings,
LLC and AT&T Inc., as successor in interest to DIRECTV,
alleging that DIRECTV, in 2014, unlawfully exchanged strategic
information with certain competitors in connection with
negotiations with SportsNet LA about carrying Los Angeles Dodgers
games. The complaint alleges that DIRECTV's conduct violated
Section 1 of the Sherman Act. The complaint seeks a declaration
that DIRECTV's conduct unlawfully restrained trade and seeks an
injunction (1) barring DIRECTV and AT&T from engaging in
unlawful information sharing in connection with future negotiations
for video programming distribution, (2) requiring DIRECTV and
AT&T to monitor relevant communications between their
executives and competitors and to periodically report to the
Department of Justice, and (3) requiring DIRECTV and AT&T to
implement training and compliance programs. The complaint asks that
the government be awarded its litigation costs. We vigorously
dispute these allegations.
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, our MBR program is permitted by
our customer contracts, was fully disclosed in advance to our
Unlimited Data Plan customers, and was implemented to protect the
network for the benefit of all customers. In March 2015, our motion
to dismiss the litigation on the grounds that the FTC lacked
jurisdiction to file suit was denied. In May 2015, the Court
granted our motion to certify its decision for immediate appeal.
The United States Court of Appeals for the Ninth Circuit
subsequently granted our petition to accept the appeal, and on
August 29, 2016, issued its decision reversing the district court
and finding that the FTC lacked jurisdiction to proceed with the
action. The FTC has asked the Court of Appeals to reconsider the
decision. In addition to the FTC case, several class actions have
been filed also challenging our MBR program. We vigorously dispute
the allegations the complaints have asserted.
In June 2015, the Federal Communications Commission (FCC) issued
a Notice of Apparent Liability and Order (NAL) to AT&T
Mobility, LLC concerning our MBR policy that applies to Unlimited
Data Plan customers described above. The NAL alleges that we
violated the FCC's Open Internet Transparency Rule by using the
term "unlimited" in connection with the offerings subject to the
MBR policy and by failing adequately to disclose the speed
reductions that apply once a customer reaches a specified data
threshold. The NAL proposes a forfeiture penalty of $100, and
further proposes to order us to correct any misleading and
inaccurate statements about our unlimited plans, inform customers
of the alleged violation, revise our disclosures to address the
alleged violation and inform these customers that they may cancel
their plans without penalty after reviewing the revised
disclosures. In July 2015, we filed our response to the NAL. We
believe that the NAL is unlawful and should be withdrawn, because
we have fully complied with the Open Internet Transparency Rule and
the FCC has no authority to impose the proposed remedies. The
matter is currently pending before the FCC.
41
AT&T INC.
SEPTEMBER 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
San Diego County Inquiry Involving Cricket Communications, Inc.
In February 2014, the San Diego County Air Pollution Control
District began inquiring into alleged violations of California
regulations governing removal, handling and disposal of asbestos
containing materials arising from an independent dealer's
demolition and construction activity in preparation to install
upgraded point of purchase and fixtures in accordance with Cricket
dealer guidelines. While the independent dealer was in sole control
of contractors performing the work at issue, the County has focused
on Cricket Communications dealer agreement terms and interactions
with the independent dealer as a basis for asserting direct
liability against Cricket Communications, Inc. After discussions,
in November 2015, the County issued a penalty demand in excess of
one hundred thousand dollars. In October 2016, we reached a
monetary settlement with the County of this matter for an
immaterial amount.
Labor Contracts 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.
On August 30, 2016, our U.S. mobility employees ratified a
separate national contract that primarily covers medical benefits
for approximately 40,000 employees.
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 expected to release an order adopting new rules that
restrict our use of customer information in marketing and
advertising. The FCC also is considering proposals that could
adversely affect our provision of video services and that would
increase regulation and lower prices of certain data services used
by businesses, beginning July 2017. We expect to appeal any new
requirements that we believe unlawfully restrain our business.
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.
42
AT&T INC.
SEPTEMBER 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 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.
LIQUIDITY AND CAPITAL RESOURCES
We had $5,895 in cash and cash equivalents available at
September 30, 2016. Cash and cash equivalents included cash of
$2,460 and money market funds and other cash equivalents of $3,435.
Approximately $813 of our cash and cash equivalents resided in
foreign jurisdictions, some of which are subject to restrictions on
repatriation. Cash and cash equivalents increased $774 since
December 31, 2015. In the first nine 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.
43
AT&T INC.
SEPTEMBER 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
Cash Provided by or Used in Operating Activities
During the first nine months of 2016, cash provided by operating
activities was $29,202, compared to $26,695 for the first nine
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 nine months of 2016, cash used in investing
activities totaled $18,189 and consisted primarily of $15,283 for
capital expenditures, excluding interest during construction, and
$2,922 for the acquisition of wireless spectrum, Quickplay Media,
Inc. and other operations. These expenditures were partially offset
by net cash receipts of $501 from the sale of securities.
The majority 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 $1,927 in the first nine months. The
increase was primarily due to DIRECTV operations, our wireless
network expansion in Mexico, 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 nine months of 2016, we excluded
$225 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 nine months of 2016, cash used in financing
activities totaled $10,239 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.
During the first nine months of 2016, we redeemed $10,688 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).
-- August redemption of $1,500 of 2.400% global notes due 2016.
44
AT&T INC.
SEPTEMBER 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 March 2016, we completed a debt exchange in which $16,049 of
DIRECTV notes with stated rates of 1.750% to 6.375% were tendered
and accepted in exchange for $16,049 of new AT&T Inc. global
notes with stated rates of 1.750% to 6.375% plus a $16 cash
payment.
On September 7, 2016, we completed a debt exchange in which
$5,615 of notes of AT&T or one or more of its subsidiaries with
stated rates of 5.350% to 8.250% were tendered and accepted in
exchange for $4,500 of new AT&T Inc. global notes with a stated
rate of 4.500% and $2,500 of new AT&T Inc. global notes with a
stated rate of 4.550%.
In July 2016, we made a refundable deposit with the FCC for
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 September 30, 2016, compared to 4.2% as of June 30,
2016, and 4.0% as of December 31, 2015. We had $123,963 of total
notes and debentures outstanding at September 30, 2016, which
included Euro, British pound sterling, Swiss franc, Brazilian real
and Canadian dollar denominated debt of approximately $25,789.
As of September 30, 2016, we had approximately 396 million
shares remaining from 2013 and 2014 authorizations from our Board
of Directors to repurchase shares of our common stock. During the
first nine months of 2016, we repurchased approximately 11 million
shares for $444. 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 $8,850 during the first nine months of
2016, compared with $7,311 for the first nine 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 third quarter and $1.44
per share for the first nine months of 2016 and $0.47 per share in
the third quarter and $1.41 per share for the first nine 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. On October 22,
2016, our Board of Directors approved a 2.1% increase in the
quarterly dividend from $0.48 to $0.49 per share.
At September 30, 2016, we had $7,982 of debt maturing within one
year, $7,468 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.
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. 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. As of September 30, 2016, we
have $2,286 outstanding under the Tranche A Facility and $1,869
outstanding under the Tranche B Facility and we have complied with
all covenants.
45
AT&T INC.
SEPTEMBER 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
On October 22, 2016, in connection with entering into Merger
Agreement, AT&T entered into the $40,000 Bridge Loan with
JPMorgan Chase Bank, N.A., as agent, and JPMorgan Chase Bank, N.A.
and Bank of America, N.A., as lenders. No amounts will be drawn
under the Bridge Loan prior to the consummation of the Merger. In
the event advances are made under the Bridge Loan, those advances
would be used solely to finance a portion of the cash consideration
to be paid in the Merger, the refinancing of debt of Time Warner
and its subsidiaries and the payment of related fees and
expenses.
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 September 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 of, or would permit the
lenders to accelerate, as applicable, required payments and would
increase the Applicable Margin by 2.00% per annum.
The Syndicated Credit Agreement
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.
46
AT&T INC.
SEPTEMBER 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 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 of, or would permit the
lenders to accelerate, as applicable, required payments and would
increase the Applicable Margin by 2.00% per annum.
Bridge Loan
The obligations of the lenders under the Bridge Loan to provide
advances will terminate on the earliest of (i) the Termination Date
(as defined in the Merger Agreement), (ii) the consummation of the
transactions contemplated by the Merger Agreement without the
borrowing of advances under the Bridge Loan and (iii) the
termination of the Merger Agreement.
Advances would bear interest, at the Company's option,
either:
-- at a variable annual rate equal to: (1) the highest of (a) the prime rate of JPMorgan Chase
Bank, N.A., (b) 0.5% per annum above the federal funds rate, and (c) the LIBOR rate applicable
to dollars for a period of one month plus 1.00%, plus (2) an applicable margin, as set forth
in the Bridge Loan (the "Applicable Margin for Base Advances"); or
-- at a rate equal to: (i) LIBOR (adjusted upwards to reflect any bank reserve costs) for a period
of one, two, three or six months, as applicable, plus (ii) an applicable margin, as set forth
in the Bridge Loan (the "Applicable Margin for Eurodollar Rate Advances").
The Applicable Margin for Eurodollar Rate Advances will be equal
to 0.750%, 1.000%, 1.125%, 1.250% or 1.500% per annum depending on
the Company's unsecured long-term debt ratings. The Applicable
Margin for Base Advances will be equal to the greater of (x) 0.00%
and (y) the relevant Applicable Margin for Eurodollar Rate Advances
minus 1.00% per annum, depending on the Company's unsecured
long-term debt ratings.
The Applicable Margin for Eurodollar Rate Advances and the
Applicable Margin for Base Advances are scheduled to increase by an
additional 0.25% on the 90th day after the closing of the Merger
and another 0.25% every 90 days thereafter.
The Company will also pay a commitment fee (Commitment Fee) of
0.070%, 0.090%, 0.100%, 0.125% or 0.175% of the commitment amount
per annum, depending on the Company's unsecured long-term debt
ratings.
The Company is scheduled to pay a duration fee of 0.50%, 0.75%
and 1.00% on the amount of advances outstanding as of the 90th,
180th and 270th day after advances are made.
The Bridge Loan contains provisions requiring the reduction of
the commitments of the lenders and the prepayment of outstanding
advances by the amount of net cash proceeds resulting from the
incurrence of certain indebtedness by the Company or its
subsidiaries, the issuance of certain capital stock by the Company
or its subsidiaries and non-ordinary course sales or dispositions
of assets by the Company or its subsidiaries, in each case subject
to exceptions set forth in the Bridge Loan.
Advances under the Bridge Loan are conditioned on the absence of
a material adverse effect on Time Warner and certain customary
events, and repayment of all advances must be made no later than
364 days after the date on which the advances are made.
The Bridge Loan 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 Bridge Loan) financial ratio covenant that the Company will
maintain, as of the last day of each fiscal quarter of not more
than 3.5-to-1.
47
AT&T INC.
SEPTEMBER 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 events of default contained in the Bridge Loan are customary
for an agreement of this type and such events would result in the
acceleration of, or would permit the lenders to accelerate, as
applicable, required payments and would increase the Applicable
Margin by 2.00% per annum.
Prior to the closing date of the Merger, only a payment or
bankruptcy event of default would permit the lenders to terminate
their commitments under the Bridge Loan.
Collateral Arrangements
During the first nine months of 2016, we posted $141 of
additional cash collateral, on a net basis, to banks and other
participants in our derivative arrangements. Cash postings under
these arrangements vary with changes in credit ratings and netting
agreements. (See Note 6)
Other
Our total capital consists of debt (long-term debt and debt
maturing within one year) and stockholders' equity. Our capital
structure does not include debt issued by our equity method
investments. At September 30, 2016, our debt ratio was 50.1%,
compared to 50.8% at September 30, 2015, and 50.5% at December 31,
2015. Our net debt ratio was 47.8% at September 30, 2016, compared
to 48.3% at September 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 nine months of 2016, we received $3,757 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 $8,630 as of September 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 $420 to the
trust during the first nine 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. Both such contributions, totaling
$350, were made in the third quarter of 2016.
48
AT&T INC.
SEPTEMBER 30, 2016
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Dollars in millions except per share amounts
At September 30, 2016, we had interest rate swaps with a
notional value of $7,050 and a fair value of $145.
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 $(3,109) at September 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 September 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 September 30, 2016.
49
AT&T INC.
SEPTEMBER 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, special access and business data services,
intercarrier compensation; interconnection obligations; pending Notices of Apparent Liability;
the transition from legacy technologies to IP-based infrastructure including the withdrawal
of legacy TDM-based services; universal service; broadband deployment; E911 services; competition
policy; 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 (which includes arbitrations),
including, without limitation, patent and product safety claims by or against third parties.
-- The impact from major equipment failures on our networks, including satellites operated by
DIRECTV; the effect of security breaches related to the network or customer information; our
inability to obtain handsets, equipment/software or have handsets, equipment/software serviced
in a timely and cost-effective manner from suppliers; and in the case of satellites launched,
timely provisioning of services from vendors; or severe weather conditions, natural disasters,
pandemics, energy shortages, wars or terrorist attacks.
-- The issuance by the Financial Accounting Standards Board or other accounting oversight bodies
of new accounting standards or changes to existing standards.
-- Our ability to integrate our acquisition of DIRECTV.
-- Our pending acquisition of Time Warner Inc.
-- 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.
50
AT&T INC.
SEPTEMBER 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. The additional Risk Factor below reflects our
pending acquisition of Time Warner (See "Other Business
Matters").
The impact of our pending acquisition of Time Warner, including
our ability to obtain governmental approvals on favorable terms
including any required divestitures; the risk that the businesses
will not be integrated successfully; the risk that the cost savings
and any other synergies from the acquisition may not be fully
realized or may take longer to realize than expected; our costs in
financing the acquisition and potential adverse effects on our
share price and dividend amount due to the issuance of additional
shares; the addition of Time Warner's existing debt to our balance
sheet; disruption from the acquisition making it more difficult to
maintain relationships with customers, employees or suppliers; and
competition and its effect on pricing, spending, third party
relationships and revenues.
As discussed in Other Business Matters, on October 22, 2016, we
agreed to acquire Time Warner for a total transaction value of
approximately $108,700 (including Time Warner's net debt). We
believe that the acquisition will give us the scale, resources and
ability to deploy video content more efficiently to more customers
than otherwise possible and to provide very attractive integrated
offerings of video, broadband and wireless services. Providing more
flexible and integrated services to customers will enable us to
compete more effectively against other video providers as well as
other technology, media and communications companies. In addition,
we believe that the acquisition will result in cost savings,
especially in the area of video content costs, and other potential
synergies enabling us to expand and enhance our broadband and video
options across multiple mobile and fixed devices.
Achieving these results will depend upon obtaining governmental
approvals on favorable terms within the time limits contemplated by
the parties. Delays in closing, including as a result of delays in
obtaining regulatory approval, could divert attention from ongoing
operations on the part of management and employees, adversely
affecting customers and suppliers and therefore revenues. If such
approvals are obtained and the transaction is consummated, then we
must integrate a large number of operational and administrative
systems, which may involve significant management time and create
uncertainty for employees, customers and suppliers. The integration
process may also result in significant expenses and charges against
earnings, both cash and noncash. While we have successfully merged
large companies into our operations in the past, delays in the
process could have a material adverse effect on our revenues,
expenses, operating results and financial condition. This
acquisition also will increase the amount of debt on our balance
sheet (both Time Warner's debt and the indebtedness which may be
needed to pay a portion of the purchase price) leading to
additional interest expense and, due to additional shares being
issued, will result in additional cash being required for any
dividends declared. Both of these factors could put pressure on our
financial flexibility to continue capital investments, develop new
services and declare future dividends. In addition, events outside
of our control, including changes in regulation and laws as well as
economic trends, could adversely affect our ability to realize the
expected benefits from this acquisition.
51
AT&T INC.
SEPTEMBER 30, 2016
PART II - OTHER INFORMATION - CONTINUED
Dollars in millions except per share amounts
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) A summary of our repurchases of common stock during the third quarter of 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
July 1, 2016 -
July 31, 2016 3,143 $ - - 401,550,000
August 1, 2016 -
August 31, 2016 6,000,384 41.15 6,000,000 395,550,000
September 1, 2016
-
September 30,
2016 624,640 - - 395,550,000
Total 6,628,167 $ 41.15 6,000,000
(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, 3,721 shares were acquired through the withholding of taxes
on the vesting of restricted stock or on the exercise price of options.
(3) Of the shares repurchased, 624,446 shares were acquired through reimbursements from AT&T
maintained Voluntary Employee Benefit Association (VEBA) trusts.
52
AT&T INC.
SEPTEMBER 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.
10-a AT&T Health Plan
10-b Agreement between James Cicconi and AT&T Inc.
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
53
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
AT&T Inc.
November 3, 2016 /s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
54
AT&T HEALTH PLAN
Effective: January 1, 1987
Previously Amended and Restated: January 1, 2016
Amended and Restated Effective: January 1, 2017 (unless
otherwise provided herein)
AT&T HEALTH PLAN
TABLE OF CONTENTS
PURPOSE..........................................................................................
ARTICLE 1 ............ 1
DEFINITIONS.....................................................................................
ARTICLE 2 ......... 1
ELIGIBILITY.....................................................................................
ARTICLE 3 ............ 5
BENEFITS........................................................................................
ARTICLE 4 ............. 6
ARTICLE 5 TERMINATION OF PARTICIPATION.................................................... 7
DISABILITY......................................................................................
ARTICLE 6 ........... 9
COSTS...........................................................................................
ARTICLE 7 ................ 10
ARTICLE 8 LOYALTY CONDITIONS.......................................................................... 10
MISCELLANEOUS...................................................................................
ARTICLE 9 .. 13
COBRA...........................................................................................
ARTICLE 10 .............. 15
ARTICLE 11 PRIVACY OF MEDICAL INFORMATION............................................. 18
ARTICLE 12 CLAIM AND APPEAL PROCESS ............................................................ 24
AT&T HEALTH PLAN
ARTICLE 1 PURPOSE
The AT&T Health Plan ("Plan") provides Participants with
supplemental medical, dental, and vision benefits. Effective March
23, 2010, the Plan shall be frozen to new Participants, as further
described in Section 2.16. The Company intends this Plan to be a
"grandfathered health plan" under the Patient Protection and
Affordable Care Act (the "Affordable Care Act"). Appendix C hereto
contains the required Participant disclosure regarding the Plan's
grandfathered status under the Affordable Care Act.
ARTICLE 2 DEFINITIONS
For purposes of this Plan, the following words and phrases shall
have the meanings indicated, unless the context clearly indicates
otherwise:
2.1 Active Participant. "Active Participant" shall mean an Active Employee Participant
and his
Dependents.
2.2 Active Employee Participant. "Active Employee Participant" shall mean an Eligible
Employee
electing to participate in the Plan while in active service, on a Leave of Absence or
while
receiving short term disability benefits under the Officer Disability Plan.
2.3 Annual Deductible. "Annual Deductible" shall mean the amount the Active Participant
must pay
for Covered Health Services in a Plan Year before the Plan will begin paying for
Covered Benefits
in that calendar year. The Annual Deductible applies to all Covered Health Services.
The Annual
Deductible does not apply to Preventive Care, Dental Services and Vision Services.
Solely
for purposes of this Plan, the Annual Deductible will operate on a combined basis with
the
Annual Deductible (both the "Network/ONA" and "Non-Network Benefit" annual
deductibles) applicable
in the AT&T Medical Plan. Once the Participant meets his applicable Annual Deductible,
the
Plan will begin to pay Covered Benefits, subject to any required Coinsurance, in
accordance
with and as governed by Section 4.1. The applicable Annual Deductible is set forth in
Appendix
A to this Plan.
2.4 Annual Out-of-Pocket Maximum. "Annual Out-of-Pocket Maximum" shall mean the maximum
amount
of Covered Health Services an Active Participant must pay out-of-pocket every calendar
year,
including the Participant's Annual Deductible. Solely for purposes of this Plan, the
Annual
Out-of-Pocket Maximum will operate on a combined basis with the Annual Out-of-Pocket
Maximum
(both the "Network/ONA" and "Non-Network Benefit annual out-of-pocket maximums)
applicable
in the AT&T Medical Plan (or the Annual Out-of-Pocket Maximum in the AT&T
International Health
Plan for Officers serving in expatriate positions with the Company). Once the
Participant
reaches the applicable Annual Out-of-Pocket Maximum, Covered Benefits for those
Covered Health
Services that apply to the Annual Out-of-Pocket Maximum are payable in accordance with
and
as governed by Section 4.1 during the rest of that Plan Year. The following costs
shall never
apply toward the Annual Out-of-Pocket Maximum: (a) any applicable Monthly
Contributions and
(b) any charges for Non-Covered Health Services. Even when the Annual Out-of-Pocket
Maximum
has been reached, Covered Benefits will not be provided for the following: (a) any
applicable
Monthly Contributions and (b) any charges for Non-Covered Health Services. The
applicable
Annual Out-of-Pocket Maximum is set forth in Appendix A to this Plan.
1
2.5 AT&T. "AT&T" shall mean AT&T Inc. References to "Company" shall mean AT&T.
2.6 Basic Plan(s). "Basic Plan(s)" shall mean AT&T's group medical (known as the "Silver
Option"
in the "AT&T Medical Plan" (or the "AT&T International Health Plan" for Officers
serving in
expatriate positions with the Company)), dental (non-DHMO option), and vision care
plans (including
the AT&T Retiree Vision Care Program). For a Participant who Retired on or before
August 31,
1992, Basic Plans shall mean the AT&T Medical and Group Life Insurance Plan-CustomCare
("CustomCare")
and dental (non-DHMO option) plans. For this purpose, the Plan Administrator maintains
governing
records setting forth the names of those Participants who Retired on or before August
31,
1992.
2.7 CEO. "CEO" shall mean the Chief Executive Officer of AT&T Inc.
2.8 COBRA. "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985,
as amended.
2.9 Coinsurance. "Coinsurance" shall mean the amount an Active Participant must pay each
time
he receives Covered Health Services, after he meets the applicable Annual Deductible.
Coinsurance
payments are calculated as a percentage of Covered Health Services, rather than a set
dollar
amount. Coinsurance does not apply to Preventive Care, Dental Services and Vision
Services
(or Medical Services for Retired Participants as provided in Section 4.1(c)). The
applicable
Coinsurance percentage is set forth in Appendix A to this Plan.
2.10 Committee. "Committee" shall mean the Human Resources Committee of the Board of
Directors
of AT&T Inc.
2.11 Covered Benefits. "Covered Benefits" shall mean the benefits provided by the Plan, as
provided
for and governed by Section 4.1 of the Plan.
2.12 Covered Health Services. "Covered Health Services" means all Medical Services or
Preventive
Care that would qualify as deductible medical expenses for federal income tax
purposes, whether
deducted or not. Dental Services and Vision Services are not included in the
definition of
Covered Health Services.
2.13 Dental Services. "Dental Services" shall mean services for dental and orthodontic
care. The
Plan Administrator, in its sole discretion, shall determine whether a particular
service is
classified as Preventive Care or a Dental, Medical or Vision Service.
2.14 Dependent(s). "Dependent(s)" shall mean those individuals who would qualify as a
Participant's
dependent(s) under the terms of the group medical Basic Plan in which the Participant
participates
(or last previously participated with respect to Medicare Eligible Retired
Participants (the
"Prior Basic Plan"), or, if applicable, Substitute Basic Coverage.
2.15 Disability. "Disability" shall mean qualification for long term disability benefits
under
Section 3.1 of the Officer Disability Plan.
2
2.16 Eligible Employee. "Eligible Employee" shall mean an Officer. Notwithstanding the
foregoing,
the CEO may, from time to time, exclude any Officer or group of Officers from being an
"Eligible
Employee" under this Plan. Employees of a company acquired by AT&T shall not be
considered
an Eligible Employee unless designated as such by the CEO. Notwithstanding the
foregoing,
only the Committee shall have the authority to exclude from participation or take any
action
with respect to Executive Officers.
Notwithstanding the foregoing provisions, individuals hired,
rehired or promoted to an Officer level position on or after March
23, 2010 shall be excluded from the term Eligible Employee, and
such individuals (and their Dependents) shall not be eligible to
participate in this Plan.
2.17 Employer. "Employer" shall mean AT&T Inc. or any of its Subsidiaries.
2.18 Executive Officer. "Executive Officer" shall mean any executive officer of AT&T, as
that term
is used under the Securities Exchange Act of 1934.
2.19 Leave of Absence. "Leave of Absence" shall mean a Company-approved leave of absence.
2.20 Medical Services. "Medical Services" shall mean medical/surgical, mental
health/substance
abuse and prescription pharmacy services. The Plan Administrator, in its sole
discretion,
shall determine whether a particular service is classified as Preventive Care or a
Medical,
Dental or Vision Service. Medical Services do not include Dental Services and Vision
Services.
2.21 Monthly Contributions. "Monthly Contributions" shall mean the monthly premiums or
contributions
required for participation in this Plan as further governed by Article 7 of the Plan.
The
applicable Monthly Contributions are set forth in Exhibit A to this Plan.
2.22 Non-Covered Health Services. "Non-Covered Health Services" shall mean any Medical
Services
or Preventive Care which do not meet the definition of Covered Health Services.
2.23 Officer. "Officer" shall mean an individual who is designated as an officer level
employee
for compensation purposes on the records of AT&T.
2.24 Participant. "Participant" shall mean an Active Participant or Retired Participant or
both,
as the context indicates.
2.25 Plan Administrator. "Plan Administrator" shall mean the SEVP-HR, or any other person
or persons
whom the Committee may appoint to administer the Plan; provided that the Committee may
act
as the Plan Administrator at any time.
2.26 Plan Year. "Plan Year" shall mean the calendar
year.
2.27 Preventive Care. "Preventive Care" shall have the same meaning as such term has in the
AT&T
Medical Plan. The plan administrator for the AT&T Medical Plan shall determine whether
a particular
service constitutes Preventive Care and the Plan Administrator for this Plan shall
rely upon
such determination.
3
2.28 Qualified Dependent. "Qualified Dependent" shall mean a Dependent who loses coverage
under
a COBRA eligible program due to a Qualifying Event.
2.29 Qualifying Event. "Qualifying Event" shall mean any of the following events if, but
for COBRA
continuation coverage, they would result in a Participant's loss of coverage under
this Plan:
(1) death of a covered Eligible Employee;
(2) termination (other than by reason of such Eligible Employee's gross misconduct) of an Employee's
employment;
(3) reduction in hours of an Eligible Employee;
(4) divorce or legal separation of an Eligible Employee or dissolution of an Eligible Employee's
registered domestic partnership;
(5) an Eligible Employee's entitlement to
Medicare benefits; or
(6) a Dependent child ceasing to qualify as a Dependent under the group medical Basic Plan,(or,
if applicable, Substitute Basic Coverage) or with respect to a Dependent child who is a Medicare
Eligible Retired Participant, the child's ceasing to otherwise qualify under the Prior Basic
Plan.
2.30 Retire, Retired or Retirement. "Retire," "Retired" or "Retirement" shall mean the
termination
of an Active Employee Participant's employment with AT&T or any of its Subsidiaries,
for reasons
other than death, on or after the earlier of the following dates: (1) the date such
Active
Employee Participant has attained age 55, and, for an Active Employee Participant on
or after
January 1, 2002, has five (5) years of service, or (2) the date the Active Employee
Participant
has attained one of the following combinations of age and service at termination of
employment
on or after April 1, 1997:
Net Credited Service Age
25 years or more 50 or older
30 years or more Any age
2.31 Retired Participant. "Retired Participant" shall mean a Retired Employee Participant
and his
Dependents.
2.32 Retired Employee Participant. "Retired Employee Participant" shall mean a former
Active Employee
Participant who has Retired within the meaning of Section 2.30 and who meets the
additional
requirements of Section 3.2 to be eligible for coverage in Retirement.
2.33 SEVP-HR. "SEVP-HR" shall mean AT&T's highest ranking Officer, specifically responsible
for
human resources matters.
2.34 Subsidiary. "Subsidiary" shall mean any corporation, partnership, venture or other
entity
in which AT&T holds, directly or indirectly, a 50% or greater ownership interest. The
Committee
may, at its sole discretion, designate any other corporation, partnership, venture or
other
entity a Subsidiary for the purpose of participating in this Plan. Notwithstanding
anything
herein to the contrary, unless designated a "Subsidiary" pursuant to the immediately
preceding
sentence, Cingular Wireless LLC, Sterling Commerce, Inc., and their respective
subsidiaries
shall not be considered a Subsidiary under this Plan.
4
2.35 Vision Services. "Vision Services" shall mean services for vision care. The Plan
Administrator,
in its sole discretion, shall determine whether a particular service is classified as
Preventive
Care or a Vision, Medical or Dental Service.
2.36 Medicare Eligible Retired Participant. "Medicare Eligible Retired Participant" shall
mean
a Retired Participant who is eligible for Medicare due to reaching the eligible age
for Medicare.
ARTICLE 3 ELIGIBILITY
3.1 Active Participants. Each Eligible Employee shall be eligible to participate in this
Plan
along with his/her Dependent(s) beginning on the effective date of the employee
becoming an
Eligible Employee.
Upon becoming an Eligible Employee, he/she shall have 90 days to
elect to participate in this Plan. In order to continue
participation, the Active Participant must pay all applicable
Monthly Contributions. If an Active Employee Participant terminates
participation in this Plan at any time for any reason, that
Participant and his/her Dependent(s) shall be ineligible to
participate in the Plan at any time in the future.
3.2 Retired Participants. Provisions of this Plan will continue in effect during
Retirement for
each Retired Employee Participant and his/her Dependent(s) with respect to any
Eligible Employee
who became a Participant before January 1, 1999. Neither an Eligible Employee who
became a
Participant after December 31, 1998 nor his/her Dependent(s) shall be eligible for
participation
hereunder on or after such Participant's Retirement. Coverage for Retired Participants
shall
be subject to the payment of all applicable Monthly Contributions, as governed by
Article
7. The provisions of this Plan related to Retired Participants, including the level of
Covered
Benefits and the applicable Monthly Premiums, shall begin to apply on the first day of
the
month following the month in which the Active Employee Participant Retires. If a
Retired Employee
Participant terminates participation at any time for any reason, participation of that
Retired
Employee participant and his/her Dependent(s) may not be reinstated for any reason.
3.3 Requirement to Enroll and Participate in Basic Plans and Medicare. Notwithstanding any
provision
in this plan to the contrary, as a condition to participation in the Plan, each
Participant
must be enrolled in, paying for, and participating in (i) the Basic Plans if such
Participant
is eligible for coverage under the terms of the Basic Plans, or, if applicable,
Substitute
Basic Coverage, and (ii) all parts of Medicare for which such Participant is eligible
and
for which Medicare would be primary if enrolled therein, except for Medicare Part D
relating
to prescription drug coverage.
Notwithstanding any other provision of the Plan to the contrary,
an individual who first becomes an Eligible Employee in the middle
of a Plan Year and who is enrolled in AT&T sponsored group
health plans other than the Basic Plans, will be allowed to
participate in the Plan for the remainder of the Plan Year along
with his/her Dependent(s) who are enrolled in such other AT&T
sponsored health plans, as if they were participating in the Basic
Plans. At the next group enrollment opportunity for the Basic
Plans, the Active Employee Participant and his/her Dependent(s)
must enroll in the Basic Plans to continue participation in this
Plan.
5
ARTICLE 4 BENEFITS
4.1 Covered Benefits. Subject to the limitations in this Plan (including but not limited
to the
loyalty conditions set forth in Article 8 below), this Plan provides the benefits
described
below. Monthly Contributions for participation in this Plan, the Basic Plans,
Medicare, or
any other health plan are not considered "services", and are therefore are not Covered
Benefits
under this Plan.
(a) Active Participants (Medical Services and Preventive Care) -
Medical Services - After the Annual Deductible has been met,
100% payment of Covered Health Services not paid under the AT&T
Medical Plan (or AT&T International Health Plan with respect to
Officers serving in expatriate positions with the Company) or
Medicare minus the amount of Coinsurance, until the Active
Participant reaches the Annual Out-of-Pocket Maximum, at which time
coverage is 100% of Covered Health Services not paid under the
AT&T Medical Plan (or AT&T International Health Plan with
respect to Officers serving in expatriate positions with the
Company) .
Preventive Care - Preventive Care, whether received as a
"Network/ONA" service or "Non-Network" service, as defined in the
AT&T Medical Plan, is covered at 100%, not subject to the
Annual Deductible or Coinsurance.
(b) Active Participants (Dental Services and Vision Services) -
100% payment, through reimbursement or otherwise, of all Dental
Services and Vision Services not paid under the Active
Participant's (i) Basic Plans or (ii) Medicare, provided expenses
for such services would qualify as deductible medical expenses for
federal income tax purposes, whether deducted or not.
(c) Retired Participants -
100% payment, through reimbursement or otherwise, of all
Medical, Dental, Vision and Preventive services not paid under the
Retired Participant's (i) Basic Plans or Substitute Basic Coverage,
if either is applicable or (ii) Medicare, provided expenses for
such services would qualify as deductible medical expenses for
federal income tax purposes, whether deducted or not.
4.2 Covered Benefit Limits. RESERVED
4.3 Priority of Paying Covered Claims. Claims for benefits will be applied against the
various
health plans, as applicable, and coordinated with Medicare in the following order:
(1) Medicare, to the extent the Participant is eligible therefore and such claim is actually paid
by Medicare,
(2) Basic Plans, if applicable,
(3) CarePlus, if elected,
(4) Long Term Care Plan, if elected,
(5) this Plan.
6
4.4 Substitute Basic Coverage. Notwithstanding any other provision of this Plan to the
contrary,
if a Retired Employee Participant, other than a Medicare Eligible Retired Participant,
is
eligible for participation under this Plan during Retirement, but not eligible to
participate
under the Basic Plans, the Plan shall provide medical, dental, and vision benefits for
the
Retired Employee Participant and his/her Dependent(s) substantially equivalent to the
benefits
under the Basic Plans through an insured product (hereinafter, "Substitute Basic
Coverage").
Eligibility for Substitute Basic Coverage is conditioned upon the Retired
Participant's payment
of contributions in the same amount that a similarly situated retired Basic Plan
participant
is required to pay under the Basic Plans. Such Substitute Basic Coverage shall
constitute
such Retired Participant's Basic Plans for all purposes under this Plan. The costs of
Substitute
Basic Coverage (except for the required monthly contributions referenced in this
paragraph)
shall be borne by AT&T, and the costs of Substitute Basic Coverage shall not be
included in
the determination of any Retired Participant's annual Plan contribution amount as
provided
in Article 7. In addition, certain other Retired Employee Participants participate in
the
"Separation Medical Plan" rather than the Basic Plans. References to Substitute Basic
Coverage
throughout this Plan shall be deemed to include the Separation Medical Plan. The Plan
Administrator
maintains records governing the names of those Retired Employee Participants who have
Substitute
Basic Coverage or Separation Medical Plan coverage.
ARTICLE 5 TERMINATION OF PARTICIPATION
5.1 Termination of Participation. Participation will cease on the last day of the month in
which
one of the following conditions occurs:
(1) The Participant, other than a Medicare Eligible Retired Participant, is no longer
a participant
in the Basic Plans or Substitute Basic Coverage, in which case participation
ceases for such
Participant;
(2) A Participant ceases to meet the definition of a Dependent (as set forth in
Section 2.14 of
this Plan) for any reason, in which case participation ceases for such
Participant;
(3) A Participant eligible to enroll in Medicare is no longer a participant in all
parts of Medicare
for which such Participant is eligible to enroll and for which Medicare would be
primary if
enrolled therein, except for Medicare Part D relating to prescription drug
coverage, in which
case participation ceases for such Participant;
(4) The Active Employee Participant's termination of employment for reasons other
than Death,
Disability, or Retirement by an individual who meets the applicable requirements
of Section
3.2 in order to qualify for Plan benefits in Retirement, in which case
participation ceases
for the Participant and his/her Dependent(s);
(5) The demotion or designation of an Active Employee Participant so as to no longer
be eligible
to participate in the Plan, in which case participation ceases for the
Participant and his/her
Dependent(s);
(6) The Active Employee Participant (or Retired Employee Participant) participates in
an activity
that constitutes engaging in competitive activity with AT&T or engaging in
conduct disloyal
to AT&T under Article 8, in which case participation ceases for the Active
Employee Participant
(or Retired Employee Participant) and his/her Dependent(s); or
7
(7) Discontinuance of the Plan by AT&T, or, with respect to a Subsidiary's Active
Employee Participants
(or Retired Employee Participants), such Subsidiary's failure to make the
benefits hereunder
available to Active Employee Participants employed by it (or its Retired Employee
Participants).
5.2 Dependents Failure to Participate in Basic Plans. If a Dependent, other than a
Medicare Eligible
Retired Participant, ceases participation under a Basic Plan or, if applicable,
Substitute
Basic Coverage, such Dependent's participation under this Plan will cease with the
same effective
date.
5.3 Death. In the event of the Active Employee Participant's (or Retired Employee's
Participant's)
death, his Dependents may continue participation in this Plan as follows:
(1) In the event of the death of a Retired Employee Participant such Retired Employee Participant's
Dependents may continue participation in this Plan, eligible for the Covered Benefits described
in Section 4.1(c) of the Plan, for so long as such Dependents are participating in the Basic
Plans (or, if applicable, Substitute Basic Coverage) or with respect to a Dependent who is
a Medicare Eligible Retired Participant, for so long as such Dependent would have otherwise
been eligible for participation under the terms of the Prior Basic Plan and are paying any
applicable contributions for this Plan as provided in Article 7. If a surviving spouse of
such deceased Active Employee Participant otherwise eligible for participation in the Plan
remarries, his/her participation and the participation of any otherwise eligible Dependents
will cease with the effective date of his/ her marriage.
(2) In the event of an in-service death of an Active Employee Participant eligible to participate
in the Plan in Retirement as provided under Article 3.2, who was Retirement eligible, within
the meaning of Section 2.30, at the time of death, such Active Employee Participant's surviving
Dependents may continue participation in this Plan, eligible for the Covered Benefits described
in Section 4.1(a) and (b), for so long as such Dependents are participating in the Basic Plans
(or, if applicable Substitute Basic Coverage) or with respect to a Dependent who is a Medicare
Eligible Retired Participant, for so long as such Dependent would have otherwise been eligible
for participation under the terms of the Prior Basic Plan and are paying any applicable contributions
for this Plan as provided in Article 7. If a surviving spouse of such deceased Active Employee
Participant otherwise eligible for participation in the Plan remarries, his/her participation
and the participation of any otherwise eligible Dependents will cease with the effective date
of his/ her marriage.
(3) In the event of (i) an in-service death of an Active Employee Participant not eligible to
participate in the Plan in Retirement as provided in Article 3.2 or (ii) an in-service death
of an Active Employee Participant eligible to participate in the Plan in Retirement as provided
in Article 3.2 but the
8
individual was not Retirement eligible, within the meaning of Section 2.30, at the time of
death, such Active Employee Participant's Dependent(s) may continue participation in this
Plan, eligible for the Covered Benefits described in Sections 4.1(a) and (b), for a 36-month
period commencing the month following the month in which such Active Employee Participant
dies as long as such Dependent(s) are participating in the Basic Plans (or with respect to
a Dependent who is a Medicare Eligible Retired Participant, for so long as such Dependent
would have otherwise been eligible for participation under the terms of the Prior Basic Plan)
and subject to the payment of Active Participant Contributions for the first 12 months and
payment of Active COBRA Contributions for the remaining 24 months, as provided by Articles
7 and 10.1. If the Active Employee Participant's Dependent(s) are eligible for COBRA, they
will automatically be enrolled in COBRA so that there is no lapse in coverage, and this 36-month
coverage will be integrated and run concurrently with COBRA coverage.
ARTICLE 6 DISABILITY
6.1 Disability. With respect to any Active Employee Participant who commences receipt of
short
term or long term disability benefits under the Officer Disability Plan, participation
under
this Plan will be as follows:
(1) The Participant will continue to participate in this Plan, eligible for the Covered Benefits
described in Section 4.1(a) and (b), for as long as he/she receives short term disability
benefits under the Officer Disability Plan and pays the applicable contributions for this
Plan as provided by Article 7.
(2) An Active Employee Participant not eligible to participate in the Plan in Retirement as provided
in Article 3.2 who commences long term disability benefits under the Officer Disability Plan
or an Active Employee Participant eligible to participate in the Plan in Retirement as provided
in Article 3.2 but who is not Retirement eligible, within the meaning of Section 2.30, at
the time long term disability benefits under the Officer Disability Plan commence, will cease
participation in this Plan (along with his/her Dependents) effective as of the last day of
the calendar month in which such long term disability benefits commence, unless such benefits
commence on the first day of a calendar month, in which case participation in this Plan shall
cease effective as of the last day of the prior month.
(3) An Active Employee Participant eligible to participate in the Plan in Retirement as provided
in Article 3.2 ,who is Retirement eligible, within the meaning of Section 2.30, at the time
long term disability benefits under the Officer Disability Plan commence, will be eligible
to continue participation in this Plan on the same terms and conditions that participation
would be available to such Participant in Retirement, subject to the payment of applicable
contributions for this Plan as provided by Article 7, regardless of his/her continued receipt
of long term disability benefits under the Officer Disability Plan.
9
ARTICLE 7 COSTS
7.1 Provision of Benefits under the Plan. Except as provided below in this Article 7 with
respect
to required Monthly Contributions or with respect to any required Coinsurance, the
benefits
available to Participants under this Plan shall be provided through an insurance
policy maintained
by AT&T.
7.2 Active Participant Contributions. An Active Participant electing to participate in the
Plan
will pay Monthly Contributions to participate in the Plan while in active service,
while on
Leave of Absence or while receiving short term disability benefits under the Officer
Disability
Plan. The Monthly Contribution for participation may change annually, effective at the
beginning
of each Plan Year. Contributions to be made by Active Participants electing to
participate
in the Plan shall be set annually by the SEVP-HR, determined in the SEVP-HR's sole and
absolute
discretion. The SEVP-HR may adopt tiered rates for similarly situated groups of
Participants
based on factors such as the number of Dependents covered or Medicare eligibility.
Notwithstanding
the foregoing, required Monthly Contributions for Executive Officers shall be approved
by
the Committee.
7.3 Retired Participant Contributions. Retired Participants who elect to participate will
pay
Monthly Contributions to participate in the Plan. The Monthly Contribution for
participation
may change annually, effective at the beginning of each Plan Year. Contributions to be
made
by Retired Participants who elect to participate shall be set annually by the SEVP-HR
(in
his/her sole and absolute discretion), to the extent their contributions have not
previously
been provided for in a separate agreement.
7.4 Survivor Contributions. Upon the death of a Participant, the Participant's Dependents
shall
be required to pay Monthly Contributions to participate in the Plan. The Monthly
Contributions
shall be set annually by the SEVP-HR, in the SEVP-HR's sole and absolute discretion.
Any changes
to the Monthly Contributions shall be effective at the beginning of each Plan Year.
7.5 Contributions for Participants on Disability. Participants continuing benefits while
on Disability
shall be required to pay Monthly Contributions to participate in the Plan. The Monthly
Contributions
shall be set annually by the SEVP-HR, determined in the SEVP-HR's sole and absolute
discretion.
Any changes to the Monthly Contributions shall be effective at the beginning of each
Plan
Year.
ARTICLE 8 LOYALTY CONDITIONS
8.1 Participants acknowledge that no coverage and benefits would be provided under this
Plan on
and after January 1, 2010 but for the loyalty conditions and covenants set forth in
this Article,
and that the conditions and covenants herein are a material inducement to AT&T's
willingness
to sponsor the Plan and to offer Plan coverage and benefits for the Participants on or
after
January 1, 2010. Accordingly, as a condition of receiving coverage and any Plan
benefits on
or after January 1, 2010, each Participant is deemed to agree that he shall not,
without obtaining
the written consent of the Plan Administrator in advance, participate in activities
that constitute
engaging in competition with AT&T or engaging in conduct disloyal to AT&T, as those
terms
are defined in this Section. Further and notwithstanding any other provision of this
Plan,
all coverage and
10
benefits under this Plan on and after January 1, 2010 with respect to a Participant and his
or her Dependents shall be subject in their entirety to the enforcement provisions of this
Section if the Participant, without the Plan Administrator's consent, participates in an activity
that constitutes engaging in competition with AT&T or engaging in conduct disloyal to AT&T,
as defined below. The provisions of this Article 8 as in effect immediately before such date
shall be applicable to Participants who retire before January 1, 2010.
8.2 Definitions. For purposes of this Article and of the Plan generally
(1) an "Employer Business" shall mean AT&T, any Subsidiary, or any
business in which AT&T or a
Subsidiary or an affiliated company of AT&T has a substantial
ownership or joint venture interest;
(2) "engaging in competition with AT&T" shall mean, while employed by
an Employer Business or
within two (2) years after the Participant's termination of
employment, engaging by the Participant
in any business or activity in all or any portion of the same
geographical market where the
same or substantially similar business or activity is being
carried on by an Employer Business.
"Engaging in competition with AT&T" shall not include owning a
nonsubstantial publicly traded
interest as a shareholder in a business that competes with an
Employer Business. "Engaging
in competition with AT&T" shall include representing or providing
consulting services to,
or being an employee or director of, any person or entity that is
engaged in competition with
any Employer Business or that takes a position adverse to any
Employer Business.
(3) "engaging in conduct disloyal to AT&T" means, while employed by
an Employer Business or within
two (2) years after the Participant's termination of employment,
(i) soliciting for employment
or hire, whether as an employee or as an independent contractor,
for any business in competition
with an Employer Business, any person employed by AT&T or its
affiliates during the one (1)
year prior to the termination of the Participant's employment,
whether or not acceptance of
such position would constitute a breach of such person's
contractual obligations to AT&T and
its affiliates; (ii) soliciting, encouraging, or inducing any
vendor or supplier with which
Participant had business contact on behalf of any Employer
Business during the two (2) years
prior to the termination of the Participant's employment, for any
reason to terminate, discontinue,
renegotiate, reduce, or otherwise cease or modify its
relationship with AT&T or its affiliate;
or (iii) soliciting, encouraging, or inducing any customer or
active prospective customer
with whom Participant had business contact, whether in person or
by other media, on behalf
of any Employer Business during the two (2) years prior to the
termination of Participant's
employment for any reason ("Customer"), to terminate,
discontinue, renegotiate, reduce, or
otherwise cease or modify its relationship with any Employer
Business, or to purchase competing
goods or services from a business competing with any Employer
Business, or accepting or servicing
business from such Customer on behalf of himself or any other
business. "Engaging in conduct
disloyal to AT&T" also means, disclosing Confidential Information
to any third party or using
Confidential Information, other than for an Employer Business, or
failing to return any Confidential
Information to the Employer Business following termination of
employment.
11
Confidential Information to the Employer Business following termination of employment.
(4) "Confidential Information" shall mean all information belonging
to, or otherwise relating
to, an Employer Business, which is not generally known,
regardless of the manner in which
it is stored or conveyed to the Participant, and which the
Employer Business has taken reasonable
measures under the circumstances to protect from unauthorized use
or disclosure. Confidential
Information includes trade secrets as well as other proprietary
knowledge, information, know-how,
and non-public intellectual property rights, including
unpublished or pending patent applications
and all related patent rights, formulae, processes, discoveries,
improvements, ideas, conceptions,
compilations of data, and data, whether or not patentable or
copyrightable and whether or
not it has been conceived, originated, discovered, or developed
in whole or in part by the
Participant. For example, Confidential Information includes, but
is not limited to, information
concerning the Employer Business' business plans, budgets,
operations, products, strategies,
marketing, sales, inventions, designs, costs, legal strategies,
finances, employees, customers,
prospective customers, licensees, or licensors; information
received from third parties under
confidential conditions; or other valuable financial, commercial,
business, technical or marketing
information concerning the Employer Business, or any of the
products or services made, developed
or sold by the Employer Business. Confidential Information does
not include information that
(i) was generally known to the public at the time of disclosure;
(ii) was lawfully received
by the Participant from a third party; (iii) was known to the
Participant prior to receipt
from the Employer Business; or (iv) was independently developed
by the Participant or independent
third parties; in each of the foregoing circumstances, this
exception applies only if such
public knowledge or possession by an independent third party was
without breach by the Participant
or any third party of any obligation of confidentiality or
non-use, including but not limited
to the obligations and restrictions set forth in this Plan.
8.3 Forfeiture of Benefits. Subject to the provisions of Section 1001(5) of the
Affordable Care
Act, coverage and benefits shall be forfeited and shall not be provided under this
Plan for
any period as to which the Plan Administrator determines that, within the time period
and
without the written consent specified, Participant has been either engaging in
competition
with AT&T or engaging in conduct disloyal to AT&T.
8.4 Equitable Relief. The parties recognize that any Participant's breach of any of the
covenants
in this Article 8 will cause irreparable injury to AT&T, will represent a failure of
the consideration
under which AT&T (in its capacity as creator and sponsor of the Plan) agreed to
provide the
Participant with the opportunity to receive Plan coverage and benefits, and that
monetary
damages would not provide AT&T with an adequate or complete remedy that would warrant
AT&T's
continued sponsorship of the Plan and payment of Plan benefits for all Participants.
Accordingly,
in the event of a Participant's actual or threatened breach of the covenants in this
Article,
the Plan Administrator, in addition to all other rights and acting as a fiduciary
under ERISA
on behalf of all Participants, shall have a fiduciary duty (in order to assure that
AT&T receives
fair and promised consideration for its continued Plan sponsorship and funding) to
seek an
injunction restraining the Participant from breaching the covenants in this Article 8.
In
addition, AT&T shall pay for any Plan expenses that the Plan Administrator incurs
hereunder,
and shall be entitled to recover from the Participant its reasonable attorneys' fees
and costs
incurred in obtaining such injunctive remedies. To enforce its repayment rights with
respect
to a Participant, the Plan shall have a first priority, equitable lien on all Plan
benefits
provided to or for the Participant and his or her Dependents. In the event the Plan
Administrator
succeeds in enforcing the terms of this Article through a written settlement with the
Participant
or a court order granting an injunction hereunder, the Participant shall be entitled
to collect
Plan benefits collect Plan benefits prospectively, if the Participant is otherwise
entitled
to such benefits, net of any fees and costs assessed pursuant hereto (which fees and
costs
shall be paid to AT&T as a repayment on behalf of the Participant), provided that the
Participant
complies with said settlement or injunction.
12
8.5 Uniform Enforcement. In recognition of AT&T's need for nationally uniform standards
for the
Plan administration, it is an absolute condition in consideration of any Participant's
accrual
or receipt of benefits under the Plan after January 1, 2010 that each and all of the
following
conditions apply to all Participants and to any benefits that are paid or are payable
under
the Plan:
(1) ERISA shall control all issues and controversies hereunder, and the
Committee shall serve
for purposes hereof as a "fiduciary" of the Plan, and as its "named
fiduciary" within the
meaning of ERISA.
(2) All litigation between the parties relating to this Article shall
occur in federal court,
which shall have exclusive jurisdiction, any such litigation shall
be held in the United States
District Court for the Northern District of Texas, and the only
remedies available with respect
to the Plan shall be those provided under ERISA.
(3) If the Plan Administrator determines in its sole discretion either
(I) that AT&T or its affiliate
that employed the Participant terminated the Participant's
employment for cause, or (II) that
equitable relief enforcing the Participant's covenants under this
Article 8 is either not
reasonably available, not ordered by a court of competent
jurisdiction, or circumvented because
the Participant has sued in state court, or has otherwise sought
remedies not available under
ERISA, then in any and all of such instances the Participant shall
not be entitled to collect
any Plan benefits, and if any Plan benefits have been paid to the,
the Participant shall immediately
repay all Plan benefits to the Plan (with such repayments being used
within such year for
increased benefits for other Participants in any manner determined
in the Plan Administrator's
discretion) upon written demand from the Plan Administrator.
Furthermore, the Participant
shall hold AT&T and its affiliates harmless from any loss, expense,
or damage that may arise
from any of the conduct described in clauses (I) and (II) hereof.
ARTICLE 9 MISCELLANEOUS
9.1 Administration. The Plan Administrator is the named fiduciary of the Plan and has the
power
and duty to do all things necessary to carry out the terms of the Plan. The Plan
Administrator
has the sole and absolute discretion to interpret the provisions of the Plan, to make
findings
of fact, to determine the rights and status of Participants and other under the Plan,
to determine
which expenses and benefits qualify as Covered Health Services or Covered Benefits, to
make
all benefit determinations under the Plan, to decide disputes under the Plan and to
delegate
all or a part of this discretion to third parties and insurers. To the fullest extent
permitted
by law, such interpretations, findings, determinations and decisions shall be final,
binding
and conclusive on all persons for all purposes of the Plan. The Plan Administrator may
delegate
any or all of its authority and responsibility under the Plan to other individuals,
committees,
third party administrators, claims administrators or insurers for any purpose,
including,
but not limited to the processing of benefits and claims related thereto. In carrying
out
these functions, these individuals or entities have been delegated responsibility and
discretion
for interpreting the provisions of the Plan, making findings of fact, determining the
rights
and status of Participants and others under the Plan, and deciding disputes under the
Plan
and such interpretations, findings, determinations and decisions shall be final,
binding and
conclusive on all persons for all purposes of the Plan.
13
9.2 Amendments and Termination. This Plan may be modified or terminated at any time in
accordance
with the provisions of AT&T's Schedule of Authorizations.
9.3 Newborns' and Mothers' Health Protection Act of 1996. To the extent this Plan provides
benefits
for hospital lengths of stay in connection with childbirth, the Plan will cover the
minimum
length of stay required for deliveries (i.e., a 48-hour hospital stay after a vaginal
delivery
or a 96-hour stay following a delivery by Cesarean section.) The mother's or newborn's
attending
physician, after consulting with the mother, may discharge the mother or her newborn
earlier
than the minimum length of stay otherwise required by law. Such coverage shall be
subject
to all other provisions of this Plan.
9.4 Women's Health and Cancer Rights Act of 1998. To the extent this Plan provides
benefits for
mastectomies, it will provide, for an individual who is receiving benefits in
connection with
a mastectomy and who elects breast reconstruction in connection with such mastectomy,
coverage
for reconstruction on the breast on which the mastectomy was performed, surgery and
reconstruction
on the other breast to give a symmetrical appearance, and prosthesis and coverage for
physical
complications of all stages of the mastectomy, including lymphedemas. Such coverage
shall
be subject to all other provisions of this Plan.
9.5 Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of
2008. To
the extent this Plan provides mental health benefits or substance use disorder
benefits it
will not place annual or lifetime maximums for such benefits that are lower than the
annual
and lifetime maximums for physical health benefits. In addition, the financial
requirements
(e.g., deductibles and co-payments) and treatment limitations (e.g., number of visits
or days
of coverage) that apply to mental health benefits or substance use disorder benefits
will
not be more restrictive than the predominant financial requirements or treatment
limitations
that apply to substantially all medical/surgical benefits; mental health benefits and
substance
use disorder benefits will not be subject to any separate cost sharing requirements or
treatment
limitations that only apply to such benefits; if the Plan provides for out of network
medical/surgical
or substance use disorder benefits, it will provide for out of network mental health
and substance
use disorder benefits and standards for medical necessity determinations and reasons
for any
denial of benefits relating to mental health benefits and substance use disorder
benefits
will be made available upon request to plan participants. Such coverage shall be
subject to
all other provisions of this Plan.
14
9.6 Continuation of Coverage During Family or Medical Leave. During any period which an
Active
Employee Participant is on a family or medical leave as defined in the Family or
Medical Leave
Act, any benefit elections in force for such Participant shall remain in effect. While
the
Participant is on paid leave, contributions shall continue. If the Participant is on
an unpaid
leave, the Participant may elect to prepay required contributions on a pre-tax basis
before
the commencement of such unpaid leave. Alternatively, the Participant may elect to
make such
payments on an after-tax basis monthly in accordance with an arrangement that the Plan
Administrator
shall provide. If coverage is not continued during the entire period of the family or
medical
leave because the Participant declines to pay the premium, the coverage must be
reinstated
upon reemployment with no exclusions or waiting periods, notwithstanding any other
provision
of this Plan to the contrary. If the Participant does not return to work upon
completion of
the leave, the Participant must pay the full cost of any health care coverage that was
continued
on his/her behalf during the leave. These rules apply to the COBRA eligible programs.
9.7 Rights While on Military Leave. Pursuant to the provisions of the Uniformed Services
Employment
and Reemployment Rights Act of 1994, an Active Employee Participant on military leave
will
be considered to be on a Leave of Absence and will be entitled during the leave to the
health
and welfare benefits that would be made available to other similarly situated
employees if
they were on a Leave of Absence. This entitlement will end if the individual provides
written
notice of intent not to return to work following the completion of the military leave.
The
individual shall have the right to continue his/her coverage, including any Dependent
coverage,
for the lesser of the length of the leave or 18 months. If the military leave is for a
period
of 31 days or more, the individual may be required to pay 102 percent of the total
premium
(determined in the same manner as a COBRA continuation coverage premium). If coverage
is not
continued during the entire period of the military leave because the individual
declines to
pay the premium or the leave extends beyond 18 months, the coverage must be reinstated
upon
reemployment with no pre-existing condition exclusions (other than for service-related
illnesses
or injuries) or waiting periods (other than those applicable to all Eligible
Employees).
9.8 Qualified Medical Child Support Orders. The Plan will comply with any Qualified
Medical Child
Support Order issued by a court of competent jurisdiction or administrative body that
requires
the Plan to provide medical coverage to a Dependent child of an Active Employee or
Retired
Employee Participant. The Plan Administrator will establish reasonable procedures for
determining
whether a court order or administrative decree requiring medical coverage for a
Dependent
child meets the requirements for a Qualified Medical Child Support Order. The cost of
coverage
or any additional cost of such coverage, if any, shall be borne by the Participant.
9.9 Right of Recovery. If the Plan has made an erroneous or excess payment to any
Participant,
the Plan Administrator shall be entitled to recover such excess from the individual or
entity
to whom such payments were made. The recovery of such overpayment may be made by
offsetting
the amount of any other benefit or amount payable by the amount of the overpayment
under the
Plan.
ARTICLE 10 COBRA
10.1 Continuation of Coverage Under COBRA. Participants shall have all COBRA continuation
rights
required by federal law and all conversion rights. COBRA continuation coverage shall
be continued
as provided in this Article 10.
15
10.2 COBRA Continuation Coverage for Terminated Participants. A covered Active Employee
Participant
may elect COBRA continuation coverage, at his/her own expense, if his participation
under
this Plan would terminate as a result of one of the following Qualifying Events: an
Employee's
termination of employment or reduction of hours with an Employer.
10.3 COBRA Continuation Coverage for Dependents. A Qualified Dependent may elect COBRA
continuation
coverage, at his/her own expense, if his/her participation under this Plan would
terminate
as a result of a Qualifying Event.
10.4 Period of Continuation Coverage for Covered Participants. A covered Active Employee
Participant
who qualifies for COBRA continuation coverage as a result of a Participant's
termination of
employment or reduction in hours of employment described in Subsection 10.2 may elect
COBRA
continuation coverage for up to 18 months measured from the date of the Qualifying
Event.
Coverage under this Subsection 10.4 may not continue beyond
the:
(1) date on which the Active Employee Participant's Employer ceases to maintain this Plan;
(2) last day of the month for which premium payments have been made with respect to this Plan,
if the individual fails to make premium payments on time, in accordance with Subsection 10.6;
(3) date the covered Active Employee Participant becomes entitled to Medicare; or
(4) date the covered Participant is no longer subject to a pre-existing condition exclusion under
the Participant's other coverage or new employer plan for the type of coverage available under
the COBRA eligible program for which the COBRA election was made.
10.5 Period of COBRA Continuation Coverage for Dependents. If a Qualified Dependent elects
COBRA
continuation coverage under a COBRA eligible program as a result of the an Active
Employee
Participant's termination of employment as described in Subsection 10.2, continuation
coverage
may be continued for up to 18 months measured from the date of the Qualifying Event.
COBRA
continuation coverage for all other Qualifying Events may continue for up to 36
months.
Continuation coverage under this Subsection 10.5 with respect to
a COBRA eligible program may not continue beyond the date:
(1) on which premium payments have not been made, in accordance with Subsection 10.6 below;
(2) the Qualified Dependent becomes entitled to Medicare;
16
(3) on which the Employer ceases to maintain this Plan; or
(4) the Qualified Dependent is no longer subject to a pre-existing condition exclusion under
the Participant's other coverage or new employer plan for the type of coverage available under
this Plan.
10.6 Contribution Requirements for COBRA Continuation Coverage. Covered Participants and
Qualified
Dependents who elect COBRA continuation coverage as a result of a Qualifying Event
will be
required to pay continuation coverage payments. Continuation coverage payments are the
payments
required for COBRA continuation coverage that is an amount equal to a reasonable
estimate
of the cost to this Plan of providing coverage for all covered Participants at the
time of
the Qualifying Event plus a 2% administrative expense. In the case of a disabled
individual
who receives an additional 11-month extended coverage under COBRA, the Employer may
assess
up to 150% of the cost for this extended coverage period. Such cost shall be
determined on
an actuarial basis and take into account such factors as the Secretary of the Treasury
may
prescribe in regulations.
Covered Participants and Qualified Dependents must make the
continuation coverage payment prior to the first day of the month
in which such coverage will take effect. However, a covered
Participant or Qualified Dependent has 45 days from the date of an
affirmative election to pay the continuation coverage payment for
the first month's payment and the cost for the period between the
date medical coverage would otherwise have terminated due to the
Qualifying Event and the date the covered Participant and/or
Qualified Dependent actually elects COBRA continuation
coverage.
The covered Participant and/or Qualified Dependent shall have a
30-day grace period to make the continuation coverage payments due
thereafter. Continuation coverage payments must be postmarked on or
before the completion of the 30-day grace period. If continuation
coverage payments are not made on a timely basis, COBRA
continuation coverage will terminate as of the last day of the
month for which timely premiums were made. The 30-day grace period
shall not apply to the 45-day period for the first month's payment
of COBRA premiums as set out in the section above.
If payment is received that is significantly less than the
required continuation coverage payment, then continuation coverage
will terminate as of the last day of the month for which premiums
were paid. A payment is considered significantly less than the
amount due if it is greater than the lesser of $50 or 10% of the
required continuation coverage payment. Upon receipt of a
continuation coverage payment that is insignificantly less than the
required amount, the Plan Administrator must notify the covered
Participant or Qualified Dependent of the amount of the shortfall
and provide them with an additional 30-day grace period from the
date of the notice for this payment only.
10.7 Limitation on Participant's Rights to COBRA Continuation Coverage.
(1) If a Qualified Dependent loses, or will lose medical coverage under this Plan as a result
of divorce, legal separation, entitlement to Medicare, or ceasing to be a Dependent, such
Qualified Dependent is responsible for notifying the Plan Administrator in writing within
60 days of the Qualifying Event. Failure to make timely notification will terminate the Qualified
Dependent's rights to COBRA continuation coverage under this Article.
17
(2) A Participant must complete and return the required enrollment materials within 60 days from
the later of (a) the date of loss of coverage, or (b) the date the Plan Administrator sends
notice of eligibility for COBRA continuation coverage. Failure to enroll for COBRA continuation
coverage during this 60-day period will terminate all rights to COBRA continuation coverage
under this Article. An affirmative election of COBRA continuation coverage by a Participant
or his/her spouse shall be deemed to be an election for that Participant's Dependent(s) who
would otherwise lose coverage under the Plan.
10.8 Subsequent Qualifying Event. If a second Qualifying Event occurs during an 18-month
extension
explained above, coverage may be continued for a maximum of 36 months from the date of
the
first Qualifying Event. In the event the Dependent loses coverage due to a Qualifying
Event
and after such date the Participant becomes entitled to Medicare, the Dependent shall
have
available up to 36 months of coverage measured from the date of the Qualifying Event
that
causes the loss of coverage. If the Participant was entitled to Medicare prior to the
Qualifying
Event, the Dependent shall have up to 36 months of coverage measured from the date of
entitlement
to Medicare.
10.9 Extension of COBRA Continuation Period for Disabled Individuals. The period of
continuation
shall be extended to 29 months in total (measured from the date of the Qualifying
Event) in
the event the individual is disabled as determined by the Social Security laws within
60 days
of the Qualifying Event. The individual must provide evidence to the Plan
Administrator of
such Social Security determination prior to the earlier of 60 days after the date of
the Social
Security determination, or the expiration of the initial 18 months of COBRA
continuation coverage.
In such event, the Employer may charge the individual up to 150% of the COBRA cost of
the
coverage.
ARTICLE 11 PRIVACY OF MEDICAL INFORMATION
11.1 Definitions. For purposes of this Article 11, the following defined terms shall have
the meaning
assigned to such terms in this subsection:
(1) "Business Associate" shall have the meaning assigned to such
phrase at 45 C.F.R. -- 160.103;
(2) "Health Care Operations" shall have the meaning assigned to
such phrase at 45 C.F.R. -- 164.501;
(3) "HIPAA" shall mean Parts 160 ("General Administrative
Requirements") and 164 ("Security and Privacy") of Title 45 of the
Code of Federal Regulations as such parts are amended from time to
time;
(4) "Payment" shall have the meaning assigned to such phrase at
45 C.F.R -- 160.103;
(5) "Protected Health Information" or "PHI" shall have the
meaning assigned to such phrase at 45 C.F.R. -- 160.103; and
(6) "Treatment" shall have the meaning assigned to such phrase
at 45 C.F.R. -- 164.501.
18
11.2 Privacy Provisions Relating to Protected Health Information ("PHI"). The Plan and its
Business
Associates shall use and disclose PHI to the extent permitted by, and in accordance
with,
HIPAA, for purposes of providing benefits under the Plan and for purposes of
administering
the plan, including, by way of illustration and not by way of limitation, for purposes
of
Treatment, Payment, and Health Care Operations.
11.3 Disclosure of De-Identified or Summary Health Information. The HIPAA Plan, or, with
respect
to the HIPAA Plan, a health insurance issuer, may disclose summary health information
(as
that phrase is defined at 45 C.F.R. -- 160.5049a)) to the Plan Sponsor of the HIPAA
Plan (and
its affiliates) if such entity requests such information for the purpose of:
(1) Obtaining premium bids from health plans for providing health insurance
coverage under the
HIPAA Plan;
(2) Modifying, amending or terminating the group health benefits under the
HIPAA Plan.
In addition, the HIPAA Plan or a health insurance insurer with
respect to the HIPAA Plan may disclose to the Plan Sponsor of the
HIPAA Plan (or its affiliates) information on whether an individual
is participating in the group health benefits provided by the HIPAA
Plan or is enrolled in, or has ceased enrollment with health
insurance offered by the HIPAA Plan.
11.4 The HIPAA Plan Will Use and Disclose PHI as Required by Law or as Permitted by the
Authorization
of the Participant or Beneficiary .
Upon submission of an authorization signed by a Participant,
beneficiary, subscriber or personal representative that meets HIPAA
requirements, the HIPAA Plan will disclose PHI.
In addition, PHI will be disclosed to the extent permitted or
required by law, without the submission of an authorization
form.
11.5 Disclosure of PHI to the Plan Sponsor. The HIPAA Plan will disclose information to the
Plan
Sponsor only upon certification from the Plan Sponsor that the HIPAA Plan documents
have been
amended to incorporate the assurances provided below.
The Plan Sponsor agrees to:
(1) not use or further disclose PHI other than as permitted or required by the HIPAA Plan document
or as required by law;
(2) ensure that any affiliates or agents, including a subcontractor, to whom the Plan Sponsor
provides PHI received from the HIPAA Plan, agrees to the same restrictions and conditions
that apply to the Plan Sponsor with respect to such PHI;
(3) not use or disclose PHI for employment-related actions and decisions unless authorized by
the individual to whom the PHI relates;
19
(4) not use or disclose PHI in connection with any other benefits or employee benefit plan of
the Plan Sponsor or its affiliates unless permitted by the Plan or authorized by an individual
to whom the PHI relates;
(5) report to the Plan any PHI use or disclosure that is inconsistent with the uses or disclosures
provided for of which it becomes aware;
(6) make PHI available to an individual in accordance with HIPAA's access rules;
(7) make PHI available for amendment and incorporate any amendments to PHI in accordance with
HIPAA;
(8) make available the information required to provide an accounting of disclosures;
(9) make internal practices, books and records relating to the use and disclosure of PHI received
from the HIPAA Plan available to the Secretary of the United States Department of Health and
Human Resources for purposes of determining the Plan's compliance with HIPAA; and
(10) if feasible, return or destroy all PHI received from the HIPAA Plan that the Plan Sponsor
still maintains in any form, and retain no copies of such PHI when no longer needed for the
purpose for which disclosure was made (or if return or destruction is not feasible, limit
further uses and disclosures to those purposes that make the return or destruction infeasible).
11.6 Separation Between the Plan Sponsor and the HIPAA Plan. In accordance with HIPAA, only
the
following employees and Business Associate personnel shall be given access to PHI:
(1) employees of the AT&T Benefits and/or AT&T Executive Compensation organizations responsible
for administering group health plan benefits under the HIPAA Plan, including those employees
whose functions in the regular course of business include Payment, Health Care Operations
or other matters pertaining to the health care programs under a HIPAA Plan;
(2) employees who supervise the work of the employees described in (1), above;
(3) support personnel, including other employees outside of the AT&T Benefits or AT&T Executive
Compensation organizations whose duties require them to rule on health plan-related appeals
or perform functions concerning the HIPAA Plan;
(4) investigatory personnel to the limited extent that such PHI is necessary to conduct investigations
of possible fraud;
(5) outside and in-house legal counsel providing counsel to the HIPAA Plan;
20
(6) consultants providing advice concerning the administration of the HIPAA Plan; and
(7) the employees of Business Associates charged with providing services to the HIPAA Plan.
The persons identified above shall have access to and use PHI to
the extent that such access and use is necessary for the
administration of group health benefits under a HIPAA Plan. If
these persons do not comply with this Plan document, the Plan
Sponsor shall provide a mechanism for resolving issues of
noncompliance, including disciplinary sanctions.
11.7 Enforcement.
Enforcement of this Article 11 shall be as provided for by HIPAA. In particular,
participants
and beneficiaries are not authorized to sue with regard to purported breaches of this
Article
11 except as explicitly permitted by HIPAA.
ARTICLE 12 CLAIM AND APPEAL PROCESS
12.1 Claims for Benefits under the Plan. - See Appendix B.
12.2 Claims Related to Basic Eligibility for Coverage under the Plan and Claims Related to
the
Article 8 Loyalty Conditions .
(a) Claims. A person who believes that he or she is being denied a benefit to which
he or she
is entitled under this Plan (hereinafter referred to as a "Claimant") based on a
claim for
basic eligibility for coverage under the Plan or a claim related to the Article 8
Loyalty
Conditions may file a written request for such benefit with the Executive
Compensation Administration
Department, setting forth his or her claim. The request must be addressed to the
AT&T Executive
Compensation Administration Department at its then principal place of business.
(b) Claim Decision. Upon receipt of a claim, the AT&T Executive Compensation
Administration Department
shall review the claim and provide the Claimant with a written notice of its
decision within
a reasonable period of time, not to exceed ninety (90) days, after the claim is
received.
If the AT&T Executive Compensation Administration Department determines that
special circumstances
require an extension of time beyond the initial ninety (90)- day claim review
period, the
AT&T Executive Compensation Administration Department shall notify the Claimant
in writing
within the initial ninety (90)-day period and explain the special circumstances
that require
the extension and state the date by which the AT&T Executive Compensation
Administration Department
expects to render its decision on the claim. If this notice is provided, the AT&T
Executive
Compensation Administration Department may take up to an additional ninety (90)
days (for
a total of one hundred eighty (180) days after receipt of the claim) to render
its decision
on the claim.
If the claim is denied by the AT&T Executive Compensation Administration Department, in whole
or in part, the AT&T Executive Compensation Administration Department shall provide a written
decision using language calculated to be understood by the Claimant and setting forth: (i)
the specific reason or reasons for such denial; (ii) specific references to pertinent provisions
of this Plan on which such denial is based; (iii) a description of any additional material
or information necessary for the Claimant to perfect his or her claim and an explanation of
why such material or such information is necessary; (iv) a description of the Plan's procedures
for review of denied claims and the steps to be taken if the Claimant wishes to submit the
claim for review; (v) the time limits for requesting a review of a denied claim under this
section and for conducting the review under this section ; and (vi) a statement of the Claimant's
right to bring a civil action under Section 502(a) of ERISA if the claim is denied following
review under this section.
21
(c) Request for Review. Within sixty (60) days after the receipt by the Claimant of the
written
decision on the claim provided for in this section, the Claimant may request in writing
that
the Plan Administrator review the determination of the AT&T Executive Compensation
Administration
Department. Such request must be addressed to the Plan Administrator at the address
provided
in the written decision regarding the claim. To assist the Claimant in deciding whether
to
request a review of a denied claim or in preparing a request for review of a denied
claim,
a Claimant shall be provided, upon written request to the Plan Administrator and free of
charge,
reasonable access to, and copies of, all documents, records and other information
relevant
to the claim. The Claimant or his or her duly authorized representative may, but need
not,
submit a statement of the issues and comments in writing, as well as other documents,
records
or other information relating to the claim for consideration by the Committee. If the
Claimant
does not request a review by the Plan Administrator of the AT&T Executive Compensation
Administration
Department's decision within such sixty (60)-day period, the Claimant shall be barred and
estopped from challenging the determination of the AT&T Executive Compensation
Administration
Department.
(d) Review of Decision. Within sixty (60) days after the Plan Administrator's receipt
of a request
for review, the Plan Administrator will review the decision of the AT&T Executive
Compensation
Administration Department. If the Plan Administrator determines that special
circumstances
require an extension of time beyond the initial sixty (60)-day review period, the
Plan Administrator
shall notify the Claimant in writing within the initial sixty (60)-day period and
explain
the special circumstances that require the extension and state the date by which
the Plan
Administrator expects to render its decision on the review of the claim. If this
notice is
provided, the Plan Administrator may take up to an additional sixty (60) days
(for a total
of one hundred twenty (120) days after receipt of the request for review) to
render its decision
on the review of the claim
During its review of the claim, the Plan Administrator
shall:
(1) Take into account all comments, documents, records, and other information
submitted by the
Claimant relating to the claim, without regard to whether such information
was submitted or
considered in the initial review of the claim conducted pursuant to this
section;
(2) Follow reasonable procedures to verify that its benefit determination is
made in accordance
with the applicable Plan documents; and
(3) Follow reasonable procedures to ensure that the applicable Plan provisions
are applied to
the Participant to whom the claim relates in a manner consistent with how
such provisions
have been applied to other similarly-situated Participants.
22
After considering all materials presented by the Claimant, the
Plan Administrator will render a decision, written in a manner
designed to be understood by the Claimant. If the Plan
Administrator denies the claim on review, the written decision will
include (i) the specific reasons for the decision; (ii) specific
references to the pertinent provisions of this Plan on which the
decision is based; (iii) a statement that the Claimant is entitled
to receive, upon request to the Plan Administrator and free of
charge, reasonable access to, and copies of, all documents,
records, and other information relevant to the claim; and (iv) a
statement of the Claimant's right to bring a civil action under
Section 502(a) of ERISA.
In any case, a Participant or Beneficiary may have further
rights under ERISA. The Plan provisions require that Participants
or Beneficiary pursue all claim and appeal rights described in this
section before they seek any other legal recourse regarding claims
for benefits.
23
Appendix A
AT&T Health Plan
2017 Monthly Contributions, Annual Deductible, Coinsurance
Percentages and
Annual Out-of-Pocket Maximum
Active Participants
Monthly Contributions Individual - $74
Individual + Spouse - $91
Individual + 1 or More Children - $74
Individual + Spouse + 1 or More Children - $178
Annual Deductible (combined with group medical plan annual Individual - $1,500
deductible) Individual + 1 or More - $3,000
Coinsurance Percentage (Note 1) 10% after the Annual Deductible is met. Coinsurance
applies until the Annual Out-of-Pocket
Maximum is reached.
Annual Out-of-Pocket Maximum Individual - $5,000
Individual + 1 or More - $10,000 (individual amount of
$5,000)
Note 1: For prescription pharmacy services, the Coinsurance
shall equal the lesser of (i) the Coinsurance Percentage multiplied
by the amount of the Covered Health Services or (ii) the amount
payable by the Participant for such services under the Basic
Plan.
Retired Participants - Monthly Contributions
Retired Prior to August 31, 1992 and Surviving Individual - $200
Spouses Individual + Spouse - $200
Individual + 2 or More - $200
Retired on or after September 1, 1992 and Surviving Class A Individual - $507
Spouses Individual + Spouse - $825
Individual + 1 or More Children - $507
Note: The Plan Administrator shall maintain records Individual + Spouse + 1 or More Children - $782
governing whether a Retired Participant
is in Class A, B, C or D.
Class B Individual - $620
Individual + Spouse - $1,009
Individual + 1 or More Children - $620
Individual + Spouse + 1 or More Children - $958
Class C Individual - $783
Individual + Spouse - $1,261
Individual + 1 or More Children - $783
Individual + Spouse + 1 or More Children - $1,209
Class D Individual - $954
Individual + Spouse - $1,944
Individual + 1 or More Children - $954
Individual + Spouse + 1 or More Children - $1,920
COBRA Continuation Coverage - Monthly Contributions
Active COBRA Individual - $873
Individual + Spouse - $1,788
Individual + 1 or More Children - $1,411
Individual + Spouse + 1 or More Children - $2,558
Retired Prior to August 31, 1992 and Surviving Spouses COBRA Individual - $1,412
Individual + 1 - $2,879
Individual + 2 or More - $3,944
Retired on or after September 1, 1992 and Surviving Spouses COBRA Individual - $1,412
Individual + Spouse - $2,879
Individual + 1 or More Children - $3,832
Individual + Spouse + 1 or More Children - $4,112
24
Appendix B
Claims Procedure Applicable to Claims for Benefits under the
Plan
Claim for Benefits Procedures
You, your covered dependents or a duly authorized person has the
right under ERISA and the Plan to file a written claim for benefits
under the Plan. The following describes the procedures used by the
Plan to process claims for benefits, along with your rights and
responsibilities. These procedures were designed to comply with the
rules of the Department of Labor (DOL) concerning claims for
Benefits. It is important that you follow these procedures to make
sure that you receive full benefits under the Plan.
The Plan is an ERISA plan, and you may file suit in federal
court if you are denied benefits you believe are due you under the
Plan. However, you must complete the full claims and appeal process
offered under the Plan before filing a lawsuit.
Filing a Claim for Benefits
When filing a claim for benefits, you should file the claim with
the Claims Administrator. The Claims Administrator is the third
party to whom claims and appeal responsibility has been delegated
as permitted under Section 9.1 of the Plan.
The following are not considered claims for benefits under the
Plan:
-- A claim related to basic eligibility for coverage under the Plan (See Section 12.2 of the
Plan).
-- A claim related to the Loyalty Conditions contained in Article 8 of the Plan (See Section
12.2 of the Plan).
Claim Filing Limits
A request for payment of benefits must be submitted within one
year after the date of service or the date the prescription was
provided.
Required Information
When you request payment of benefits from the Plan, you must
provide certain information as requested by the Claims
Administrator.
Benefit Determinations
Post-Service Claims
Post-service claims are those claims that are filed for payment
of benefits after medical care has been received. If your
post-service claim is denied, you will receive a written notice
from the Claims Administrator within 30 days of receipt of the
claim, as long as all needed information identified above and any
other information that the Claims Administrator may request in
connection with services rendered to you was provided with the
claim. The Claims Administrator will notify you within this 30-day
period if additional information is needed to process the Claim and
may request a one-time extension not longer than 15 days and pend
your Claim until all information is received.
Once notified of the extension, you then have 45 days to provide
this information. If all of the needed information is received
within the 45-day time frame and the claim is denied, the claims
Administrator will notify you of the denial within 15 days after
the information is received. If you don't provide the needed
information within the 45-day period, your claim will be
denied.
A denial notice will explain the reason for denial, refer to the
part of the Plan on which the denial is based, and provide the
claim appeal procedures.
Pre-Service Claims
Pre-service claims are those claims that require notification or
approval prior to receiving medical care or require notification
within a specified time period after service begins as required
under the Plan provisions. If your claim is a pre-service claim and
is submitted properly with all needed information, you will receive
written notice of the claim decision from the Claims Administrator
within 15 days of receipt of the claim. If you file a pre-service
claim improperly, the Claims Administrator will notify you of the
improper filing and how to correct it within five days after the
pre-service claim is received. If additional information is needed
to process the
25
pre-service claim, the Claims Administrator will notify you of
the information needed within 15 days after the claim was received
and may request a one-time extension not longer than 15 days and
pend your claim until all information is received. Once notified of
the extension, you then have 45 days to provide this information.
If all of the needed information is received within the 45-day time
frame, the Claims Administrator will notify you of the
determination within 15 days after the information is received. If
you don't provide the needed information within the 45-day period,
your claim will be denied. A denial notice will explain the reason
for denial, refer to the part of the Plan on which the denial is
based, and provide the claim appeal procedures.
Urgent Care Claims That Require Immediate Action
Urgent care claims are those claims that require notification or
approval prior to receiving medical care in which a delay in
treatment could seriously jeopardize your life or health or the
ability to regain maximum function or, in the opinion of a
physician with knowledge of your medical condition, could cause
severe pain. In these situations:
-- You will receive notice of the benefit determination in writing or electronically within 72
hours after the Claims Administrator receives all necessary information, taking into account
the seriousness of your condition.
-- Notice of denial may be oral with a written or electronic confirmation to follow within three
days.
If you filed an urgent claim improperly, the Claims
Administrator will notify you of the improper filing and how to
correct it within 24 hours after the urgent claim was received. If
additional information is needed to process the claim, the Claims
Administrator will notify you of the information needed within 24
hours after the claim was received. You then have 48 hours to
provide the requested information.
You will be notified of a determination no later than 48 hours
after either:
-- The Claims Administrator's receipt of the requested information.
-- The end of the 48-hour period within which you were to provide the additional information,
if the information is not received within that time.
A denial notice will explain the reason for denial, refer to the
part of the Plan on which the denial is based, and provide the
claim appeal procedures.
Concurrent Care Claims
If an ongoing course of treatment was previously approved for a
specific period of time or number of treatments, and your request
to extend the treatment is an urgent care claim as defined above,
your request will be decided within 24 hours, provided your request
is made at least 24 hours prior to the end of the approved
treatment. The Claims Administrator will make a determination on
your request for the extended treatment within 24 hours from
receipt of your request.
If your request for extended treatment is not made at least 24
hours prior to the end of the approved treatment, the request will
be treated as an urgent care claim and decided according to the
time frames described above. If an ongoing course of treatment was
previously approved for a specific period of time or number of
treatments, and you request to extend treatment in a non-urgent
circumstance, your request will be considered a new claim and
decided according to post-service or pre-service timeframes,
whichever applies.
How to Appeal a Claim Decision
If you disagree with a pre-service or post-service claim
determination after following the above steps, you can contact the
applicable Claims Administrator in writing to formally request an
appeal. Your first appeal request must be submitted to the Claims
Administrator within 180 days after you receive the Claim
denial.
Appeal Process
A qualified individual who was not involved in the decision
being appealed will be appointed to decide the appeal. The Claims
Administrator may consult with, or seek the participation of,
medical experts as part of the appeal resolution process. You must
consent to this referral and the sharing of pertinent medical claim
information. Upon written request and free of charge you have the
right to reasonable access to and copies of all documents, records
and other information relevant to your claim for benefits.
26
Appeals Determinations
Pre-Service and Post-Service Claim Appeals
You will be provided written or electronic notification of the
decision on your appeal as follows:
-- For appeals of pre-service claims, the first-level appeal will be conducted and you will be
notified by the Claims Administrator of the decision within 15 days from receipt of a request
for appeal of a denied Claim. The second-level appeal will be conducted and you will be notified
by the Claims Administrator of the decision within 15 days from receipt of a request for review
of the first-level appeal decision.
-- For appeals of post-service claims, the first-level appeal will be conducted and you will
be notified by the Claims Administrator of the decision within 30 days from receipt of a request
for appeal of a denied claim. The second-level appeal will be conducted and you will be notified
by the Claims Administrator of the decision within 30 days from receipt of a request for review
of the first-level appeal decision.
-- For procedures associated with urgent Claims, refer to the following "Urgent Claim Appeals
That Require Immediate Action" section.
-- If you are not satisfied with the first-level appeal decision of the Claims Administrator,
you have the right to request a second-level appeal from the Claims Administrator. Your second
level appeal request must be submitted to the Claims Administrator in writing within 60 days
from receipt of the first-level appeal decision.
-- For pre-service and post-service claim appeals, the Plan Administrator has delegated to the
Claims Administrator the exclusive right to interpret and administer the provisions of the
Plan. The Claims Administrator's decisions are conclusive and binding.
Please note that the Claims Administrator's decision is based
only on whether or not benefits are available under the Plan for
the proposed treatment or procedure. The determination as to
whether the pending health service is necessary or appropriate is
between you and your physician.
Urgent Claim Appeals That Require Immediate Action
Your appeal may require immediate action if a delay in treatment
could significantly increase the risk to your health or the ability
to regain maximum function or cause severe pain.
In these urgent situations, the appeal does not need to be
submitted in writing. You or your physician should call the Claims
Administrator as soon as possible. The Claims Administrator will
provide you with a written or electronic determination within 72
hours following receipt by the Claims Administrator of your request
for review of the determination taking into account the seriousness
of your condition.
For urgent claim appeals, the Plan Administrator has delegated
to the applicable Claims Administrator the exclusive right to
interpret and administer the provisions of the Plan. The Claims
Administrator's decisions are conclusive and binding.
In any case, a Participant or Beneficiary may have further
rights under ERISA. The Plan provisions require that Participants
or Beneficiary pursue and exhaust all claim and appeal rights
described in this section before they seek any other legal recourse
regarding claims for benefits.
27
APPIX C
DISCLOSURE OF GRANDFATHERED STATUS
MODEL NOTICE
AT&T, as plan sponsor, believes this Plan is a
"grandfathered health plan" under the Patient Protection and
Affordable Care Act (the "Affordable Care Act"). As permitted by
the Affordable Care Act, a grandfathered health plan can preserve
certain basic health coverage that was already in effect when that
law was enacted. Being a grandfathered health plan means that the
plan may not include certain consumer protections of the Affordable
Care Act that apply to other plans, for example, the requirement
for the provision of preventive health services without any cost
sharing. However, grandfathered health plans must comply with
certain other consumer protections of the Affordable Care Act, for
example, the elimination of lifetime limits on benefits.
Questions regarding which protections apply and which
protections do not apply to a grandfathered health plan and what
might cause a plan to change from grandfathered health plan status
can be directed to the plan administrator at P.O. Box 30558, Salt
Lake City, Utah 84130-0558 . You may also contact the Employee
Benefits Security Administration, U.S. Department of labor at
1-866-444-3272 or www.dol.gov/ebsa/healthreform . This website has
a table summarizing which protections do and do not apply to
grandfathered health plans.
28
AGREEMENT AND RELEASE AND WAIVER OF CLAIMS
This Agreement and the Release and Waiver contained herein are
made and entered into in Dallas, Texas, by and between AT&T
Services, Inc. (hereinafter "Company") and Mr. James Cicconi
(hereinafter "Mr. Cicconi") for and in consideration of the mutual
promises and agreements set forth below and are conditional on
performance of such promises and agreements.
WHEREAS, Mr. Cicconi will retire from Company on September 30,
2016; and as a consequence, Mr. Cicconi will be entitled to receive
appropriate, usual and customary benefits and certain other
benefits described herein; and
WHEREAS, both parties agree that in connection with Mr.
Cicconi's retirement on September 30, 2016, in addition to the
before referenced appropriate, usual and customary benefits, Mr.
Cicconi should receive additional benefits and consideration as set
forth herein, and that Mr. Cicconi, among other things, should
release and forever discharge Company, AT&T Inc. ("AT&T"),
any and all other subsidiaries (which term when used throughout
this document shall include entities, corporate or otherwise, in
which the company referred to owns, directly or indirectly, fifty
percent or more of the outstanding equity interests) of Company and
of AT&T, their officers, directors, agents, employees,
successors and assigns and any and all employee benefit plans
maintained by AT&T or any subsidiary thereof and/or any and all
fiduciaries of any such plan, from any and all common law and/or
statutory claims, causes of action or suits of any kind whatsoever,
arising from or in connection with Mr. Cicconi's employment by
Company or any affiliate of AT&T and/or Mr. Cicconi's
separation from Company, all as set forth in more detail in the
Release and Waiver contained herein.
WHEREAS, Mr. Cicconi has been employed by Company and/or
AT&T's subsidiaries for eighteen (18) years and worked in
significant positions and assignments that required access to and
involvement with confidential and proprietary information, trade
secrets and matters of strategic importance to Company, AT&T
and/or AT&T's subsidiaries that will continue beyond Mr.
Cicconi's employment with Company. During the term of his
longstanding with Company, or an AT&T subsidiary, Mr. Cicconi
has acquired knowledge of all aspects of its business, on a
national and regional level, including but not limited to
operations, sales, marketing, advertising, technology, networks,
network technology, network development and strategy, distribution
and distribution channels, operations, strategic planning
initiatives, new product and services development, strategic
planning, rate information and growth strategies and initiatives.
Mr. Cicconi has acquired and possesses unique skills as a result of
employment with Company and/or AT&T subsidiaries. The trade
secrets with which Mr. Cicconi has been involved are critical to
Company's, AT&T's, and AT&T's subsidiaries' success.
Disclosure of this information in the performance of services for a
subsequent employer engaged in similar businesses would be
inevitable and inherent as part of Mr. Cicconi's performance of
services for such an employer. For all of these reasons and due to
the confidential and proprietary information and trade secrets Mr.
Cicconi learned in his employment with Company, or an AT&T
subsidiary, Mr. Cicconi acknowledges that it is reasonable for
Company to seek the restrictions contained in the subsequent
provisions of this Agreement and that more limited restrictions are
neither feasible nor appropriate. Mr. Cicconi understands and
agrees that the consideration provided herein requires Mr. Cicconi
to comply strictly with all terms of this Agreement including, but
not limited to, confidentiality, non-compete, non-solicitation of
employees and non-solicitation of customers as set forth below.
NOW, therefore, the parties further agree as follows:
1. Mr. Cicconi will retire from Company effective at the close
of business on September 30, 2016, and Mr. Cicconi herewith resigns
all officer and director positions that he may hold in AT&T and
in any subsidiary of AT&T effective at the close of business on
September 30, 2016.
2. Company shall propose to the Human Resources Committee of the
AT&T Board of Directors or its authorized delegate (the
"Committee") that the AT&T 2011 Incentive Plan provisions
requiring (A) the automatic proration of Mr. Cicconi' 2014, 2015,
and 2016 Performance Share Grants shall not apply and Mr. Cicconi
shall be eligible for full distribution of such grants after the
applicable three (3) year performance period, subject to adjustment
based on achievement of the applicable performance goals, approval
of the Committee and all other terms and conditions of the grant,
(B) the automatic forfeiture of Mr. Cicconi's 2013, 2014, 2015, and
2016 Restricted Stock Units shall not apply and Mr. Cicconi shall
be eligible for full distribution of such Restricted Stock Units,
which shall be paid subject to all other terms and conditions of
the Restricted Stock Unit grants, including with respect to timing,
and (C) the automatic forfeiture of Mr. Cicconi's 2014 Restricted
Stock Award shall not apply and Mr. Cicconi shall be fully vested
and such Restricted Stock Award shall be distributed upon his
termination of employment. Notwithstanding the foregoing, none of
the consideration described in this Section 2 shall be made
available to Mr. Cicconi (or shall be subject to rescission) should
he not timely sign, or should he revoke, the Release and Wavier
contained herein.
3. The consideration described herein shall be in lieu of, and
Mr. Cicconi hereby specifically waives any right to any and all
other termination pay allowance resulting from his retirement.
4. This Agreement and the Release and Waiver contained herein do
not abrogate any of the usual entitlements that Mr. Cicconi has or
will have, first, while a regular employee and subsequently, upon
his retirement, under any AT&T or AT&T subsidiary sponsored
employee benefit plan, program or policy, all of which will be
subject to and provided in accordance with the terms and conditions
of the respective benefit plan, program, or policy as applicable to
Mr. Cicconi. Further, AT&T and its subsidiaries have reserved
the right to end or amend any or all of the plans, programs, and
policies that it sponsors. Each participating subsidiary, which
includes Company, has reserved the right to end its participation
in these plans, programs, and policies and to discontinue providing
any and all such benefits. This means, for example, that Mr.
Cicconi will not acquire a lifetime right to any health care plan
benefit or to the continuation of any health care plan merely by
reason of the fact that such benefit, plan, program, or policy is
in existence at the time of Mr. Cicconi' retirement or because of
this Agreement and the Release and Waiver contained herein. Thus,
except as specifically provided in this Agreement, Mr. Cicconi's
rights/entitlements to any benefit under any of the plans,
programs, or policies are no different as a result of entering into
this Agreement and the Release and Waiver contained herein than
they would have been in the absence of this Agreement and the
Release and Waiver contained herein.
5. At Company's request at any time during the eighteen (18)
months immediately following his retirement, Mr. Cicconi will
cooperate with Company, AT&T or any of their respective
subsidiaries in any future claims or lawsuits involving any of them
where Mr. Cicconi has knowledge of the underlying facts; provided,
however, Mr. Cicconi shall not be required to and shall not provide
such services for more than twenty percent (20%) of the average
amount of time he provided bona fide services over the thirty-six
(36) month period immediately preceding September 30, 2016. For the
time Mr. Cicconi spends working on any claims or lawsuits at such
request, Mr. Cicconi shall be reimbursed at the equivalent per hour
base salary rate at which Mr. Cicconi was being compensated by
Company immediately prior to his retirement; provided, however,
that if Mr. Cicconi is a named party in any claim or lawsuit and
Company, in its discretion, determines that Mr. Cicconi's interests
are adverse to Company, AT&T or any of their respective
subsidiaries, he will not be entitled to such compensation. Mr.
Cicconi agrees not to voluntarily aid, assist, or cooperate with
any claimants or plaintiffs or their attorneys or agents, whether
individually or as part of a class, in any claims or lawsuits
commenced in the future against Company, AT&T or any AT&T
subsidiary; provided, however, that nothing in this Agreement shall
prohibit Mr. Cicconi from exercising his right to file a charge of
discrimination with, or that would limit his right to testify,
assist, or participate in an investigation, hearing, or proceeding
conducted by the Equal Employment Opportunity Commission ("EEOC"),
a comparable state or local agency, or any other governmental
agency charged with enforcing anti-discrimination laws; provided,
further, however, nothing in this Agreement will be construed to
prevent Mr. Cicconi from testifying at an administrative hearing, a
deposition, or in court in response to a lawful subpoena in any
litigation or proceedings involving Company, AT&T or any of
their respective subsidiaries. Notwithstanding the foregoing, Mr.
Cicconi acknowledges and agrees that the Release and Waiver
contained herein includes a waiver of his right, if any, to
monetary recovery should any party, entity, administrative agency,
or
governmental agency (such as the EEOC, the National Labor
Relations Board, or any state or local agencies) pursue any claims
on Mr. Cicconi's behalf against the persons or entities covered by
the Agreement and the Release and Waiver contained herein.
1
Company agrees to indemnify Mr. Cicconi if he is a defendant or
is threatened to be made a defendant to any action, suit or
proceeding, whether civil, criminal, administrative or
investigative that is brought by a third party by reason of the
fact that he was a director, officer, employee or agent of Company,
or was serving at the request of Company as a director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such
action, suit or proceeding, but in each case only if and to the
extent permitted under applicable state or federal law.
6. Mr. Cicconi acknowledges that, as a result of his employment
with Company and/or any AT&T subsidiaries, he has and had
access to certain Trade Secrets and Confidential Information (as
these terms are defined below) and the Company will continue to
provide Mr. Cicconi access to such Trade Secrets and Confidential
Information through his termination of employment so that he may
continue performing his job responsibilities. Mr. Cicconi
acknowledges that AT&T and its subsidiaries must protect its
Trade Secrets and Confidential Information from disclosure or
misappropriation, and Mr. Cicconi further acknowledges that the
Trade Secrets and Confidential Information are unique and
confidential and are the proprietary property of AT&T and its
subsidiaries. Mr. Cicconi acknowledges that the Trade Secrets and
Confidential Information derive independent, actual and potential
commercial value from not being generally known, or readily
ascertainable through independent development. Mr. Cicconi agrees
to hold Trade Secrets or Confidential Information in trust and
confidence and to not directly or indirectly disclose or transmit
Trade Secrets or Confidential Information to any third party
without prior written consent of AT&T; provided however,
nothing in this Agreement shall prohibit Mr. Cicconi from reporting
possible violations of federal law or regulation to any
governmental agency or entity or making other disclosures that are
protected under the whistleblower provisions of federal or state
law or regulation. Mr. Cicconi further agrees not to use any such
Trade Secrets or Confidential Information for his personal benefit
or for the benefit of any third party. This restriction shall apply
indefinitely as long as the document or information exists as a
Trade Secret or Confidential Information.
2
On or before his retirement, Mr. Cicconi shall return to
AT&T or an AT&T subsidiary all of AT&T's (and its
subsidiaries') documents (and all copies thereof), and other
property of AT&T and its subsidiaries that are in Mr. Cicconi's
possession, including, but not limited to, AT&T's (and its
subsidiaries') files, notes, drawings, records, business plans and
forecasts, financial information, specifications, all product
specifications, customer identity information, product development
information, source code information, object code information,
tangible property (including, but not limited to, computers),
intellectual property, credit cards, entry cards, and keys; and,
any materials of any kind which contain or embody Trade Secrets or
Confidential Information (and all reproductions thereof),
including, without limitation, any such documents and other
property in electronic form, or any computer or data storage
device. Mr. Cicconi shall not retain or provide to anyone else any
copies, summaries, abstracts, descriptions, compilation, or other
representations of such information or things or their
contents.
"Trade Secret" means information proprietary to AT&T or any
AT&T subsidiary including, but not limited to, technical or
non-technical data, a formula, a pattern, a compilation, a program,
a device, a method, a technique, a drawing, a process, financial
data, financial plans, product plans, marketing plans, pricing
plans, advertising and sponsorship plans, product development
analyses or plans, any plans involving the combination of
AT&T's or its subsidiaries' products or services, or pricing of
such products or services, offered or to be offered by or in
conjunction with AT&T or any subsidiary of AT&T, or lists
of actual or potential customers or suppliers which: (1) derives
economic value, actual or potential, from not being generally known
to, and not being readily ascertainable by proper means by, other
persons who can obtain economic value from its disclosure or use;
and (2) is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.
"Confidential Information" means this Agreement and the Release
and Waiver contained herein and any data or information, other than
Trade Secrets, that is competitively sensitive to AT&T or an
AT&T subsidiary and not generally known by the public. To the
extent consistent with the foregoing definition, Confidential
Information includes, without limitation: (1) the sales records,
profit and performance records, pricing manuals, sales manuals,
training manuals, selling and pricing procedures, and financing
methods of AT&T or any AT&T subsidiary, (2) customer lists,
the special demands of particular customers, and the current and
anticipated requirements of customers for the products and services
of AT&T or any AT&T subsidiary, (3) the specifications of
any new products or services under development by AT&T or any
AT&T subsidiary, (4) the sources of supply for integrated
components and materials used for production, assembly, and
packaging by AT&T or any AT&T subsidiary, and the quality,
prices, and usage of those components and materials, and (5) the
business plans, marketing strategies, promotional and advertising
strategies, branding strategies, and internal financial statements
and projections of AT&T or any AT&T subsidiary.
3
Notwithstanding the definitions of Trade Secrets and
Confidential Information set forth above, Trade Secrets and
Confidential Information shall not include any information: (1)
that is or becomes generally known to the public, (2) that is
developed by Mr. Cicconi after his retirement through his entirely
independent efforts without use of any Trade Secret or Confidential
Information, (3) that Mr. Cicconi obtains from an independent
source having a bona fide right to use and disclose such
information, (4) that is required to be disclosed by subpoena, law,
or similar legislative, judicial, or administrative requirement;
provided, however, Mr. Cicconi will notify Company upon receipt of
any such subpoena or similar request and give Company a reasonable
opportunity to contest or otherwise oppose the subpoena or similar
request, or (5) that AT&T approves for unrestricted release by
express authorization of a duly authorized officer.
It is hereby agreed that Mr. Cicconi may represent himself as a
former employee or retiree of Company or AT&T; but otherwise he
agrees that he will not make, nor cause to be made any public
statements, disclosures or publications which relate in any way,
directly or indirectly to his cessation of employment with Company
without prior written approval by Company. Mr. Cicconi also agrees
that he will not make, nor cause to be made any public statements,
disclosures or publications which portray unfavorably, reflect
adversely on, or are derogatory or inimical to the best interests
of AT&T, its subsidiaries, or their respective directors,
officers, employees or agents, past, present or future.
7. Mr. Cicconi agrees that he shall not, during the twenty-four
(24) months immediately following his retirement, without obtaining
the written consent of Company in advance, participate in
activities that constitute Engaging in Competition with AT&T or
Engaging in Conduct Disloyal to AT&T, as those terms are
defined below.
a. "Engaging in Competition with AT&T" means engaging in any business or activity in all or any
portion of the same geographical market where the same or substantially similar business or
activity is being carried on by an Employer Business. "Engaging in Competition with AT&T"
shall not include owning a nonsubstantial publicly traded interest as a shareholder in a business
that competes with an Employer Business. "Engaging in Competition with AT&T" shall include
representing or providing consulting services to, or being an employee or director of, any
person or entity that is engaged in competition with any Employer Business or that takes a
position adverse to any Employer Business.
b. "Engaging in Conduct Disloyal to AT&T" means (i) soliciting for employment or hire, whether
as an employee or as an independent contractor, any person employed by AT&T or its subsidiaries
during the one (1) year prior to Mr. Cicconi's retirement, whether or not acceptance of such
position would constitute a breach of such person's contractual obligations to AT&T or its
subsidiaries; (ii) soliciting, encouraging, or inducing any vendor or supplier with which
Mr. Cicconi had business contact on behalf of any Employer Business during the two (2) years
prior to Mr. Cicconi's retirement, to terminate, discontinue, renegotiate, reduce, or otherwise
cease or modify its relationship with AT&T or any AT&T subsidiary; or (iii) soliciting, encouraging,
or inducing any AT&T or AT&T subsidiary customer or active prospective customer, in each case,
with respect to whom Mr. Cicconi had business contact, whether in person or by other media
("Customer"), on behalf of any Employer Business during the two (2) years prior to Mr. Cicconi's
retirement, to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its
relationship with any Employer Business, or to purchase competing goods or services from a
business competing with any Employer Business, or accepting or servicing business from such
Customer on behalf of himself or any other business.
4
c. "Employer Business" shall mean AT&T, any subsidiary of AT&T, or any business in which AT&T
or an AT&T subsidiary has a substantial ownership or joint venture interest.
Mr. Cicconi acknowledges that the business of AT&T and its
subsidiaries is global in scope and that the geographic and
temporal limitations set forth in this Section are therefore
reasonable.
Mr. Cicconi may submit a description of any proposed activity in
writing to Company (attn: Vice President - Executive Compensation),
and Company shall advise Mr. Cicconi, in writing, within (15)
fifteen business days whether such proposed activity would
constitute a breach of the provisions of this Section.
8. Mr. Cicconi acknowledges and agrees that Company would be
unwilling to provide the consideration provided pursuant to this
Agreement and the Release and Waiver contained herein but for the
confidentiality, non-solicitation, and non-compete conditions and
covenants set forth in Sections 6 and 7, and that these conditions
and covenants are a material inducement to AT&T's willingness
to enter into this Agreement. Accordingly, Mr. Cicconi shall return
to Company any consideration received pursuant to this Agreement
and the Release and Waiver contained herein, for any breach by Mr.
Cicconi of the provisions of Section 6 or 7 hereof, or of the
Release and Waiver contained herein. Further, Mr. Cicconi
recognizes that any breach by him of the provisions in Sections 6
or 7 would cause irreparable injury to Company such that monetary
damages would not provide an adequate or complete remedy.
Accordingly, in the event of Mr. Cicconi's actual or threatened
breach of the provisions of Section 6 or 7, Company, in addition to
all other rights under law or this Agreement, shall be entitled to
an injunction restraining Mr. Cicconi from breaching these
provisions and to recover from Mr. Cicconi its reasonable
attorneys' fees and costs incurred in obtaining such remedies.
9. It is hereby specifically agreed that Mr. Cicconi shall
maintain the confidentiality of the terms of this Agreement and the
Release and Waiver contained herein and that he shall not, except
as necessary for performance of the terms hereof or as specifically
required by law, disclose the existence of this Agreement and the
Release and Waiver contained herein or any of its terms to third
persons without the express consent of Company; provided, however,
Mr. Cicconi may disclose the existence of this Agreement and the
Release and Waiver contained herein or any of its terms to any
member of his immediate family, his financial advisor, and/or his
attorney, but only after making such individuals aware of the
non-disclosure requirements with respect to such information. Mr.
Cicconi hereby specifically agrees to secure from those persons to
whom he makes such disclosure, their agreement to maintain the
confidentiality of such disclosed information.
10. Mr. Cicconi declares that his decision to execute this
Agreement and the Release and Waiver contained herein has not been
influenced by any declarations or representations by Company,
AT&T, or any AT&T subsidiary, other than the contractual
agreements and consideration expressly stated herein.
5
Company has expressly advised Mr. Cicconi to seek personal legal
advice prior to executing this Agreement and the Release and Waiver
contained herein, and Mr. Cicconi, by his signature below, hereby
expressly acknowledges that he was given at least twenty one (21)
days in which to seek such advice and decide whether or not to
enter into and execute the Release and Waiver contained herein. The
parties agree that any changes to this Agreement or to the Release
and Waiver contained herein made after the initial draft of this
Agreement and Release and Waiver of Claims is presented to Mr.
Cicconi, whether material or immaterial, do not restart the running
of said twenty-one (21) day period.
Mr. Cicconi may revoke this Agreement and the Release and Waiver
contained herein within seven (7) days of his execution of the
Release and Waiver contained herein by giving notice, in writing,
by certified mail, return receipt requested to Company at the
address specified below. Proof of such mailing within said seven
(7) day period shall suffice to establish revocation pursuant to
this Section. In the event of any such revocation, this entire
Agreement and the Release and Waiver contained herein shall be null
and void, and unenforceable by either party.
11. Any notice required hereunder to be given by either party
must be in writing and will be deemed effectively given upon
personal delivery to the party to be notified, or five (5) days
after deposit with the United States Post Office by certified mail,
postage prepaid, to the other party at the addresses noted in the
signature block of this Agreement.
12. The parties agree that any conflicts relating to this
Agreement and the Release and Waiver contained herein, including
choice of law and venue with respect to any such conflict, shall be
determined as provided in that certain Management Arbitration
Agreement to the extent agreed to by and between Mr. Cicconi and
Company (the "Management Arbitration Agreement"). If the Management
Arbitration Agreement is inapplicable, the validity,
interpretation, construction and performance of this Agreement and
the Release and Waiver contained herein shall be governed by the
laws of the State of Texas excluding any conflicts or choice of law
rule or principle that might otherwise refer construction or
interpretation of this Agreement and the Release and Waiver
contained herein to the substantive law of another jurisdiction,
and to achieve certainty regarding the appropriate forum in which
to prosecute and defend actions arising out of or relating to this
Agreement, which the parties agree is a material condition of
entering into this Agreement, the parties agree and acknowledge
that (a) the sole and exclusive venue for any such action shall be
an appropriate federal or state court in Dallas County, Texas, and
no other, (b) all claims with respect to any such action shall be
heard and determined exclusively in such Dallas County, Texas
court, and no other, (c) such Dallas County, Texas court shall have
sole and exclusive jurisdiction over the person of such parties and
over the subject matter of any dispute relating hereto, and (d)
that the parties waive any and all objections and defenses to
bringing any such action before such Dallas County, Texas court,
including but not limited to those relating to lack of personal
jurisdiction, improper venue or forum non conveniens .
13. The terms and conditions contained in this Agreement that by
their sense and context are intended to survive the termination or
completion of performance of obligations by either or both parties
under this Agreement shall so survive.
6
14. This Agreement and the Release and Waiver contained herein
shall not be modified or amended except pursuant to an instrument
in writing executed and delivered on behalf of each of the parties
hereto.
15. This Agreement and the Release and Waiver contained herein,
and, to the extent agreed by Mr. Cicconi and Company, the
Management Arbitration Agreement, constitute the entire agreement
and supersede all other prior agreements and understandings, both
written and oral, between the parties with respect to the subject
matter hereof, except that neither this Agreement nor the
Management Arbitration Agreement (to the extent applicable) shall
be deemed to supersede or cancel any obligations applicable to Mr.
Cicconi under any AT&T or AT&T subsidiary sponsored
deferred compensation plan, equity award plan, fringe benefit
program, or any other AT&T or AT&T subsidiary sponsored
benefit plan as to which Mr. Cicconi is a participant immediately
preceding his retirement.
16. In the event any provision of this Agreement or the Release
and Waiver contained herein is held invalid, void, or
unenforceable, the same shall not affect in any respect whatsoever
the validity of any other provision of this Agreement or said
Release and Waiver, except that should said Release and Waiver be
held to be invalid as applicable to and as asserted by Mr. Cicconi
with regard to any claim or dispute covered thereunder, or should
any part of the provisions of Sections 6, 7, or 8 of this Agreement
be held invalid, void, or unenforceable as applicable to and as
asserted by Mr. Cicconi, this Agreement and the Release and Waiver
contained herein, at Company's option, may be declared by Company
null and void. If this Agreement and the Release and Waiver
contained herein are declared null and void by Company pursuant to
the provisions of this Section, Mr. Cicconi shall return to Company
all consideration previously received pursuant to this Agreement
and the Release and Waiver contained herein.
17. This Agreement and the Release and Waiver contained herein
shall inure to the benefit of and be binding upon, Company, its
successors and assigns, and Mr. Cicconi and his beneficiaries,
whether under the various employee benefit programs or
otherwise.
(The remainder of this page is intentionally left blank)
7
18. This Agreement and the Release and Waiver contained herein
shall be and hereby are declared to be null and void in the event
that Mr. Cicconi does not retire from Company on or before the
close of business on September 30, 2016. All payments and other
consideration to be provided to Mr. Cicconi by Company are
contingent upon Mr. Cicconi's retirement actually becoming
effective on or before the close of business on September 30, 2016,
and are further contingent upon Mr. Cicconi's execution of this
Agreement no later than September 30, 2016 and the Release and
Waiver contained herein on September 30, 2016, and not revoking
either this Agreement or the Release and Waiver contained
herein.
AT&T Services, Inc. James Cicconi
208 South Akard Street 891 Alvermar Ridge Dr.
Room 412 McLean, VA 22102
Dallas, TX 75202
By: William A. Blase, Jr.
Title: Senior Executive Vice President- James Cicconi
Human Resources
Date:
Date:
8
RELEASE AND WAIVER
I, James Cicconi, hereby fully waive and forever release and
discharge Company, AT&T, any and all other subsidiaries of
Company and of AT&T, their officers, directors, agents,
servants, employees, successors and assigns and any and all
employee benefit plans maintained by AT&T or any subsidiary
thereof and/or any and all fiduciaries of any such plan from any
and all common law and/or statutory claims, causes of action or
suits of any kind whatsoever arising from or in connection with my
past employment by Company (and any AT&T subsidiary to the
extent applicable) and/or my separation therefrom, including but
not limited to claims, actions, causes of action or suits of any
kind allegedly arising under the Employee Retirement Income
Security Act (ERISA), as amended, 29 USC ---- 1001 et seq.; the
Rehabilitation Act of 1973, as amended, 29 USC ---- 701 et seq.;
the Civil Rights Acts of 1866 and 1870, as amended, 42 USC ----
1981, 1982 and 1988; the Civil Rights Act of 1871, as amended, 42
USC ---- 1983 and 1985; the Civil Rights Act of 1964, as amended,
42 USC -- 2000d et seq.; the Americans With Disabilities Act, as
amended, 42 USC ---- 12101 et seq., and the Age Discrimination in
Employment Act of 1967 (ADEA), as amended, 29 USC ---- 621 et seq.,
the Family and Medical Leave Act; the Fair Credit Reporting Act,
known and unknown. Notwithstanding the foregoing, nothing herein is
intended to release claims that cannot be released as a matter of
law, including, by way of example, filing a charge of
discrimination with the EEOC or testifying, assisting, or
participating in an investigation, hearing, or proceeding conducted
by the EEOC. In addition, I, Mr. Cicconi, agree not to file any
lawsuit or other claim seeking monetary damage or other relief in
any state or federal court or with any administrative agency
(except as provided in the Agreement delivered by Company
contemporaneously with this Release and Waiver (the "Agreement"))
against any of the aforementioned parties in connection with or
relating to any of the aforementioned matters. Provided, however,
by executing this Release and Waiver, I, James Cicconi, do not
waive rights or claims that may arise after the date of execution;
provided further, however, this Release and Waiver shall not affect
my right to receive or enforce through litigation, any
indemnification rights to which I am entitled as a result of my
past employment by Company and, if applicable, any subsidiary of
AT&T, or contract rights pursuant to the Agreement and Release
and Waiver of Claims entered into substantially contemporaneously
herewith; and, provided further, this Release and Waiver shall not
affect the ordinary distribution of benefits/entitlements, if any,
to which I am entitled upon termination from Company; it being
understood by me that said benefits/entitlements, if any, will be
subject to and provided in accordance with the terms and conditions
of their respective governing plan and the Agreement.
James Cicconi
Dated: September 30, 2016
9
EXHIBIT
12
AT&T INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
Nine Months Ended
September 30,
(Unaudited) Year Ended December 31,
2016 2015 2015 2014 2013 2012 2011
Earnings:
Income from
continuing
operations
before income
taxes $16,621 $14,385 $20,692 $10,355 $28,050 $10,496 $ 6,998
Equity in net
income of
affiliates
included above (57) (48) (79) (175) (642) (752) (784 )
Fixed charges 5,465 4,834 6,592 5,295 5,452 4,876 4,835
Distributed
income of
equity
affiliates 35 12 30 148 318 137 161
Interest
capitalized (669) (566) (797) (234) (284) (263) (162 )
Earnings, as
adjusted $21,395 $18,617 $26,438 $15,389 $32,894 $14,494 $ 11,048
Fixed Charges:
Interest expense $ 3,689 $ 2,977 $ 4,120 $ 3,613 $ 3,940 $ 3,444 $ 3,535
Interest
capitalized 669 566 797 234 284 263 162
Portion of
rental expense
representative
of interest
factor 1,107 1,291 1,675 1,448 1,228 1,169 1,138
Fixed Charges $ 5,465 $ 4,834 $ 6,592 $ 5,295 $ 5,452 $ 4,876 $ 4,835
Ratio of
Earnings to
Fixed Charges 3.91 3.85 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: November 3, 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: November 3, 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
September 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.
November 3, 2016 November 3, 2016
By: /s/ Randall Stephenson By: /s/ John J. Stephens
Randall Stephenson John J. Stephens
Chairman of the Board, Chief Executive Officer Senior Executive Vice President
and President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant
to 18 U.S.C. Section 1350 and is not being filed as part of the
Report or as a separate disclosure document. This certification
shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934 ("Exchange Act") or otherwise
subject to liability under that section. This certification shall
not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Exchange Act except to the extent
this Exhibit 32 is expressly and specifically incorporated by
reference in any such filing.
A signed original of this written statement required by Section
906, or other document authenticating, acknowledging, or otherwise
adopting the signature that appears in typed form within the
electronic version of this written statement required by Section
906, has been provided to AT&T Inc. and will be retained by
AT&T Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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