# AT&T INC. (T) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from AT&T INC.'s 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/732717/000073271722000015/t-20211231.htm Accession: 0000732717-22-000015 Filing date: 2022-02-16 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/T/ All MD&A years: /company/T/mda/ Next year: /company/T/mda/fy2022/ (FY 2022) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes (Notes). Our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this document generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this document can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in exhibit 99.1, revised Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed on Form 8-K on June 21, 2021. On July 31, 2021, we closed our transaction with TPG Capital (TPG) to form a new company named DIRECTV Entertainment Holdings, LLC (DIRECTV). With the close of the transaction, we separated our Video business, comprised of our U.S. video operations, and began accounting for our investment in DIRECTV under the equity method. On November 15, 2021, we sold or Latin America video operations, Vrio, to Grupo Werthein. (See Note 6) 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. Each segment’s percentage calculation of total segment operating revenue and contribution is derived from our segment results table in Note 4 and may total more than 100% due to losses in one or more segments. Percentage increases and decreases that are not considered meaningful are denoted with a dash. [[GREPCENT_TABLE]] [["","","","","Percent Change"],["","2021","2020","2019","2021 vs. 2020","2020 vs. 2019"],["Operating Revenues"],["Communications","$","114,730","","$","109,965","","$","109,969","","4.3","%","\u2014","%"],["WarnerMedia","35,632","","30,442","","35,259","","17.0","","(13.7)"],["Latin America","5,354","","5,716","","6,963","","(6.3)","","(17.9)"],["Corporate and Other:"],["Corporate","1,264","","2,207","","2,131","","(42.7)","","3.6"],["Video","15,513","","28,610","","32,124","","(45.8)","","(10.9)"],["Eliminations and consolidation","(3,629)","","(5,180)","","(5,253)","","29.9","","1.4"],["AT&T Operating Revenues","168,864","","171,760","","181,193","","(1.7)","","(5.2)"],["Operating Contribution"],["Communications","28,279","","28,313","","29,815","","(0.1)","","(5.0)"],["WarnerMedia","7,277","","8,210","","10,659","","(11.4)","","(23.0)"],["Latin America","(430)","","(729)","","(635)","","41.0","","(14.8)"],["Segment Operating Contribution","$","35,126","","$","35,794","","$","39,839","","(1.9)","","(10.2)"],["Corporate and Other1","(11,148)","","(29,294)","","(11,878)","","61.9","","\u2014"],["AT&T Operating Contribution","$","23,978","","$","6,500","","$","27,961","","\u2014","%","(76.8)","%"],["1Includes the reclassification of prior service credit amortization and retained costs previously allocated to Video, the Video business separated in July 2021, acquisition-related and certain significant items, and eliminations and consolidations. See Note 4 for additional details and amounts included in Corporate and Other."]] [[/GREPCENT_TABLE]] 29 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] The Communications segment accounted for approximately 74% of our 2021 total segment operating revenues compared to 75% in 2020 and 81% of our 2021 total segment operating contribution as compared to 79% in 2020. This segment provides services to businesses and consumers located in the U.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 IP-based services, as well as traditional voice and data services and related equipment to business customers. •Consumer Wireline provides internet, including broadband fiber, and legacy telephony voice communication services to residential customers. The WarnerMedia segment accounted for approximately 23% of our 2021 total segment operating revenues compared to 21% in 2020 and 21% of our 2021 total segment operating contribution compared to 23% in 2020. This 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 include Xandr advertising and Otter Media Holdings (Otter Media). We disposed of substantially all of the Otter Media assets in the third quarter of 2021 (see Note 6). The Latin America segment accounted for approximately 3% of our 2021 total segment operating revenues compared to 4% in 2020. This segment provides wireless services and equipment in Mexico, and prior to the November 2021 disposition of Vrio, video services in Latin America and the Caribbean (see Note 6). RESULTS OF OPERATIONS Consolidated Results Our financial results are summarized in the following table. We then discuss factors affecting our overall results. Additional analysis is discussed in our “Segment Results” section. We also discuss our expected revenue and expense trends for 2022 in the “Operating Environment and Trends of the Business” section. Certain prior-period amounts have been reclassified to conform to the current period’s presentation. [[GREPCENT_TABLE]] [["","","","","Percent Change"],["","2021","2020","2019","2021 vs.2020","2020 vs.2019"],["Operating revenues"],["Service","$","146,391","","$","152,767","","$","163,499","","(4.2)","%","(6.6)","%"],["Equipment","22,473","","18,993","","17,694","","18.3","","7.3"],["Total Operating Revenues","168,864","","171,760","","181,193","","(1.7)","","(5.2)"],["Operating expenses"],["Operations and support","117,751","","117,959","","123,563","","(0.2)","","(4.5)"],["Asset impairments and abandonments","4,904","","18,880","","1,458","","(74.0)","","\u2014"],["Depreciation and amortization","22,862","","28,516","","28,217","","(19.8)","","1.1"],["Total Operating Expenses","145,517","","165,355","","153,238","","(12.0)","","7.9"],["Operating Income","23,347","","6,405","","27,955","","\u2014","","(77.1)"],["Interest expense","6,884","","7,925","","8,422","","(13.1)","","(5.9)"],["Equity in net income of affiliates","631","","95","","6","","\u2014","","\u2014"],["Other income (expense) \u2013 net","9,853","","(1,431)","","(1,071)","","\u2014","","(33.6)"],["Income (Loss) Before Income Taxes","26,947","","(2,856)","","18,468","","\u2014","","\u2014"],["Net Income (Loss)","21,479","","(3,821)","","14,975","","\u2014","","\u2014"],["Net Income (Loss) Attributable to AT&T","20,081","","(5,176)","","13,903","","\u2014","","\u2014"],["Net Income (Loss) Attributable toCommon Stock","$","19,874","","$","(5,369)","","$","13,900","","\u2014","%","\u2014","%"]] [[/GREPCENT_TABLE]] 30 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] OVERVIEW Operating revenues decreased in 2021, with declines reflecting our July 31, 2021 separation of the U.S. video business, the completion of the sale of our Vrio business unit in November 2021 and the October 2020 sale of wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands. Also contributing to revenue declines was lower Business Wireline revenues due in part to higher demand for pandemic-related connectivity in the prior year. Partially offsetting declines were higher Mobility equipment and service revenues and gains in broadband service in our Communications segment; higher content and DTC subscription revenues in our WarnerMedia segment; and growth in Mexico wireless operations including favorable foreign exchange impacts. Operations and support expenses decreased in 2021, with declines reflecting our business divestitures, lower bad debt expense and lower personnel costs associated with our ongoing transformation initiatives. Declines were mostly offset by increased domestic wireless equipment expense from higher volumes, and higher WarnerMedia programming costs and marketing activities. Asset impairments and abandonments decreased in 2021, with higher impairments in 2020. Noncash impairment charges in 2020 included $15,508, resulting from our assessment of the recoverability of the long-lived assets and goodwill associated with our U.S. video business (see Notes 7 and 9); $2,212 goodwill impairment at our Vrio business unit (see Note 9); and $780 from the impairment of production and other content inventory at WarnerMedia, with approximately $524 resulting from the continued shutdown of theaters during the pandemic and the hybrid distribution model for our 2021 film slate (see Note 11). In 2021, we took an additional Vrio impairment of $4,555, resulting from our assessment of the recoverability of the net assets of Vrio (see Note 6). Depreciation and amortization expense decreased in 2021. Amortization expense decreased $3,779, or 47.2%, in 2021, primarily due to ceasing amortization on Video and Vrio held-for-sale assets. Depreciation expense decreased $1,875, or 9.1%, in 2021, primarily due to the lower cost basis of property, plant and equipment resulting from Video impairments taken in the fourth quarter of 2020 and ceasing depreciation on Video and Vrio held-for-sale assets in 2021. Operating income increased in 2021 and decreased in 2020. Our operating margin was 13.8% in 2021, compared to 3.7% in 2020 and 15.4% in 2019. Interest expense decreased in 2021, primarily due to lower interest rates and capitalized interest associated with the spectrum acquisitions, partially offset by higher debt balances. Equity in net income (loss) of affiliates increased in 2021, primarily due to the close of our transaction with TPG related to the U.S. video business, which resulted in our accounting for our investment in DIRECTV under the equity method of accounting beginning August 1, 2021 (see Notes 6 and 20). Other income (expense) – net increased in 2021, primarily due to the recognition of $4,140 in actuarial gains, compared to losses of $4,169 in 2020, and recognition of $1,405 of debt redemption costs in 2020. Also contributing to increased income were higher net pension and postretirement benefit credits from higher prior service credit amortization (see Note 15) and net gains on the sale of assets (see Note 6). Income tax expense increased in 2021, primarily driven by increased income before income taxes, offset primarily by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) benefit of U.S. federal Net Operating Loss (NOL) carryback and benefits on divestitures in 2021. Our effective tax rate was 20.3% in 2021, (33.8)% in 2020, and 18.9% in 2019. The effective tax rate in 2020 was impacted by our impairment of Vrio and Video goodwill, which was not deductible for tax purposes. 31 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] Segment Results Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our segment results presented below follow our internal management reporting. In addition to segment operating contribution, we also evaluate segment performance based on EBITDA and/or EBITDA margin. EBITDA is defined as segment operating contribution, excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to depreciation and amortization expenses incurred in operating contribution nor is it burdened by cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues. [[GREPCENT_TABLE]] [["COMMUNICATIONS SEGMENT","","","","Percent Change"],["","2021","2020","2019","2021 vs.2020","2020 vs.2019"],["Segment Operating Revenues"],["Mobility","$","78,254","","$","72,564","","$","71,056","","7.8","%","2.1","%"],["Business Wireline","23,937","","25,083","","25,901","","(4.6)","","(3.2)"],["Consumer Wireline","12,539","","12,318","","13,012","","1.8","","(5.3)"],["Total Segment Operating Revenues","114,730","","109,965","","109,969","","4.3","","\u2014"],["Segment Operating Contribution"],["Mobility","23,312","","22,372","","22,321","","4.2","","0.2"],["Business Wireline","3,990","","4,564","","5,137","","(12.6)","","(11.2)"],["Consumer Wireline","977","","1,377","","2,357","","(29.0)","","(41.6)"],["Total Segment Operating Contribution","$","28,279","","$","28,313","","$","29,815","","(0.1)","%","(5.0)","%"],["Selected Subscribers and Connections"],["","","","","December 31,"],["(000s)","","","2021","2020","2019"],["Mobility subscribers","","","201,791","","182,558","","165,889"],["Total domestic broadband connections","","","15,504","","15,384","","15,389"],["Network access lines in service","","","6,177","","7,263","","8,487"],["U-verse VoIP connections","","","3,333","","3,816","","4,370"]] [[/GREPCENT_TABLE]] Operating revenues increased in 2021, driven by increases in our Mobility and Consumer Wireline business units, partially offset by a decrease in our Business Wireline business unit. The increases are primarily driven by equipment and wireless service revenue growth and gains in broadband service. Operating contribution decreased in 2021 and 2020. The 2021 operating contribution includes declines in our Business Wireline and Consumer Wireline business units, and reflects an increase in operating contribution from our Mobility business unit. Our Communications segment operating income margin was 24.6% in 2021, 25.7% in 2020 and 27.1% in 2019. 32 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] Communications Business Unit Discussion [[GREPCENT_TABLE]] [["Mobility Results"],["","","","","Percent Change"],["","2021","2020","2019","2021 vs.2020","2020 vs.2019"],["Operating revenues"],["Service","$","57,590","","$","55,542","","$","55,331","","3.7","%","0.4","%"],["Equipment","20,664","","17,022","","15,725","","21.4","","8.2"],["Total Operating Revenues","78,254","","72,564","","71,056","","7.8","","2.1"],["Operating expenses"],["Operations and support","46,820","","42,106","","40,681","","11.2","","3.5"],["Depreciation and amortization","8,122","","8,086","","8,054","","0.4","","0.4"],["Total Operating Expenses","54,942","","50,192","","48,735","","9.5","","3.0"],["Operating Income","23,312","","22,372","","22,321","","4.2","","0.2"],["Equity in Net Income (Loss) of Affiliates","\u2014","","\u2014","","\u2014","","\u2014","","\u2014"],["Operating Contribution","$","23,312","","$","22,372","","$","22,321","","4.2","%","0.2","%"]] [[/GREPCENT_TABLE]] The following tables highlight other key measures of performance for Mobility: [[GREPCENT_TABLE]] [["Subscribers"],["","","","","Percent Change"],["(in 000s)","2021","2020","2019","2021 vs.2020","2020 vs.2019"],["Postpaid","81,534","77,154","75,207","5.7","%","2.6","%"],["Postpaid phone","67,260","64,216","63,018","4.7","","1.9"],["Prepaid","19,028","18,102","17,803","5.1","","1.7"],["Reseller","6,113","6,535","6,893","(6.5)","","(5.2)"],["Connected devices1","95,116","80,767","65,986","17.8","","22.4"],["Total Mobility Subscribers","201,791","182,558","165,889","10.5","%","10.0","%"],["1Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems."]] [[/GREPCENT_TABLE]] 33 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Mobility Net Additions"],["","","","","Percent Change"],["(in 000s)","2021","2020","2019","2021 vs.2020","2020 vs.2019"],["Postpaid Phone Net Additions","3,196","1,457","483","\u2014","%","\u2014","%"],["Total Phone Net Additions","3,850","1,640","989","\u2014","","65.8"],["Postpaid2","4,482","2,183","(435)","\u2014","","\u2014"],["Prepaid","956","379","677","\u2014","","(44.0)"],["Reseller","(534)","(449)","(928)","(18.9)","","51.6"],["Connected devices3","14,328","14,785","14,645","(3.1)","","1.0"],["Mobility Net Subscriber Additions1","19,232","16,898","13,959","13.8","%","21.1","%"],["Postpaid Churn4","0.94","%","0.98","%","1.18","%","(4)","BP","(20)","BP"],["Postpaid Phone-Only Churn4","0.76","%","0.79","%","0.95","%","(3)","BP","(16)","BP"],["1 Excludes acquisition-related additions during the period."],["2In addition to postpaid phones, includes tablets and wearables and other. Tablet net adds (losses) were 28, (512) and (1,487) for the years ended December 31, 2021, 2020 and 2019, respectively. Wearables and other net adds were 1,257, 1,223 and 569 for the years ended December 31, 2021, 2020 and 2019, respectively."],["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 7.9 million for the year ended December 31, 2021."],["4Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month 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."]] [[/GREPCENT_TABLE]] Service revenue increased during 2021, largely due to growth from subscriber gains. ARPU Average revenue per subscriber (ARPU) decreased in 2021 and 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 lower in 2021 due to retention offers, migrations to unlimited plans, continued network performance and lower involuntary disconnects. Equipment revenue increased in 2021, primarily driven by increased volumes, the sale of higher-priced smartphones and a mix of higher-priced postpaid smartphones. Operations and support expenses increased in 2021, largely driven by growth in equipment sales and associated expenses, including costs associated with the upcoming first-quarter 2022 3G network shutdown, increased content costs associated with bundling HBO Max, increased amortization of deferred contract acquisition costs and higher network and technology costs. These expense increases were partially offset by lower sales costs and lower bad debt expense. Depreciation expense increased in 2021, primarily due to ongoing capital spending for network upgrades and expansion partially offset by fully depreciated assets. Operating income increased in 2021 and 2020. Our Mobility operating income margin was 29.8% in 2021, 30.8% in 2020 and 31.4% in 2019. Our Mobility EBITDA margin was 40.2% in 2021, 42.0% in 2020 and 42.7% in 2019. 34 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] Subscriber Relationships As the wireless industry has matured, with nearly full penetration of smartphones in the U.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, which went nationwide in July 2020. 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. In January 2022, we began to deploy our C-band spectrum acquired in FCC Auction 107 (see Note 6). 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. [[GREPCENT_TABLE]] [["Business Wireline Results"],["","","","","Percent Change"],["","2021","2020","2019","2021 vs.2020","2020 vs.2019"],["Operating revenues"],["Services","$","23,224","","$","24,313","","$","25,116","","(4.5)","%","(3.2)","%"],["Equipment","713","","770","","785","","(7.4)","","(1.9)"],["Total Operating Revenues","23,937","","25,083","","25,901","","(4.6)","","(3.2)"],["Operating expenses"],["Operations and support","14,755","","15,303","","15,839","","(3.6)","","(3.4)"],["Depreciation and amortization","5,192","","5,216","","4,925","","(0.5)","","5.9"],["Total Operating Expenses","19,947","","20,519","","20,764","","(2.8)","","(1.2)"],["Operating Income","3,990","","4,564","","5,137","","(12.6)","","(11.2)"],["Equity in Net Income (Loss) of Affiliates","\u2014","","\u2014","","\u2014","","\u2014","","\u2014"],["Operating Contribution","$","3,990","","$","4,564","","$","5,137","","(12.6)","%","(11.2)","%"]] [[/GREPCENT_TABLE]] Service revenues decreased in 2021, driven by lower demand for legacy voice and data services in the current year, proactive rationalization of low profit margin products and higher demand for pandemic-related connectivity in the prior-year. We expect this trend to continue. Equipment revenues decreased in 2021, driven by declines in legacy and non-core services which we expect to continue. Operations and support expenses decreased in 2021, primarily due to our continued efforts to drive efficiencies in our network operations through automation and reductions in customer support expenses through digitization and proactive rationalization of low profit margin products. Depreciation expense decreased in 2021, primarily due to certain network assets becoming fully depreciated. Operating income decreased in 2021 and 2020. Our Business Wireline operating income margin was 16.7% in 2021, 18.2% in 2020 and 19.8% in 2019. Our Business Wireline EBITDA margin was 38.4% in 2021, 39.0% in 2020 and 38.8% in 2019. 35 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Consumer Wireline Results"],["","","","","Percent Change"],["","2021","2020","2019","2021 vs.2020","2020 vs.2019"],["Operating revenues"],["Broadband","$","9,085","","$","8,534","","$","8,403","","6.5","%","1.6","%"],["Legacy voice and data services","1,977","","2,213","","2,573","","(10.7)","","(14.0)"],["Other service and equipment","1,477","","1,571","","2,036","","(6.0)","","(22.8)"],["Total Operating Revenues","12,539","","12,318","","13,012","","1.8","","(5.3)"],["Operating expenses"],["Operations and support","8,467","","8,027","","7,775","","5.5","","3.2"],["Depreciation and amortization","3,095","","2,914","","2,880","","6.2","","1.2"],["Total Operating Expenses","11,562","","10,941","","10,655","","5.7","","2.7"],["Operating Income","977","","1,377","","2,357","","(29.0)","","(41.6)"],["Equity in Net Income (Loss) of Affiliates","\u2014","","\u2014","","\u2014","","\u2014","","\u2014"],["Operating Contribution","$","977","","$","1,377","","$","2,357","","(29.0)","%","(41.6)","%"]] [[/GREPCENT_TABLE]] The following tables highlight other key measures of performance for Consumer Wireline: [[GREPCENT_TABLE]] [["Connections"],["","","","","Percent Change"],["(in 000s)","2021","2020","2019","2021 vs.2020","2020 vs.2019"],["Broadband Connections"],["Total Broadband and DSL Connections","14,160","","14,100","","14,119","0.4","%","(0.1)","%"],["Fiber Broadband Connections","5,992","","4,951","","3,887","21.0","","27.4"],["Voice Connections"],["Retail Consumer Switched Access Lines","2,423","2,862","3,329","(15.3)","","(14.0)"],["U-verse Consumer VoIP Connections","2,736","3,231","3,794","(15.3)","","(14.8)"],["Total Retail Consumer Voice Connections","5,159","6,093","7,123","(15.3)","%","(14.5)","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Net Additions"],["","","","","Percent Change"],["(in 000s)","2021","2020","2019","2021 vs.2020","2020 vs.2019"],["Broadband Net Additions"],["Total Broadband and DSL Net Additions","60","(19)","(290)","\u2014","%","93.4","%"],["Fiber Broadband Net Additions","1,041","1,064","1,124","(2.2)","%","(5.3)","%"]] [[/GREPCENT_TABLE]] Broadband revenues increased in 2021, driven by an increase in fiber customers and pricing, which we expect to continue for the foreseeable future. Legacy voice and data service revenues decreased in 2021, reflecting the continued decline in the number of customers, which we expect to continue. Other service and equipment revenues decreased in 2021, reflecting the continued decline in the number of VoIP customers, which we expect to continue. 36 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] Operations and support expenses increased in 2021, primarily driven by higher advertising, technology and customer support costs, and content costs associated with plans bundling HBO Max. Partially offsetting these increases was lower amortization of deferred fulfillment costs, including updates to extend the estimated economic life of our subscribers. Depreciation expense increased in 2021, primarily due to ongoing capital spending for network upgrades and expansion. Operating income decreased in 2021 and 2020. Our Consumer Wireline operating income margin was 7.8% in 2021, 11.2% in 2020 and 18.1% in 2019. Our Consumer Wireline EBITDA margin was 32.5% in 2021, 34.8% in 2020 and 40.2% in 2019. [[GREPCENT_TABLE]] [["WARNERMEDIA SEGMENT"],["","","","","Percent Change"],["","2021","2020","2019","2021 vs. 2020","2020 vs. 2019"],["Segment Operating Revenues"],["Subscription","$","15,596","","$","13,765","","$","13,651","","13.3","%","0.8","%"],["Content and other","13,514","","10,552","","14,930","","28.1","","(29.3)"],["Advertising","6,522","","6,125","","6,678","","6.5","","(8.3)"],["Total Segment Operating Revenues","35,632","","30,442","","35,259","","17.0","","(13.7)"],["Segment Operating Expenses"],["Direct Costs"],["Programming","15,286","","11,678","","13,949","","30.9","","(16.3)"],["Marketing","4,137","","2,529","","2,953","","63.6","","(14.4)"],["Other","3,658","","3,211","","3,060","","13.9","","4.9"],["Selling, general and administrative","4,656","","4,161","","4,210","","11.9","","(1.2)"],["Depreciation and amortization","656","","671","","589","","(2.2)","","13.9"],["Total Operating Expenses","28,393","","22,250","","24,761","","27.6","","(10.1)"],["Operating Income","7,239","","8,192","","10,498","","(11.6)","","(22.0)"],["Equity in Net Income (Loss) of Affiliates","38","","18","","161","","\u2014","","(88.8)"],["Total Segment Operating Contribution","$","7,277","","$","8,210","","$","10,659","","(11.4)","%","(23.0)","%"]] [[/GREPCENT_TABLE]] 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. HBO Latin America Group (HBO LAG) is included as an equity method investment prior to our acquiring the remaining interest in May 2020. It is included in the segment operating results following the date of acquisition. On May 17, 2021, we entered into an agreement to combine our WarnerMedia segment, subject to certain exceptions, with a subsidiary of Discovery Inc. On December 21, 2021, we entered into an agreement to sell the marketplace component of Xandr to Microsoft Corporation (Microsoft). (See Note 6) Operating revenues increased in 2021 and decreased in 2020. The increase in 2021 was primarily due to increases in content and other, reflecting the partial recovery from prior-year impacts of the pandemic, and also in subscription revenues. The decrease in 2020 was primarily due to lower content and advertising revenues, which were negatively impacted by the pandemic, partially offset by higher subscription revenues. Subscription revenues increased in 2021 and 2020, reflecting growth of DTC domestic HBO Max and HBO subscribers and the May 2020 acquisition of the remaining interest in HBO Latin America Group. DTC subscription revenues were $7,723 in 2021, versus $6,090 and $5,814 in 2020 and 2019, respectively, and include growth from intercompany relationships with the Communications segment. 37 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] Content and other revenues increased in 2021 and decreased in 2020. The increase in 2021 was due to higher TV production and licensing, which represent a partial recovery from prior-year impacts of the pandemic, as well as higher theatrical, with 2020 including only five worldwide theatrical releases compared to 17 in 2021. The decrease in 2020 was primarily due to pandemic-related movie theater closures and television and theatrical production delays. Advertising revenues increased in 2021 and decreased in 2020. The increase in 2021 was due to the return in 2021 of major sporting events, including the NCAA Division I Men’s Championship Basketball Tournament. The decrease in 2020 was primarily due to the pandemic-related cancellation of sporting events, partially offset by higher news coverage of general elections and COVID-19 developments. Direct costs increased in 2021 and decreased in 2020. The increase in 2021 was driven by higher film and programming costs and increased costs for HBO Max. Direct costs supporting DTC revenues were $7,934 in 2021, versus $5,452 and $3,824 in 2020 and 2019, respectively. The decrease in 2020 was primarily due to pandemic-related closures and production delays. Selling, general and administrative expenses increased in 2021 and decreased in 2020. The increase in 2021 was primarily due to incremental selling costs associated with a DIRECTV advertising revenue sharing arrangement, partially offset by lower bad debt expense and integration of support functions. The decrease in 2020 was primarily due to lower print and advertising expenses from limited theatrical releases, lower distribution fees and cost-saving initiatives, partially offset by marketing costs associated with HBO Max. Operating contribution decreased in 2021 and 2020. The WarnerMedia segment operating income margin was 20.3% in 2021, 26.9% in 2020 and 29.8% in 2019. [[GREPCENT_TABLE]] [["LATIN AMERICA SEGMENT"],["","","","","Percent Change"],["","2021","2020","2019","2021 vs.2020","2020 vs.2019"],["Segment Operating Revenues"],["Mexico","$","2,747","","$","2,562","","$","2,869","","7.2","%","(10.7)","%"],["Vrio","2,607","","3,154","","4,094","","(17.3)","","(23.0)"],["Total Segment Operating Revenues","5,354","","5,716","","6,963","","(6.3)","","(17.9)"],["Segment Operating Contribution"],["Mexico","(510)","","(587)","","(718)","","13.1","","18.2"],["Vrio","80","","(142)","","83","","\u2014","","\u2014"],["Total Segment Operating Contribution","$","(430)","","$","(729)","","$","(635)","","41.0","%","(14.8)","%"]] [[/GREPCENT_TABLE]] Our Latin America operations conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates, subjecting results to foreign currency fluctuations. On November 15, 2021, we completed the sale of our Latin America video operations, Vrio, to Grupo Werthein (see Note 6). Operating revenues decreased in 2021, reflecting the sale of Vrio partially offset by growth in the Mexico wireless operations. Foreign exchange pressure in Vrio was partially offset by improvements in Mexico. Operating contribution improved in 2021, reflecting higher profitability in Mexico and lower depreciation resulting from Vrio assets being accounted for as held-for-sale. Our Latin America segment operating income margin was (8.1)% in 2021, (13.2)% in 2020 and (9.5)% in 2019. 38 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] Latin America Business Unit Discussion [[GREPCENT_TABLE]] [["Mexico Results"],["","","","","Percent Change"],["","2021","2020","2019","2021 vs.2020","2020 vs.2019"],["Operating revenues"],["Service","$","1,834","","$","1,656","","$","1,863","","10.7","%","(11.1)","%"],["Equipment","913","","906","","1,006","","0.8","","(9.9)"],["Total Operating Revenues","2,747","","2,562","","2,869","","7.2","","(10.7)"],["Operating expenses"],["Operations and support","2,652","","2,636","","3,085","","0.6","","(14.6)"],["Depreciation and amortization","605","","513","","502","","17.9","","2.2"],["Total Operating Expenses","3,257","","3,149","","3,587","","3.4","","(12.2)"],["Operating Income (Loss)","(510)","","(587)","","(718)","","13.1","","18.2"],["Equity in Net Income (Loss) of Affiliates","\u2014","","\u2014","","\u2014","","\u2014","","\u2014"],["Operating Contribution","$","(510)","","$","(587)","","$","(718)","","13.1","%","18.2","%"]] [[/GREPCENT_TABLE]] The following tables highlight other key measures of performance for Mexico: [[GREPCENT_TABLE]] [["","","","","Percent Change"],["(in 000s)","2021","2020","2019","2021 vs. 2020","2020 vs. 2019"],["Mexico Wireless Subscribers"],["Postpaid","4,807","","4,696","","5,103","","2.4","%","(8.0)","%"],["Prepaid","15,057","","13,758","","13,584","","9.4","","1.3"],["Reseller","498","","489","","472","","1.8","","3.6"],["Mexico Wireless Subscribers","20,362","","18,943","","19,159","","7.5","%","(1.1)","%"],["","","","","Percent Change"],["(in 000s)","2021","2020","2019","2021 vs. 2020","2020 vs. 2019"],["Mexico Wireless Net Additions"],["Postpaid","111","","(407)","","(608)","","\u2014","%","33.1","%"],["Prepaid","1,299","","174","","1,919","","\u2014","","(90.9)"],["Reseller","9","","118","","219","","(92.4)","","(46.1)"],["Mexico Wireless Net Additions","1,419","","(115)","","1,530","","\u2014","%","\u2014","%"]] [[/GREPCENT_TABLE]] Service revenues increased in 2021, driven by improvements in foreign exchange and growth in other services. Equipment revenues increased in 2021, driven by improvements in foreign exchange impact partly offset by lower equipment sales volumes. Operations and support expenses increased in 2021, due to foreign exchange impact partially offset by lower expenses. Approximately 7% of Mexico expenses are U.S. dollar-based, with the remainder in the local currency. Depreciation expense increased in 2021, reflecting higher in-service assets and foreign exchange impacts. Operating income improved in 2021 and 2020. Our Mexico operating income margin was (18.6)% in 2021, (22.9)% in 2020 and (25.0)% in 2019. Our Mexico EBITDA margin was 3.5% in 2021, (2.9)% in 2020 and (7.5)% in 2019. 39 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Vrio Results"],["","","","","Percent Change"],["","2021","2020","2019","2021 vs.2020","2020 vs.2019"],["Operating revenues","$","2,607","","$","3,154","","$","4,094","","(17.3)","%","(23.0)","%"],["Operating expenses"],["Operations and support","2,302","","2,800","","3,378","","(17.8)","","(17.1)"],["Depreciation and amortization","231","","520","","660","","(55.6)","","(21.2)"],["Total Operating Expenses","2,533","","3,320","","4,038","","(23.7)","","(17.8)"],["Operating Income (Loss)","74","","(166)","","56","","\u2014","","\u2014"],["Equity in Net Income (Loss) of Affiliates","6","","24","","27","","(75.0)","","(11.1)"],["Operating Contribution","$","80","","$","(142)","","$","83","","\u2014","%","\u2014","%"]] [[/GREPCENT_TABLE]] Operating revenues decreased in 2021, driven by the sale of Vrio and foreign exchange impacts. Operations and support expenses decreased in 2021, driven by the sale of Vrio and foreign exchange impacts. Depreciation expense decreased in 2021, due to ceasing depreciation on held-for-sale Vrio assets. We applied held-for-sale accounting to Vrio on June 30, 2021 and ceased depreciation beginning July 1, 2021. Operating income improved in 2021 and 2020. Our Vrio operating income margin was 2.8% in 2021, (5.3)% in 2020 and 1.4% in 2019. Our Vrio EBITDA margin was 11.7% in 2021, 11.2% in 2020 and 17.5% in 2019. OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS 2022 Revenue Trends We expect revenue growth in our wireless and broadband businesses as customers demand instant connectivity and higher speeds made possible by wireless network enhancements through 5G deployment and our fiber network expansion. We also expect revenue growth from continued investment in premium content and by expanding the international reach of HBO Max. In our Communications segment, we expect that our simplified go-to-market strategy for 5G in underpenetrated markets will continue to contribute to wireless subscriber and service revenue growth and that expansion of our fiber footprint and our new multi-gig rollout will drive greater demand for broadband services on our fast-growing fiber network. In our WarnerMedia segment, we expect our video streaming platform, HBO Max, and premium content will continue to drive revenue growth. The pandemic-related partial closure of movie theaters is expected to continue to pressure revenues; however, we are working towards a shorter but exclusive theatrical window for our 2022 film slate. The decline in viewing on our basic cable networks is expected to continue as consumers continue to increase their use of streaming platforms. As we expand our fiber reach, we will be orienting our business portfolio to leverage this opportunity to offset continuing declines in legacy business wireline products by growing connectivity with small to mid-sized business. We plan to use our strong fiber and wireless assets, broad distribution and converged product offers to strengthen our overall market position. We will continue to deemphasize non-core services with a longer-term shift of the business to fiber and mobile connectivity, and growth in value-added services. 2022 Expense Trends We expect the spending required to support growth initiatives, primarily our continued deployment of fiber and 5G, including 3G shutdown costs in the first quarter of 2022, as well as continued investment into the HBO Max platform, to pressure expense trends in 2022. To the extent 5G handset introductions continue in 2022, and as anticipated, the expenses associated with those device sales are expected to contribute to higher costs. During 2022, we will also continue to prioritize efficiency, led by our cost transformation initiative and continued transition from our hardware-based network technology to more efficient and less expensive software-based technology. These investments will help prepare us to meet increased customer demand for enhanced wireless and broadband services, including video streaming, augmented reality and “smart” technologies. The software benefits of our 5G wireless technology should result in a more efficient use of capital and lower network-related expenses in the coming years. 40 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] We continue to transform our operations to be more efficient and effective, reinvesting savings into growth areas of the business. We are restructuring businesses, sunsetting legacy networks, improving customer service and ordering functions through digital transformation, sizing our support costs and staffing with current activity levels, and reassessing overall benefit costs. Cost savings and asset sales align with our focus on debt reduction. Market Conditions The U.S. stock market experienced steady growth in 2021; however, several factors, including the global pandemic, have resulted in changes in demand in business communication services. The global pandemic has caused, and could again cause, delays in the development, manufacturing (including the sourcing of key components) and shipment of products, as well as continued tight labor market and actual or perceived inflation. Most of our products and services are not directly affected by the imposition of tariffs on Chinese goods. However, we expect ongoing pressure on pricing during 2022 as we respond to the competitive marketplace, especially in wireless services. Included on our consolidated balance sheets are assets held by benefit plans for the payment of future benefits. Our pension plans are subject to funding requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). We expect only minimal ERISA contribution requirements to our pension plans for 2022. Investment returns on these assets depend largely on trends in the economy, and a weakness in the equity, fixed income and real asset markets could require us to make future contributions to the pension plans. In addition, our policy of recognizing actuarial gains and losses related to our pension and other postretirement plans in the period in which they arise subjects us to earnings volatility caused by changes in market conditions; however, these actuarial gains and losses do not impact segment performance as they are required to be recorded in “Other income (expense) – net.” Changes in our discount rate, which are tied to changes in the bond market, and changes in the performance of equity markets, may have significant impacts on the valuation of our pension and other postretirement obligations at the end of 2022 (see “Critical Accounting Policies and Estimates”). OPERATING ENVIRONMENT OVERVIEW AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided. In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. Nonetheless, over the ensuing two decades, the Federal Communications Commission (FCC) and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. More recently, the FCC 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. Communications Segment Internet The FCC currently classifies fixed and mobile consumer broadband services as information services, subject to light-touch regulation. The D.C. Circuit upheld the FCC’s current classification, although it remanded three discrete issues to the FCC for further consideration. These issues related to the effect of the FCC’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 sought Supreme Court review of the D.C. Circuit’s decision to uphold the FCC’s classification of broadband as an information service, that decision is final. In October 2020, the FCC adopted an order addressing the three issues remanded by the D.C. Circuit for further consideration. After considering those issues, the FCC 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 the FCC’s remand decision is pending. Some states have adopted legislation or issued executive orders that would reimpose net neutrality rules repealed by the FCC. Suits have been filed concerning such laws in California and Vermont. The California statute is now in effect, and the lawsuit regarding the Vermont statute has been stayed pending resolution of any appeal of the California lawsuit. We expect that going forward additional states may seek to impose net neutrality requirements. 41 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] On November 15, 2021, President Biden signed the Infrastructure 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), an FCC-administered monthly, low-income broadband benefit program, replacing the Emergency Broadband Benefit program (established in December 2020 by the Consolidated Appropriations Act 2021). Qualifying customers can receive up to thirty dollars per month (or seventy-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 in FCC 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, the FCC 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. WarnerMedia Segment We create, own and distribute intellectual property, including copyrights, trademarks and licenses of intellectual property. To protect our intellectual property, we rely on a combination of laws and license agreements. Outside of the U.S., laws and regulations relating to intellectual property protection and the effective enforcement of these laws and regulations vary greatly from country to country. The European Union Commission is pursuing legislative and regulatory initiatives which could impact WarnerMedia’s activities in the EU. Piracy, particularly of digital content, continues to threaten WarnerMedia’s revenues from products and services, and we work to limit that threat through a combination of approaches, including technological and legislative solutions. Outside the U.S., various laws and regulations, as well as trade agreements with the U.S., also apply to the distribution or licensing of feature films for exhibition in movie theaters and on broadcast and cable networks. For example, in certain countries, including China, laws and regulations limit the number of foreign films exhibited in such countries in a calendar year. EXPECTED GROWTH AREAS Over the next few years, we expect our growth to come from wireless and IP-based fiber broadband services. We provide integrated services to diverse groups of customers in the U.S. on an integrated telecommunications network utilizing different technological platforms. In 2022, our key initiatives include: •Continuing our wireless subscriber momentum while increasing the pace of our 5G deployment and expansion of 5G service, including to underpenetrated markets. •Improving fiber penetration, accelerating subscriber growth and increasing broadband revenues. •Increasing international subscriber base for HBO Max, our platform for premium content and video offered directly to consumers, as well as through other distributors. •Continuing to develop efficiencies and a competitive advantage through cost transformation initiatives and product simplification. Wireless We expect to continue to deliver revenue growth in the coming years. We are in a period of rapid growth in wireless video usage and believe that there are substantial opportunities available for next-generation converged services that combine technologies and services. As of December 31, 2021, we served 222 million wireless subscribers in North America, with more than 202 million in the United States. 42 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] Our LTE technology covers over 434 million people in North America, and in the United States, we cover all major metropolitan areas and over 330 million people. We also provide 4G coverage using another technology (HSPA+), and when combined with our upgraded backhaul network, we provide enhanced network capabilities and superior mobile broadband speeds for data and video services. In December 2018, we introduced the nation’s first commercial mobile 5G service and expanded that deployment nationwide in July 2020. At December 31, 2021, our network covers more than 250 million people with 5G technology in the United States and North America. Our networks covering both the U.S. and Mexico have enabled our customers to use wireless services without roaming on other companies’ networks. We believe this seamless access will prove attractive to customers and provide a significant growth opportunity. As of the end of 2021, we provided LTE coverage to over 104 million people in Mexico. Integration of Data/Broadband and Streaming Services As the communications industry has evolved into internet-based technologies capable of blending wireline and wireless services, we plan to focus on expanding our wireless network capabilities and provide broadband offerings that allow customers to integrate their home or business fixed services with their mobile service. In January 2022, we launched our multi-gig rollout, which brings the fastest internet to AT&T Fiber customers with symmetrical 2 gig and 5 gig tiers. We will continue to develop and provide unique integrated mobile and broadband/fiber solutions. REGULATORY DEVELOPMENTS Set forth below is a summary of the most significant regulatory proceedings that directly affected our operations during 2021. Industry-wide regulatory developments are discussed above in Operating Environment Overview. While these issues may apply only to certain subsidiaries, the words “we,” “AT&T” and “our” are used to simplify the discussion. The following discussions are intended as a condensed summary of the issues rather than as a comprehensive legal analysis and description of all of these specific issues. International Regulation Our subsidiaries operating outside the United States are subject to the jurisdiction of regulatory authorities in the territories in which the subsidiaries operate. Our licensing, compliance and advocacy initiatives in foreign countries primarily enable the provision of enterprise (i.e., large business) globally and wireless services in Mexico. The General Data Protection Regulation went into effect in Europe in May of 2018. AT&T processes and handles personal data of its customers and subscribers, employees of its enterprise customers and its employees. This regulation created a range of new compliance obligations and significantly increased financial penalties for noncompliance. Federal Regulation We have organized our following discussion by service impacted. Internet In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to Title II of the Communications Act. The Order, which represented a departure from longstanding bipartisan precedent, significantly expanded the FCC’s authority to regulate broadband internet access services, as well as internet interconnection arrangements. In December 2017, the FCC reversed its 2015 decision by reclassifying fixed and mobile consumer broadband services as information services and repealing most of the rules that were adopted in 2015. In lieu of broad conduct prohibitions, the order requires internet service providers to disclose information about their network practices and terms of service, including whether they block or throttle internet traffic or offer paid prioritization. On October 1, 2019, the D.C. Circuit issued a unanimous opinion upholding the FCC’s reclassification of broadband as an information service, and its reliance on transparency requirements and competitive marketplace dynamics to safeguard net neutrality. Because no party sought Supreme Court review of the D.C. Circuit’s decision to uphold the FCC’s classification of broadband as an information service, that decision is final. While the court vacated the FCC’s express preemption of any state regulation of net neutrality, it stressed that its ruling did not prevent the FCC or ISPs from relying on conflict preemption to invalidate particular state laws that are inconsistent with the FCC’s regulatory objectives and framework. The court also remanded the matter to the FCC for further consideration of the impact of reclassifying broadband services as information services on public safety, the Lifeline program, and pole attachment regulation. In October 2020, the FCC adopted an order concluding that those issues did not justify reversing its decision to reclassify broadband services as information services. An appeal of the FCC’s remand decision is pending. 43 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] Following the FCC’s 2017 decision to reclassify broadband as information services, a number of states adopted legislation to reimpose the very rules the FCC repealed. In some cases, state legislation imposes requirements that go beyond the FCC’s February 2015 order. Additionally, some state governors have issued executive orders that effectively reimpose the repealed requirements. Suits have been filed concerning laws in California and Vermont. Both lawsuits were stayed pursuant to agreements by those states not to enforce their laws pending final resolution of all appeals of the FCC’s December 2017 order. Because that order is now final, the California suit has returned to active status. In January 2021, a U.S. District Court in California denied a request for a preliminary injunction against enforcement of the California law. As a consequence, the California statute now is in effect. The trade associations challenging the statute have appealed the denial of their request for preliminary injunction to the Ninth Circuit; that appeal remains pending. The lawsuit regarding the Vermont statute has been stayed pending the Ninth Circuit’s resolution of the appeal or April 15, 2022, whichever occurs first. We expect that going forward additional states may seek to impose net neutrality requirements. We will continue to support congressional action to codify a set of standard consumer rules for the internet. 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 and Broadband In June and November 2020, the FCC issued a Declaratory Ruling clarifying the limits on state and local authority to deny applications to modify existing structures to accommodate wireless facilities. Appeals of the November 2020 order remain pending in the Ninth Circuit Court of Appeals, following multiple requests by the FCC to hold the appeal in abeyance until the Senate confirms a fifth FCC Commissioner. If sustained on appeal, these FCC decisions will remove state and local regulatory barriers and reduce the costs of the infrastructure needed for 5G and FirstNet deployments, which will enhance our ability to place small cell facilities on utility poles, expand existing facilities to accommodate public safety services, and replace legacy facilities and services with advanced broadband infrastructure and services. 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. In March 2020, the FCC released its order setting rules for certain spectrum bands (C-band) for 5G operations. In that order, the FCC concluded that C-band 5G services that met the agency’s technical limits on power and emissions would not cause harmful interference with aircraft operations. In reliance on that order, AT&T bid a total of $23,406 and was awarded 1,621 C-band licenses, including 40 MHz nationwide available for deployment in December 2021, with the remainder available for deployment in December 2023. In late 2021, the Federal Aviation Administration (FAA) questioned whether the C-band launch could impact radio altimeter equipment on airplanes, which operate on spectrum bands over 400 MHz away from the spectrum AT&T is launching in 2022. In response, to allow the FAA more time to evaluate, AT&T and Verizon delayed their planned December 2021 5G C-band launch by six weeks and voluntarily committed to a series of temporary, precautionary measures, in addition to deferring turning on a limited number of towers around certain airports. On January 19, 2022, we launched 5G C-band services, subject to these voluntary temporary measures. In recent years, the FCC took several actions to make spectrum available for 5G services, including the auction of 280 MHz of mid-band spectrum used for satellite service (the “C Band” auction) and 39 GHz band spectrum. AT&T obtained spectrum in these auctions (see “Other Business Matters”). The FCC also made 150 MHz of mid-band CBRS spectrum available, to be shared with Federal incumbents, which enjoy priority. In addition, the FCC recently completed Auction 110, in which AT&T won 40 MHz of spectrum nationwide at a cost of $9,079. Following enactment in December 2019 of the Pallone-Thune Telephone Robocall Abuse Criminal Enforcement and Deterrence Act (TRACED Act) by Congress, the FCC adopted new rules requiring voice service providers to implement caller ID authentication protocols (known as STIR/SHAKEN) and adopt robocall mitigation measures. These measures apply to portions of their networks where STIR/SHAKEN is not enabled, in addition to other anti-robocall measures. The new rules contemplate ongoing FCC oversight and review of efforts related to STIR/SHAKEN implementation. Among other goals, the FCC has stated its intention to promote the IP transition through its rules. In September 2019, the FCC released reformed aspects of its intercarrier compensation regime related to tandem switching and transport charges, with the goal of reducing the prevalence of telephone access arbitrage schemes. In October 2020, the FCC further reformed aspects of its intercarrier compensation regime by greatly reducing, and in some cases eliminating, the charges long distance carriers must pay to originating carriers for toll-free calls. Appeals of both orders are pending at the D.C. Circuit Court of Appeals. 44 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] ACCOUNTING POLICIES AND STANDARDS Critical Accounting Policies and Estimates Because of the size of the financial statement line items they relate to or the extent of judgment required by our management, some of our accounting policies and estimates have a more significant impact on our consolidated financial statements than others. The following policies are presented in the order in which the topics appear in our consolidated statements of income. Pension and Postretirement Benefits Our actuarial estimates of retiree benefit expense and the associated significant weighted-average assumptions are discussed in Note 15. Our assumed weighted-average discount rates for pension and postretirement benefits of 3.00% and 2.80%, respectively, at December 31, 2021, reflect the hypothetical rate at which the projected benefit obligations could be effectively settled or paid out to participants. We determined our discount rate based on a range of factors, including a yield curve composed of the rates of return on several hundred high-quality, fixed income corporate bonds available at the measurement date and corresponding to the related expected durations of future cash outflows for the obligations. These bonds had an average rating of at least Aa3 or AA- by the nationally recognized statistical rating organizations, denominated in U.S. dollars, and neither callable, convertible nor index linked. For the year ended December 31, 2021, when compared to the year ended December 31, 2020, we increased our pension discount rate by 0.30%, resulting in a decrease in our pension plan benefit obligation of $1,645, and increased our postretirement discount rate by 0.40%, resulting in a decrease in our postretirement benefit obligation of $341. Our expected long-term rate of return is 6.75% on pension plan assets and 4.50% on postretirement plan assets for 2022 and for 2021. Our expected return on plan assets is calculated using the actual fair value of plan assets. If all other factors were to remain unchanged, we expect that a 0.50% decrease in the expected long-term rate of return would cause 2022 combined pension and postretirement cost to increase $272, which under our accounting policy would be adjusted to actual returns in the current year as part of our fourth-quarter remeasurement of our retiree benefit plans. We recognize gains and losses on pension and postretirement plan assets and obligations immediately in “Other income (expense) – net” in our consolidated statements of income. These gains and losses are generally measured annually as of December 31, and accordingly, will normally be recorded during the fourth quarter, unless an earlier remeasurement is required. Should actual experience differ from actuarial assumptions, the projected pension benefit obligation and net pension cost and accumulated postretirement benefit obligation and postretirement benefit cost would be affected in future years. See Note 15 for additional discussions regarding our assumptions. Depreciation Our depreciation of assets, including use of composite group depreciation for certain subsidiaries and estimates of useful lives, is described in Notes 1 and 7. If all other factors were to remain unchanged, we expect that a one-year increase in the useful lives of our plant in service would have resulted in a decrease of approximately $2,702 in our 2021 depreciation expense and that a one-year decrease would have resulted in an increase of approximately $3,700 in our 2021 depreciation expense. See Notes 7 and 8 for depreciation and amortization expense applicable to property, plant and equipment, including our finance lease right-of-use assets. Asset Valuations and Impairments Goodwill and other indefinite-lived intangible assets are not amortized but tested at least annually on October 1 for impairment. For impairment testing, we estimate fair values using models that predominantly rely on the expected cash flows to be derived from the reporting unit or use of the asset. Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the book value may not be recoverable over the remaining life. Inputs underlying the expected cash flows include, but are not limited to, subscriber counts, revenues from subscriptions, advertising and content, revenue per user, capital investment and acquisition costs per subscriber, production and content costs, and ongoing operating costs. We based our assumptions on a combination of our historical results, trends, business plans and marketplace participant data. Annual Goodwill Testing Goodwill is tested on a reporting unit basis by comparing the estimated fair value of each reporting unit to its book value. If the fair value exceeds the book value, then no impairment is measured. We estimate fair values using an income approach (also known as a discounted cash flow model) and a market multiple approach. The income approach utilizes our future cash flow projections with a perpetuity value discounted at an appropriate weighted average cost of capital. The market multiple approach uses the multiples of publicly traded companies whose services are comparable to those offered by the reporting units. 45 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] Effective January 1, 2021, we updated our reporting units to reflect changes in how WarnerMedia, an integrated content organization that distributes across various platforms, is managed and evaluated. With this operational change, the reporting unit is deemed to be the operating segment. The previous reporting units, Turner, Home Box Office, Warner Bros., and Xandr, and the new WarnerMedia reporting unit were tested for goodwill impairment on January 1, 2021, for which there was no impairment identified. As of October 1, 2021, the calculated fair values of the reporting units exceeded their book values in all circumstances; however, the WarnerMedia segment fair value exceeded its book value by less than 10% with increased investment in content and distribution expenses affecting fair value. For all reporting units, if either the projected rate of long-term growth of cash flows or revenues declined by 0.5%, or if the weighted average cost of capital increased by 0.5%, the fair values would still be higher than the book value of the goodwill. In the event of a 10% drop in the fair values of the reporting units, the fair values still would have exceeded the book values of the reporting units. For the WarnerMedia reporting unit as of October 1, 2021, if the projected rate of longer-term growth of cash flows or revenues declined by 4.4%, or if the weighted average cost of capital increased by 0.6%, it would have resulted in impairment of the goodwill. U.S. Wireless Licenses The fair value of U.S. wireless licenses is assessed using a discounted cash flow model (the Greenfield Approach) and a qualitative collaborative market approach based on auction prices, depending upon auction activity. The Greenfield Approach assumes a company initially owns only the wireless licenses and makes investments required to build an operation comparable to current use. These licenses are tested annually for impairment on an aggregated basis, consistent with their use on a national scope for the United States. For impairment testing, we assume subscriber and revenue growth will trend up to projected levels, with a long-term growth rate reflecting expected long-term inflation trends. We assume churn rates will initially exceed our current experience but decline to rates that are in line with industry-leading churn. We used a discount rate of 9.25%, based on the optimal long-term capital structure of a market participant and its associated cost of debt and equity for the licenses, to calculate the present value of the projected cash flows. If either the projected rate of long-term growth of cash flows or revenues declined by 0.5%, or if the discount rate increased by 0.5%, the fair values of these wireless licenses would still be higher than the book value of the licenses. The fair value of these wireless licenses exceeded their book values by more than 10%. Other Finite-Lived Intangibles Customer relationships, licenses in Mexico and other finite-lived intangible assets are reviewed for impairment whenever events or circumstances indicate that the book value may not be recoverable over their remaining life. For this analysis, we compare the expected undiscounted future cash flows attributable to the asset to its book value. When the asset’s book value exceeds undiscounted future cash flows, an impairment is recorded to reduce the book value of the asset to its estimated fair value (see Notes 7 and 9). Vrio Business In the second quarter of 2021, we classified the Vrio disposal group as held-for-sale and reported the disposal group at fair value less cost to sell, which resulted in a noncash, pre-tax impairment charge of $4,555, including approximately $2,100 related to accumulated foreign currency translation adjustments and $2,500 related to property, plant and equipment and intangible assets. Approximately $80 of the impairment was attributable to noncontrolling interest. Vrio was sold in November 2021, resulting in the release of the accumulated foreign currency translation adjustments from accumulated other comprehensive income. (See Notes 3, 7 and 9) Income Taxes Our estimates of income taxes and the significant items giving rise to the deferred assets and liabilities are shown in Note 14 and reflect our assessment of actual future taxes to be paid on items reflected in the financial statements, giving consideration to both timing and probability of these estimates. Actual income taxes could vary from these estimates due to future changes in income tax law or the final review of our tax returns by federal, state or foreign tax authorities. We use our judgment to determine whether it is more likely than not that we will sustain positions that we have taken on tax returns and, if so, the amount of benefit to initially recognize within our financial statements. We regularly review our uncertain tax positions and adjust our unrecognized tax benefits (UTBs) in light of changes in facts and circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law. These adjustments to our UTBs may affect our income tax expense. Settlement of uncertain tax positions may require use of our cash. New Accounting Standards See Note 1 for discussion of recently issued or adopted accounting standards. 46 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] OTHER BUSINESS MATTERS Spectrum Auction On February 24, 2021, the FCC announced that AT&T was the winning bidder for 1,621 C-Band licenses, comprised of a total of 80 MHz nationwide, including 40 MHz in Phase I. We provided to the FCC an upfront deposit of $550 in 2020 and cash payments totaling $22,856 in the first quarter of 2021, for a total of $23,406. We received the licenses in July 2021 and classified the auction deposits, related capitalized interest and billed relocation costs as “Licenses – Net” on our December 31, 2021 consolidated balance sheet. In December 2021, we paid $955 of Incentive Payments for the clearing of Phase I spectrum and estimate that we will be responsible for an additional $2,112 upon clearing of Phase II spectrum, expected by the end of 2023. Additionally, we are responsible for approximately $1,000 of compensable relocation costs over the next several years as the spectrum is being cleared by satellite operators, of which $650 was paid in the fourth quarter of 2021. On January 14, 2022, the FCC announced that we were the winning bidder for 1,624 3.45 GHz licenses in Auction 110. We provided the FCC an upfront deposit of $123 in the third quarter of 2021 and will pay the remaining $8,956 in the first quarter of 2022, for a total of $9,079. We intend to fund the purchase price using cash and short-term investments. Video Business On July 31, 2021, we closed our transaction with TPG to form a new company named DIRECTV, which is jointly governed by a board with representation from both AT&T and TPG, with TPG having tie-breaking authority on certain key decisions. With the close of the transaction, we separated our Video business, comprised of our U.S. video operations, and began accounting for our investment in DIRECTV under the equity method. In connection with the transaction, we contributed our U.S. Video business unit to DIRECTV for $4,250 of junior preferred units, an additional distribution preference of $4,200 and a 70% economic interest in common units (collectively “equity considerations”). Upon close, we received approximately $7,170 in cash from DIRECTV ($7,600, net of $430 cash on hand) and transferred $195 of DIRECTV debt. TPG contributed approximately $1,800 in cash to DIRECTV for $1,800 of senior preferred units and a 30% economic interest in common units. As part of this transaction, we agreed to cover net losses under the NFL SUNDAY TICKET contract up to a cap of $2,100 over the remaining period of the contract, of which $1,800 was a note payable to DIRECTV. Under separate transition services agreements, we will provide DIRECTV certain operational support for up to three years. We also have entered into commercial arrangements, for up to five years, to provide network transport for U-verse products and sales services. WarnerMedia On May 17, 2021, we entered into an agreement to combine our WarnerMedia segment, subject to certain exceptions, with a subsidiary of Discovery, Inc. (Discovery). The agreement is structured as a Reverse Morris Trust transaction, under which WarnerMedia will be distributed to AT&T’s shareholders via a pro rata dividend, an exchange offer, or a combination of both, followed by its combination with Discovery. The transaction is expected to be tax-free to AT&T and AT&T’s shareholders. AT&T will receive approximately $43,000 (subject to working capital and other adjustments) in a combination of cash, debt securities, and WarnerMedia’s retention of certain debt. AT&T’s shareholders will receive stock representing approximately 71% of the new company; Discovery shareholders will own approximately 29% of the new company. On February 1, 2022, we announced that we will structure the distribution as a spin-off rather than an exchange offer. Upon closing of the transaction, each AT&T shareholder will receive, on a tax-free basis, an estimated 0.24 shares of the new company for each share of AT&T common stock held as of the record date for the pro rata distribution. The exact number of shares to be received by AT&T shareholders for each AT&T common share will be determined closer to the closing based on the number of shares of AT&T common stock outstanding and the number of shares of Discovery common stock outstanding on an as-converted and as-exercised basis. AT&T shareholders will continue to hold the same number of shares of AT&T common stock after the transaction closes. The transaction is expected to close in the second quarter of 2022, subject to approval by Discovery shareholders and customary closing conditions, including receipt of regulatory approvals. No vote is required by AT&T shareholders. Upon close of the transaction, WarnerMedia will be deconsolidated. The merger agreement contains certain customary termination rights for AT&T and Discovery, including, without limitation, a right for either party to terminate if the transaction is not completed on or before July 15, 2023. Termination fees under specified circumstances will require Discovery to pay AT&T $720 or AT&T to pay Discovery $1,770. Magallanes, Inc. (Spinco), a subsidiary of AT&T, entered into a $41,500 commitment letter (Bridge Loan) on May 17, 2021. On June 4, 2021, Spinco entered into a $10,000 term loan credit agreement (Spinco Term Loan) and reduced the aggregate commitment amount under the Bridge Loan to $31,500. There have been no draws on the Bridge Loan or the Spinco Term Loan. In the event advances are made under the Bridge Loan or Spinco Term Loan, those advances will be used by Spinco to finance a portion of the cash distribution to AT&T in connection with the transaction. 47 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] On September 20, 2021, we sold WarnerMedia’s mobile games app studio, Playdemic Ltd. for approximately $1,370 in cash and recognized a pre-tax gain of $706. Playdemic was excluded from the pending WarnerMedia/Discovery transaction. On December 21, 2021, we entered into an agreement to sell the marketplace component of Xandr, our WarnerMedia advertising business that was not included in the WarnerMedia/Discovery transaction, to Microsoft, which is expected to close in 2022, subject to customary regulatory approvals. Vrio On November 15, 2021, we sold our Latin America video operations, Vrio, to Grupo Werthein. In the second quarter of 2021, we classified the Vrio disposal group as held-for-sale and reported the disposal group at fair value less cost to sell, which resulted in a noncash, pre-tax impairment charge of $4,555, including approximately $2,100 related to accumulated foreign currency translation adjustments and $2,500 related to property, plant and equipment and intangible assets. Approximately $80 of the impairment was attributable to noncontrolling interest. We retained our 41.3% interest in SKY Mexico, a leading pay-TV provider in Mexico. Labor Contracts As of January 31, 2022, we employed approximately 203,000 persons. Approximately 37% of our employees are represented by the Communications Workers of America (CWA), the International Brotherhood of Electrical Workers (IBEW) or other unions. After expiration of the collective bargaining agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached. The main contracts included the following: •A contract covering approximately 12,000 Mobility employees in 36 states and the District of Columbia is set to expire in February 2022. •A contract covering approximately 6,000 wireline employees in five Midwest states that was set to expire in April 2022 was extended for a four-year period until April 2026. •A contract covering approximately 3,000 MW IBEW employees is set to expire in June 2022. •A contract covering approximately 2,000 AT&T Corp. employees nationwide that was set to expire in April 2022 was extended for a four-year period until April 2026. •A contract covering approximately 170 Teamsters Alascom employees in Alaska is set to expire in February 2022. Environmental We are subject from time to time to judicial and administrative proceedings brought by various governmental authorities under federal, state or local environmental laws. We reference in our Forms 10-Q and 10-K certain environmental proceedings that could result in monetary sanctions (exclusive of interest and costs) of three hundred thousand dollars or more. However, we do not believe that any of those currently pending will have a material adverse effect on our results of operations. LIQUIDITY AND CAPITAL RESOURCES [[GREPCENT_TABLE]] [["For the years ended December 31,","2021","2020","2019"],["Cash provided by operating activities","$","41,957","","$","43,130","","$","48,668"],["Cash used in investing activities","(32,089)","","(13,548)","","(16,690)"],["Cash provided by (used in) financing activities","1,578","","(32,007)","","(25,083)"],["At December 31,","2021","2020"],["Cash and cash equivalents","$","21,169","","$","9,740"],["Total debt","177,354","","157,245"]] [[/GREPCENT_TABLE]] We had $21,169 in cash and cash equivalents available at December 31, 2021. Cash and cash equivalents included cash of $5,204 and money market funds and other cash equivalents of $15,965. Approximately $2,706 of our cash and cash equivalents were held by our foreign entities in accounts predominantly outside of the U.S. and may be subject to restrictions on repatriation. Cash and cash equivalents increased $11,429 since December 31, 2020. In 2021, cash inflows were primarily provided by cash receipts from operations, including cash from our sale and transfer of our receivables to third parties, the disposition of businesses, including our recently completed U.S. video business transaction, and issuance of long-term debt and commercial paper. 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 significant availability under our credit facilities and our commercial paper program to meet our short-term liquidity requirements. 48 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] Our cash and debt management will be impacted by the WarnerMedia/Discovery transaction. During this time, we plan to maintain cash and cash equivalent balances above historical thresholds. Refer to “Contractual Obligations” discussion below for additional information regarding our cash requirements, including payments required for Auction 110 which was completed in January 2022. We will make the remaining payment of $8,956 for Auction 110 spectrum in the first quarter of 2022, funded with cash and short-term investments. Cash Provided by or Used in Operating Activities During 2021, cash provided by operating activities was $41,957 compared to $43,130 in 2020, reflecting higher content investment and the separation of the U.S. video business, partially offset by higher receivable securitizations in 2021. Total cash paid for WarnerMedia’s content investment was $19,164 in 2021, an increase of $4,266 over 2020. 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 improve cash from operating activities $25 in 2021 and $432 in 2020. All supplier financing payments are due within one year. Cash Used in or Provided by Investing Activities During 2021, cash used in investing activities totaled $32,089, and consisted primarily of $16,527 (including interest during construction) for capital expenditures, and acquisitions of $25,453, which includes C-Band spectrum licenses won in Auction 107, associated capitalized interest, clearing and compensable relocation costs. Investing activities also included cash receipts of approximately $5,370 (excluding cash on hand and $1,800 of financing activities) from the separation of our Video business and $2,910 from the sale of Otter Media assets and Playdemic. In 2021, we received a return of investment of $1,323 from DIRECTV representing distributions in excess of cumulative equity in earnings from DIRECTV (see Note 10). On January 14, 2022, the FCC announced that we were the winning bidder for 1,624 3.45 GHz licenses in Auction 110. We provided the FCC an upfront deposit of $123 in the third quarter of 2021 and will pay the remaining $8,956 in the first quarter of 2022, for a total of $9,079. We intend to fund the purchase price using cash and short-term investments. (See Note 6) 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. Vendor financing payments were $4,596 in 2021, compared to $2,966 in 2020. Capital expenditures in 2021 were $16,527, and when including $4,596 cash paid for vendor financing and excluding $515 of FirstNet reimbursements, gross capital investment was $21,638 ($1,934 higher than the prior year). The vast majority of our capital expenditures are spent on our networks, including product development and related support systems. In 2021, we placed $5,282 of equipment in service under vendor financing arrangements (compared to $4,664 in 2020) and approximately $750 of assets related to the FirstNet build (compared to $1,230 in 2020). Total reimbursements from the government for FirstNet were $865 for 2021 and $1,626 for 2020, predominantly for capital expenditures. The amount of our capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. In 2022, we expect that our gross capital investment, which includes capital expenditures and cash paid for vendor financing, will be in the $24,000 range with capital expenditures in the $20,000 range. Cash Used in or Provided by Financing Activities In 2021, cash provided by financing activities totaled $1,578 and was comprised of debt issuances and repayments, payments of dividends, and vendor financing payments. We also paid approximately $459 in cash on the $1,800 note payable to DIRECTV (see Note 6 and Note 20). 49 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] A tabular summary of our debt activity during 2021 is as follows: [[GREPCENT_TABLE]] [["","First Quarter","Second Quarter","Third Quarter","Fourth Quarter","Full Year 2021"],["Net commercial paper borrowings1","$","7,072","","$","(513)","","$","(2)","","$","4","","$","6,561"],["Issuance of Notes and Debentures2:"],["U.S. dollar denominated global notes","$","6,000","","$","\u2014","","$","\u2014","","$","\u2014","","$","6,000"],["Initial average rate of 1.27%"],["Euro denominated global notes (converted to USD at issuance)","1,461","","\u2014","","\u2014","","\u2014","","1,461"],["Rate of 0.00%"],["2021 Syndicated Term Loan","7,350","","\u2014","","\u2014","","\u2014","","7,350"],["BAML Bilateral Term Loan","2,000","","\u2014","","\u2014","","\u2014","","2,000"],["Private financing","750","","\u2014","","\u2014","","\u2014","","750"],["Other","636","","\u2014","","835","","\u2014","","1,471"],["Debt Issuances","$","18,197","","$","\u2014","","$","835","","$","\u2014","","$","19,032"],["Repayments:"],["Private financing","$","(649)","","$","\u2014","","$","\u2014","","$","\u2014","","$","(649)"],["2.650% Euro denominated global notes due 2021","\u2014","","\u2014","","\u2014","","(1,349)","","(1,349)"],["Other","(253)","","(253)","","(498)","","(140)","","(1,144)"],["Repayments of long-term debt","$","(902)","","$","(253)","","$","(498)","","$","(1,489)","","$","(3,142)"],["1Includes $1,316 net issuance of commercial paper with original maturities of three months or less, $12,755 of commercial paper issued greater than 90 days and $7,510 of commercial paper repaid greater than 90 days."],["2 Includes credit agreement borrowing."]] [[/GREPCENT_TABLE]] The weighted average interest rate of our long-term debt portfolio, including, credit agreement borrowings and the impact of derivatives, was approximately 3.8% as of December 31, 2021 and 4.1% as of December 31, 2020. We had $169,147 of total notes and debentures outstanding at December 31, 2021, which included Euro, British pound sterling, Canadian dollar, Mexican peso, Australian dollar, and Swiss franc denominated debt that totaled approximately $41,249. At December 31, 2021, we had $24,630 of debt maturing within one year, consisting of $6,586 of commercial paper borrowings, $10,100 of credit agreement borrowings, and $7,944 of long-term debt issuances. During 2021, we paid $4,596 of cash under our vendor financing program, compared to $2,966 in 2020. Total vendor financing payables included in our December 31, 2021 consolidated balance sheet were approximately $5,000, with $3,950 due within one year (in “Accounts payable and accrued liabilities”) and the remainder predominantly due within five years (in “Other noncurrent liabilities”). At December 31, 2021, we had approximately 178 million shares remaining from our share repurchase authorizations approved by the Board of Directors in 2014. We paid dividends on common shares and preferred shares of $15,068 in 2021, compared with $14,956 in 2020. Dividends on common stock declared by our Board of Directors totaled $2.08 per share in both 2021 and 2020. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of AT&T and long-term growth opportunities. On February 1, 2022, we announced that our Board of Directors approved an expected annual dividend level of $1.11 per share, or approximately $8,000 per year, following the close of the WarnerMedia/Discovery transaction. Our 2022 financing activities will focus on managing our debt level and paying dividends, subject to approval by our Board of Directors. We plan to fund our financing uses of cash through a combination of cash from operations, issuance of debt, and asset sales. The timing and mix of any debt issuance and/or refinancing will be guided by credit market conditions and interest rate trends. 50 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] Credit Facilities The following summary of our various credit and loan agreements does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form 10-K. We use credit facilities as a tool in managing our liquidity status. In November 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 on December 11, 2023 and the other terminating on November 17, 2025. No amounts were outstanding under either agreement as of December 31, 2021. On January 29, 2021, we entered into a $14,700 Term Loan Credit Agreement (2021 Syndicated Term Loan), with Bank of America, N.A., as agent. On March 23, 2021, we borrowed $7,350 under the 2021 Syndicated Term Loan, and the remaining $7,350 of lenders’ commitments was terminated. As of December 31, 2021, $7,350 was outstanding and is due on March 22, 2022. In March 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 due December 31, 2021 (BAML Tranche A Facility) and subsequently extended to December 31, 2022 in the fourth quarter of 2021, and (ii) a $1,000 facility due December 31, 2022 (BAML Tranche B Facility), with Bank of America, N.A., as agent. At December 31, 2021, $2,000 was outstanding under these facilities. 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 requiring AT&T to maintain, as of the last day of each fiscal quarter through June 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 of December 31, 2021, we were in compliance with the covenants for our credit facilities. Collateral Arrangements Most of our counterparty collateral arrangements require cash collateral posting by AT&T only when derivative market values exceed certain thresholds. Under these arrangements, which cover approximately 97% of our approximate $41,000 derivative portfolio, counterparties are still required to post collateral. During 2021, we posted approximately $770 of cash collateral, on a net basis. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 13) Other Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders’ equity. Our capital structure does not include debt issued by our equity method investments. At December 31, 2021, our debt ratio was 49.1%, compared to 46.7% at December 31, 2020 and 44.7% at December 31, 2019. Our net debt ratio was 43.2% at December 31, 2021, compared to 43.8% at December 31, 2020 and 41.4% at December 31, 2019. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments. A significant amount of our cash outflows is related to tax items, acquisition of spectrum through FCC auctions and benefits paid for current and former employees: •Total taxes incurred, collected and remitted by AT&T during 2021 and 2020, were $21,739 and $21,967. These taxes include income, franchise, property, sales, excise, payroll, gross receipts and various other taxes and fees. •Total domestic spectrum acquired primarily through FCC auctions, including cash, exchanged spectrum and auction deposits was approximately $25,400 in 2021, $2,800 in 2020 and $1,300 in 2019. •Total health and welfare benefits provided to certain active and retired employees and their dependents totaled $3,617 in 2021 and $3,656 in 2020, with $1,163 paid from plan assets in 2021 compared to $1,029 in 2020. Of those benefits, $3,210 related to medical and prescription drug benefits in 2021 compared to $3,293 in 2020. In addition, in 2021, we prefunded $685 for future benefit payments versus $745 in 2020. We paid $5,942 of pension benefits out of plan assets in 2021 compared to $5,124 in 2020. On May 17, 2021, we entered into an agreement to combine our WarnerMedia segment with a subsidiary of Discovery. The transaction is anticipated to close in the second quarter of 2022, subject to approval by Discovery shareholders and customary closing conditions, including receipt of regulatory approvals. We expect to receive $43,000 (subject to working capital and other adjustments) in a combination of cash, debt securities, and WarnerMedia’s retention of certain debt. (See Note 6) 51 [[GREPCENT_TABLE]] [["AT&T Inc."],["Dollars in millions except per share amounts"]] [[/GREPCENT_TABLE]] On May 17, 2021, in anticipation of the separation of WarnerMedia business from us, Spinco entered into a $41,500 commitment letter (Bridge Loan). On June 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), with JPMorgan 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 $31,500. No amounts were outstanding as of December 31, 2021. Contractual Obligations Our contractual obligations as of December 31, 2021, and the estimated timing of payment, are in the following table: [[GREPCENT_TABLE]] [["","Payments Due By Period"],["","Total","Less than1 Year","1-3Years","3-5Years","More than 5 Years"],["Long-term debt obligations1","$","181,449","","$","18,185","","$","19,301","","$","17,041","","$","126,922"],["Interest payments on long-term debt2","117,454","","6,710","","12,624","","11,400","","86,720"],["Purchase obligations3","77,621","","28,860","","24,585","","11,636","","12,540"],["Operating lease obligations4","29,852","","4,922","","8,472","","5,772","","10,686"],["FirstNet sustainability payments5","17,400","","195","","390","","1,785","","15,030"],["Unrecognized tax benefits6","10,108","","268","","\u2014","","\u2014","","9,840"],["Other finance obligations7","12,724","","4,635","","2,414","","1,524","","4,151"],["Note payable to DIRECTV","1,341","","1,245","","96","","\u2014","","\u2014"],["Total Contractual Obligations","$","447,949","","$","65,020","","$","67,882","","$","49,158","","$","265,889"]] [[/GREPCENT_TABLE]] 1Represents principal or payoff amounts of notes, debentures and credit agreement borrowings at maturity or, for puttable debt, the next put opportunity (see Note 12). Foreign debt includes the impact from hedges, when applicable. 2Includes credit agreement borrowings. 3We expect to fund the purchase obligations with cash provided by operations or through incremental borrowings. Consists of commitments primarily related to network programming at WarnerMedia, spectrum acquisitions and other commercial commitments. The minimum commitment for certain obligations is based on termination penalties that could be paid to exit the contracts. (See Note 22) 4Represents operating lease payments (see Note 8). 5Represents contractual commitment to make sustainability payments over the 25-year contract. These sustainability payments represent our commitment to fund FirstNet’s operating expenses and future reinvestment in the network, which we own and operate. FirstNet has a statutory requirement to reinvest funds that exceed the agency’s operating expenses, which we anticipate to be $15,000. (See Note 21) 6The noncurrent portion of the UTBs is included in the “More than 5 Years” column, as we cannot reasonably estimate the timing or amounts of additional cash payments, if any, at this time (see Note 14). 7Represents future minimum payments under the Crown Castle and other arrangements (see Note 19), payables subject to extended payment terms (see Note 23) and finance lease payments (see Note 8). Certain items were excluded from this table, as the year of payment is unknown and could not be reliably estimated since past trends were not deemed to be an indicator of future payment, we believe the obligations are immaterial or because the settlement of the obligation will not require the use of cash. These items include: deferred income tax liability of $65,226 (see Note 14); net postemployment benefit obligations of $13,927 (including current portion); and other noncurrent liabilities of $13,409. Contractual obligations at December 31, 2021 include approximately $36,912 of commitments related to our WarnerMedia segment, which we have entered into an agreement to combine with Discovery (see Note 6).