REG - AT & T Inc. - 1st Quarter Results <Origin Href="QuoteRef">T.N</Origin> - Part 2
16/05/2016 15:45
- Part 2: For the preceding part double click ID:nRSP3835Ya
11
AT&T INC.
MARCH 31, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
The following table is a reconciliation of operating contribution to "Income Before Income Taxes" reported on our consolidated statements of income.
First Quarter
2016 2015
Business Solutions $ 4,299 $ 4,142
Entertainment Group 1,595 (270 )
Consumer Mobility 2,494 2,235
International (184 ) (10 )
Segment Operating Contribution 8,204 6,097
Reconciling Items:
Corporate and Other (121 ) 91
Merger and integration charges (295 ) (299 )
Amortization of intangibles acquired (1,351 ) (121 )
Employee separation charges (25 ) (217 )
Gain on wireless spectrum transactions 736 -
Segment equity in net (income) loss of affiliates (17 ) 6
AT&T Operating Income 7,131 5,557
Interest Expense 1,207 899
Equity in net income (loss) of affiliates 13 -
Other income (expense) - Net 70 70
Income Before Income Taxes $ 6,007 $ 4,728
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 fair value of $8,787 at March 31, 2016. The trust is entitled to receive cumulative
cash distributions of $560 per annum, which will be distributed quarterly in equal amounts and will be accounted for as
contributions. We distributed $140 to the trust during the three months ended March 31, 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 have also agreed
to make a cash contribution to the trust of $175 no later than the due date of our federal income tax return for 2015.
We recognize actuarial gains and losses on pension and postretirement plan assets in our operating results at our annual
measurement date of December 31, unless earlier remeasurements are required. The following table details pension and
postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income. A
portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net
expense recorded.
12
AT&T INC.
MARCH 31, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
Three months ended
March 31,
2016 2015
Pension cost:
Service cost - benefits earned during the period $ 278 $ 299
Interest cost on projected benefit obligation 495 474
Expected return on assets (778 ) (826 )
Amortization of prior service credit (26 ) (26 )
Net pension (credit) cost $ (31 ) $ (79 )
Postretirement cost:
Service cost - benefits earned during the period $ 48 $ 55
Interest cost on accumulated postretirement benefit obligation 243 242
Expected return on assets (89 ) (105 )
Amortization of prior service credit (319 ) (320 )
Net postretirement (credit) cost $ (117 ) $ (128 )
Combined net pension and postretirement (credit) cost $ (148 ) $ (207 )
The increase of $59 in the first quarter 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 first quarter ended 2016 and 2015, net supplemental retirement pension benefits costs not included in the
table above, were $23 and $20, respectively.
NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described
below:
Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access.
Level 2 Inputs to the valuation methodology include:
· Quoted prices for similar assets and liabilities in active markets.
· Quoted prices for identical or similar assets or liabilities in inactive markets.
· Inputs other than quoted market prices that are observable for the asset or liability.
· Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
· Fair value is often based on developed models in which there are few, if any, external observations.
The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of
any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs
and minimize the use of unobservable inputs.
13
AT&T INC.
MARCH 31, 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:
March 31, 2016 December 31, 2015
Carrying Fair Carrying Fair
Amount Value Amount Value
Notes and debentures1 $ 129,229 $ 137,865 $ 124,847 $ 128,993
Bank borrowings 4 4 4 4
Investment securities 2,592 2,592 2,704 2,704
1 Includes credit agreement borrowings.
The carrying value 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. The carrying and fair values
included above reflect our March 2016 debt exchange of $16,049 of DIRECTV notes for AT&T global notes with matching terms.
Following is the fair value leveling for available-for-sale securities and derivatives as of March 31, 2016, and December
31, 2015:
March 31, 2016
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 1,111 $ - $ - $ 1,111
International equities 541 - - 541
Fixed income bonds - 676 - 676
Asset Derivatives1
Interest rate swaps - 197 - 197
Cross-currency swaps - 519 - 519
Liability Derivatives1
Cross-currency swaps - (2,582 ) - (2,582 )
1 Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.
14
AT&T INC.
MARCH 31, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
December 31, 2015
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 1,132 $ - $ - $ 1,132
International equities 569 - - 569
Fixed income bonds - 680 - 680
Asset Derivatives1
Interest rate swaps - 136 - 136
Cross-currency swaps - 556 - 556
Foreign exchange contracts - 3 - 3
Liability Derivatives1
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 $99 have maturities of less than one year, $308 within one to three years, $65
within three to five years, and $204 for five or more years.
Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and customer
deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term
investments and customer deposits are recorded in "Other current assets" and our investment securities are recorded in
"Other Assets" on the consolidated balance sheets.
Derivative Financial Instruments
We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency
exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and
combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or
speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from
observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows
associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as
the item being hedged.
Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps
is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt
of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying
principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated
statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized
losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest
rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early
termination of our fair value hedges are recognized in interest expense. In the three months ended March 31, 2016, and
March 31, 2015, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.
15
AT&T INC.
MARCH 31, 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 three months ended March 31, 2016, and March 31, 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 three months ended March 31, 2016, and March 31, 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 March 31, 2016, we had posted
collateral of $1,743 (a deposit asset) and held collateral of $111 (a receipt liability). Under the agreements, if our
credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in March, we
would have been required to post additional collateral of $130. If DIRECTV Holdings LLC's credit rating had been downgraded
below BBB- (S&P) and below Baa3 (Moody's), we would owe an additional $195. 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 is the notional amount of our outstanding derivative positions:
March 31, December 31,
2016 2015
Interest rate swaps $ 7,050 $ 7,050
Cross-currency swaps 29,642 29,642
Foreign exchange contracts 3 100
Total $ 36,695 $ 36,792
16
AT&T INC.
MARCH 31, 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
Fair Value Hedging Relationships Three months ended
March 31, March 31,
2016 2015
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ 66 $ 41
Gain (Loss) on long-term debt (66 ) (41 )
In addition, the net swap settlements that accrued and settled in the quarter ended March 31 were offset against interest
expense.
Three months ended
March 31, March 31,
Cash Flow Hedging Relationships 2016 2015
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI $ 191 $ (228 )
Interest rate locks:
Gain (Loss) recognized in accumulated OCI - (316 )
Interest income (expense) reclassified from accumulated OCI into income (15 ) (11 )
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 preliminarily 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.
The fair value estimates are preliminary in nature and subject to adjustments, which could be material. Any necessary
adjustments will be finalized within one year from the date of acquisition. Substantially all the receivables acquired are
expected to be collectable. We have not identified any material unrecorded pre-acquisition contingencies where the related
asset, liability or impairment is probable and the amount can be reasonably estimated. Goodwill is 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 acquisition. Prior to the
finalization of the purchase price allocation, if information becomes available that would indicate it is probable that
such events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase
price allocation and may change goodwill.
17
AT&T INC.
MARCH 31, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
The following table summarizes the preliminary estimated 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 2,026
All other current assets 1,535
Property, plant and equipment 9,331
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 457
Investments and other assets 2,388
Goodwill 34,449
Total assets acquired 90,723
Liabilities assumed
Current liabilities, excluding current portion of long-term debt 5,733
Long-term debt 20,585
Other noncurrent liabilities 16,642
Total liabilities assumed 42,960
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.
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AT&T INC.
MARCH 31, 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,
with the right to trade in the original equipment for a new device within a set period and have the remaining unpaid
balance satisfied. As of March 31, 2016, and December 31, 2015, gross equipment installment receivables of $5,079 and
$5,719 were included on our consolidated balance sheets, of which $3,007 and $3,239 are notes receivable that are included
in "Accounts receivable - net."
In 2014, we entered into the first of a series of uncommitted agreements pertaining to the sale of equipment installment
receivables and related security with Citibank and various other relationship banks as purchasers (collectively, the
Purchasers). Under these agreements, 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 arrangements, we
continue to bill and collect on behalf of our customers for the receivables sold.
The following table sets forth a summary of equipment installment receivables sold during the three months ended March 31,
2016 and 2015:
Three months ended
March 31,
2016 2015
Gross receivables sold $ 2,482 $ 2,635
Net receivables sold1 2,256 2,381
Cash proceeds received 1,521 1,524
Deferred purchase price recorded 719 858
1 Receivables net of allowance, imputed interest and trade-in right guarantees.
The deferred purchase price is initially recorded at estimated fair value, which is based on remaining installment payments
expected to be collected, adjusted by the expected timing and value of device trade-ins, and subsequently carried at the
lower of cost or net realizable value. The estimated value of the device trade-ins considers prices offered to us by
independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements
used are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).
During the first quarter of 2016, we repurchased installment receivables previously sold to the Purchasers, with a fair
value of $532. These transactions reduced our current deferred purchase price receivable by $539, resulting in a loss of $7
during the quarter. This loss is included in "Selling, general and administrative" in the consolidated statements of
income.
At March 31, 2016, and December 31, 2015, our deferred purchase price receivable was $2,975 and $2,961, respectively, of
which $1,469 and $1,772 is included in "Other current assets" on our consolidated balance sheets, with the remainder in
"Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to
the amount of our deferred purchase price at any point in time.
The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or
to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as
operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both
the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate
risk.
19
AT&T INC.
MARCH 31, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share and per subscriber amounts
RESULTS OF OPERATIONS
For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of
the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company
whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our
subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both
domestically and internationally. During 2015, we completed our acquisitions of DIRECTV and wireless properties in Mexico,
and the following discussion of changes in our operating revenues and expenses is affected by the timing of these
acquisitions. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from acquired
businesses prior to acquisition are excluded. You should read this discussion in conjunction with the consolidated
financial statements and accompanying notes. A reference to a "Note" in this section refers to the accompanying Notes to
Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not
considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period's
presentation.
Consolidated Results Our financial results in the first quarter of 2016 and 2015 are summarized as follows:
First Quarter
2016 2015 PercentChange
Operating Revenues
Service $ 37,101 $ 28,962 28.1 %
Equipment 3,434 3,614 (5.0 )
Total Operating Revenues 40,535 32,576 24.4
Operating expenses
Cost of services and sales
Equipment 4,375 4,546 (3.8 )
Broadcast, programming and operations 4,629 1,122 -
Other cost of services 9,396 8,812 6.6
Selling, general and administrative 8,441 7,961 6.0
Depreciation and amortization 6,563 4,578 43.4
Total Operating Expenses 33,404 27,019 23.6
Operating Income 7,131 5,557 28.3
Income Before Income Taxes 6,007 4,728 27.1
Net Income 3,885 3,339 16.4
Net Income Attributable to AT&T $ 3,803 $ 3,263 16.5 %
Overview
Operating revenues increased $7,959, or 24.4%, in the first quarter of 2016.
Service revenues increased $8,139, or 28.1%, in the first quarter of 2016. The increase was primarily due to our 2015
acquisitions of DIRECTV and wireless operations in Mexico and gains in IP broadband and fixed strategic business services.
These were partially offset by continued declines in our legacy wireline voice and data products as well as from customers
choosing to purchase devices through installment payment agreements, which entitle them to a lower monthly service rate
under our wireless Mobile Share plans.
Equipment revenues decreased $180, or 5.0%, in the first quarter of 2016. This decline reflects fewer wireless handset
sales, additional promotional activities during 2016 and lower revenue related to customer premises equipment. Revenue
declines were partially offset by the continuing trend of our wireless customers to purchase higher priced devices and an
increase in customers choosing to purchase devices on installment when compared to the prior year.
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AT&T INC.
MARCH 31, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Operating expenses increased $6,385, or 23.6%, in the first quarter of 2016.
Equipment expenses decreased $171, or 3.8%, in the first quarter of 2016. The decrease was primarily due to the decline in
devices sold to postpaid subscribers, who tend to buy more expensive devices. The decrease was partially offset by
increased sales volumes to our prepaid subscribers.
Broadcast, programming and operations expenses increased $3,507 in the first quarter of 2016. Broadcast costs increased due
to our acquisition of DIRECTV, slightly offset by fewer AT&T U-verse (U-verse) subscribers.
Other cost of services expenses increased $584, or 6.6%, in the first quarter of 2016. The increase was primarily due to
our acquisitions of DIRECTV and Mexican wireless properties. Also contributing to higher expenses was an increase in
noncash financing-related costs associated with our pension and postretirement benefits. These increases were partially
offset by lower network and access charges.
Selling, general and administrative expenses increased $480, or 6.0%, in the first quarter of 2016. The increase was
primarily due to our acquisitions in 2015 and increased advertising activity in 2016. The increases were largely offset by
a $736 noncash gain on wireless spectrum transactions, lower wireless commission expenses and lower employee separation
charges.
Depreciation and amortization expense increased $1,985, or 43.4%, in the first quarter of 2016. Amortization expense
increased $1,228 due to the amortization of intangibles from recent acquisitions. Depreciation expense increased $757
primarily due to the previously mentioned acquisitions and ongoing capital spending for network upgrades.
Operating income increased $1,574, or 28.3%, in the first quarter of 2016. Our operating income margin in the first quarter
increased from 17.1% in 2015 to 17.6% in 2016.
Interest expense increased $308, or 34.3%, in the first quarter of 2016. The increase was primarily due to higher average
debt balances, including debt issued and debt acquired in connection with our acquisition of DIRECTV. The increases were
partially offset by higher capitalized interest resulting from spectrum acquired in the Advanced Wireless Service (AWS)-3
Auction (see Note 7).
Equity in net income of affiliates increased $13 in the first quarter of 2016. This increase primarily resulted from
earnings from investments acquired in our purchase of DIRECTV in the third quarter of 2015, partially offset by lower
earnings from Otter Media Holdings and YP Holdings LLC.
Other income (expense) - net We had other income of $70 in the first quarter of both 2016 and 2015. Results in the first
quarter of 2016 and 2015 included a net gain on the sale of investments of $44 and $33 and interest and dividend income of
$29 and $19, respectively.
Income taxes increased $733, or 52.8%, in the first quarter of 2016. Our effective tax rate was 35.3% for the first quarter
of 2016, compared to 29.4% for first quarter of 2015. The increase in income tax expense for the first quarter of 2016 was
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 income tax expense and the
effective tax rate in the first quarter of 2015.
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AT&T INC.
MARCH 31, 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
March 31,
Subscribers and connections in (000s) 2016 2015
Domestic wireless subscribers 130,445 121,772
Mexican wireless subscribers 9,213 5,728
North American wireless subscribers 139,658 127,500
North American branded subscribers 98,158 91,448
North American branded net additions 1,195 539
Domestic satellite video subscribers 20,112 -
U-verse video subscribers 5,260 5,993
Latin America satellite video subscribers1 12,436 -
Total video subscribers 37,808 5,993
Total domestic broadband connections 15,764 16,097
Network access lines in service 15,975 18,949
U-Verse VoIP connections 5,484 5,200
Debt ratio2 51.2 % 51.5 %
Net Debt Ratio3 47.3 % 49.1 %
Ratio of earnings to fixed charges4 4.22 4.30
Number of AT&T employees 280,870 250,790
1 Excludes subscribers of our International segment equity investments in SKY Mexico.
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 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 operating income before 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 operating income before
depreciation and amortization, divided by total revenues.
The Business Solutions segment provides services to business, 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.
22
AT&T INC.
MARCH 31, 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 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 wireless wholesale and resale
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 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."
Business Solutions
Segment Results
First Quarter
2016 2015 PercentChange
Segment operating revenues
Wireless service $ 7,855 $ 7,515 4.5 %
Fixed strategic services 2,786 2,549 9.3
Legacy voice and data services 4,338 4,754 (8.8 )
Other service and equipment 859 846 1.5
Wireless equipment 1,771 1,893 (6.4 )
Total Segment Operating Revenues 17,609 17,557 0.3
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