OVERVIEW
AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted.AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. Our comparative results are impacted by theJuly 2021 separation of our Video business and theNovember 2021 separation of Vrio. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes (Notes). We have three reportable segments: (1) Communications, (2) WarnerMedia and (3)Latin America . Our segment results presented in Note 4 and discussed below follow our internal management reporting. We analyze our segments based on segment operating contribution, which consists of operating income, excluding acquisition-related costs and other significant items and equity in net income (loss) of affiliates for investments managed within each segment. Percentage increases and decreases that are not considered meaningful are denoted with a dash. OnApril 8, 2022 , we closed on our transaction to combine our WarnerMedia segment, except for certain retained assets such asXandr , (WarnerMedia business) with a subsidiary ofDiscovery, Inc (Discovery). With the separation and distribution of WarnerMedia, the WarnerMedia business will meet the criteria for discontinued operations for our second-quarter 2022 reporting. For discontinued operations, we evaluated transactions completed during 2021 that were components ofAT&T's single plan of a strategic shift, including dispositions that may not have individually met the criteria due to materiality, and have determined discontinued operations to be comprised of WarnerMedia, Vrio,Xandr andPlaydemic Ltd. These businesses will be reflected in our historical financial statements as discontinued operations, including for periods prior to the consummation of the WarnerMedia/Discovery transaction. First Quarter Percent 2022 2021 Change Operating Revenues Communications$ 28,876 $ 28,178 2.5 % WarnerMedia 8,741 8,526 2.5 Latin America 690 1,374 (49.8) Corporate and Other: Corporate 130 164 (20.7) Video - 6,725 - Held-for-sale and other reclassifications 29 262 (88.9) Eliminations and consolidation (361) (1,290) 72.0 AT&T Operating Revenues 38,105 43,939 (13.3) Operating Contribution Communications 7,029 7,431 (5.4) WarnerMedia 1,306 2,030 (35.7) Latin America (102) (173) 41.0 Segment Operating Contribution 8,233 9,288 (11.4) Corporate (571) (275) - Video 522 901 (42.1) Held-for-sale and other reclassifications 4 9 (55.6) Reclassification of prior service credits (617) (669) 7.8 Merger and Significant Items (1,429) (1,192) (19.9) Eliminations and consolidations - (349) - AT&T Operating Contribution$ 6,142 $ 7,713 (20.4) % 33
--------------------------------------------------------------------------------AT&T INC. MARCH 31, 2022 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts The Communications segment provides services to businesses and consumers located in theU.S. and businesses globally. Our business strategies reflect bundled product offerings that cut across product lines and utilize shared assets. This segment contains the following business units: •Mobility provides nationwide wireless service and equipment. •Business Wireline provides advanced ethernet-based fiber services, IP Voice and managed professional services, as well as traditional voice and data services and related equipment to business customers. •Consumer Wireline provides broadband services, including fiber connections that now provide our multi-gig services to residential customers. Consumer Wireline also provides legacy telephony voice communication services. The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content in various physical and digital formats globally. WarnerMedia content is distributed through basic networks, Direct-to-Consumer (DTC) or theatrical, TV content and games licensing. Segment results also includeXandr advertising. OnApril 8, 2022 , we completed the separation of our WarnerMedia business, which excluded certain retained assets such asXandr , with a subsidiary of Discovery by distribution ofAT&T stockholders via a pro rata dividend. OnDecember 21, 2021 , we entered into an agreement to sell the marketplace component ofXandr to Microsoft Corporation (Microsoft). (See Notes 8 and 13)
The
In the first quarter of 2022, we reclassified into "Corporate" certain administrative costs borne byAT&T where the business units do not influence decision making to conform with the current period presentation. This recast increased Corporate operations and support expenses by approximately$100 in the first quarter of 2021, with a total of$270 for full-year 2021. Correspondingly, this recast lowered administrative expenses atAT&T's Communications operations, Video and WarnerMedia, with no change on a consolidated basis.
RESULTS OF OPERATIONS
Consolidated Results Our financial results are summarized in the discussions that follow. Additional analysis is discussed in our "Segment Results" section. Certain prior period amounts have been reclassified to conform to the current period's presentation. First Quarter Percent 2022 2021 Change Operating Revenues Service$ 32,392 $ 38,504 (15.9) % Equipment 5,713 5,435 5.1 Total Operating Revenues 38,105 43,939 (13.3) Operating expenses Operations and support 26,925 30,469 (11.6) Depreciation and amortization 5,539 5,809 (4.6) Total Operating Expenses 32,464 36,278 (10.5) Operating Income 5,641 7,661 (26.4) Interest expense 1,722 1,870 (7.9) Equity in net income (loss) of affiliates 501 52 - Other income (expense) - net 2,187 4,221 (48.2) Income Before Income Taxes 6,607 10,064 (34.4) Net Income 5,164 7,942 (35.0) Net Income Attributable to AT&T 4,810 7,550 (36.3) Net Income Attributable to Common Stock$ 4,762 $ 7,500 (36.5) % 34
--------------------------------------------------------------------------------AT&T INC. MARCH 31, 2022 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts Operating revenues decreased in the first quarter of 2022, reflecting theJuly 31, 2021 separation of theU.S. video business, the sale of our Vrio business unit inNovember 2021 , and lower Business Wireline revenues driven by lower demand for legacy services and a strategic decision to deemphasize non-core services. Partially offsetting declines were higher Mobility service and equipment revenues and gains in broadband service in our Communications segment; higher subscription and content revenues in our WarnerMedia segment; and growth inMexico wireless operations. Operations and support expenses decreased in the first quarter of 2022. The expense decrease reflects our aforementioned business divestitures. Expenses in the quarter also reflect updates to the expected economic lives of customer relationships, which extended the amortization period of deferred acquisition and fulfillment costs and reduced expenses approximately$135 , with$60 recorded to Mobility,$35 to Business Wireline and$40 to Consumer Wireline. Declines were partially offset by increased domestic wireless equipment expense from subscriber growth and the sale of higher-priced smartphones, 3G network shutdown costs, and higher WarnerMedia programming, marketing and selling costs.
Depreciation and amortization expense decreased in the first quarter of 2022.
Amortization expense decreased
Depreciation expense decreased$110 , or 2.4% in the first quarter of 2022 primarily due to the sale of the Vrio business unit and our first-quarter 2022 update to extend the estimated economic lives and depreciation period ofAT&T owned fiber assets (see Note 1).
Operating income decreased in the first quarter of 2022. Our operating income margin for the first quarter decreased from 17.4% in 2021 to 14.8% in 2022.
Interest expense decreased in the first quarter of 2022, primarily due to higher capitalized interest associated with spectrum acquisitions, partially offset by higher debt balances. Equity in net income of affiliates increased in the first quarter of 2022, primarily due to the close of our transaction with TPG and our accounting for our investment inDIRECTV Entertainment Holdings, LLC (DIRECTV) under the equity method of accounting beginningAugust 1, 2021 (see Note 11), partially offset by decreases from certain WarnerMedia investments. Other income (expense) - net decreased in the first quarter of 2022 primarily due to lower actuarial gains of$1,053 compared to$2,844 in 2021, and lower amortization of prior service credit (see Note 6). The decrease also includes lower returns on benefit-related investments for the three-month comparable period. Income tax expense decreased in the first quarter of 2022. The decrease in the first quarter was primarily driven by lower income before income tax. Our effective tax rate was 21.8% for the first quarter of 2022, versus 21.1% in the comparable period in the prior year. 35 --------------------------------------------------------------------------------AT&T INC. MARCH 31, 2022 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts COMMUNICATIONS SEGMENT First Quarter Percent 2022 2021 Change Segment Operating Revenues Mobility$ 20,075 $ 19,034 5.5 % Business Wireline 5,640 6,046 (6.7) Consumer Wireline 3,161 3,098 2.0 Total Segment Operating Revenues 28,876
28,178 2.5
Segment Operating Contribution Mobility 5,853 6,044 (3.2) Business Wireline 859 1,080 (20.5) Consumer Wireline 317 307 3.3 Total Segment Operating Contribution$ 7,029
Selected Subscribers and Connections
March 31, (000s) 2022 2021 Mobility Subscribers 196,616 186,108 Total domestic broadband connections 15,533 15,435 Network access lines in service 5,956 6,988 U-verse VoIP connections 3,227 3,684 Operating revenues increased in the first quarter of 2022, driven by increases in our Mobility and Consumer Wireline business units, partially offset by decreases in our Business Wireline business unit. The increases are primarily driven by wireless service and equipment revenue growth and gains in broadband service. Operating contribution decreased in the first quarter of 2022, reflecting lower operating contribution from our Mobility and Business Wireline business units, offset by increases in our Consumer Wireline business unit. Our Communications segment operating income margin in the first quarter decreased from 26.4% in 2021 to 24.3% in 2022, reflecting, in part, increased equipment sales with negative margins. 36 --------------------------------------------------------------------------------AT&T INC. MARCH 31, 2022 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts Communications Business Unit Discussion Mobility Results First Quarter Percent 2022 2021 Change Operating revenues Service$ 14,724 $ 14,048 4.8 % Equipment 5,351 4,986 7.3 Total Operating Revenues 20,075 19,034 5.5 Operating expenses Operations and support 12,163 10,976 10.8 Depreciation and amortization 2,059 2,014 2.2 Total Operating Expenses 14,222 12,990 9.5 Operating Income 5,853 6,044 (3.2) Equity in Net Income (Loss) of Affiliates - - - Operating Contribution$ 5,853 $ 6,044 (3.2) % The following tables highlight other key measures of performance for Mobility: Subscribers March 31, Percent (in 000s) 2022 2021 Change Postpaid 81,639 77,934 4.8 % Postpaid phone 67,518 64,752 4.3 Prepaid 18,859 18,387 2.6 Reseller 5,383 6,501 (17.2) Connected devices1 90,735 83,286 8.9 Total Mobility Subscribers2 196,616 186,108 5.6 % 1Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. 2The quarter endedMarch 31, 2022 excludes the impact of 10,707 subscriber and connected device disconnections resulting from our 3G network shutdown inFebruary 2022 . Postpaid disconnections were 899, including 438 phone, 234 prepaid, 749 reseller subscribers, and 8,825 connected devices. 37 --------------------------------------------------------------------------------AT&T INC. MARCH 31, 2022 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts Net Additions First Quarter Percent (in 000s) 2022 2021 Change Postpaid Phone Net Additions 691 595 16.1 % Total Phone Net Additions 804 802 0.2 Postpaid2 965 823 17.3 Prepaid 116 279 (58.4) Reseller (17) (68) 75.0 Connected devices3 4,468 2,517 77.5 Mobility Net Subscriber Additions1 5,532 3,551 55.8 % Postpaid Churn4 0.94 % 0.93 % 1 BP Postpaid Phone-Only Churn4 0.79 % 0.76 % 3 BP 1Excludes migrations and acquisition-related activities during the period. 2In addition to postpaid phones, includes tablets and wearables and other. Tablet net adds (losses) were 31 and (63) for the three months endedMarch 31, 2022 and 2021. Wearables and other net adds were 243 and 291 for the quarter endedMarch 31, 2022 and 2021. 3Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes postpaid tablets and other postpaid data devices. Wholesale connected car net adds were 1.5 million for the quarter endedMarch 31, 2022 . 4Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for each month of that period.
Service revenue increased in the first quarter of 2022. The increases are largely due to growth from subscriber gains.
ARPU
Average revenue per subscriber (ARPU) decreased in the first quarter 2022. ARPU during 2022 reflects the impact of higher promotional discount amortization (see Note 5).
Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Postpaid churn and postpaid phone-only churn were slightly higher in the first three months due to involuntary disconnects. Churn remains consistently low reflecting the impacts of retention offers, migrations to unlimited plans, and continued network performance.
Equipment revenue increased in the first quarter of 2022, primarily driven by customer growth and the sale of higher-priced smartphones.
Operations and support expenses increased in the first quarter of 2022 largely driven by growth in equipment sales and associated expenses, 3G network shutdown costs, higher bad debt, increased content costs associated with bundlingHBO Max, the elimination of Connect America Fund Phase II (CAF II ) government credits, and higher FirstNet costs. In the first quarter of 2022, we updated our analysis of economic lives of customer relationships and extended the amortization period of Mobility deferred customer contract costs, which decreased expense approximately$60 in the first quarter.
Depreciation expense increased in the first quarter of 2022. The first quarter increase is due to ongoing capital spending for network upgrades and expansion.
Operating income decreased in the first quarter of 2022. Our Mobility operating income margin in the first quarter decreased from 31.8% in 2021 to 29.2% in 2022. Our Mobility EBITDA margin in the first quarter decreased from 42.3% in 2021 to 39.4% in 2022. EBITDA is defined as operating contribution excluding equity in net income (loss) of affiliates and depreciation and amortization. 38 --------------------------------------------------------------------------------AT&T INC. MARCH 31, 2022 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts
Subscriber Relationships
As the wireless industry has matured, with nearly full penetration of smartphones in theU.S. population, future wireless growth will depend on our ability to offer innovative services, plans and devices that bundle product offerings and take advantage of our 5G wireless network. We believe 5G opens up vast possibilities of connecting sensors, devices, and autonomous things, commonly referred to as the Internet of Things (IoT). More and more, these devices are performing use cases that require high bandwidth, ultra-reliability and low latency that only 5G and edge computing can bring. To support higher mobile data usage, our priority is to best utilize a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. To attract and retain subscribers in a mature and highly competitive market, we have launched a wide variety of plans, including our FirstNet and prepaid products, and arrangements that bundle our services. Virtually all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and subscribers to such plans tend to have higher retention and lower churn rates. We offer unlimited data plans and subscribers to such plans also tend to have higher retention and lower churn rates. Our offerings are intended to encourage existing subscribers to upgrade their current services and/or add devices, attract subscribers from other providers and/or minimize subscriber churn. Subscribers that purchase two or more services from us have significantly lower churn than subscribers that purchase only one service. Business Wireline Results First Quarter Percent 2022 2021 Change Operating revenues Service$ 5,478 $ 5,872 (6.7) % Equipment 162 174 (6.9) Total Operating Revenues 5,640 6,046 (6.7) Operating expenses Operations and support 3,482 3,688 (5.6) Depreciation and amortization 1,299 1,278 1.6 Total Operating Expenses 4,781 4,966 (3.7) Operating Income 859 1,080 (20.5) Equity in Net Income (Loss) of Affiliates - - - Operating Contribution$ 859 $ 1,080 (20.5) % Service revenues decreased in the first quarter of 2022, driven by lower demand for legacy voice and data services and a strategic decision to deemphasize non-core services. We expect this trend to continue for the remainder of the year.
Equipment revenues decreased in the first quarter of 2022, driven by declines in legacy and non-core services.
Operations and support expenses decreased in the first quarter of 2022, primarily due to our continued efforts to drive efficiencies in our network operations through automation and reductions in customer support expenses through digitization and proactive rationalization of low profit margin products. Expense declines were also driven by lower amortization of deferred fulfillment costs, including our first-quarter 2022 updates to the estimated economic lives of subscribers, which decreased expense approximately$35 in the first quarter. Depreciation expense increased in the first quarter of 2022, primarily due to ongoing capital spending for network upgrades and expansion, partially offset by updates to extend the estimated lives of our fiber assets. Operating income decreased in the first quarter of 2022. Our Business Wireline operating income margin in the first quarter decreased from 17.9% in 2021 to 15.2% in 2022. Our Business Wireline EBITDA margin in the first quarter decreased from 39.0% in 2021 to 38.3% in 2022. 39 --------------------------------------------------------------------------------AT&T INC. MARCH 31, 2022 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts
Consumer Wireline Results
First Quarter Percent 2022 2021 Change Operating revenues Broadband$ 2,355 $ 2,205 6.8 % Legacy voice and data services 460 519 (11.4) Other service and equipment 346 374 (7.5) Total Operating Revenues 3,161 3,098 2.0 Operating expenses Operations and support 2,078 2,029 2.4 Depreciation and amortization 766 762 0.5 Total Operating Expenses 2,844 2,791 1.9 Operating Income 317 307 3.3 Equity in Net Income (Loss) of Affiliates - - - Operating Contribution$ 317 $ 307 3.3 % The following tables highlight other key measures of performance for Consumer Wireline: Connections March 31, Percent (in 000s) 2022 2021 Change Broadband Connections Total Broadband and DSL Connections 14,148 14,146 - % Broadband 13,850 13,767 0.6 Fiber Broadband Connections
6,281 5,186 21.1
Voice Connections Retail Consumer Switched Access Lines 2,324 2,740 (15.2) U-verse Consumer VoIP Connections 2,628 3,096 (15.1) Total Retail Consumer Voice Connections 4,952 5,836 (15.1) % Net Additions First Quarter Percent (in 000s) 2022 2021 Change Broadband Net Additions Total Broadband and DSL Net Additions (12) 46 - % Broadband Net Additions 5 74 (93.2) Fiber Broadband Net Additions 289 235 23.0 %
Broadband revenues increased in the first quarter of 2022, driven by an increase in fiber customers, which we expect to continue for the foreseeable future.
Legacy voice and data service revenues decreased in the first quarter of 2022, reflecting the continued decline in the number of customers, which we expect to continue. 40 --------------------------------------------------------------------------------AT&T INC. MARCH 31, 2022 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts
Other service and equipment revenues decreased in the first quarter of 2022, reflecting the continued decline in the number of VoIP customers, which we expect to continue.
Operations and support expenses increased in the first quarter of 2022, primarily driven by higher advertising costs and the elimination ofCAF II government credits. Partially offsetting these increases was our first-quarter 2022 updates to the estimated economic lives of broadband/fiber subscribers, which decreased expense approximately$40 in the first quarter. Depreciation expense increased in the first quarter of 2022, primarily due to ongoing capital spending for network upgrades and expansion, partially offset by updates to extend the estimated lives of our fiber assets.
Operating income increased in the first quarter of 2022. Our Consumer Wireline operating income margin in the first quarter increased from 9.9% in 2021 to 10.0% in 2022. Our Consumer Wireline EBITDA margin in the first quarter decreased from 34.5% in 2021 to 34.3% in 2022.
WARNERMEDIA SEGMENT First Quarter Percent 2022 2021 Change Segment Operating Revenues Subscription$ 3,997 $ 3,830 4.4 % Content and other 3,059 2,959 3.4 Advertising 1,685 1,737 (3.0) Total Segment Operating Revenues
8,741 8,526 2.5
Segment Operating Expenses Direct Costs Programming 3,976 3,774 5.4 Marketing 1,096 850 28.9 Other 869 813 6.9 Selling, general and administrative
1,354 966 40.2
Depreciation and amortization 127 163 (22.1) Total Operating Expenses 7,422 6,566 13.0 Operating Income 1,319 1,960 (32.7) Equity in Net Income (Loss) of Affiliates (13) 70 - Total Segment Operating Contribution $
1,306
Our WarnerMedia segment is operated as a content organization that distributes across various platforms, including basic networks, Direct-to-Consumer (DTC) or theatrical, TV content and games licensing. OnApril 8, 2022 , we closed our transaction to combine our WarnerMedia segment, except for certain retained assets such asXandr , with a subsidiary ofDiscovery Inc. OnDecember 21, 2021 , we entered into an agreement to sell the marketplace component ofXandr to Microsoft. (See Notes 8 and 13)
Operating revenues increased in the first quarter of 2022, primarily due to increased subscription revenues and higher content and other revenues, partially offset by lower advertising revenues.
Subscription revenues increased in the first quarter of 2022, primarily due to growth of HBO Max subscribers, including growth from intercompany relationships with the Communications segment.
Content and other revenues increased in the first quarter of 2022 due to stronger theatrical revenues compared to the year-ago quarter and also higher HBO Max licensing, partially offset by lower TV licensing.
41 --------------------------------------------------------------------------------AT&T INC. MARCH 31, 2022 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts Advertising revenues decreased in the first quarter of 2022 due to lower linear audiences and lower political ad spending, partially offset by higher sports advertising.
Direct costs increased in the first quarter of 2022, driven by higher marketing and programming costs.
Selling, general and administrative expenses increased in the first quarter of 2022 primarily due to incremental selling costs associated with DIRECTV advertising revenue sharing arrangements.
Operating contribution decreased in the first quarter of 2022. The WarnerMedia segment operating income margin in the first quarter decreased from 23.0% in 2021 to 15.1% in 2022. LATIN AMERICA SEGMENT First Quarter Percent 2022 2021 Change Segment Operating Revenues Mexico$ 690 $ 631 9.4 % Vrio - 743 - Total Segment Operating Revenues 690
1,374 (49.8)
Segment Operating Contribution Mexico (102) (134) 23.9 Vrio - (39) - Total Segment Operating Contribution$ (102) $ (173) 41.0 % Operating Results OurLatin America operations conduct business in their local currency and operating results are converted toU.S. dollars using average exchange rates during the period, subjecting results to foreign currency fluctuations.
In
Operating revenues decreased in the first quarter of 2022, primarily reflecting
the sale of Vrio partially offset by growth in the
Operating contribution improved in the first quarter of 2022, reflecting the sale of Vrio and growth inMexico wireless operations. OurLatin America segment operating income margin in the first quarter decreased from (12.3)% in 2021 to (14.8)% in 2022. 42 --------------------------------------------------------------------------------AT&T INC. MARCH 31, 2022 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts Latin America Business Unit Discussion Mexico Results First Quarter 2022 2021 Percent Change Operating revenues Service$ 490 $ 439 11.6 % Equipment 200 192 4.2 Total Operating Revenues 690 631 9.4 Operating expenses Operations and support 631 620 1.8 Depreciation and amortization 161 145 11.0 Total Operating Expenses 792 765 3.5 Operating Income (Loss) (102) (134) 23.9 Equity in Net Income (Loss) of Affiliates - - - Operating Contribution$ (102) $ (134) 23.9 % The following tables highlight other key measures of performance forMexico : March 31, Percent (in 000s) 2022 2021 Change Mexico Wireless Subscribers Postpaid 4,810 4,725 1.8 % Prepaid 15,235 13,756 10.8 Reseller 458 500 (8.4) Total Mexico Wireless Subscribers 20,503 18,981 8.0 % First Quarter Percent (in 000s) 2022 2021 Change Mexico Wireless Net Additions Postpaid 3 29 (89.7) % Prepaid 178 (2) - Reseller (40) 11 - Total Mexico Wireless Net Additions 141 38 - %
Service revenues increased in the first quarter of 2022 reflecting improvements in subscriber growth and growth in other services.
Equipment revenues increased in the first quarter of 2022 driven by higher equipment sales volume.
Operations and support expenses increased in the first quarter of 2022 driven by
equipment costs from customer growth, partially offset by foreign exchange
impact. Approximately 7% of
Depreciation and amortization expense increased in the first quarter of 2022, reflecting higher in-service assets and spectrum amortization.
43 --------------------------------------------------------------------------------AT&T INC. MARCH 31, 2022 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts Operating loss improved in the first quarter of 2022. OurMexico operating income margin in the first quarter increased from (21.2)% in 2021 to (14.8)% in 2022. Our Mexico EBITDA margin in the first quarter increased from 1.7% in 2021 to 8.6% in 2022. OTHER BUSINESS MATTERS Spectrum Auction OnJanuary 14, 2022 , theFederal Communications Commission (FCC ) announced that we were the winning bidder for 1,624 3.45 GHz licenses in Auction 110. We provided theFCC with an upfront deposit of$123 in the third quarter of 2021 and paid the remaining$8,956 in the first quarter of 2022, for a total of$9,079 . We funded the purchase price using cash and short-term investments. The amounts deposited toward the acquisition of the licenses and capitalized interest were reported as "Deposits on Wireless Licenses" on our consolidated balance sheet as ofMarch 31, 2022 . We expect to receive the licenses in the second quarter of 2022. (See Note 8) WarnerMedia OnMay 17, 2021 , we entered into an agreement to combine our WarnerMedia segment, except for certain retained assets such asXandr , with a subsidiary of Discovery in aReverse Morris Trust transaction. OnApril 8, 2022 , we completed the separation and distribution of our WarnerMedia business, and merger ofSpinco , anAT&T subsidiary formed to hold the WarnerMedia business, with a subsidiary ofDiscovery, Inc. , which was renamed Warner Bros. Discovery Inc. (WBD). EachAT&T shareholder was entitled to receive 0.241917 shares of WBD common stock for each share ofAT&T common stock held as of the record date. In connection with and in accordance with the terms of the transaction, prior to the distribution and merger,AT&T received approximately$40,400 , which includes$38,800 of cash and$1,600 of debt retained by WarnerMedia. AtMarch 31, 2022 , the WarnerMedia business did not meet the criteria for held-for-sale and, accordingly, its financial results are included in continuing operations for all periods presented herein. In preparation for the close of the WarnerMedia/Discovery transaction, inMarch 2022 ,Spinco issued$30,000 ofSpinco senior notes with a weighted-average interest rate of 4.5% and maturities ranging from 2024 to 2062. These notes conveyed to WBD upon close of the transaction. Our cash balance atMarch 31, 2022 , includes the proceeds of this issuance that were retained byAT&T in connection with the close of the transaction. In connection with the debt issuances, the aggregate commitment amount under the existingSpinco commitment letter (Bridge Loan ) was reduced from$31,500 to$1,687 , with no amounts outstanding as ofMarch 31, 2022 .
See Note 13 and "Liquidity and Capital Resources" for more information.
COMPETITIVE AND REGULATORY ENVIRONMENT
OverviewAT&T subsidiaries operating withinthe United States are subject to federal and state regulatory authorities.AT&T subsidiaries operating outsidethe 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. Nonetheless, over the ensuing two decades, theFCC 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. More recently, theFCC has pursued a more deregulatory agenda, eliminating a variety of antiquated and unnecessary regulations and streamlining its processes in a number of areas. We continue to support regulatory and legislative measures and efforts, at both the state and federal levels, to reduce inappropriate regulatory burdens that inhibit our ability to compete effectively and offer needed services to 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. 44 --------------------------------------------------------------------------------AT&T INC. MARCH 31, 2022 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts Communications Segment Internet TheFCC currently classifies fixed and mobile consumer broadband services as information services, subject to light-touch regulation. The D.C. Circuit upheld theFCC 's current classification, although it remanded three discrete issues to theFCC for further consideration. These issues related to the effect of theFCC 's decision to classify broadband services as information services on public safety, the regulation of pole attachments, and universal service support for low-income consumers through the Lifeline program. Because no party soughtSupreme Court review of the D.C. Circuit's decision to uphold theFCC 's classification of broadband as an information service, that decision is final. InOctober 2020 , theFCC adopted an order addressing the three issues remanded by the D.C. Circuit for further consideration. After considering those issues, theFCC concluded they provided no grounds to depart from its determination that fixed and mobile consumer broadband services should be classified as information services. An appeal of theFCC 's remand decision is pending. Some states have adopted legislation or issued executive orders, includingCalifornia , that would reimpose net neutrality rules repealed by theFCC . TheCalifornia statute is now in effect, and challenges regarding other states' net neutrality laws are pending. We expect that going forward additional states may seek to impose net neutrality requirements. OnNovember 15, 2021 ,President Biden signed theInfrastructure Investment and Jobs Act (IIJA) into law. The legislation appropriates$65,000 to support broadband deployment and adoption.The National Telecommunications and Information Agency (NTIA) is responsible for distributing more than$48,000 of this funding, including$42,500 in state grants for broadband deployment projects in unserved and underserved areas. NTIA will establish rules for this program in the first half of 2022. The IIJA also appropriated$14,200 for establishment of the Affordable Connectivity Program (ACP), anFCC -administered monthly, low-income broadband benefit program, replacing the Emergency Broadband Benefit program (established inDecember 2020 by the Consolidated Appropriations Act 2021). Qualifying customers can receive up tothirty dollars per month (orseventy-five dollars per month for those on Tribal lands) to assist with their internet bill.AT&T is a participating provider in the ACP program and will consider participating in the deployment program where appropriate. The IIJA includes various provisions that will result inFCC proceedings regarding ACP program administration and consumer protection, reform of the existing universal support program, and broadband labeling and equal access. Privacy-related legislation continues to be adopted or considered in a number of jurisdictions. Legislative, regulatory and litigation actions could result in increased costs of compliance, further regulation or claims against broadband internet access service providers and others, and increased uncertainty in the value and availability of data. Wireless Industry-wide network densification and 5G technology expansion efforts, which are needed to satisfy extensive demand for video and internet access, will involve significant deployment of "small cell" equipment. This increases the importance of local permitting processes that allow for the placement of small cell equipment in the public right-of-way on reasonable timelines and terms. Between 2018 and 2020, theFCC adopted multiple Orders streamlining federal, state, and local wireless structure review processes that had the tendency to delay and impede deployment of small cell and related infrastructure used to provide telecommunications and broadband services. The key elements of these orders have been affirmed on judicial review. During 2020-2021, we have also deployed 5G nationwide on "low band" spectrum on macro towers. Executing on the recent spectrum purchase, we announced on-going construction and continuing deployment of 5G on C-band spectrum in 2022 and beyond. 45 --------------------------------------------------------------------------------AT&T INC. MARCH 31, 2022 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts
LIQUIDITY AND CAPITAL RESOURCES
For three months ended March 31, 2022 2021
Cash provided by operating activities
(12,651) (26,852) Cash provided by financing activities 24,251 18,483 March 31, December 31, 2022 2021 Cash and cash equivalents1$ 38,565 $ 21,169 Spinco and WarnerMedia debt1 31,529 1,724 AT&T Inc. and other subsidiary debt 176,029 175,630 Total debt 207,558 177,354 1AT&T cash balance atMarch 31, 2022 , includes the proceeds of the issuance ofSpinco senior notes in preparation for the close of the WarnerMedia/Discovery transaction. TheSpinco senior notes conveyed to WBD upon close onApril 8, 2022 . The cash was retained byAT&T in connection with the close of the transaction. (See Note 8) We had$38,565 in cash and cash equivalents available atMarch 31, 2022 . Cash and cash equivalents included cash of$2,911 and money market funds and other cash equivalents of$35,654 . Approximately$2,402 of our cash and cash equivalents were held by our foreign entities in accounts predominantly outside of theU.S. and may be subject to restrictions on repatriation. Approximately$29,800 of cash and cash equivalents was raised in anticipation of the close of the transaction onApril 8, 2022 . Cash and cash equivalents increased$17,396 sinceDecember 31, 2021 . In the first three months of 2022, cash inflows were primarily provided by cash receipts from operations, including cash from our sale and transfer of our receivables to third parties, issuance of long-term debt and commercial paper and distributions from DIRECTV. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, spectrum acquisitions, funding capital expenditures and vendor financing payments, investment in WarnerMedia content and dividends to stockholders. We maintain availability under our credit facilities and our commercial paper program to meet our short-term liquidity requirements. Cash Provided by or Used in Operating Activities During the first three months of 2022, cash provided by operating activities was$5,732 , compared to$9,927 for the first three months of 2021, reflecting lower receivable securitization, increased cash spend for content and higher bonus payouts. Total cash paid for WarnerMedia's content investment was$5,149 in the first three months of 2022 ($614 higher than the prior-year comparable period). We actively manage the timing of our supplier payments for operating items to optimize the use of our cash. Among other things, we seek to make payments on 90-day or greater terms, while providing the suppliers with access to bank facilities that permit earlier payments at their cost. In addition, for payments to a key supplier, as part of our working capital initiatives, we have arrangements that allow us to extend payment terms up to 90 days at an additional cost to us (referred to as supplier financing). The net impact of supplier financing was to decrease cash from operating activities$95 and$1,071 for the three months endedMarch 31, 2022 and 2021, respectively. All supplier financing payments are due within one year. Cash Used in or Provided by Investing Activities For the first three months of 2022, cash used in investing activities totaled$12,651 , and consisted primarily of$4,748 (including interest during construction) for capital expenditures and$9,244 for acquisitions of spectrum licenses won in Auction 110 and associated capitalized interest. During the first three months of 2022, we received a return of investment of$1,315 from DIRECTV representing distributions in excess of cumulative equity in earnings from DIRECTV (see Note 11). For capital improvements, we have negotiated favorable vendor payment terms of 120 days or more (referred to as vendor financing) with some of our vendors, which are excluded from capital expenditures and reported as financing activities. For the first three months of 2022, vendor financing payments were$1,566 , compared to$1,690 for the first three months of 2021. Capital expenditures in the first three months of 2022 were$4,748 , and when including$1,566 cash paid for vendor financing, gross capital investment was$6,314 ($591 higher than the prior-year comparable period). 46 --------------------------------------------------------------------------------AT&T INC. MARCH 31, 2022 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts The vast majority of our capital expenditures are spent on our networks, including product development and related support systems. During the first three months of 2022, we placed$954 of equipment in service under vendor financing arrangements (compared to$998 in the prior-year comparable period) and$80 of assets related to the FirstNet build (compared to$240 in the prior-year comparable period). The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. Cash Provided by or Used in Financing Activities For the first three months of 2022, cash provided by financing activities totaled$24,251 and was comprised of debt issuances and repayments, payments of dividends, and vendor financing payments. During the first quarter of 2022, we also paid approximately$294 in cash on the note payable to DIRECTV, with$1,047 remaining due as ofMarch 31, 2022 . In preparation for the close of the WarnerMedia/Discovery transaction, inMarch 2022 ,Spinco issued$30,000 ofSpinco senior notes with a weighted-average interest rate of 4.5% and maturities ranging from 2024 to 2062. InApril 2022 , subsequent to the first quarter of 2022,Spinco drew$10,000 on the Spinco Term Loan andAT&T paid off$10,100 of credit agreement borrowings. TheSpinco senior notes and Spinco Term Loan conveyed to WBD upon close of the WarnerMedia/Discovery transaction onApril 8, 2022 . The weighted average interest rate of our entire long-term debt portfolio, including, credit agreement borrowings and the impact of derivatives but excludingSpinco debt, was approximately 3.8% as ofMarch 31, 2022 andDecember 31, 2021 . We had$197,829 of total notes and debentures outstanding atMarch 31, 2022 , includingSpinco notes. This also included Euro, British pound sterling, Canadian dollar, Mexican peso, Australian dollar, and Swiss franc denominated debt that totaled approximately$40,361 .
At
For the first three months of 2022, we paid$1,566 of cash under our vendor financing program, compared to$1,690 in the prior-year comparable period. Total vendor financing payables included in ourMarch 31, 2022 consolidated balance sheet were$4,374 , with$3,303 due within one year (in "Accounts payable and accrued liabilities") and the remainder predominantly due within five years (in "Other noncurrent liabilities").
At
We paid dividends on common and preferred shares of
Dividends on common stock declared by our Board of Directors totaled$0.2775 per share in the first three months of 2022 and$0.52 per share in the first three months of 2021. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements ofAT&T and long-term growth opportunities. OnFebruary 1, 2022 , we announced that our Board of Directors approved an expected annual dividend level of$1.11 per common share, or approximately$8,000 per year, following the close of the WarnerMedia/Discovery transaction. Credit Facilities The following summary of our various credit and loan agreements does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form 10-K. We use credit facilities as a tool in managing our liquidity status. InNovember 2020 , we amended one of our$7,500 revolving credit agreements by extending the termination date. In total, we have two$7,500 revolving credit agreements, totaling$15,000 , with one terminating onDecember 11, 2023 and the other terminating onNovember 17, 2025 . No amounts were outstanding under either agreement as ofMarch 31, 2022 . 47 --------------------------------------------------------------------------------AT&T INC. MARCH 31, 2022 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts OnJanuary 29, 2021 , we entered into a$14,700 Term Loan Credit Agreement (2021 Syndicated Term Loan), withBank of America, N.A ., as agent. OnMarch 23, 2021 , we borrowed$7,350 under the 2021 Syndicated Term Loan and the remaining$7,350 of lenders' commitments were terminated. In the first quarter of 2022, the maturity date of the 2021 Syndicated Term Loan was extended toDecember 31, 2022 . As ofMarch 31, 2022 ,$7,350 was outstanding under the agreement. OnApril 13, 2022 , the 2021 Syndicated Term Loan was paid off and terminated. InMarch 2021 , we entered into and drew on a$2,000 term loan credit agreement (BAML Bilateral Term Loan) consisting of (i) a$1,000 facility originally dueDecember 31, 2021 (BAML Tranche A Facility) and subsequently extended toDecember 31, 2022 in the fourth quarter of 2021, and (ii) a$1,000 facility dueDecember 31, 2022 (BAML Tranche B Facility), withBank of America, N.A ., as agent. AtMarch 31, 2022 ,$2,000 was outstanding under these facilities. OnApril 13, 2022 , the BAML Bilateral Term Loan was paid off and terminated. InMay 2021 , in anticipation of the separation of the WarnerMedia business,Spinco , a wholly owned subsidiary, entered into a$41,500 commitment letter (Bridge Loan ). OnJune 4, 2021 ,Spinco entered into a$10,000 term loan credit agreement (Spinco Term Loan) consisting of (i) an 18 month$3,000 tranche (Tranche 1 Facility), and (ii) a 3 year$7,000 tranche (Tranche 2 Facility), withJPMorgan Chase Bank, N.A ., as agent. In connection with the execution of the Spinco Term Loan, the aggregate commitment amount under the Bridge Loan was reduced to$31,500 in 2021. In connection withSpinco debt issuances in the first quarter of 2022, the aggregate commitment amount under the Bridge Loan was reduced to$1,687 inMarch 2022 . No amounts were outstanding as ofMarch 31, 2022 . InApril 2022 , the Bridge Loan was terminated andSpinco drew on the Spinco Term Loan.
We also utilize other external financing sources, which include various credit arrangements supported by government agencies to support network equipment purchases as well as a commercial paper program.
Each of our credit and loan agreements contains covenants that are customary for an issuer with an investment grade senior debt credit rating as well as a net debt-to-EBITDA financial ratio covenant requiringAT&T to maintain, as of the last day of each fiscal quarter throughJune 30, 2023 , a ratio of not more than 4.0-to-1, and a ratio of not more than 3.5-to-1 for any fiscal quarter thereafter. As ofMarch 31, 2022 , we were in compliance with the covenants for our credit facilities. Collateral Arrangements Most of our counterparty collateral arrangements require cash collateral posting byAT&T only when derivative market values exceed certain thresholds. Under these arrangements, which cover over 97% of our approximate$41,000 derivative portfolio, counterparties are still required to post collateral. During the first three months of 2022, we posted approximately$450 of cash collateral, on a net basis. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 7)
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. AtMarch 31, 2022 , our debt ratio was 52.7%, compared to 49.6% atMarch 31, 2021 and 49.1% atDecember 31, 2021 . The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments. OnMarch 31, 2022 , we issued a notice for the redemption in full of all of the outstanding$1,962 aggregate principal amount of 3.000% Global Notes dueJune 30, 2022 . We redeemed the notes onApril 30, 2022 at 100% of the principal amount.
On
OnApril 11, 2022 , we issued a notice for the redemption in full of all of outstanding approximately$9,042 aggregate principal amount of various global notes due 2022 to 2026 with coupon rates ranging from 2.625% to 4.450% ("Make Whole Notes"). The Make-Whole Notes will be redeemed on the redemption dates set forth in the notices of redemption, at "make whole" redemption prices to be calculated as set forth in the respective redemption notices.
© Edgar Online, source