REG - AT & T Inc. - 1st Quarter Results 2017 <Origin Href="QuoteRef">T.N</Origin> - Part 4
23/05/2017 15:40
- Part 4: For the preceding part double click ID:nRSW0123Gc
growth and to maintain and
improve margins. Total churn and postpaid churn were higher for the first quarter of 2017, reflecting higher tablets churn.
Postpaid phone only churn was lower in the first quarter of 2017 despite competitive pressure in the industry.
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AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Branded Subscribers
Branded subscribers decreased 0.1% in the first quarter of 2017 when compared to December 31, 2016 and increased 2.1% when
compared to March 31, 2016. The sequential decrease reflects a 0.6% decline in postpaid subscribers partially offset by a
2.3% increase in prepaid subscribers. The year-over-year increase includes increases of 0.3% and 13.7% in postpaid and
prepaid subscribers, respectively.
At March 31, 2017, 91% of our postpaid phone subscriber base used smartphones, compared to 88% at March 31, 2016. Virtually
all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and
such subscribers tend to have higher retention and lower churn rates. Device connections on our Mobile Share and unlimited
wireless data plans now represent 85% of our postpaid customer base, compared to 81% at March 31, 2016. Such offerings are
intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract
subscribers from other providers and/or minimize subscriber churn.
Our equipment installment purchase programs, including AT&T Next, allow for postpaid subscribers to purchase certain
devices in installments over a period of up to 30 months. Additionally, after a specified period of time, AT&T Next
subscribers also have the right to trade in the original device for a new device with a new installment plan and have the
remaining unpaid balance satisfied. For installment programs, we recognize equipment revenue at the time of the sale for
the amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest. A
significant percentage of our customers choosing equipment installment programs pay a lower monthly service charge, which
results in lower service revenue recorded for these subscribers. At March 31, 2017, about 54% of the postpaid smartphone
base is on an equipment installment program compared to 49% at March 31, 2016. Of the postpaid smartphone gross adds and
upgrades during the first quarter of 2017, 92% were either equipment installment plans or BYOD, compared to 91% in 2016.
While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins.
Connected Devices
Connected Devices includes data-centric devices such as session-based tablets, monitoring devices and automobile systems.
Connected device subscribers increased 2.6% during the first quarter when compared to December 31, 2016 and 16.7% when
compared to March 31, 2016. During the first quarter of 2017, we added approximately 1.6 million "connected" cars through
agreements with various carmakers, and experienced strong growth in other IoT connections as well. We believe that these
connected car agreements give us the opportunity to create future retail relationships with the car owners.
OTHER BUSINESS MATTERS
Time Warner Inc. Acquisition In October 2016, we announced an agreement (Merger Agreement) to acquire Time Warner Inc.
(Time Warner) in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately
$85,400 at the date of the announcement (Merger). Each share of Time Warner common stock will be exchanged for $53.75 per
share in cash and a number of shares of AT&T common stock equal to the exchange ratio. The cash portion of the purchase
price will be financed with new debt and cash. The transaction remains subject to review by the U.S. Department of Justice,
but is expected to close before year-end 2017. See Note 7 for additional details of the transaction and "Liquidity" for a
discussion of our financing arrangements.
Straight Path Communications Acquisition As announced on April 10, 2017, we offered to acquire Straight Path
Communications, Inc. (Straight Path), which holds a nationwide portfolio of millimeter wave spectrum, including 39 GHz and
28 GHz licenses. Subsequent to our agreement, Straight Path received a proposal from an unsolicited bidder. The process is
ongoing at the time of this filing.
FirstNet On March 30, 2017, the First Responder Network Authority (FirstNet) announced its selection of AT&T to build and
manage the first nationwide broadband network dedicated to America's first responders. FirstNet expects to provide 20 MHz
of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network
buildout. We expect to spend about $40,000 over the life of the 25-year contract to build, deploy, operate and maintain the
network. The actual reach of the network and our investment over the 25-year period will be determined by the number of
individual states electing to participate in FirstNet. We do not expect FirstNet to materially impact our 2017 results
given the timing of the state opt-in process.
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AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Litigation Challenging DIRECTV's NFL SUNDAY TICKET More than two dozen putative class actions were filed in the U.S.
District Courts for the Central District of California and the Southern District of New York against DIRECTV and the
National Football League (NFL). These cases were brought by residential and commercial DIRECTV subscribers that have
purchased NFL SUNDAY TICKET. The plaintiffs allege that (i) the 32 NFL teams have unlawfully agreed not to compete with
each other in the market for nationally televised NFL football games and instead have "pooled" their broadcasts and
assigned to the NFL the exclusive right to market them; and (ii) the NFL and DIRECTV have entered into an unlawful
exclusive distribution agreement that allows DIRECTV to charge "supra-competitive" prices for the NFL SUNDAY TICKET
package. The complaints seek unspecified treble damages and attorneys' fees along with injunctive relief. The first
complaint, Abrahamian v. National Football League, Inc., et al., was served in June 2015. In December 2015, the Judicial
Panel on Multidistrict Litigation transferred the cases outside the Central District of California to that court for
consolidation and management of pre-trial proceedings. In June 2016, the plaintiffs filed a consolidated amended complaint.
We vigorously dispute the allegations the complaints have asserted. In August 2016, DIRECTV filed a motion to compel
arbitration and the NFL defendants filed a motion to dismiss the complaint. The court held a hearing on both motions on
February 13, 2017. The court has not yet ruled.
SportsNet LA Litigation On November 2, 2016, the U.S. Department of Justice filed a civil antitrust complaint in federal
court (Central District of California) against DIRECTV Group Holdings, LLC and AT&T Inc., as successor in interest to
DIRECTV, alleging that DIRECTV, in 2014, unlawfully exchanged strategic information with certain competitors in connection
with negotiations with SportsNet LA about carrying the Los Angeles Dodgers games. The complaint alleges that DIRECTV's
conduct violated Section 1 of the Sherman Act. The complaint seeks a declaration that DIRECTV's conduct unlawfully
restrained trade and seeks an injunction (1) barring DIRECTV and AT&T from engaging in unlawful information sharing in
connection with future negotiations for video programming distribution, (2) requiring DIRECTV and AT&T to monitor relevant
communications between their executives and competitors and to periodically report to the Department of Justice, and (3)
requiring DIRECTV and AT&T to implement training and compliance programs. The complaint asks that the government be awarded
its litigation costs. We vigorously dispute these allegations. On March 23, 2017, the parties advised the court that they
have finalized a settlement to resolve the case.
Federal Trade Commission Litigation Involving DIRECTV In March 2015, the Federal Trade Commission (FTC) filed a civil suit
in the U.S. District Court for the Northern District of California against DIRECTV seeking injunctive relief and
unspecified money damages under Section 5 of the Federal Trade Commission Act and Section 4 of the Restore Online Shoppers'
Confidence Act. The FTC's allegations concern DIRECTV's advertising, marketing and sale of programming packages. The FTC
alleges that DIRECTV did not adequately disclose all relevant terms. We vigorously dispute these allegations. On April 4,
2017, we reported to the court that we had reached a written settlement with the FTC Bureau of Consumer Protection.
Commission approval is still required. The court scheduled trial to begin on August 14, 2017, if Commission approval has
not been secured by that date.
Unlimited Data Plan Claims In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern
District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5
of the Federal Trade Commission Act. The FTC's allegations concern the application of AT&T's Maximum Bit Rate (MBR) program
to customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces in certain instances the
download speeds of a small portion of our legacy Unlimited Data Plan customers each month after the customer exceeds a
designated amount of data during the customer's billing cycle. MBR is an industry-standard practice that is designed to
affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media posts,
internet browsing and many other applications are typically unaffected. Contrary to the FTC's allegations, our MBR program
is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was
implemented to protect the network for the benefit of all customers. In March 2015, our motion to dismiss the litigation on
the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court granted our motion to certify
its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit subsequently granted our
petition to accept the appeal, and on August 29, 2016, issued its decision reversing the district court and finding that
the FTC lacked jurisdiction to proceed with the action. The FTC has asked the Court of Appeals to reconsider the decision
but the Court has not ruled on that request. In addition to the FTC case, several class actions have been filed also
challenging our MBR program. We vigorously dispute the allegations the complaints have asserted.
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AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
In June 2015, the FCC issued a Notice of Apparent Liability and Order (NAL) to AT&T Mobility, LLC concerning our MBR policy
that applies to Unlimited Data Plan customers described above. The NAL alleges that we violated the FCC's Open Internet
Transparency Rule by using the term "unlimited" in connection with the offerings subject to the MBR policy and by failing
adequately to disclose the speed reductions that apply once a customer reaches a specified data threshold. The NAL proposes
a forfeiture penalty of $100, and further proposes to order us to correct any misleading and inaccurate statements about
our unlimited plans, inform customers of the alleged violation, revise our disclosures to address the alleged violation and
inform these customers that they may cancel their plans without penalty after reviewing the revised disclosures. In July
2015, we filed our response to the NAL. We believe that the NAL is unlawful and should be withdrawn, because we have fully
complied with the Open Internet Transparency Rule and the FCC has no authority to impose the proposed remedies. The matter
is currently pending before the FCC.
Labor Contracts As of March 31, 2017, we employed approximately 265,000 persons. Approximately 48% of our employees are
represented by the Communications Workers of America, the International Brotherhood of Electrical Workers or other unions.
After expiration of the agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other
agreements being reached.
A summary of labor contract negotiations, by region or employee group, is as follows:
· Approximately 20,000 traditional wireline employees in the Southwest ratified a new contract in April 2017. The new contract will expire in April 2021.
· Approximately 5,000 traditional wireline employees primarily in the Midwest are covered by a contract that expires in June 2017. In April, we reached a tentative agreement on a new five-year contract that is subject to ratification.
· Approximately 20,000 mobility employees across the country are covered by contracts that expired in early 2017. We continue to negotiate with labor representatives.
· Approximately 15,000 traditional wireline employees in our West region are covered by contracts that expired in April 2016. We continue to negotiate with labor representatives.
· Approximately 11,000 former DIRECTV employees were eligible for and chose union representation. Bargaining has resulted in approximately 80% of these employees now being covered under ratified contracts that expire between 2017 and 2021.
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AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
COMPETITIVE AND REGULATORY ENVIRONMENT
Overview AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities.
AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational
regulatory authorities in the markets where service is provided.
In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the
benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening
all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare.
Since the Telecom Act was passed, the Federal Communications Commission (FCC) and some state regulatory commissions have
maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline
subsidiaries when they operated as legal monopolies. However, based on their public statements and written opinions, we
expect the new leadership at the FCC to chart a more predictable and balanced regulatory course that will encourage
long-term investment and benefit consumers. In addition, we are pursuing, at both the state and federal levels, additional
legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive
telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by
our customers, including initiatives to transition services from traditional networks to all IP-based networks. At the same
time, we also seek to ensure that legacy regulations are not further extended to broadband or wireless services, which are
subject to vigorous competition.
In March 2017, the FCC circulated a draft order proposing to significantly reduce regulation of the bulk data connections
that telecom companies provide to businesses otherwise known as special access services or business data services. That
order, which was adopted on April 20, 2017, maintains light touch pricing regulation of packet-based services, largely
eliminates pricing regulation of high-speed TDM transport services, and establishes a competitive market test for granting
pricing flexibility for other TDM services. For those services that do not meet the competitive test, the order allows
companies to offer volume and term discounts, as well as contract tariffs. The order establishes a period of permissive
detariffing with a date certain for mandatory detariffing in all areas that meet the competitive market test.
In January 2017, the FCC removed from its list of active proceedings proposed rules on cable set-top boxes.
In October 2016, a sharply divided FCC adopted new rules governing the use of customer information by providers of
broadband internet access service. Those rules were more restrictive in certain respects than those governing other
participants in the internet economy, including so-called "edge" providers such as Google and Facebook. On April 3, 2017,
the President signed a resolution passed by Congress repealing the new rules under the Congressional Review Act, which
prohibits the issuance of a new rule that is substantially the same as a rule repealed under its provisions, or the
reissuance of the repealed rule, unless the new or reissued rule is specifically authorized by a subsequent act of
Congress.
In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services
as telecommunications services, subject to comprehensive regulation under the Telecom Act. The FCC's decision significantly
expanded its existing authority to regulate the provision of fixed and mobile broadband internet access services. On April
26, 2017, the FCC announced that, in May 2017, it will initiate a proceeding to reverse its 2015 decision to classify
broadband internet access services as telecommunications services. On a separate track, AT&T and other providers of
broadband internet access services challenged the FCC's decision before the U.S. Court of Appeals for the D.C. Circuit. In
June 2016, a panel of the Court of Appeals upheld the FCC's rules by a 2-1 vote. In July 2016, AT&T and several of the
other parties that challenged the rules filed petitions with the Court of Appeals asking that the case be reheard either by
the panel or by the full Court of Appeals. On May 1, 2017, those rehearing petitions were rejected by the D.C. Circuit.
Parties now have 90 days from issuance of that decision to determine whether to seek review by the U.S. Supreme Court. The
outcome of the April 26, 2017 FCC proceedings could influence the court rulings.
We provide satellite video service through our subsidiary DIRECTV, whose satellites are licensed by the FCC. The
Communications Act of 1934 and other related acts give the FCC broad authority to regulate the U.S. operations of DIRECTV.
In addition, states representing a majority of our local service access lines have adopted legislation that enables us to
provide IP-based service through a single statewide or state-approved franchise (as opposed to the need to acquire hundreds
or even thousands of municipal-approved franchises) to offer a competitive video product. We also are supporting efforts to
update and improve regulatory treatment for our services. Regulatory reform and passage of legislation is uncertain and
depends on many factors.
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AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
We provide wireless services in robustly competitive markets, but are subject to substantial governmental regulation.
Wireless communications providers must obtain licenses from the FCC to provide communications services at specified
spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of
the spectrum. While wireless communications providers' prices and offerings are generally not subject to state regulation,
states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer
protection.
The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. government
to make more spectrum available. The FCC finished its most recent auction in April 2017 of certain spectrum that is
currently used by broadcast television licensees (the "600 MHz Auction").
On March 30, 2017, FirstNet announced that it awarded AT&T the contract for constructing and operating the nationwide
public safety broadband network. The actual reach of the network will depend on participation by the individual states.
In May 2014, the FCC issued an order revising its policies governing mobile spectrum holdings. The FCC rejected the
imposition of caps on the amount of spectrum any carrier could acquire, retaining its case-by-case review policy. Moreover,
it increased the amount of spectrum that could be acquired before exceeding an aggregation "screen" that would
automatically trigger closer scrutiny of a proposed transaction. On the other hand, it indicated that it will separately
consider an acquisition of "low band" spectrum that exceeds one-third of the available low band spectrum as presumptively
harmful to competition. The spectrum screen (including the low band screen) recently increased by 23 MHz. On balance, the
order and the spectrum screen should allow AT&T to obtain additional spectrum to meet our customers' needs.
As the wireless industry continues to mature, future wireless growth will become increasingly dependent on our ability to
offer innovative video and data services and a wireless network that has sufficient spectrum and capacity to support these
innovations. We continue to invest significant capital in expanding our network capacity, as well as to secure and utilize
spectrum that meets our long-term needs. To that end, we have:
· Submitted winning bids for 251 AWS spectrum licenses for a near-nationwide contiguous block of high-quality AWS spectrum in the AWS-3 Auction.
· Redeployed spectrum previously used for basic 2G services to support more advanced mobile internet services on our 3G and 4G networks.
· Secured the FirstNet contract, which provides us with access to a nationwide low band 20 MHz of spectrum, assuming all states opt in.
· Invested in 5G and millimeter-wave technologies with our in-process acquisition of Fiber Tower Corporation, which holds significant amounts of spectrum in the millimeter wave bands (28 GHz and 39 GHz) that the FCC recently reallocated for mobile broadband services. These bands will help to accelerate our entry into 5G services.
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AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURE
We believe the following measure is relevant and useful information to investors as it is used by management as a method of
comparing performance with that of many of our competitors. This supplemental measure should be considered in addition to,
but not as a substitute of, our consolidated and segment financial information.
Supplemental Operational Measure
We provide a supplemental discussion of our domestic wireless operations that is calculated by combining our Consumer
Mobility and Business Solutions segments, and then adjusting to remove non-wireless operations. The following table
presents a reconciliation of our supplemental AT&T Mobility results.
Supplemental Operational Measure
Three Months Ended
March 31, 2017 March 31, 2016
Consumer Mobility Business Solutions Adjustments1 AT&T Mobility Consumer Mobility Business Solutions Adjustments1 AT&T Mobility
Operating Revenues
Wireless service $ 6,609 $ 7,929 $ - $ 14,538 $ 6,943 $ 7,855 $ - $ 14,798
Fixed strategic services - 2,974 (2,974 ) - - 2,751 (2,751 ) -
Legacy voice and data services - 3,630 (3,630 ) - - 4,373 (4,373 ) -
Other service and equipment - 817 (817 ) - - 859 (859 ) -
Wireless equipment 1,131 1,498 - 2,629 1,385 1,771 - 3,156
Total Operating Revenues 7,740 16,848 (7,421 ) 17,167 8,328 17,609 (7,983 ) 17,954
Operating Expenses
Operations and support 4,528 10,176 (4,706 ) 9,998 4,912 10,802 (5,090 ) 10,624
EBITDA 3,212 6,672 (2,715 ) 7,169 3,416 6,807 (2,893 ) 7,330
Depreciation and amortization 873 2,312 (1,188 ) 1,997 922 2,508 (1,374 ) 2,056
Total Operating Expenses 5,401 12,488 (5,894 ) 11,995 5,834 13,310 (6,464 ) 12,680
Operating Income $ 2,339 $ 4,360 $ (1,527 ) $ 5,172 $ 2,494 $ 4,299 $ (1,519 ) $ 5,274
1 Non-wireless (fixed) operations reported in Business Solutions segment.
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AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
LIQUIDITY AND CAPITAL RESOURCES
We had $14,884 in cash and cash equivalents available at March 31, 2017. Cash and cash equivalents included cash of $3,307
and money market funds and other cash equivalents of $11,577. Approximately $1,303 of our cash and cash equivalents resided
in foreign jurisdictions, some of which are subject to restrictions on repatriation.
Cash and cash equivalents increased $9,096 since December 31, 2016. In the first three months of 2017, cash inflows were
primarily provided by the issuance of long-term debt, and cash receipts from operations, including cash from our sale and
transfer of certain wireless equipment installment receivables to third parties. These inflows were offset by cash used to
meet the needs of the business, including, but not limited to, payment of operating expenses, funding capital expenditures,
debt repayments, dividends to stockholders, and the acquisition of wireless spectrum and other operations. We discuss many
of these factors in detail below.
Cash Provided by or Used in Operating Activities
During the first three months of 2017, cash provided by operating activities was $9,218, compared to $7,900 for the first
three months of 2016. Higher operating cash flows in 2017 were primarily due to lower tax payments and working capital
improvements.
Cash Used in or Provided by Investing Activities
For the first three months of 2017, cash used in investing activities totaled $6,171 and consisted primarily of $5,784 for
capital expenditures, excluding interest during construction, and $162 for the acquisition of business operations and
wireless spectrum.
The majority of our capital expenditures are spent on our networks, our video services and related support systems. Capital
expenditures, excluding interest during construction, increased $1,333 in the first three months. The increase was
primarily due to our continued fiber buildout and timing of build schedules in 2017 compared with 2016. Additionally, in
connection with capital improvements, we negotiate favorable payment terms (referred to as vendor financing). For the first
three months of 2017, vendor financing related to capital investments was $107. We do not report capital expenditures at
the segment level.
We continue to expect our 2017 capital expenditures to be in the $22,000 range, and we expect our capital expenditures to
be in the 15% range of service revenues or lower for each of the years 2017 through 2019. The amount of capital
expenditures is influenced by demand for services and products, capacity needs and network enhancements. Our capital
spending also takes into account existing tax law and does not reflect anticipated tax reform. We are also focused on
ensuring DIRECTV merger commitments are met.
Cash Provided by or Used in Financing Activities
For the first three months of 2017, cash provided by financing activities totaled $6,049 and included net proceeds of
$12,440 primarily from the following long-term debt issuances:
· February issuance of $1,250 of 3.200% global notes due 2022.
· February issuance of $750 of 3.800% global notes due 2024.
· February issuance of $2,000 of 4.250% global notes due 2027.
· February issuance of $3,000 of 5.250% global notes due 2037.
· February issuance of $2,000 of 5.450% global notes due 2047.
· February issuance of $1,000 of 5.700% global notes due 2057.
· March issuance of $1,430 of 5.500% global notes due 2047.
· March issuance of $800 floating rate global notes due 2020. The floating rate for the notes is based upon the three-month London Interbank Offered Rate (LIBOR), reset quarterly, plus 65 basis points.
· March draw of $300 on a private financing agreement with Banco Nacional de Mexico, S.A. due March 2019. The agreement contains terms similar to that provided under our syndicated credit arrangements; the interest rate is a market rate.
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AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
During the first three months of 2017, we redeemed $3,053 of debt, primarily consisting of the following:
· $1,142 of 2.400% global notes due 2017.
· $1,000 of 1.600% global notes due 2017.
· $500 of floating rate notes due 2017.
The FCC's 600 MHz Auction concluded in April 2017. We submitted winning bids to purchase spectrum licenses in 18 markets
for which we paid $910. With our previous deposit made in July 2016, we received a refund from the FCC in the amount of
$1,438 on April 19, 2017.
Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was
approximately 4.3% as of March 31, 2017, compared to 4.2% as of December 31, 2016. We had $132,379 of total notes and
debentures outstanding at March 31, 2017, which included Euro, British pound sterling, Swiss franc, Brazilian real, Mexican
peso and Canadian dollar denominated debt that totaled approximately $24,941.
As of March 31, 2017, we had approximately 396 million shares remaining from 2013 and 2014 authorizations from our Board of
Directors to repurchase shares of our common stock. During the first three months of 2017, we did not repurchase any shares
under these authorizations. In 2017, we intend to use free cash flow (operating cash flows less construction and capital
expenditures) after dividends primarily to pay down debt.
We paid dividends of $3,009 during the first three months of 2017, compared with $2,947 for the first three months of 2016,
primarily reflecting the increase in the quarterly dividend approved by our Board of Directors in October 2016, partially
offset by the impact of the decline in shares outstanding due to repurchases in 2016. Dividends declared by our Board of
Directors totaled $0.49 per share in the first three months of 2017 and $0.48 per share for the first three months of 2016.
Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of AT&T and
long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to
consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain
subject to declaration by our Board of Directors.
At March 31, 2017, we had $12,681 of debt maturing within one year, $12,507 of which was related to long-term debt
issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:
· $1,000 of annual put reset securities issued by BellSouth that may be put back to us each April until maturity in 2021. No such put was exercised during April 2017.
· An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the zero-coupon note (issued for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,030.
Credit Facilities
The following summary of our various credit and loan agreements does not purport to be complete and is qualified in its
entirety by reference to each agreement filed as exhibits to our Annual Report on Form 10-K.
We use credit facilities as a tool in managing our liquidity status. In December 2015, we entered into a five-year $12,000
revolving credit agreement of which no amounts are outstanding as of March 31, 2017. We also have a $9,155 syndicated
credit agreement, of which $4,155 remains outstanding as of March 31, 2017 ($2,286 of which is payable March 2018).
In connection with our pending Merger with Time Warner, we have also entered into a $30,000 bridge loan credit agreement
("Bridge Loan") and a $10,000 term loan agreement ("Term Loan"). No amounts will be borrowed under either the Bridge Loan
or the Term Loan prior to the closing of the Merger. Borrowings under either agreement will be used solely to finance a
portion of the cash to be paid in the Merger, the refinancing of debt of Time Warner and its subsidiaries and the payment
of related expenses.
Each of our credit and loan agreements contains covenants that are customary for an issuer with an investment grade senior
debt credit rating as well as a net debt-to-EBITDA financial ratio covenant requiring AT&T to maintain, as of the last day
of each fiscal quarter, a ratio of not more than 3.5-to-1. As of March 31, 2017, we were in compliance with the covenants
for our credit facilities.
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AT&T INC.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Collateral Arrangements
During the first three months of 2017, we received $396 of additional cash collateral, on a net basis, from banks and other
participants in our derivative arrangements. Cash postings under these arrangements vary with changes in credit ratings and
netting agreements. (See Note 6)
Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders' equity. Our capital
structure does not include debt issued by our equity method investments. At March 31, 2017, our debt ratio was 51.6%,
compared to 51.2% at March 31, 2016, and 49.9% at December 31, 2016. Our net debt ratio was 45.8% at March 31, 2017,
compared to 47.3% at March 31, 2016 and 47.5% at December 31, 2016. The debt ratio is affected by the same factors that
affect total capital, and reflects our recent debt issuances and repayments.
During the first three months of 2017, we received $1,446 from the monetization of various assets, primarily the sale of
certain equipment installment receivables. We plan to continue to explore similar opportunities.
In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding
company for our U.S. wireless operations, to the trust used to pay pension benefits under our qualified pension plans. The
preferred equity interest had a value of $8,426 as of March 31, 2017, and $8,477 as of December 31, 2016, does not have any
voting rights and has a liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of $560
per annum, which are distributed quarterly in equal amounts. We distributed $140 to the trust during the first three months
of 2017. So long as we make the distributions, the terms of the preferred equity interest will not impose any limitations
on our ability to declare a dividend or repurchase shares.
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MARCH 31, 2017
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
At March 31, 2017, we had interest rate swaps with a notional value of $10,450 and a fair value of $42.
We have fixed-to-fixed and floating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a
U.S. dollar notional value of $29,642 to hedge our exposure to changes in foreign currency exchange rates. These
derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $(3,400) at March
31, 2017.
Item 4. Controls and Procedures
The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be
disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including
its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and
reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The chief executive
officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the
registrant's disclosure controls and procedures as of March 31, 2017. Based on that evaluation, the chief executive officer
and chief financial officer concluded that the registrant's disclosure controls and procedures were effective as of March
31, 2017.
43
AT&T INC.
MARCH 31, 2017
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and
actual results could differ materially. Many of these factors are discussed in more detail in the "Risk Factors" section.
We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation
Reform Act of 1995.
The following factors could cause our future results to differ materially from those expressed in the forward-looking
statements:
· Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers' ability to access financial markets at favorable rates and terms.
· Changes in available technology and the effects of such changes, including product substitutions and deployment costs.
· Increases in our benefit plans' costs, including increases due to adverse changes in the United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates; adverse changes in mortality assumptions; adverse medical cost trends; and unfavorable or delayed implementation or repeal of healthcare legislation, regulations or related court decisions.
· The final outcome of FCC and other federal, state or foreign government agency proceedings (including judicial review, if any, of such proceedings) involving issues that are important to our business, including, without limitation, special access and
business data services; intercarrier compensation; interconnection obligations; pending Notices of Apparent Liability; the transition from legacy technologies to IP-based infrastructure, including the withdrawal of legacy TDM-based services; universal
service; broadband deployment; E911 services; competition policy; privacy; net neutrality, including the FCC's order classifying broadband as Title II services subject to much more comprehensive regulation; unbundled network elements and other wholesale
obligations; multi-channel video programming distributor services and equipment; availability of new spectrum, on fair and balanced terms; and wireless and satellite license awards and renewals.
· The final outcome of state and federal legislative efforts involving issues that are important to our business, including deregulation of IP-based services, relief from Carrier of Last Resort obligations and elimination of state commission review of the withdrawal of services.
· Enactment of additional state, local, federal and/or foreign regulatory and tax laws and regulations, or changes to existing standards and actions by tax agencies and judicial authorities including the resolution of disputes with any taxing jurisdictions, pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs.
· Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies or delivery methods (e.g., cable, wireless, VoIP and over-the-top video service), subscriber reluctance to purchase new wireless handsets, and our ability to maintain capital expenditures.
· The extent of competition including from governmental networks and other providers and the resulting pressure on customer and access line totals and segment operating margins.
· Our ability to develop attractive and profitable product/service offerings to offset increasing competition.
· The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and non-regulation of comparable alternative technologies (e.g., VoIP).
· The continued development and delivery of attractive and profitable video offerings through satellite and IP-based networks; the extent to which regulatory and build-out requirements apply to our offerings; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.
· Our continued ability to maintain margins, attract and offer a diverse portfolio of wireless service and devices and device financing plans.
· The availability and cost of additional wireless spectrum and regulations and conditions relating to spectrum use, licensing, obtaining additional spectrum, technical standards and deployment and usage, including network management rules.
· Our ability to manage growth in wireless video and data services, including network quality and acquisition of adequate spectrum at reasonable costs and terms.
· The outcome of pending, threatened or potential litigation (which includes arbitrations), including, without limitation, patent and product safety claims by or against third parties.
· The impact from major equipment failures on our networks, including satellites operated by DIRECTV; the effect of security breaches related to the network or customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers; and in the case of satellites launched, timely provisioning of services from vendors; or severe weather conditions, natural disasters, pandemics, energy shortages, wars or
terrorist attacks.
· The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.
· Our ability to integrate our acquisition of DIRECTV.
· Our ability to close our pending acquisition of Time Warner Inc. and successfully integrate its operations.
· Our ability to adequately fund our wireless operations, including payment for additional spectrum, network upgrades and technological advancements.
· Our increased exposure to video competition and foreign economies due to our recent acquisitions of DIRECTV and Mexican wireless properties, including foreign exchange fluctuations as well as regulatory and political uncertainty.
· Changes in our corporate strategies, such as changing network-related requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments.
· The uncertainty surrounding further congressional action to address spending reductions, which may result in a significant decrease in government spending and reluctance of businesses and consumers to spend in general.
· The uncertainty and impact of anticipated regulatory and corporate tax reform, which may impact the overall economy and incentives for business investments.
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially
affect our future earnings.
44
AT&T INC.
MARCH 31, 2017
PART II - OTHER INFORMATION
Dollars in millions except per share amounts
Item 1A. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to
update this discussion to reflect material developments since our Form 10-K was filed. For the first quarter 2017, there
were no such material developments.
(a)Total Number of Shares (or Units) Purchased 1, 2, 3
(b) Average Price Paid Per Share (or Unit)
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs 1
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or
Programs
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) A summary of our repurchases of common stock during the first quarter of 2017 is as follows:
Period (a) (b) (c) (d)
January 1, 2017 -January 31, 2017 658,242 $ 40.95 - 395,550,000
February 1, 2017 -February 28, 2017 1,782,268 41.86 - 395,550,000
March 1, 2017 -March 31, 2017 2,346,758 41.91 - 395,550,000
Total 4,787,268 $ 41.74 -
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, 4,244,764 shares were acquired through the withholding of taxes on the vesting of restricted stock and performance shares or on the exercise price of options.
3 Of the shares repurchased, 542,504 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit Association (VEBA) trusts.
45
AT&T INC.
MARCH 31, 2017
Item 6. Exhibits
Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by
reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610.
10-a Stock Purchase and Deferral Plan
10-b Cash Deferral Plan
12 Computation of Ratios of Earnings to Fixed Charges
31 Rule 13a-14(a)/15d-14(a) Certifications31.1 Certification of Principal Executive Officer31.2 Certification of Principal Financial Officer
32 Section 1350 Certifications
101 XBRL Instance Document
46
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
May 4, 2017 AT&T Inc. /s/ John J. StephensJohn J. StephensSenior Executive Vice President and Chief Financial Officer
47
Exhibit 10-a
AT&T INC.
STOCK PURCHASE AND DEFERRAL PLAN
Adopted November 19, 2004
As amended through March 30, 2017
Article 1 - Statement of Purpose
The purpose of the Stock Purchase and Deferral Plan ("Plan") is to increase stock ownership by, and to provide savings
opportunities to, a select group of management employees of AT&T Inc. ("AT&T") and its Subsidiaries.
Article 2 - Definitions
For the purpose of this Plan, the following words and phrases shall have the meanings indicated, unless the context
indicates otherwise:
Annual Bonus. The award designated the "Annual Bonus" by AT&T (including but not limited to an award that may be paid in
more frequent installments than annually), together with any individual discretionary award made in connection therewith,
or comparable awards, if any, determined by AT&T to be used in lieu of these awards.
Base Compensation. The following types of cash-based compensation paid by an Employer (but
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