AT&T INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts COMPETITIVE AND REGULATORY ENVIRONMENT Overview AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided. In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. Nonetheless, over the ensuing two decades, the FCC and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. 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, including California, that would reimpose net neutrality rules similar to those repealed by the FCC. The California statute is now in effect, and challenges regarding other states’ net neutrality laws are pending. We expect that going forward additional states may seek to impose net neutrality requirements. 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, including $42,500 administered by the National Telecommunications and Information Agency (NTIA) in state grants for broadband deployment projects, $1,000 for middle mile broadband infrastructure, and $1,500 for digital equity programs. The IIJA also appropriated $14,200 for establishment of the Affordable Connectivity Program (ACP), an FCC-administered monthly, low-income broadband benefit program. The ACP provides qualifying customers up to thirty dollars per month (or seventy-five dollars per month for those on Tribal lands) to assist with their internet bill. These funds are in addition to or replacements for other significant pandemic-related funds designated or that could be used for broadband deployment and subscription. AT&T is a participating provider in the ACP program and is participating in deployment programs where appropriate. Absent additional funding, at present pace the ACP fund will likely exhaust in 2024. Privacy-related legislation continues to be adopted or considered in a number of jurisdictions, including at the federal level. 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. 40 AT&T INC. JUNE 30, 2023 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts Wireless During 2020-2021, we 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 and 3.45 GHz spectrum in 2022 and beyond. Additional spectrum will be needed industrywide for 5G and future services. The federal government is developing a national spectrum strategy but its ability and intent to make sufficient spectrum available to the industry in needed timeframes remains uncertain. LIQUIDITY AND CAPITAL RESOURCES Continuing operations for six months ended June 30, 2023 2022 Cash provided by operating activities $ 16,600 $ 15,370 Cash used in investing activities (9,241) (17,311) Cash used in financing activities (1,530) (49,464) June 30, December 31, 2023 2022 Cash and cash equivalents $ 9,528 $ 3,701 Total debt 143,280 135,890 We had $9,528 in cash and cash equivalents available at June 30, 2023, increasing $5,827 since December 31, 2022. Cash and cash equivalents included cash of $1,049 and money market funds and other cash equivalents of $8,479. Approximately $1,215 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. For the first six months of 2023, cash inflows were primarily provided by cash receipts from operations, including cash from our sale and transfer of our receivables to third parties, issuance of commercial paper, long-term debt and cumulative preferred interests in subsidiaries and distributions from DIRECTV. These inflows exceeded cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, funding capital expenditures and vendor financing payments, repayment of short-term borrowings and long-term debt, repurchase of the Series A Cumulative Perpetual Preferred Membership Interests in AT&T Mobility II LLC (Mobility preferred interests) and dividend payments to stockholders. We maintain availability under our credit facilities and our commercial paper program to meet our short-term liquidity requirements. Cash Provided by Operating Activities from Continuing Operations During the first six months of 2023, cash provided by operating activities was $16,600, compared to $15,370 for the first six months of 2022, reflecting operational growth and a focus to lower working capital programs, which resulted in lower device payments partially offset by lower receivable sales, net of remittances (see Note 8). 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 (referred to as supplier financing program). In addition, for payments to suppliers of handset inventory, as part of our working capital initiatives, we have arrangements that allow us to extend the stated payment terms by up to 90 days at an additional cost to us (referred to as direct supplier financing). The net impact of direct supplier financing was to decrease cash from operating activities $2,100 and $916 for the six months ended June 30, 2023 and 2022, respectively. All direct supplier financing payments are due within one year. (See Note 11) Cash Used in or Provided by Investing Activities from Continuing Operations For the first six months of 2023, cash used in investing activities totaled $9,241 and consisted primarily of $8,605 (including interest during construction) for capital expenditures. During the first six months of 2023, we received a return of investment of $974 from DIRECTV representing distributions in excess of cumulative equity in earnings from DIRECTV (see Note 10). We expect to pay approximately $2,100 of spectrum clearing costs in the second half of 2023, which we report as “Acquisitions, net of cash acquired” on our consolidated statements of cash flows. 41 AT&T INC. JUNE 30, 2023 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts For capital improvements, we have negotiated favorable vendor payment terms of 120 days or more (referred to as vendor financing) with some of our vendors, which are excluded from capital expenditures and reported as financing activities. For the first six months of 2023, vendor financing payments were $3,756, compared to $3,337 for the first six months of 2022. Capital expenditures for the first six months of 2023 were $8,605, and when including $3,756 cash paid for vendor financing, capital investment was $12,361 ($452 lower than the prior-year comparable period). The vast majority of our capital expenditures are spent on our networks, including product development and related support systems. During the first six months of 2023, we placed $1,341 of equipment in service under vendor financing arrangements (compared to $2,012 in the prior-year comparable period). The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. Cash Provided by or Used in Financing Activities from Continuing Operations For the first six months of 2023, cash used in financing activities totaled $1,530 and was comprised of debt issuances and repayments, issuances and repurchase of preferred interests in subsidiaries, payments of dividends and vendor financing payments. A tabular summary of our debt activities for the six months ended June 30, 2023 is as follows: First Quarter Second Quarter Six months ended June 30, 2023 Net commercial paper borrowings $ 2,341 $ 1,284 $ 3,625 Issuance of Notes and Debentures: USD notes $ 1,747 $ 2,730 $ 4,477 Euro notes 1,319 3,537 4,856 Other 1,050 — 1,050 Debt Issuances $ 4,116 $ 6,267 $ 10,383 Repayments: Private financing $ — $ (750) $ (750) Repayment of other short-term borrowings $ — $ (750) $ (750) USD notes $ (376) $ (750) $ (1,126) Euro notes (1,626) (473) (2,099) 2025 Term Loan (2,500) — (2,500) Other (1,443) (441) (1,884) Repayments of long-term debt $ (5,945) $ (1,664) $ (7,609) The weighted average interest rate of our long-term debt portfolio, including credit agreement borrowings and the impact of derivatives, was approximately 4.1% as of June 30, 2023 and as of December 31, 2022. We had $136,629 of total notes and debentures outstanding at June 30, 2023. This also included Euro, British pound sterling, Canadian dollar, Australian dollar, and Swiss franc denominated debt that totaled approximately $38,261. At June 30, 2023, we had $15,268 of debt maturing within one year, consisting of $4,619 of commercial paper borrowings and $10,649 of long-term debt issuances. The weighted average interest rate on our outstanding short-term borrowings was approximately 5.9% as of June 30, 2023 and 4.8% as of December 31, 2022. For the first six months of 2023, we paid $3,756 of cash under our vendor financing program, compared to $3,337 in the prior-year comparable period. Total vendor financing payables included in our June 30, 2023 consolidated balance sheet were $3,587, with $2,177 due within one year (in “Accounts payable and accrued liabilities”) and the remainder predominantly due within five years (in “Other noncurrent liabilities”). 42 AT&T INC. JUNE 30, 2023 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts At June 30, 2023, we had approximately 144 million shares remaining from our share repurchase authorizations approved by the Board of Directors in 2014. We paid dividends on common and preferred shares of $4,097 during the first six months of 2023, compared with $5,835 for the first six months of 2022. Dividends on common stock declared by our Board of Directors totaled $0.5550 per share in the first six months of 2023 and 2022. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of AT&T and long-term growth opportunities. In April 2023, we expanded our September 2020 sale of Telco LLC cumulative preferred interests and issued an additional $5,250 of nonconvertible cumulative preferred interests (April preferreds). The April preferreds pay an initial preferred distribution of 6.85% annually, subject to declaration, and subject to reset on November 1, 2027, and every seven years thereafter. (See Note 12) In April 2023, we also accepted the December 2022 put option notice from the AT&T pension trust and repurchased the remaining 213 million Mobility preferred interests for a purchase price, including accrued and unpaid distributions, of $5,414. The Mobility preferred interests had a redemption value of $5,320, with approximately $2,650 removed from “Accounts payable and accrued liabilities” and $2,670 removed from “Other noncurrent liabilities.” The repurchase was primarily funded with proceeds from the April 2023 issuances of Telco LLC preferred interests. (See Note 12) In June 2023, we issued $2,000 of Series B Cumulative Perpetual Preferred Membership Interests in Mobility II LLC (Mobility noncontrolling interests), which pay cash distributions of 6.8% per annum, subject to declaration. The Mobility noncontrolling interests are included in “Redeemable Noncontrolling Interest” on the consolidated balance sheets. (See Note 12) 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. We currently have one $12,000 revolving credit agreement that terminates on November 18, 2027 (Revolving Credit Agreement). No amount was outstanding under the Revolving Credit Agreement as of June 30, 2023. In November 2022, we entered into and drew on a $2,500 term loan agreement due February 16, 2025 (2025 Term Loan), with Mizuho Bank, Ltd., as agent. On March 30, 2023, the 2025 Term Loan was paid off and terminated. 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, a ratio of not more than 3.75-to-1. As of June 30, 2023, 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 the majority of our approximate $43,400 derivative portfolio, counterparties are still required to post collateral. During the first six months of 2023, we received approximately $180 of cash collateral, on a net basis. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 7) Other Our total capital consists of debt (long-term debt and debt maturing within one year), redeemable noncontrolling interest and stockholders’ equity. Our capital structure does not include debt issued by our equity method investments. At June 30, 2023, our debt ratio was 54.8%, compared to 50.1% at June 30, 2022 and 56.1% at December 31, 2022. The debt ratio is affected by 43 AT&T INC. JUNE 30, 2023 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations- Continued Dollars in millions except per share amounts the same factors that affect total capital, and reflects our recent debt issuances, repayments and reclassifications related to redemption of noncontrolling interests.