REG - AT & T Inc. - 2015 10-K <Origin Href="QuoteRef">T.N</Origin> - Part 9
01/04/2016 16:03
- Part 9: For the preceding part double click ID:nRSZ3512Qh
next opportunity.
On July 24, 2015, we added $20,585 in long-term debt, including capital leases, related to our acquisition of DIRECTV.
DIRECTV's debt included both fixed and floating-rate coupons with a weighted average rate of approximately 4.6% (ranging
from 1.75% to 9.50%) and had maturities ranging from 2015 to 2042. Included in our "Total notes and debentures" balance in
the table above was the face value of acquired debt from DIRECTV of $17,050, which had a carrying amount of $17,787 at
December 31, 2015.
Included in the table above at December 31, 2015, was approximately $738, representing the remaining excess of the fair
value over the recorded value of debt in connection with the acquisition of DIRECTV, all of which was included in our
"Unamortized (discount) premium - net." The excess is amortized over the remaining lives of the underlying debt
obligations.
We had outstanding Euro, British pound sterling, Canadian dollar, Swiss franc and Brazilian real denominated debt of
approximately $26,221 and $24,568 at December 31, 2015 and 2014. The weighted-average interest rate of our entire long-term
debt portfolio, including the impact of derivatives, decreased from 4.2% at December 31, 2014 to 4.0% at December 31,
2015.
Other debt includes financing arrangements we have in Mexico for the construction of wireless network facilities that
totaled $416, at December 31, 2015.
Current maturities of long-term debt include debt that may be put back to us by the holders in 2016. We have $1,000 of
annual put reset securities that may be put each April until maturity in 2021. If the holders do not require us to
repurchase the securities, the interest rate will be reset based on current market conditions. Likewise, we have an
accreting zero-coupon note that may be redeemed each May, until maturity in 2022. If the zero-coupon note (issued for
principal of $500 in 2007) is held to maturity, the redemption amount will be $1,030.
Debt maturing within one year consisted of the following at December 31:
2015 2014
Current maturities of long-term debt $ 7,632 $ 6,051
Bank borrowings1 4 5
Total $ 7,636 $ 6,056
1 Outstanding balance of short-term credit facility of a foreign subsidiary.
Financing Activities
During 2015, we issued $33,969 in long-term debt in various markets, with an average weighted maturity of approximately 12
years and a weighted average coupon of 2.7%. We redeemed $10,042 in borrowings of various notes with stated rates of 0.80%
to 9.10%.
During 2015 we completed the following long-term debt issuances:
· February 2015 issuance of $2,619 of 4.600% global notes due 2045.
· March 2015 borrowings under a variable rate term loan facility due 2018, variable rate term loan facility due 2020
and variable rate 18-month credit agreement due 2016, together totaling $11,155.
· March 2015 issuance of E1,250 of 1.300% global notes due 2023 and E1,250 of 2.450% global notes due 2035 (together,
equivalent to $2,844, when issued).
· May 2015 issuance of $3,000 of 2.450% global notes due 2020; $2,750 of 3.000% global notes due 2022; $5,000 of
3.400% global notes due 2025; $2,500 of 4.500% global notes due 2035; $3,500 of 4.750% global notes due 2046; and $750
floating rate global notes due 2020. The floating rate for the note is based upon the three-month London Interbank Offered
Rate (LIBOR), reset quarterly, plus 93 basis points.
On February 9, 2016, we completed the following long-term debt issuances:
· $1,250 of 2.800% global notes due 2021.
· $1,500 of 3.600% global notes due 2023.
· $1,750 of 4.125% global notes due 2026.
· $1,500 of 5.650% global notes due 2047.
As of December 31, 2015 and 2014, we were in compliance with all covenants and conditions of instruments governing our
debt. Substantially all of our outstanding long-term debt is unsecured. Maturities of outstanding long-term notes and
debentures, as of December 31, 2015, and the corresponding weighted-average interest rate scheduled for repayment are as
follows:
2016 2017 2018 2019 2020 Thereafter
Debt repayments1 $ 7,383 $ 7,789 $ 13,058 $ 7,863 $ 9,459 $ 83,891
Weighted-average interest rate 2.8 % 2.3 % 3.5 % 3.9 % 3.2 % 4.8 %
1 Debt repayments assume putable debt is redeemed by the holders at the next opportunity.
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 a $2,000
18-month credit agreement (the "18-Month Credit Agreement") with Mizuho as initial lender and agent. On December 11, 2015,
AT&T amended the Syndicated Credit Agreement and the 18-Month Credit Agreement to, among other things, revise the financial
covenant to match the financial covenant in the Revolving Credit Agreement.
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 December 31, 2015, we had no advances outstanding under the Revolving Credit Agreement and we have
complied will 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 (1) 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 (2) 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, a ratio of not more than 3.5-to-1.
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. Among other things, the Syndicated Credit Agreement requires us to maintain a net debt-to-EBITDA (earnings
before interest, income taxes, depreciation and amortization, and other modifications described in the Syndicated Credit
Agreement) ratio of not more than 3.5-to-1, as of the last day of each fiscal quarter.
Events of default are customary for an agreement of this nature and result in the acceleration or permit the lenders to
accelerate, as applicable, required payment and which would increase the Applicable Margin by 2.00% per annum.
The 18-Month Credit Agreement
In March 2015, AT&T borrowed all amounts available under the 18-Month Credit Agreement. Amounts borrowed under the 18-Month
Credit Agreement will be due and payable on September 2, 2016. In September 2015, we partially repaid the amount borrowed.
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 one, two, three or six months, as applicable, plus (ii) the Applicable Margin (each such
Advance, a Eurodollar Rate Advance). The Applicable Margin will equal 0.800%, 0.900% or 1.000% per annum, depending on
AT&T's credit rating. In the event that AT&T's unsecured senior long-term debt ratings are split by S&P, Moody's and Fitch,
then the Applicable Margin will be determined by the highest rating, unless the lowest of such ratings is more than one
level below the highest of such ratings, in which case the pricing will be the rating that is one level above the lowest of
such ratings.
The 18-Month Credit Agreement contains affirmative and negative covenants and events of default equivalent to those
contained in the Syndicated Credit Agreement.
NOTE 10. 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. Valuation techniques used should maximize the use of
observable inputs and minimize the use of unobservable inputs.
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, 2014.
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:
December 31, 2015 December 31, 2014
Carrying Fair Carrying Fair
Amount Value Amount Value
Notes and debentures1 $ 124,847 $ 128,993 $ 81,399 $ 90,367
Bank borrowings 4 4 5 5
Investment securities 2,704 2,704 2,735 2,735
1 Includes credit agreement borrowings.
The carrying value of debt with an original maturity of less than one year approximates fair value. The fair value
measurements used for notes and debentures are considered Level 2 and are determined using various methods, including
quoted prices for identical or similar securities in both active and inactive markets.
Following is the fair value leveling for available-for-sale securities and derivatives as of December 31, 2015, and
December 31, 2014:
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)
December 31, 2014
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 1,160 $ - $ - $ 1,160
International equities 553 - - 553
Fixed income bonds - 836 - 836
Asset Derivatives1
Interest rate swaps - 157 - 157
Cross-currency swaps - 1,243 - 1,243
Interest rate locks - 5 - 5
Liability Derivatives1
Cross-currency swaps - (1,506) - (1,506)
Interest rate locks - (133) - (133)
1 Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion
of interest rate swaps, "Other current assets" in our consolidated balance sheets.
Investment Securities
Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair
values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not
traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar
characteristics or discounted cash flows. Realized gains and losses on securities are included in "Other income (expense) -
net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of
tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than
temporary are recorded in "Other income (expense) - net" with the corresponding reduction to the carrying basis of the
investment. Fixed income investments of $95 have maturities of less than one year, $320 within one to three years, $52
within three to five years, and $213 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 employ derivatives 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.
The majority of our derivatives are designated either as a hedge of the fair value of a recognized asset or liability or of
an unrecognized firm commitment (fair value hedge), or as a hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or liability (cash flow hedge).
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 years ended December 31, 2015, and December
31, 2014, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.
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 denominations to fixed U.S. denominated
amounts, to be exchanged at a specified rate, usually determined by the market spot rate upon issuance. They also include
an interest rate swap of a fixed or floating foreign-denominated rate to a fixed U.S. 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, both for the period they are
outstanding. 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 years ended December
31, 2015, and December 31, 2014, 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. In the years ended December 31, 2015, and December 31, 2014, no ineffectiveness was measured on interest rate
locks. 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 years ended December 31, 2015, and December 31, 2014, 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 December 31, 2015, we had posted
collateral of $2,343 (a deposit asset) and held collateral of $124 (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 December, we
would have been required to post additional collateral of $105. If DIRECTV Holdings LLC's credit rating had been downgraded
below BBB- (S&P) and below Baa3 (Moody's) we would owe an additional $163. At December 31, 2014, we had posted collateral
of $530 (a deposit asset) and held collateral of $599 (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:
2015 2014
Interest rate swaps $ 7,050 $ 6,550
Cross-currency swaps 29,642 26,505
Interest rate locks - 6,750
Foreign exchange contracts 100 -
Total $ 36,792 $ 39,805
Following is the related hedged items affecting our financial position and performance:
Effect of Derivatives on the Consolidated Statements of Income
Fair Value Hedging Relationships
For the years ended December 31, 2015 2014 2013
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ (16) $ (29) $ (113)
Gain (Loss) on long-term debt 16 29 113
In addition, the net swap settlements that accrued and settled in the periods above were included in interest expense.
Cash Flow Hedging Relationships
For the year ended December 31, 2015 2014 2013
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI $ (813) $ 528 $ 813
Interest rate locks:
Gain (Loss) recognized in accumulated OCI (361) (128) -
Interest income (expense) reclassified from accumulated OCI into income (58) (44) (46)
Foreign exchange contracts:
Gain (Loss) recognized in accumulated OCI - - (2)
NOTE 11. INCOME TAXES
Significant components of our deferred tax liabilities (assets) are as follows at December 31:
2015 2014
Depreciation and amortization $ 59,879 $ 47,082
Intangibles (nonamortizable) 6,920 1,874
Employee benefits (10,517) (11,679)
Deferred fulfillment costs 2,172 2,035
Net operating loss and other carryforwards (4,029) (2,126)
Other - net (1,478) 68
Subtotal 52,947 37,254
Deferred tax assets valuation allowance 2,141 1,182
Net deferred tax liabilities $ 55,088 $ 38,436
Noncurrent deferred tax liabilities $ 56,181 $ 38,436
Less: Noncurrent deferred tax assets (1,093) -
Net deferred tax liabilities $ 55,088 $ 38,436
At December 31, 2015, we had combined net operating loss carryforwards (tax effected) for federal income tax purposes of
$106, state of $851 and foreign of $1,676, expiring through 2031. Additionally, we had federal credit carryforwards of $134
and state credit carryforwards of $1,262, expiring primarily through 2035. The increase in our net operating loss
carryforwards was primarily due to our acquisitions of GSF Telecom, Nextel Mexico and DIRECTV.
We recognize a valuation allowance if, based on the weight of available evidence, it is more likely than not that some
portion, or all, of a deferred tax asset will not be realized. Our valuation allowances at December 31, 2015 and 2014
related primarily to state and foreign net operating losses and state credit carryforwards. The increase in our valuation
allowance was primarily due to our 2015 acquisitions.
We recognize the financial statement effects of a tax return position when it is more likely than not, based on the
technical merits, that the position will ultimately be sustained. For tax positions that meet this recognition threshold,
we apply our judgment, taking into account applicable tax laws, our experience in managing tax audits and relevant GAAP, to
determine the amount of tax benefits to recognize in our financial statements. For each position, the difference between
the benefit realized on our tax return and the benefit reflected in our financial statements is recorded on our
consolidated balance sheets as an unrecognized tax benefit (UTB). We update our UTBs at each financial statement date to
reflect the impacts of audit settlements and other resolutions of audit issues, the expiration of statutes of limitation,
developments in tax law and ongoing discussions with taxing authorities. A reconciliation of the change in our UTB balance
from January 1 to December 31 for 2015 and 2014 is as follows:
Federal, State and Foreign Tax 2015 2014
Balance at beginning of year $ 4,465 $ 4,227
Increases for tax positions related to the current year 1,333 470
Increases for tax positions related to prior years 660 484
Decreases for tax positions related to prior years (396) (657)
Lapse of statute of limitations (16) (38)
Settlements 10 (21)
Current year acquisitions 864 -
Foreign currency effects (22) -
Balance at end of year 6,898 4,465
Accrued interest and penalties 1,138 973
Gross unrecognized income tax benefits 8,036 5,438
Less: Deferred federal and state income tax benefits (582) (434)
Less: Tax attributable to timing items included above (3,460) (2,400)
Less: UTBs included above that relate to acquisitions that would impact goodwill
if recognized during the measurement period (842) -
Total UTB that, if recognized, would impact the
effective income tax rate as of the end of the year $ 3,152 $ 2,604
Periodically we make deposits to taxing jurisdictions which reduce our UTB balance but are not included in the
reconciliation above. The amount of deposits that reduced our UTB balance was $3,027 at December 31, 2015, and $2,258 at
December 31, 2014.
Accrued interest and penalties included in UTBs were $1,138 as of December 31, 2015, and $973 as of December 31, 2014. We
record interest and penalties related to federal, state and foreign UTBs in income tax expense. The net interest and
penalty expense (benefit) included in income tax expense was $83 for 2015, $(64) for 2014, and $35 for 2013.
We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. As a large
taxpayer, our income tax returns are regularly audited by the Internal Revenue Service (IRS) and other taxing authorities.
The IRS has completed field examinations of our tax returns through 2010. All audit periods prior to 2003 are closed for
federal examination purposes. Contested issues from our 2003 through 2010 returns are at various stages of resolution with
the IRS Appeals Division; we are unable to estimate the impact the resolution of these issues may have on our UTBs.
The components of income tax (benefit) expense are as follows:
2015 2014 2013
Federal:
Current $ 2,496 $ 1,610 $ 3,044
Deferred 3,828 2,060 5,783
6,324 3,670 8,827
State and local:
Current 72 (102) (132)
Deferred 671 (73) 596
743 (175) 464
Foreign:
Current 320 163 71
Deferred (382) (39) (34)
(62) 124 37
Total $ 7,005 $ 3,619 $ 9,328
"Income Before Income Taxes" in the Consolidated Statements of Income included the following components for the years ended
December 31:
2015 2014 2013
U.S. income before income taxes $ 21,519 $ 10,244 $ 27,903
Foreign income (loss) before income taxes (827) 111 147
Total $ 20,692 $ 10,355 $ 28,050
A reconciliation of income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate
(35%) to income from continuing operations before income taxes is as follows:
2015 2014 2013
Taxes computed at federal statutory rate $ 7,242 $ 3,624 $ 9,818
Increases (decreases) in income taxes resulting from:
State and local income taxes - net of federal income tax benefit 483 (113) 302
Connecticut wireline sale - 350 -
Loss of foreign tax credits in connection with América Móvil sale - 386 -
Other - net (720) (628) (792)
Total $ 7,005 $ 3,619 $ 9,328
Effective Tax Rate 33.9 % 34.9 % 33.3 %
NOTE 12. PENSION AND POSTRETIREMENT BENEFITS
Pension Benefits and Postretirement Benefits
Substantially all of our U.S. employees are covered by one of our noncontributory pension plans. The majority of our newly
hired employees, longer-service management and some nonmanagement employees participate in cash balance pension programs
that include annual or monthly credits based on salary as well as an interest credit. Other longer-service management
employees participate in pension programs that have a traditional pension formula (i.e., a stated percentage of employees'
adjusted career income). Other longer-service nonmanagement employees' pension benefits are generally calculated using one
of two formulas: a flat dollar amount applied to years of service according to job classification or a cash balance plan
with negotiated annual pension band credits as well as interest credits. Most nonmanagement employees can elect to receive
their pension benefits in either a lump sum payment or an annuity. Effective January 1, 2015, the pension plan was amended
so that new management hires are no longer eligible for the plan.
We also provide a variety of medical, dental and life insurance benefits to certain retired employees under various plans
and accrue actuarially determined postretirement benefit costs as active employees earn these benefits.
We acquired DIRECTV on July 24, 2015. DIRECTV sponsors a noncontributory defined benefit pension plan, which provides
benefits to most employees based on either years of service and final average salary, or eligible compensation while
employed by DIRECTV. DIRECTV also maintains (1) a postretirement benefit plan for those retirees eligible to participate in
health care and life insurance benefits generally until they reach age 65 and (2) an unfunded nonqualified pension plan for
certain eligible employees. We have recorded the fair value of the DIRECTV plans using assumptions and accounting policies
consistent with those disclosed by AT&T. Upon acquisition, the excess of projected benefit obligation over the plan assets
was recognized as a liability and previously existing deferred actuarial gains and losses and unrecognized service costs or
benefits were eliminated.
In December 2014, we announced an opportunity for certain management employees who are retirement eligible as of March 31,
2015 to elect an enhanced, full lump sum payment option of their accrued pension if they retire on or before March 31,
2015. The lump sum value totaled approximately $1,200 which was distributed in 2015. We recorded special termination
benefits of $149 as a result of the offer.
In October 2013, we offered an opportunity for certain retirement-eligible employees to elect a full lump sum payment of
their accrued pension if they retired as of December 30, 2013. The lump sum value was calculated using the August 2012
discount rates for some pension programs and was equal to the cash balance amount for the management new hire pension
program. The lump sum value totaled approximately $2,700, which was distributed in 2014. We recorded special termination
benefits of $15 in 2014 and $250 in 2013 as a result of this offer.
In October 2013, as part of our 2014 annual benefits enrollment process, we also communicated an amendment to our
Medicare-eligible retirees that, beginning in 2015, AT&T would provide access to retiree health insurance coverage that
supplements government-sponsored Medicare through a private insurance marketplace. The plan was further amended in 2014 to
include access to dental benefits through the private insurance marketplace. This new approach allowed retirees to choose
insurance with the terms, cost and coverage that best fit their needs, while still receiving financial support as
determined by AT&T. Future changes in support, if any, will be based on a number of factors such as business conditions,
government actions, marketplace changes and the general consumer inflation rate.
In the fourth quarter of 2014, we changed the method we use to estimate the service and interest components of net periodic
benefit cost for pension (as of October 1, 2014) and other postretirement benefits (as of December 31, 2014). This change
did not affect the measurement of our total benefit obligations or our annual net periodic benefit cost as the change in
service and interest costs was completely offset in the actuarial (gain) loss reported. This change compared to the
previous method resulted in a decrease of $150 in the service and interest components for pension cost in the fourth
quarter of 2014. For the year ended December 31, 2015, the change resulted in an incremental decrease of $740 in service
and interest components for pension and postretirement costs. Prior to the fourth quarter of 2014, we estimated these
service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to
measure the benefit obligation at the beginning of the period. We have elected to utilize a full yield curve approach in
the estimation of these components by applying the specific spot rates along the yield curve used in the determination of
the benefit obligation to the relevant projected cash flows. We have made this change to provide a more precise measurement
of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot
yield curve rates. We have accounted for this change as a change in accounting estimate that is inseparable from a change
in accounting principle and accordingly have accounted for it prospectively.
Obligations and Funded Status
For defined benefit pension plans, the benefit obligation is the "projected benefit obligation," the actuarial present
value, as of our December 31 measurement date, of all benefits attributed by the pension benefit formula to employee
service rendered to that date. The amount of benefit to be paid depends on a number of future events incorporated into the
pension benefit formula, including estimates of the average life of employees/survivors and average years of service
rendered. It is measured based on assumptions concerning future interest rates and future employee compensation levels.
For postretirement benefit plans, the benefit obligation is the "accumulated postretirement benefit obligation," the
actuarial present value as of a date of all future benefits attributed under the terms of the postretirement benefit plan
to employee service rendered to the valuation date.
The following table presents this reconciliation and shows the change in the projected benefit obligation for the years
ended December 31:
Pension Benefits Postretirement Benefits
2015 2014 2015 2014
Benefit obligation at beginning of year $ 59,543 $ 56,560 $ 30,709 $ 30,285
Service cost - benefits earned during the period 1,212 1,134 222 233
Interest cost on projected benefit obligation 1,902 2,470 967 1,458
Amendments (8) (73) (74) (617)
Actuarial (gain) loss (3,079) 6,269 (1,988) 1,822
Special termination benefits 149 17 - -
Benefits paid (4,681) (6,543) (1,958) (2,298)
DIRECTV acquisition 470 - 20 -
Transfer for sale of Connecticut wireline operations (42) (293) - (174)
Plan transfers (2) 2 - -
Benefit obligation at end of year $ 55,464 $ 59,543 $ 27,898 $ 30,709
The following table presents the change in the value of plan assets for the years ended December 31 and the plans' funded
status at December 31:
Pension Benefits Postretirement Benefits
2015 2014 2015 2014
Fair value of plan assets at beginning of year $ 45,163 $ 47,238 $ 7,846 $ 8,960
Actual return on plan assets 604 4,213 64 384
Benefits paid1 (4,681) (6,543) (1,239) (1,498)
Contributions 735 562 - -
DIRECTV acquisition 418 - - -
Transfer for sale of Connecticut wireline operations (42) (308) - -
Plan transfers and other (2) 1 - -
Fair value of plan assets at end of year3 42,195 45,163 6,671 7,846
Unfunded status at end of year2 $ (13,269) $ (14,380) $ (21,227) $ (22,863)
1 At our discretion, certain postretirement benefits may be paid from AT&T cash accounts, which does not reduce
Voluntary Employee Benefit Association (VEBA) assets. Future benefit payments may be made from VEBA trusts and thus reduce those asset balances.
2 Funded status is not indicative of our ability to pay ongoing pension benefits or of our obligation to fund retirement trusts.
Required pension funding is determined in accordance with the Employee Retirement Income Security Act of 1974, as amended (ERISA) regulations.
3 Net assets available for benefits were $50,909 at December 31, 2015 and $54,184 at December 31, 2014 and include the preferred equity
interest in AT&T Mobility II LLC discussed below, which was valued at $8,714 and $9,021, respectively.
In July 2014, the U.S. Department of Labor published in the Federal Register their final retroactive approval of our
September 9, 2013 voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary 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 $9,104 on the contribution date and was valued at $8,714 at December 31, 2015. 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 $560 to the trust during 2015. 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 (see Note 14), it is not
reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation. At the
time of the contribution of the preferred equity interest, we made an additional cash contribution of $175 and have agreed
to annual cash contributions of $175 no later than the due date for our federal income tax return for each of 2014, 2015
and 2016. We made such a contribution of $175 in 2015. These contributions combined with our existing pension assets are in
excess of 90% of the pension obligation at December 31, 2015.
As noted above, this preferred equity interest represents a plan asset of our pension trust, which is recognized in the
separate financial statements of our pension plan as a qualified plan asset for funding purposes. The following table
presents a reconciliation of our pension plan assets recognized in the consolidated financial statements of the Company
with the net assets available for benefits included in the separate financial statements of the pension plan at December
31:
2015 2014
Plan assets recognized in the consolidated financial statements $ 42,195 $ 45,163
Preferred equity interest in Mobility 8,714 9,021
Net assets available for benefits $ 50,909 $ 54,184
Amounts recognized on our consolidated balance sheets at December 31 are listed below:
Pension Benefits Postretirement Benefits
2015 2014 2015 2014
Current portion of employee benefit obligation1 $ - $ - $ (1,766) $ (1,842)
Employee benefit obligation2 (13,269) (14,380) (19,461) (21,021)
Net amount recognized $ (13,269) $ (14,380) $ (21,227) $ (22,863)
1 Included in "Accounts payable and accrued liabilities."
2 Included in "Postemployment benefit obligation."
The accumulated benefit obligation for our pension plans represents the actuarial present value of benefits based on
employee service and compensation as of a certain date and does not include an assumption about future compensation levels.
The accumulated benefit obligation for our pension plans was $54,007 at December 31, 2015, and $57,949 at December 31,
2014.
Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income
Periodic Benefit Costs
Our combined net pension and postretirement (credit) cost recognized in our consolidated statements of income was $(2,821),
$7,232 and $(7,390) for the years ended December 31, 2015, 2014 and 2013. A portion of pension and postretirement benefit
costs is capitalized as part of the benefit load on internal construction and capital expenditures, providing a small
reduction in the net expense recorded. The following
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