REG - AT & T Inc. - 1st Quarter Results <Origin Href="QuoteRef">T.N</Origin> - Part 4
16/05/2016 15:45
- Part 4: For the preceding part double click ID:nRSP3835Yc
allows for unlimited wireless data when combined with our video services,
ending the quarter with more than 3.0 million subscribers on these packages.
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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
ARPU
Postpaid phone-only ARPU (average revenue per average wireless subscriber) was $59.53 at March 31, 2016 and $59.98 at March
31, 2015. Postpaid phone-only ARPU plus AT&T Next subscriber installment billings increased 5.1% in the first quarter of
2016 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 slightly higher in the first quarter of 2016. Postpaid churn was also higher reflecting
continuing competitive pressure in the industry.
Branded Subscribers
Branded subscribers increased 3.6% in the first quarter of 2016, which included a 21.3% increase in prepaid subscribers and
a 1.3% increase in postpaid subscribers. At March 31, 2016, 88% of our postpaid phone subscriber base used smartphones,
compared to 84% at March 31, 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.
About half of our Mobile Share accounts have chosen data plans with 10 gigabytes or higher and 38% have chosen plans with
15 gigabytes or higher. Device connections on our Mobile Share plans now represent 77% 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 the AT&T Next program or choose to bring their
own device, with no annual service contract. Over 90% of postpaid smartphone gross adds and upgrades during the first
quarter of 2016 were either AT&T Next or BYOD. While BYOD customers do not generate equipment revenue or expense, the
service revenue helps improve our margins.
Our AT&T Next program allows for postpaid subscribers to purchase certain devices in installments over a period of up to 30
months. Additionally, after a specified period of time, they 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 on the AT&T Next program 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 26.4% in the first quarter of 2016. During the first quarter of 2016, we added
approximately 1.2 million "connected" cars through agreements with various carmakers. We believe that these connected car
agreements give us the opportunity to create future retail relationships with the car owners.
OTHER BUSINESS MATTERS
Litigation Challenging DIRECTV's NFL Sunday Ticket More than two dozen putative class actions have been 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. We vigorously dispute the allegations the complaints have asserted.
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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
Federal Trade Commission Litigation Involving DIRECTV In March 2015, the Federal Trade Commission (FTC) filed a civil suit
in the U.S. District Court for the Northern District of California against DIRECTV seeking injunctive relief and
unspecified money damages under Section 5 of the Federal Trade Commission Act and Section 4 of the Restore Online Shoppers'
Confidence Act. The FTC's allegations concern DIRECTV's advertising, marketing and sale of programming packages. The FTC
alleges that DIRECTV did not adequately disclose all relevant terms. We are disputing these allegations vigorously.
Unlimited Data Plan Claims In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern
District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5
of the Federal Trade Commission Act. The FTC's allegations concern the application of AT&T's Maximum Bit Rate (MBR) program
to customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces in certain instances the
download speeds of a small portion of our legacy Unlimited Data Plan customers each month after the customer exceeds a
designated amount of data during the customer's billing cycle. MBR is an industry-standard practice that is designed to
affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media posts,
Internet browsing and many other applications are typically unaffected. Contrary to the FTC's allegations, which we
vigorously dispute, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited
Data Plan customers, and was implemented to protect the network for the benefit of all customers. In March 2015, our motion
to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court
granted our motion to certify its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit
subsequently granted our petition to accept the appeal, and the appeal is now pending before that Court while limited
discovery proceeds in the District Court. Oral argument on the appeal is presently set for June 17, 2016. 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.
South Coast Air Quality On January 15, 2016, AT&T Mobility received an offer to enter into an administrative settlement
with California's South Coast Air Quality Management District associated with a Notice of Violation (NOV) received in 2015.
The 2015 NOV alleged violations of local environmental air permitting and emissions rules issued by the District in
connection with operation of a back-up power generator system at one AT&T Mobility facility. After conclusion of its
investigation and discussion, the parties resolved the alleged violations set forth in the NOV without admission of fault
by AT&T Mobility for a payment of civil penalties in an amount less than one hundred thousand dollars.
Labor Contracts A contract covering approximately 9,000 mobility employees in the Southwest region, which expired in
February 2016, was ratified on April 14, 2016. A contract covering nearly 16,000 traditional wireline employees in our West
region expired in April 2016 and employees are working under the terms of the prior contract, including benefits, while
negotiations continue. After expiration of the current agreements, work stoppages or labor disruptions may occur in the
absence of new contracts or other agreements being reached. A separate contract covering only benefits with approximately
40,000 employees in our mobility business expires in 2016, though there is a no strike/no lock-out clause. Contracts
covering wages and other non-benefit working terms for these mobility employees are structured on a regional basis.
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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
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 have challenged the FCC's decision before the U.S. Court of
Appeals for the D.C. Circuit. We expect a decision on AT&T's appeal in the first half of 2016.
Though early in the rulemaking process, the FCC is considering a number of regulatory changes that could restrict our
commercial flexibility in the provision of video, special access, business, and advertising services.
We provide satellite video service through our subsidiary DIRECTV, whose satellites are licensed by the FCC. The
Communications Act of 1934 and other related acts give the FCC broad authority to regulate the U.S. operations of DIRECTV.
In addition, states representing a majority of our local service access lines have adopted legislation that enables us to
provide U-verse service through a single statewide or state-approved franchise (as opposed to the need to acquire hundreds
or even thousands of municipal-approved franchises) to offer a competitive video product. We also are supporting efforts to
update and improve regulatory treatment for retail services. Regulatory reform and passage of legislation is uncertain and
depends on many factors.
We provide wireless services in robustly competitive markets, but are subject to substantial and increasing governmental
regulation. Wireless communications providers must obtain licenses from the FCC to provide communications services at
specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing
the use of the spectrum. While wireless communications providers' prices and offerings are generally not subject to state
regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the area of
consumer protection.
The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. Government
to make more spectrum available. In February 2012, Congress set forth specific spectrum blocks to be auctioned and licensed
by February 2015 (the "AWS-3 Auction") and also authorized the FCC to conduct an "incentive auction," to make available for
wireless broadband use certain spectrum that is currently used by broadcast television licensees (the "600 MHz Auction").
We participated in the AWS-3 Auction. The 600 MHz Auction (Auction 1000) began on March 29, 2016, and the multiple phases
of Auction 1000 are expected to progress over the next several months.
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.
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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
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 $10,008 in cash and cash equivalents available at March 31, 2016. Cash and cash equivalents included cash of $2,114
and money market funds and other cash equivalents of $7,894. Approximately $939 of our cash and cash equivalents resided in
foreign jurisdictions, some of which is subject to restrictions on repatriation. Cash and cash equivalents increased $4,887
since December 31, 2015. In the first three months of 2016, cash inflows were primarily provided by cash receipts from
operations, including cash from our sale and transfer of certain 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. We discuss many of these factors in detail below.
Cash Provided by or Used in Operating Activities
During the first three months of 2016, cash provided by operating activities was $7,900, compared to $6,738 for the first
three months of 2015. Higher operating cash flows in 2016 were primarily due to our acquisition of DIRECTV and partially
offset by the timing of working capital payments.
Cash Used in or Provided by Investing Activities
For the first three months of 2016, cash used in investing activities totaled $4,308 and consisted primarily of $4,451 for
capital expenditures, excluding interest during construction, and $165 for the acquisition of wireless spectrum and other
operations. These expenditures were partially offset by net cash receipts of $445 from the sale of securities.
Virtually all of our capital expenditures are spent on our communications networks and our video services and support
systems for our digital entertainment services. Capital expenditures, excluding interest during construction, increased
$603 in the first three months. The increase was primarily due to our wireless network expansion in Mexico, DIRECTV
operations and 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 three months of 2016, we deferred $43
of vendor financing related to capital additions to future periods. 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.
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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
Cash Provided by or Used in Financing Activities
For the first three months of 2016, cash provided by financing activities totaled $1,295 and included net proceeds of
$5,978 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.
During the first three months of 2016, we redeemed $2,296 of debt, consisting primarily of the following:
· February redemption of $1,250 of AT&T Floating Rate Notes due 2016.
· March prepayment of the remaining $1,000 of the outstanding advances under the $2,000 18-month credit agreement (the "18-month Credit Agreement") by and between AT&T and Mizuho. (See "Credit Facilities" below).
In March 2016, we completed a debt exchange covering $16,049 of notes of various series issued by DIRECTV with stated rates
of 1.75% to 6.375% for $16,049 in new AT&T Inc. global notes with stated rates of 1.75% to 6.375% plus a $16 cash payment.
On May 3, 2016, we agreed to sell the following debt amounts:
· $750 of 2.300% global notes due 2019.
· $750 of 2.800% global notes due 2021.
· $1,100 of 3.600% global notes due 2023.
· $900 of 4.125% global notes due 2026.
· $500 of 4.800% global notes due 2044.
These notes will be reopening of existing series of notes. The transactions are expected to close on May 12, 2016, and
proceeds will be used to pay down amounts outstanding under our $9,155 Syndicated Credit Agreement (discussed below).
Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was
approximately 4.1% as of March 31, 2016, and 4.0% as of December 31, 2015. We had $129,229 of total notes and debentures
outstanding at March 31, 2016, which included Euro, British pound sterling, Swiss Franc, Brazilian real and Canadian dollar
denominated debt of approximately $26,852.
As of March 31, 2016, we had approximately 407 million shares remaining from 2013 and 2014 authorizations from our Board of
Directors to repurchase shares of our common stock. In 2016, our priority will be to use free cash flow (operating cash
flows less construction and capital expenditures) after dividends to pay down debt.
We paid dividends of $2,947 during the first three months of 2016, compared with $2,434 for the first three 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 first quarter of 2016 and $0.47 per share for the first three months
of 2015. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of
AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of
Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends
remain subject to declaration by our Board of Directors.
At March 31, 2016, we had $8,399 of debt maturing within one year, $7,874 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 2016.
· An accreting zero-coupon note 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.
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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
Credit Facilities
On December 11, 2015, we entered into a five-year, $12,000 credit agreement (the "Revolving Credit Agreement") with
Citibank, N.A. (Citibank), as administrative agent, replacing our $5,000 credit agreement that would have expired in
December 2018. At the same time, AT&T and the lenders terminated their obligations under the existing revolving $3,000
credit agreement with Citibank that would have expired in December 2017.
In January 2015, we entered into a $9,155 credit agreement (the "Syndicated Credit Agreement") containing (i) a $6,286 term
loan facility (the "Tranche A Facility") and (ii) a $2,869 term loan facility (the "Tranche B Facility"), with certain
investment and commercial banks and Mizuho Bank, Ltd. ("Mizuho"), as administrative agent. We also entered into the 18
Month Credit Agreement with Mizuho as initial lender and agent. The 18-Month Credit Agreement was repaid and terminated in
March 2016.
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 March 31, 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 LIBOR applicable to U.S. dollars for a period of one month plus 1.00% per annum, plus (ii) an applicable margin, as set forth in the Revolving Credit Agreement ("Applicable Margin for Base Advances"); or
· at a rate equal to: (i) LIBOR for a period of one, two, three or six months, as applicable, plus (ii) the Applicable Margin ("Applicable Margin for Eurocurrency Rate Advances").
The Applicable Margin for Eurocurrency Rate Advances will equal 0.680%, 0.910%, 1.025%, or 1.125% per annum, depending on
AT&T's credit rating. The Applicable Margin for Base Rate Advances will be equal to the greater of 0.00% and the relevant
Applicable Margin for Eurocurrency Rate Advances minus 1.00% per annum depending on AT&T's credit rating.
We will pay a facility fee of 0.070%, 0.090%, 0.100% or 0.125% per annum, depending on AT&T's credit rating, of the amount
of lender commitments.
The Revolving Credit Agreement contains covenants that are customary for an issuer with an investment grade senior debt
credit rating, as well as a net debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization, and other
modifications described in the Revolving Credit Agreement) financial ratio covenant that AT&T will maintain, as of the last
day of each fiscal quarter of not more than 3.5-to-1.
The events of default contained in the Revolving Credit Agreement are customary for an agreement of this type and such
events would result in the acceleration or permit the lenders to accelerate, as applicable, required payments and would
increase the Applicable Margin by 2.00% per annum.
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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
The Syndicated Credit Agreement
In March 2015, AT&T borrowed all amounts available under the Tranche A Facility and the Tranche B Facility. Amounts
borrowed under the Tranche A Facility will be due on March 2, 2018. Amounts borrowed under the Tranche B Facility will be
subject to amortization from March 2, 2018, with 25 percent of the aggregate principal amount thereof being payable prior
to March 2, 2020, and all remaining principal amount due on March 2, 2020.
Advances bear interest at a rate equal to: (i) the LIBOR for deposits in dollars (adjusted upwards to reflect any bank
reserve costs) for a period of three or six months, as applicable, plus (ii) the Applicable Margin (each such Advance, a
Eurodollar Rate Advance). The Applicable Margin under the Tranche A Facility will equal 1.000%, 1.125% or 1.250% per annum
depending on AT&T's credit rating. The Applicable Margin under the Tranche B Facility will equal 1.125%, 1.250% or 1.375%
per annum, depending on AT&T's credit rating.
The Syndicated Credit Agreement contains covenants that are customary for an issuer with an investment grade senior debt
credit rating, as well as a net debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization, and other
modifications described in the Syndicated Credit Agreement) financial ratio covenant that AT&T will maintain, as of the
last day of each fiscal quarter of not more than 3.5-to-1.
The events of default contained in the Syndicated Credit Agreement are customary for an agreement of this type and such
events would result in the acceleration or permit the lenders to accelerate, as applicable, required payments and would
increase the Applicable Margin by 2.00% per annum.
Collateral Arrangements
During the first three months of 2016, we received $587 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 foreign currency
exchange rates, interest rates, 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, 2016, our debt ratio was 51.2%,
compared to 51.5% at March 31, 2015, and 50.5% at December 31, 2015. Our net debt ratio was 47.3% at March 31, 2016,
compared to 49.1% at March 31, 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 2016, we received $1,610 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 wireless business, to the trust used to pay pension benefits under our qualified pension plans. The
preferred equity interest had a value of $8,787 as of March 31, 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 will be distributed quarterly in equal amounts. We distributed $140 to the trust during the first quarter
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
At March 31, 2016, we had interest rate swaps with a notional value of $7,050 and a fair value of $197.
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 $(2,063) at March
31, 2016.
We also have foreign exchange contracts with a notional value of $3 and a fair value of $0.
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, 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 March
31, 2016.
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MARCH 31, 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 or state agency proceedings (including judicial review, if any, of such proceedings) involving issues that are important to our business, including, without limitation, intercarrier compensation; interconnection
obligations; pending Notices of Apparent Liability; the transition from legacy technologies to IP-based infrastructure including the withdrawal of legacy TDM-based services; universal service; broadband deployment; E911 services; competition policy; net
neutrality; including the FCC's order reclassifying broadband as Title II services subject to much more fulsome regulation; unbundled network elements and other wholesale obligations; multi-channel video programming distributor services and equipment;
availability of new spectrum from the FCC on fair and balanced terms, and wireless and satellite license awards and renewals.
· The final outcome of state and federal legislative efforts involving issues that are important to our business, including deregulation of IP-based services, relief from Carrier of Last Resort obligations and elimination of state commission review of the withdrawal of services.
· Enactment of additional state, local, federal and/or foreign regulatory and tax laws and regulations, or changes to existing standards and actions by tax agencies and judicial authorities including the resolution of disputes with any taxing jurisdictions, pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs.
· Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies or delivery methods (e.g., cable, wireless, VoIP and Over The Top Video service) and our ability to maintain capital expenditures.
· The extent of competition including from governmental networks and other providers and the resulting pressure on customer and access line totals and segment operating margins.
· Our ability to develop attractive and profitable product/service offerings to offset increasing competition.
· The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and nonregulation of comparable alternative technologies (e.g., VoIP).
· The continued development and delivery of attractive and profitable video offerings through satellite and U-verse; the extent to which regulatory and build-out requirements apply to our offerings; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.
· Our continued ability to maintain margins, attract and offer a diverse portfolio of wireless service and devices and device financing plans.
· The availability and cost of additional wireless spectrum and regulations and conditions relating to spectrum use, licensing, obtaining additional spectrum, technical standards and deployment and usage, including network management rules.
· Our ability to manage growth in wireless data services, including network quality and acquisition of adequate spectrum at reasonable costs and terms.
· The outcome of pending, threatened or potential litigation, including, without limitation, patent and product safety claims by or against third parties.
· The impact from major equipment failures on our networks, including satellites operated by DIRECTV; the effect of security breaches related to the network or customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers; and in the case of satellites launched, timely provisioning of services from vendors; or severe weather conditions, natural disasters, pandemics, energy shortages, wars or
terrorist attacks.
· The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.
· Our ability to integrate our acquisition of DIRECTV.
· Our ability to adequately fund our wireless operations, including payment for additional spectrum, network upgrades and technological advancements.
· Our increased exposure to video competition and foreign economies due to our recent acquisitions of DIRECTV and Mexican wireless properties, including foreign exchange fluctuations as well as regulatory and political uncertainty in Latin America.
· Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments.
· The uncertainty surrounding further congressional action to address spending reductions, which may result in a significant decrease in government spending and reluctance of businesses and consumers to spend in general.
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially
affect our future earnings.
41
AT&T INC.
MARCH 31, 2016
PART II - OTHER INFORMATION
Dollars in millions except per share amounts
Item 1A. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to
update this discussion to reflect material developments since our Form 10-K was filed. For the first quarter 2016, there
were no such material developments.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) A summary of our repurchases of common stock during the first quarter of 2016 is as follows:
Period (a) Total Number ofShares (or Units)Purchased1,2 (b) Average Price PaidPer Share (or Unit) (c) Total Number ofShares (or Units)Purchased as Part ofPublicly AnnouncedPlans or Programs1 (d) Maximum Number (orApproximate DollarValue) of Shares (orUnits) That May Yet BePurchased Under ThePlans or Programs
January 1, 2016 -January 31, 2016 541,982 $ - - 406,550,000
February 1, 2016 -February 29, 2016 448 - - 406,550,000
March 1, 2016 -March 31, 2016 9,074 - - 406,550,000
Total 551,504 $ - -
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 300 million shares of our common stock.
The authorizations have no expiration
date.
2 All repurchased shares were acquired
through the withholding of taxes on the
vesting of restricted stock or through the
payment in stock of taxes on the exercise
price of options.
42
AT&T INC.
MARCH 31, 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-a12 2016 Incentive PlanComputation 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
43
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 5, 2016 AT&T Inc. /s/ John J. StephensJohn J. StephensSenior Executive Vice President and Chief Financial Officer
44
AT&T INC.
2016 Incentive Plan
Article 1. Establishment and Purpose.
1.01 Establishment of the Plan. AT&T Inc., a Delaware corporation (the "Company" or "AT&T"), hereby establishes an incentive compensation plan (the "Plan"), as set forth in this document.
1.02 Purpose of the Plan. The purpose of the Plan is to promote the success and enhance the value of the Company by linking the personal interests of Participants to those of the Company's shareowners, and by providing Participants with an incentive for outstanding performance.
1.03 Effective Date of the Plan. The Plan is effective on May 1, 2016.
Article 2. Definitions.
2.01 Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized:
(a) "Applicable Law" means the legal requirements relating to the administration of options and share-based or performance-based awards under any applicable laws of the United States, any other country, and any provincial, state, or local subdivision, any applicable stock exchange or automated quotation system rules or regulations, as such laws, rules, regulations and requirements shall be in place from time to time.
(b) "Award" means, individually or collectively, a grant or award under this Plan of Stock Options, Restricted Stock (including unrestricted Stock), Restricted Stock Units, Performance Units, or Performance Shares.
(c) "Award Agreement" means an agreement which may be entered into by each Participant and the Company, setting forth the terms and provisions applicable to Awards granted to Participants under this Plan.
(d) "Board" or "Board of Directors" means the AT&T Board of Directors.
(e) "Cause" means willful and gross misconduct on the part of an Employee that is materially and demonstrably detrimental to the Company or any Subsidiary as determined by the Committee in its sole discretion.
(f) "Change in Control" shall be deemed to have occurred if (1) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the shareowners of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly,
of securities of the Company representing twenty percent (20%) or more of the total voting power represented by the Company's then outstanding voting securities; or (2) during any period of two (2) consecutive years, individuals who at the beginning of
such period constitute the Board of Directors of the Company and any new Director whose election by the Board of Directors or nomination for election by the Company's shareowners was approved by a vote of at least two-thirds (2/3) of the Directors then
still in office who either were Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (3) the consummation of a merger or consolidation of
the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the
shareowners of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets.
(g) "Code" means the Internal Revenue Code of 1986, as amended from time to time.
(h) "Committee" means the committee or committees of the Board of Directors given authority to administer the Plan as provided in Article 3.
(i) "Director" means any individual who is a member of the AT&T Board of Directors.
(j) "Disability" means, absence of an Employee from work under the relevant Company or Subsidiary long term disability plan.
(k) "Employee" means any employee of the Company or of one of the Company's Subsidiaries. "Employment" means the employment of an Employee by the Company or one of its Subsidiaries. Directors who are not otherwise employed by the Company shall not be considered Employees under this Plan.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor Act thereto.
(m) "Exercise Price" means the price at which a Share may be purchased by a Participant pursuant to an Option, as determined by the Committee.
(n) "Fair Market Value" means the closing price on the NYSE for a Share on the relevant date, or if such date was not a trading day, the next preceding trading date, all as determined by the Company. A trading day is any day that the Shares are traded on the NYSE. In lieu of the foregoing, the Committee may, from time to time, select any other index or measurement to determine the Fair Market Value of Shares under the Plan, including but not limited to an average determined over a period of trading days.
(o) "Insider" means an Employee who is, on the relevant date, an officer, director, or ten percent (10%) beneficial owner of the Company, as those terms are defined under Section 16 of the Exchange Act.
(p) "NYSE" or "New York Stock Exchange." If the New York Stock Exchange is no longer the principal exchange on which the stock is listed, then NYSE shall refer to such principal exchange unless otherwise provided by the Disinterested Committee.
(q) "Officer Level Employee" means a Participant who is an officer level Employee for compensation purposes as indicated on the records of AT&T. References to records of AT&T shall include the records of its Subsidiaries.
(r) "Option" means an option to purchase Shares from AT&T.
(s) "Participant" means an Employee or former Employee who holds an outstanding Award granted under the Plan.
(t) "Performance Unit" and "Performance Share" each mean an Award granted to an Employee pursuant to Article 8 herein.
(u) "Retirement" or to "Retire" means the Participant's Termination of Employment for any reason other than death, Disability, or for Cause, on or after the earlier of the following dates, or as otherwise provided by the Committee: (1) for Officer Level
Employees, the date the Participant is at least age fifty-five (55) and has completed a 5 year Term of Employment; provided, however, that individuals who are designated as an Officer on or after October 1, 2015, must have completed a 10-year Term of
Employment; or (2) the date the Participant has attained one of the following combinations of age and service, except as otherwise indicated below:
Term of Employment Age
10 years or more 65 or older
20 years or more 55 or older
25 years or more 50 or older
30 years or more Any age
For purposes of this Plan only, Term of Employment shall have the same meaning as in the AT&T Pension Benefit Plan -
Nonbargained Program ("Pension Plan"), as that may be amended from time to time, except that service with a Participant's
employer shall be counted as though the employer were a "Participating Company" under the Pension Plan and the Employee was
a participant in the Pension Plan.
(v) "Senior Manager" means a Participant who is a senior manager for compensation purposes as indicated on the records of AT&T.
(w) "Severance Termination of Employment" means a Termination of Employment where the Participant receives a cash severance payment under a severance plan of the Participant's employer or pursuant to an individually negotiated severance agreement.
(x) "Shares" or "Stock" means the shares of common stock of the Company.
(y) "Subsidiary" means any corporation, partnership, venture or other entity in which AT&T holds, directly or indirectly, a fifty percent (50%) or greater ownership interest.
(z) "Surplus Termination of Employment" means a Termination of Employment as a result of force surplus, technological, operational, organizational and/or structural changes affecting the relevant employer without an offer for comparable employment, or an Employment Termination that occurs as a result of declining a Company initiated or offered job relocation to a work location that is more than fifty (50) miles from the employee's work location and that increases the employee's work commute.
(aa) "Termination of Employment" or a similar
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