10-Q 1 q1_10q.htm AT&T 2016 FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
                                                       
(Mark One)
 
x
 
 
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2016
 
or
 
 
 
o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
       
For the transition period from          to

Commission File Number 1-8610

AT&T INC.

Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883

208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210) 821-4105


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
                                                                                                                                                                        Yes [X]    No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
                                                                                                                                                               Yes [X]   No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
[X]
 
Accelerated filer
[   ]
Non-accelerated filer
[   ]
(Do not check if a smaller reporting company)
Smaller reporting company
[   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
                                                                                                                                                                            Yes [   ]   No [X]

At April 30, 2016, there were 6,156 million common shares outstanding.

 
PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements

AT&T INC.
 
CONSOLIDATED STATEMENTS OF INCOME
 
Dollars in millions except per share amounts
 
(Unaudited)
 
   
Three Months Ended
 
   
March 31,
 
   
2016
   
2015
 
             
Operating Revenues
           
Service
 
$
37,101
   
$
28,962
 
Equipment
   
3,434
     
3,614
 
Total operating revenues
   
40,535
     
32,576
 
                 
Operating Expenses
               
Cost of services and sales
               
   Equipment
   
4,375
     
4,546
 
   Broadcast, programming and operations
   
4,629
     
1,122
 
   Other cost of services (exclusive of depreciation
               
     and amortization shown separately below)
   
9,396
     
8,812
 
Selling, general and administrative
   
8,441
     
7,961
 
Depreciation and amortization
   
6,563
     
4,578
 
Total operating expenses
   
33,404
     
27,019
 
Operating Income
   
7,131
     
5,557
 
Other Income (Expense)
               
Interest expense
   
(1,207
)
   
(899
)
Equity in net income of affiliates
   
13
     
-
 
Other income (expense) – net
   
70
     
70
 
Total other income (expense)
   
(1,124
)
   
(829
)
Income Before Income Taxes
   
6,007
     
4,728
 
Income tax expense
   
2,122
     
1,389
 
Net Income
   
3,885
     
3,339
 
Less: Net Income Attributable to Noncontrolling Interest
   
(82
)
   
(76
)
Net Income Attributable to AT&T
 
$
3,803
   
$
3,263
 
Basic Earnings Per Share Attributable to AT&T
 
$
0.62
   
$
0.63
 
Diluted Earnings Per Share Attributable to AT&T
 
$
0.61
   
$
0.63
 
Weighted Average Number of Common Shares Outstanding – Basic (in millions)
   
6,172
     
5,203
 
Weighted Average Number of Common Shares Outstanding – with Dilution (in millions)
   
6,190
     
5,219
 
Dividends Declared Per Common Share
 
$
0.48
   
$
0.47
 
See Notes to Consolidated Financial Statements.
 
             
 
2

AT&T INC.
           
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
           
Dollars in millions
           
(Unaudited)
           
   
Three months ended
 
   
March 31,
 
   
2016
   
2015
 
Net income
 
$
3,885
   
$
3,339
 
Other comprehensive income, net of tax:
               
   Foreign currency:
               
        Foreign currency translation adjustment, net of taxes of $(10) and $(104)
   
(44
)
   
(186
)
   Available-for-sale securities:
               
        Net unrealized gains (losses), net of taxes of $(15) and $19
   
(26
)
   
33
 
        Reclassification adjustment included in net income, net of taxes of $(2) and $(3)
   
(3
)
   
(5
)
   Cash flow hedges:
               
        Net unrealized gains (losses), net of taxes of $67 and $(190)
   
124
     
(354
)
        Reclassification adjustment included in net income, net of taxes of $5 and $4
   
10
     
7
 
   Defined benefit postretirement plans:
               
        Amortization of net prior service credit included in net income, net of taxes of $(131)
             and $(131)
   
(215
)
   
(215
)
Other comprehensive income (loss)
   
(154
)
   
(720
)
Total comprehensive income
   
3,731
     
2,619
 
Less: Total comprehensive income attributable to noncontrolling interest
   
(82
)
   
(76
)
Total Comprehensive Income Attributable to AT&T
 
$
3,649
   
$
2,543
 
See Notes to Consolidated Financial Statements.
               
 
3

AT&T INC.
 
CONSOLIDATED BALANCE SHEETS
 
Dollars in millions except per share amounts
 
   
March 31,
   
December 31,
 
   
2016
   
2015
 
Assets
 
(Unaudited)
       
Current Assets
           
Cash and cash equivalents
 
$
10,008
   
$
5,121
 
Accounts receivable - net of allowances for doubtful accounts of $697 and $704
   
16,070
     
16,532
 
Prepaid expenses
   
1,378
     
1,072
 
Other current assets
   
10,545
     
13,267
 
Total current assets
   
38,001
     
35,992
 
Property, plant and equipment
   
309,380
     
306,227
 
   Less: accumulated depreciation and amortization
   
(185,926
)
   
(181,777
)
Property, Plant and Equipment – Net
   
123,454
     
124,450
 
Goodwill
   
104,651
     
104,568
 
Licenses
   
94,130
     
93,093
 
Customer Lists and Relationships - Net
   
17,197
     
18,208
 
Other Intangible Assets – Net
   
9,108
     
9,409
 
Investments in Equity Affiliates
   
1,594
     
1,606
 
Other Assets
   
15,503
     
15,346
 
Total Assets
 
$
403,638
   
$
402,672
 
                 
Liabilities and Stockholders' Equity
               
Current Liabilities
               
Debt maturing within one year
 
$
8,399
   
$
7,636
 
Accounts payable and accrued liabilities
   
26,169
     
30,372
 
Advanced billing and customer deposits
   
4,550
     
4,682
 
Accrued taxes
   
2,455
     
2,176
 
Dividends payable
   
2,955
     
2,950
 
Total current liabilities
   
44,528
     
47,816
 
Long-Term Debt
   
122,104
     
118,515
 
Deferred Credits and Other Noncurrent Liabilities
               
Deferred income taxes
   
57,489
     
56,181
 
Postemployment benefit obligation
   
34,114
     
34,262
 
Other noncurrent liabilities
   
20,998
     
22,258
 
Total deferred credits and other noncurrent liabilities
   
112,601
     
112,701
 
                 
Stockholders' Equity
               
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2016 and
               
   December 31, 2015: issued 6,495,231,088 at March 31, 2016 and December 31, 2015)
   
6,495
     
6,495
 
Additional paid-in capital
   
89,414
     
89,763
 
Retained earnings
   
34,506
     
33,671
 
Treasury stock (339,006,986 at March 31, 2016 and 350,291,239
               
   at December 31, 2015, at cost)
   
(12,163
)
   
(12,592
)
Accumulated other comprehensive income
   
5,180
     
5,334
 
Noncontrolling interest
   
973
     
969
 
Total stockholders' equity
   
124,405
     
123,640
 
Total Liabilities and Stockholders' Equity
 
$
403,638
   
$
402,672
 
See Notes to Consolidated Financial Statements.
               
 
4

AT&T INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Dollars in millions
 
(Unaudited)
 
   
Three months ended
 
   
March 31,
 
   
2016
   
2015
 
Operating Activities
           
Net income
 
$
3,885
   
$
3,339
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
   Depreciation and amortization
   
6,563
     
4,578
 
   Undistributed earnings from investments in equity affiliates
   
(13
)
   
-
 
   Provision for uncollectible accounts
   
374
     
285
 
   Deferred income tax expense
   
1,346
     
252
 
   Net gain from sale of investments, net of impairments
   
(44
)
   
(33
)
Changes in operating assets and liabilities:
               
      Accounts receivable
   
627
     
739
 
      Other current assets
   
612
     
408
 
      Accounts payable and accrued liabilities
   
(4,006
)
   
(1,817
)
Retirement benefit funding
   
(140
)
   
(140
)
Other - net
   
(1,304
)
   
(873
)
Total adjustments
   
4,015
     
3,399
 
Net Cash Provided by Operating Activities
   
7,900
     
6,738
 
                 
Investing Activities
               
Construction and capital expenditures:
               
   Capital expenditures
   
(4,451
)
   
(3,848
)
   Interest during construction
   
(218
)
   
(123
)
Acquisitions, net of cash acquired
   
(165
)
   
(19,514
)
Dispositions
   
81
     
8
 
Sale of securities, net
   
445
     
1,890
 
Net Cash Used in Investing Activities
   
(4,308
)
   
(21,587
)
                 
Financing Activities
               
Issuance of long-term debt
   
5,978
     
16,572
 
Repayment of long-term debt
   
(2,296
)
   
(596
)
Issuance of treasury stock
   
89
     
8
 
Dividends paid
   
(2,947
)
   
(2,434
)
Other
   
471
     
(2,860
)
Net Cash Provided by Financing Activities
   
1,295
     
10,690
 
Net increase (decrease) in cash and cash equivalents
   
4,887
     
(4,159
)
Cash and cash equivalents beginning of year
   
5,121
     
8,603
 
Cash and Cash Equivalents End of Period
 
$
10,008
   
$
4,444
 
                 
Cash paid (received) during the three months ended March 31 for:
               
   Interest
 
$
1,459
   
$
1,021
 
   Income taxes, net of refunds
 
$
477
   
$
(247
)
See Notes to Consolidated Financial Statements.
               
 
5

AT&T INC.
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
 
Dollars and shares in millions except per share amounts
 
(Unaudited)
 
   
March 31, 2016
   
Shares
   
Amount
 
             
Common Stock
           
Balance at beginning of year
   
6,495
   
$
6,495
 
Issuance of stock
   
-
     
-
 
Balance at end of period
   
6,495
   
$
6,495
 
                 
Additional Paid-In Capital
               
Balance at beginning of year
         
$
89,763
 
Issuance of treasury stock
           
(41
)
Share-based payments
           
(308
)
Balance at end of period
         
$
89,414
 
                 
Retained Earnings
               
Balance at beginning of year
         
$
33,671
 
Net income attributable to AT&T ($0.61 per diluted share)
           
3,803
 
Dividends to stockholders ($0.48 per share)
           
(2,968
)
Balance at end of period
         
$
34,506
 
                 
Treasury Stock
               
Balance at beginning of year
   
(350
)
 
$
(12,592
)
Issuance of treasury stock
   
11
     
429
 
Balance at end of period
   
(339
)
 
$
(12,163
)
                 
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
               
Balance at beginning of year
         
$
5,334
 
Other comprehensive loss attributable to AT&T
           
(154
)
Balance at end of period
         
$
5,180
 
                 
Noncontrolling Interest
               
Balance at beginning of year
         
$
969
 
Net income attributable to noncontrolling interest
           
82
 
Distributions
           
(78
)
Balance at end of period
         
$
973
 
                 
Total Stockholders' Equity at beginning of year
         
$
123,640
 
Total Stockholders' Equity at end of period
         
$
124,405
 
See Notes to Consolidated Financial Statements.
               
 
6

AT&T INC.
MARCH 31, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

Basis of Presentation  Throughout this document, AT&T Inc. is referred to as "AT&T," "we" or the "Company." These consolidated financial statements include all adjustments that are necessary to present fairly the results for the presented interim periods, consisting of normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of those for the full year. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2015.

The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates, including the results of DIRECTV and wireless properties in Mexico for the period from acquisition to the reporting date. Our subsidiaries and affiliates operate in the communications and digital entertainment services industry, providing services and equipment that deliver voice, video and broadband services domestically and internationally.

All significant intercompany transactions are eliminated in the consolidation process. Investments in less than majority-owned subsidiaries and partnerships where we have significant influence are accounted for under the equity method. Earnings from certain investments accounted for using the equity method are included for periods ended within up to one quarter of our period end. We also record our proportionate share of our equity method investees' other comprehensive income (OCI) items, including cumulative translation adjustments.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. Certain amounts have been conformed to the current period's presentation, including our change in accounting to capitalize customer set-up and installations costs and amortize them over the expected economic life of the customer relationship. The consolidated statements of income also include revisions to present "Equipment" and "Broadcast, programming and operations" costs separately from "Other cost of services."

New Accounting Standards

Leases  In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, "Leases (Topic 842)" (ASU 2016-02), which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASU 2016-02 will require lessees to recognize most leases on their balance sheets as liabilities, with corresponding "right-of-use" assets. Leases will be classified as either a finance or an operating lease without relying upon the bright-line tests under current GAAP.

Upon initial evaluation, we believe the key change upon adoption will be the balance sheet recognition. The income statement recognition appears similar to our current methodology.

ASU 2016-02 becomes effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. We have just begun our evaluation of the impact on our financial statements, as well as available adoption methods, but we believe our implementation of the revenue recognition standard discussed below could influence the timing of our adoption of ASU 2016-02.

Revenue Recognition  In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09) and has since modified the standard with ASU 2015-14, "Deferral of the Effective Date," ASU 2016-08, "Revenue from Contracts with Customers (Topic 606):  Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," and ASU 2016-10, "Revenue from Contracts with Customers (Topic 606):  Identifying Performance Obligations and Licensing." These standards replace existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASU 2014-09, as amended, becomes effective for annual reporting periods beginning after December 15, 2017, at which point we plan to adopt the standard.
 
7


AT&T INC.
MARCH 31, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

The FASB allows two adoption methods under ASU 2014-09. Under one method, a company will apply the rules to contracts in all reporting periods presented, subject to certain allowable exceptions. Under the other method, a company will apply the rules to all contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous rules ("modified retrospective method"). We continue to evaluate the impact of the new standard and available adoption methods.

Upon initial evaluation, we believe the key changes in the standard that impact our revenue recognition relate to the allocation of contract revenues between various services and equipment, and the timing of when those revenues are recognized. We are still in the process of evaluating these impacts. As a result of our accounting policy change for customer set-up and installation costs in 2015, we believe under the new standard that the requirement to defer such costs will not result in a significant change to our results. However, the requirement to defer incremental contract acquisition costs and recognize them over the contract period or expected customer life will result in the recognition of a deferred charge on our balance sheets. We cannot currently estimate the impact of this change upon adoption, as the industry continues to undergo changes in how devices and services are sold to customers.

NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for the three months ended March 31, 2016 and 2015, is shown in the table below:

   
Three months ended
 
   
March 31,
 
   
2016
   
2015
 
Numerators
           
Numerator for basic earnings per share:
           
   Net income
 
$
3,885
   
$
3,339
 
   Less:  Net income attributable to noncontrolling interest
   
(82
)
   
(76
)
   Net income attributable to AT&T
   
3,803
     
3,263
 
   Dilutive potential common shares:
               
      Share-based payment
   
4
     
4
 
Numerator for diluted earnings per share
 
$
3,807
   
$
3,267
 
Denominators (000,000)
               
Denominator for basic earnings per share:
               
   Weighted-average number of common shares outstanding
   
6,172
     
5,203
 
   Dilutive potential common shares:
               
      Share-based payment (in shares)
   
18
     
16
 
Denominator for diluted earnings per share
   
6,190
     
5,219
 
Basic earnings per share attributable to AT&T
 
$
0.62
   
$
0.63
 
Diluted earnings per share attributable to AT&T
 
$
0.61
   
$
0.63
 

NOTE 3. OTHER COMPREHENSIVE INCOME

Changes in the balances of each component included in accumulated other comprehensive income (accumulated OCI) are presented below. All amounts are net of tax and exclude noncontrolling interest.

Following our 2015 acquisitions of DIRECTV and wireless businesses in Mexico, we have additional foreign operations that are exposed to fluctuations in the exchange rates used to convert operations, assets and liabilities into U.S. dollars. Since December 31, 2015, when compared to the U.S. dollar, the Brazilian real exchange rate has appreciated 9.3%, the Argentine peso exchange rate has depreciated 13.7% and the Mexican peso exchange rate has depreciated 0.4%.
 
8

AT&T INC.
MARCH 31, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
At March 31, 2016, and for the period ended:
 
                     
 
Foreign
Currency
Translation
Adjustment
 
Net Unrealized
Gains (Losses)
on Available-
for-Sale
Securities
 
Net Unrealized
Gains (Losses)
on Cash Flow
Hedges
 
Defined Benefit
Postretirement
Plans
 
Accumulated
Other
Comprehensive
Income
Balance as of December 31, 2015
$
 (1,198)
 
$
 484 
 
$
 16 
 
$
 6,032 
 
$
 5,334 
Other comprehensive income
   (loss) before reclassifications
 
 (44)
 
 
 (26)
 
 
 124 
 
 
 -   
 
 
 54 
Amounts reclassified
   from accumulated OCI
 
 -   
 
 
 (3)
 
 
 10 
 
 
 (215)
 
 
 (208)
Net other comprehensive
   income (loss)
 
 (44)
 
 
 (29)
 
 
 134 
 
 
 (215)
 
 
 (154)
Balance as of March 31, 2016
$
 (1,242)
 
$
 455 
 
$
 150 
 
$
 5,817 
 
$
 5,180 
 
                             
At March 31, 2015, and for the period ended:
 
                     
 
Foreign
Currency
Translation
Adjustment
 
Net Unrealized
Gains (Losses)
on Available-
for-Sale
Securities
 
Net Unrealized
Gains (Losses)
on Cash Flow
Hedges
 
Defined Benefit
Postretirement
Plans
 
Accumulated
Other
Comprehensive
Income
Balance as of December 31, 2014
$
 (26)
 
$
 499 
 
$
 741 
 
$
 6,847 
 
$
 8,061 
Other comprehensive income
   (loss) before reclassifications
 
 (186)
 
 
 33 
 
 
 (354)
 
 
 -   
 
 
 (507)
Amounts reclassified
   from accumulated OCI
 
 -   
 
 
 (5)
 
 
 7 
 
 
 (215)
 
 
 (213)
Net other comprehensive
   income (loss)
 
 (186)
 
 
 28 
 
 
 (347)
 
 
 (215)
 
 
 (720)
Balance as of March 31, 2015
$
 (212)
 
$
 527 
 
$
 394 
 
$
 6,632 
 
$
 7,341 
 
 Translation (gain) loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
 
 (Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
 
 (Gains) losses are included in interest expense in the consolidated statements of income. See Note 6 for additional information.
 
 The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income (see Note 5).

NOTE 4. SEGMENT INFORMATION

Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. Due to recent organizational changes and our July 24, 2015, acquisition of DIRECTV, effective for the quarter ended September 30, 2015, we revised our operating segments to align with our new management structure and organizational responsibilities. We analyze our operating segments based on segment contribution, which consists of operating income, excluding acquisition-related costs and other significant items (as discussed below), and equity in net income of affiliates for investments managed within each operating segment. We have four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.
 
9

AT&T INC.
MARCH 31, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
We also evaluate segment performance based on segment operating income before depreciation and amortization, which we refer to as EBITDA and/or EBITDA margin. 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 segment operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses.

The Business Solutions segment provides services to business, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively referred to as strategic business services; as well as traditional data and voice products. We utilize our wireless and wired networks (referred to as "wired" or "wireline") to provide a complete communications solution to our business customers.

The Entertainment Group segment provides video, Internet, voice communication and interactive and targeted advertising services to customers located in the U.S. or in U.S. territories. We utilize our copper and IP-based wired network and/or our satellite technology.

The Consumer Mobility segment provides nationwide wireless service to consumers and wireless wholesale and resale subscribers located in the U.S. or in U.S. territories. We utilize our U.S. wireless network to provide voice and data services, including high-speed Internet, video, and home monitoring services.

The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates.

In reconciling items to consolidated operating income and income before income taxes, Corporate and Other includes: (1) operations that are not considered reportable segments and that are no longer integral to our operations or which we no longer actively market, and (2) impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.

Certain operating items are not allocated to our business segments:
·
Acquisition-related items include (1) operations and support items associated with the merger and integration of newly acquired businesses, and (2) the noncash amortization of intangible assets acquired in acquisitions.
·
Certain significant items include (1) noncash actuarial gains and losses from pension and other postretirement benefits, (2) employee separation charges associated with voluntary and/or strategic offers, (3) losses resulting from abandonment or impairment of assets and (4) other items for which the segments are not being evaluated.

Interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are also not included in each segment's reportable results.

Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as an international satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by operating segment, and therefore asset information and capital expenditures by segment are not presented. Depreciation is allocated based on network usage or asset utilization by segment.
 
10

AT&T INC.
MARCH 31, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

For the three months ended March 31, 2016
   
Revenue
   
Operations
and
Support
Expenses
   
EBITDA
   
Depreciation
and
Amortization
   
Operating
Income
(Loss)
   
Equity in
Net
Income
(Loss) of
Affiliates
   
Segment
Contribution
Business Solutions
$
 17,609 
 
$
 10,802 
 
$
 6,807 
 
$
 2,508 
 
$
 4,299 
 
$
 - 
 
$
 4,299 
Entertainment Group
 
 12,658 
   
 9,578 
   
 3,080 
   
 1,488 
   
 1,592 
   
 3 
   
 1,595 
Consumer Mobility
 
 8,328 
   
 4,912 
   
 3,416 
   
 922 
   
 2,494 
   
 - 
   
 2,494 
International
 
 1,667 
   
 1,588 
   
 79 
   
 277 
   
 (198)
   
 14 
   
 (184)
Segment Total
 
 40,262 
   
 26,880 
   
 13,382 
   
 5,195 
   
 8,187 
 
$
 17 
 
$
 8,204 
Corporate and Other
 
 273 
   
 377 
   
 (104)
   
 17 
   
 (121)
           
Acquisition-related items
 
 - 
   
 295 
   
 (295)
   
 1,351 
   
 (1,646)
           
Certain significant items
 
 - 
   
 (711)
   
 711 
   
 - 
   
 711 
           
AT&T Inc.
$
 40,535 
 
$
 26,841 
 
$
 13,694 
 
$
 6,563 
 
$
 7,131 
           
                                         
For the three months ended March 31, 2015
   
Revenue
   
Operations
and
Support
Expenses
   
EBITDA
   
Depreciation
and
Amortization
   
Operating
Income
(Loss)
   
Equity in
Net
Income
(Loss) of
Affiliates
   
Segment
Contribution
Business Solutions
$
 17,557 
 
$
 11,073 
 
$
 6,484 
 
$
 2,342 
 
$
 4,142 
 
$
 - 
 
$
 4,142 
Entertainment Group
 
 5,660 
   
 4,859 
   
 801 
   
 1,065 
   
 (264)
   
 (6)
   
 (270)
Consumer Mobility
 
 8,778 
   
 5,541 
   
 3,237 
   
 1,002 
   
 2,235 
   
 - 
   
 2,235 
International
 
 236 
   
 218 
   
 18 
   
 28 
   
 (10)
   
 - 
   
 (10)
Segment Total
 
 32,231 
   
 21,691 
   
 10,540 
   
 4,437 
   
 6,103 
 
$
 (6)
 
$
 6,097 
Corporate and Other
 
 345 
   
 234 
   
 111 
   
 20 
   
 91 
           
Acquisition-related items
 
 - 
   
 299 
   
 (299)
   
 121 
   
 (420)
           
Certain significant items
 
 - 
   
 217 
   
 (217)
   
 - 
   
 (217)
           
AT&T Inc.
$
 32,576 
 
$
 22,441 
 
$
 10,135 
 
$
 4,578 
 
$
 5,557 
           
 
11

AT&T INC.
MARCH 31, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
The following table is a reconciliation of operating contribution to "Income Before Income Taxes" reported on our consolidated statements of income.
 
             
   
First Quarter
 
   
2016
   
2015
 
Business Solutions 
 
$
4,299
   
$
4,142
 
Entertainment Group 
   
1,595
     
(270
)
Consumer Mobility 
   
2,494
     
2,235
 
International 
   
(184
)
   
(10
)
Segment Operating Contribution 
   
8,204
     
6,097
 
Reconciling Items:
               
  Corporate and Other 
   
(121
)
   
91
 
  Merger and integration charges 
   
(295
)
   
(299
)
  Amortization of intangibles acquired 
   
(1,351
)
   
(121
)
  Employee separation charges 
   
(25
)
   
(217
)
  Gain on wireless spectrum transactions 
   
736
     
-
 
  Segment equity in net (income) loss
    of affiliates 
   
(17
)
   
6
 
AT&T Operating Income 
   
7,131
     
5,557
 
Interest Expense 
   
1,207
     
899
 
Equity in net income (loss) of affiliates 
   
13
     
-
 
Other income (expense) - Net 
   
70
     
70
 
Income Before Income Taxes 
 
$
6,007
   
$
4,728
 

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

Substantially all of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental, life insurance and death benefits to certain retired employees under various plans and accrue actuarially determined postretirement benefit costs. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits described in the plans to employees upon their retirement.

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a fair value of $8,787 at March 31, 2016. The trust is entitled to receive cumulative cash distributions of $560 per annum, which will be distributed quarterly in equal amounts and will be accounted for as contributions. We distributed $140 to the trust during the three months ended March 31, 2016. So long as we make the distributions, we will have no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan's separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation. We have also agreed to make a cash contribution to the trust of $175 no later than the due date of our federal income tax return for 2015.

We recognize actuarial gains and losses on pension and postretirement plan assets in our operating results at our annual measurement date of December 31, unless earlier remeasurements are required. The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income. A portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded.
 
12

AT&T INC.
MARCH 31, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
   
Three months ended
 
   
March 31,
 
   
2016
   
2015
 
Pension cost:
           
   Service cost – benefits earned during the period
 
$
278
   
$
299
 
   Interest cost on projected benefit obligation
   
495
     
474
 
   Expected return on assets
   
(778
)
   
(826
)
   Amortization of prior service credit
   
(26
)
   
(26
)
   Net pension (credit) cost
 
$
(31
)
 
$
(79
)
                 
Postretirement cost:
               
   Service cost – benefits earned during the period
 
$
48
   
$
55
 
   Interest cost on accumulated postretirement benefit obligation
   
243
     
242
 
   Expected return on assets
   
(89
)
   
(105
)
   Amortization of prior service credit
   
(319
)
   
(320
)
   Net postretirement (credit) cost
 
$
(117
)
 
$
(128
)
                 
   Combined net pension and postretirement (credit) cost
 
$
(148
)
 
$
(207
)

The increase of $59 in the first quarter of 2016 is primarily due to a lower expected return on assets resulting from a decrease in the value in the plan assets.

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the first quarter ended 2016 and 2015, net supplemental retirement pension benefits costs not included in the table above, were $23 and $20, respectively.

NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE

The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access.

Level 2 Inputs to the valuation methodology include:
·
Quoted prices for similar assets and liabilities in active markets.
·
Quoted prices for identical or similar assets or liabilities in inactive markets.
·
Inputs other than quoted market prices that are observable for the asset or liability.
·
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
·
Fair value is often based on developed models in which there are few, if any, external observations.

The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
 
13

AT&T INC.
MARCH 31, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2015.

Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities and other financial instruments, are summarized as follows:

 
March 31, 2016
 
December 31, 2015
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Amount
 
Value
 
Amount
 
Value
 
Notes and debentures1
$
129,229
   
$
137,865
   
$
124,847
   
$
128,993
 
Bank borrowings
 
4
     
4
     
4
     
4
 
Investment securities
 
2,592
     
2,592
     
2,704
     
2,704
 
 1 Includes credit agreement borrowings.
                             

The carrying value of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets. The carrying and fair values included above reflect our March 2016 debt exchange of $16,049 of DIRECTV notes for AT&T global notes with matching terms.

Following is the fair value leveling for available-for-sale securities and derivatives as of March 31, 2016, and December 31, 2015:

 
 
March 31, 2016
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Available-for-Sale Securities
                       
   Domestic equities
 
$
1,111
   
$
-
   
$
-
   
$
1,111
 
   International equities
   
541
     
-
     
-
     
541
 
   Fixed income bonds
   
-
     
676
     
-
     
676
 
Asset Derivatives
                               
   Interest rate swaps
   
-
     
197
     
-
     
197
 
   Cross-currency swaps
   
-
     
519
     
-
     
519
 
Liability Derivatives
                               
   Cross-currency swaps
   
-
     
(2,582
)
   
-
     
(2,582
)
 Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.
 
 
 
 
 
14

AT&T INC.
MARCH 31, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
   
December 31, 2015
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Available-for-Sale Securities
                       
   Domestic equities
 
$
1,132
   
$
-
   
$
-
   
$
1,132
 
   International equities
   
569
     
-
     
-
     
569
 
   Fixed income bonds
   
-
     
680
     
-
     
680
 
Asset Derivatives
                               
   Interest rate swaps
   
-
     
136
     
-
     
136
 
   Cross-currency swaps
   
-
     
556
     
-
     
556
 
   Foreign exchange contracts
   
-
     
3
     
-
     
3
 
Liability Derivatives
                               
   Cross-currency swaps
   
-
     
(3,466
)
   
-
     
(3,466
)
 Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.
 
 
 
 
 
Investment Securities
Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in "Other income (expense) – net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in "Other income (expense) – net" with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $99 have maturities of less than one year, $308 within one to three years, $65 within three to five years, and $204 for five or more years.

Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments and customer deposits are recorded in "Other current assets" and our investment securities are recorded in "Other Assets" on the consolidated balance sheets.

Derivative Financial Instruments
We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the three months ended March 31, 2016, and March 31, 2015, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.
 
15

AT&T INC.
MARCH 31, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
Cash Flow Hedging  We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro, British pound sterling, Canadian dollar and Swiss franc denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency denominations to fixed U.S. dollar denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign currency-denominated rate to a fixed U.S. dollar denominated interest rate.

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as "Other income (expense) – net" in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the three months ended March 31, 2016, and March 31, 2015, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) – net" in the consolidated statements of income. Over the next 12 months, we expect to reclassify $59 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) – net" in the consolidated statements of income. In the three months ended March 31, 2016, and March 31, 2015, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.

Collateral and Credit-Risk Contingency  We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At March 31, 2016, we had posted collateral of $1,743 (a deposit asset) and held collateral of $111 (a receipt liability). Under the agreements, if our credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in March, we would have been required to post additional collateral of $130. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- (S&P) and below Baa3 (Moody's), we would owe an additional $195. At December 31, 2015, we had posted collateral of $2,343 (a deposit asset) and held collateral of $124 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

Following is the notional amount of our outstanding derivative positions:

   
March 31,
   
December 31,
 
   
2016
   
2015
 
Interest rate swaps
 
$
7,050
   
$
7,050
 
Cross-currency swaps
   
29,642
     
29,642
 
Foreign exchange contracts
   
3
     
100
 
Total
 
$
36,695
   
$
36,792
 
 
16

AT&T INC.
MARCH 31, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

Following are the related hedged items affecting our financial position and performance:
 
           
Effect of Derivatives on the Consolidated Statements of Income
         
Fair Value Hedging Relationships
Three months ended
 
March 31,
 
March 31,
 
2016
 
2015
 
Interest rate swaps (Interest expense):
         
   Gain (Loss) on interest rate swaps
$
66
   
$
41
 
   Gain (Loss) on long-term debt
 
(66
)
   
(41
)

In addition, the net swap settlements that accrued and settled in the quarter ended March 31 were offset against interest expense.

    
Three months ended
 
 
March 31,
   
March 31,
 
Cash Flow Hedging Relationships
 
2016
   
2015
 
Cross-currency swaps:
           
   Gain (Loss) recognized in accumulated OCI
 
$
191
   
$
(228
)
Interest rate locks:
               
   Gain (Loss) recognized in accumulated OCI
   
-
     
(316
)
   Interest income (expense) reclassified from accumulated OCI into income
   
(15
)
   
(11
)

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions

DIRECTV  In July 2015, we completed our acquisition of DIRECTV, a leading provider of digital television entertainment services in both the United States and Latin America. For accounting purposes, the transaction was valued at $47,409. Our operating results include the results of DIRECTV following the acquisition date.

The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 under the Fair Value Measurement and Disclosure framework, other than long-term debt assumed in the acquisition (see Note 6). The income approach was primarily used to value the intangible assets, consisting of acquired customer relationships, orbital slots and trade names. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used primarily for property, plant and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation.

The fair value estimates are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments will be finalized within one year from the date of acquisition. Substantially all the receivables acquired are expected to be collectable. We have not identified any material unrecorded pre-acquisition contingencies where the related asset, liability or impairment is probable and the amount can be reasonably estimated. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of acquisition. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that such events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change goodwill.
 
17

AT&T INC.
MARCH 31, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
The following table summarizes the preliminary estimated fair values of the DIRECTV assets acquired and liabilities assumed and related deferred income taxes that existed as of the acquisition date.

Assets acquired
     
Cash
 
$
4,797
 
Accounts receivable
   
2,026
 
All other current assets
   
1,535
 
Property, plant and equipment
   
9,331
 
Intangible assets not subject to amortization
       
   Orbital slots
   
11,946
 
   Trade name
   
1,371
 
Intangible assets subject to amortization
       
   Customer lists and relationships
   
19,508
 
   Trade name
   
2,915
 
   Other
   
457
 
Investments and other assets
   
2,388
 
Goodwill
   
34,449
 
Total assets acquired
   
90,723
 
         
Liabilities assumed
       
Current liabilities, excluding current portion of long-term debt
   
5,733
 
Long-term debt
   
20,585
 
Other noncurrent liabilities
   
16,642
 
Total liabilities assumed
   
42,960
 
Net assets acquired
   
47,763
 
Noncontrolling interest
   
(354
)
Aggregate value of consideration paid
 
$
47,409
 

Purchased goodwill is not expected to be deductible for tax purposes. The goodwill was allocated to our Entertainment Group and International segments.

Nextel Mexico  In April 2015, we completed our acquisition of the subsidiaries of NII Holdings Inc., operating its wireless business in Mexico, for $1,875, including approximately $427 of net debt and other adjustments. The subsidiaries offered service under the name Nextel Mexico.

The purchase price allocation of assets acquired was: $376 in licenses, $1,167 in property, plant and equipment, $128 in customer lists and $193 of goodwill. The goodwill was allocated to our International segment.

GSF Telecom  In January 2015, we acquired Mexican wireless company GSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom) for $2,500, including net debt of approximately $700. GSF Telecom offered service under both the Iusacell and Unefon brand names in Mexico.

The purchase price allocation of assets acquired was: $735 in licenses, $658 in property, plant and equipment, $378 in customer lists, $26 in trade names and $956 of goodwill. The goodwill was allocated to our International segment.

AWS-3 Auction  In January 2015, we submitted winning bids of $18,189 in the Advanced Wireless Service (AWS)-3 Auction (FCC Auction 97) a portion of which represented spectrum clearing and First Responder Network Authority funding. We provided the Federal Communications Commission (FCC) an initial down payment of $921 in October 2014 and paid the remaining $17,268 in the first quarter of 2015.
 
18

AT&T INC.
MARCH 31, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES
 
We offer our customers the option to purchase certain wireless devices in installments over a period of up to 30 months, with the right to trade in the original equipment for a new device within a set period and have the remaining unpaid balance satisfied. As of March 31, 2016, and December 31, 2015, gross equipment installment receivables of $5,079 and $5,719 were included on our consolidated balance sheets, of which $3,007 and $3,239 are notes receivable that are included in "Accounts receivable - net."
In 2014, we entered into the first of a series of uncommitted agreements pertaining to the sale of equipment installment receivables and related security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under these agreements, we transferred the receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Under the terms of the arrangements, we continue to bill and collect on behalf of our customers for the receivables sold.
The following table sets forth a summary of equipment installment receivables sold during the three months ended March 31, 2016 and 2015:

 
Three months ended
 
 
March 31,
 
 
2016
 
2015
 
Gross receivables sold
 
$
2,482
   
$
2,635
 
Net receivables sold
   
2,256
     
2,381
 
Cash proceeds received
   
1,521
     
1,524
 
Deferred purchase price recorded
   
719
     
858
 
 1 Receivables net of allowance, imputed interest and trade-in right guarantees.
 

The deferred purchase price is initially recorded at estimated fair value, which is based on remaining installment payments expected to be collected, adjusted by the expected timing and value of device trade-ins, and subsequently carried at the lower of cost or net realizable value. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).
During the first quarter of 2016, we repurchased installment receivables previously sold to the Purchasers, with a fair value of $532. These transactions reduced our current deferred purchase price receivable by $539, resulting in a loss of $7 during the quarter. This loss is included in "Selling, general and administrative" in the consolidated statements of income.
At March 31, 2016, and December 31, 2015, our deferred purchase price receivable was $2,975 and $2,961, respectively, of which $1,469 and $1,772 is included in "Other current assets" on our consolidated balance sheets, with the remainder in "Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the amount of our deferred purchase price at any point in time.
The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate risk.
19

AT&T INC.
MARCH 31, 2016

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share and per subscriber amounts
 
RESULTS OF OPERATIONS

For ease of reading, 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 in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. During 2015, we completed our acquisitions of DIRECTV and wireless properties in Mexico, and the following discussion of changes in our operating revenues and expenses is affected by the timing of these acquisitions. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from acquired businesses prior to acquisition are excluded. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period's presentation.

Consolidated Results  Our financial results in the first quarter of 2016 and 2015 are summarized as follows:

   
First Quarter
 
   
2016
   
2015
   
Percent
Change
 
 
Operating Revenues
                 
   Service
 
$
37,101
   
$
28,962
     
28.1
%
   Equipment
   
3,434
     
3,614
     
(5.0
)
Total Operating Revenues
   
40,535
     
32,576
     
24.4
 
Operating expenses
                       
   Cost of services and sales
                       
     Equipment
   
4,375
     
4,546
     
(3.8
)
     Broadcast, programming and operations
   
4,629
     
1,122
     
-
 
     Other cost of services
   
9,396
     
8,812
     
6.6
 
   Selling, general and administrative
   
8,441
     
7,961
     
6.0
 
   Depreciation and amortization
   
6,563
     
4,578
     
43.4
 
Total Operating Expenses
   
33,404
     
27,019
     
23.6
 
Operating Income
   
7,131
     
5,557
     
28.3
 
Income Before Income Taxes
   
6,007
     
4,728
     
27.1
 
Net Income
   
3,885
     
3,339
     
16.4
 
Net Income Attributable to AT&T
 
$
3,803
   
$
3,263
     
16.5
%

Overview

Operating revenues increased $7,959, or 24.4%, in the first quarter of 2016.

Service revenues increased $8,139, or 28.1%, in the first quarter of 2016. The increase was primarily due to our 2015 acquisitions of DIRECTV and wireless operations in Mexico and gains in IP broadband and fixed strategic business services. These were partially offset by continued declines in our legacy wireline voice and data products as well as from customers choosing to purchase devices through installment payment agreements, which entitle them to a lower monthly service rate under our wireless Mobile Share plans.

Equipment revenues decreased $180, or 5.0%, in the first quarter of 2016. This decline reflects fewer wireless handset sales, additional promotional activities during 2016 and lower revenue related to customer premises equipment. Revenue declines were partially offset by the continuing trend of our wireless customers to purchase higher priced devices and an increase in customers choosing to purchase devices on installment when compared to the prior year.
 
 
20

AT&T INC.
MARCH 31, 2016

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
Operating expenses increased $6,385, or 23.6%, in the first quarter of 2016.

Equipment expenses decreased $171, or 3.8%, in the first quarter of 2016. The decrease was primarily due to the decline in devices sold to postpaid subscribers, who tend to buy more expensive devices. The decrease was partially offset by increased sales volumes to our prepaid subscribers.

Broadcast, programming and operations expenses increased $3,507 in the first quarter of 2016. Broadcast costs increased due to our acquisition of DIRECTV, slightly offset by fewer AT&T U-verse® (U-verse) subscribers.

Other cost of services expenses increased $584, or 6.6%, in the first quarter of 2016. The increase was primarily due to our acquisitions of DIRECTV and Mexican wireless properties. Also contributing to higher expenses was an increase in noncash financing-related costs associated with our pension and postretirement benefits. These increases were partially offset by lower network and access charges.

Selling, general and administrative expenses increased $480, or 6.0%, in the first quarter of 2016. The increase was primarily due to our acquisitions in 2015 and increased advertising activity in 2016. The increases were largely offset by a $736 noncash gain on wireless spectrum transactions, lower wireless commission expenses and lower employee separation charges.

Depreciation and amortization expense increased $1,985, or 43.4%, in the first quarter of 2016. Amortization expense increased $1,228 due to the amortization of intangibles from recent acquisitions. Depreciation expense increased $757 primarily due to the previously mentioned acquisitions and ongoing capital spending for network upgrades.

Operating income increased $1,574, or 28.3%, in the first quarter of 2016. Our operating income margin in the first quarter increased from 17.1% in 2015 to 17.6% in 2016.

Interest expense increased $308, or 34.3%, in the first quarter of 2016. The increase was primarily due to higher average debt balances, including debt issued and debt acquired in connection with our acquisition of DIRECTV. The increases were partially offset by higher capitalized interest resulting from spectrum acquired in the Advanced Wireless Service (AWS)-3 Auction (see Note 7).

Equity in net income of affiliates increased $13 in the first quarter of 2016. This increase primarily resulted from earnings from investments acquired in our purchase of DIRECTV in the third quarter of 2015, partially offset by lower earnings from Otter Media Holdings and YP Holdings LLC.

Other income (expense) – net We had other income of $70 in the first quarter of both 2016 and 2015. Results in the first quarter of 2016 and 2015 included a net gain on the sale of investments of $44 and $33 and interest and dividend income of $29 and $19, respectively.

Income taxes increased $733, or 52.8%, in the first quarter of 2016. Our effective tax rate was 35.3% for the first quarter of 2016, compared to 29.4% for first quarter of 2015. The increase in income tax expense for the first quarter of 2016 was primarily due to higher income before income taxes in 2016. In 2015, we recognized tax benefits related to the restructuring of a portion of our Business Solutions segment, which contributed to lower income tax expense and the effective tax rate in the first quarter of 2015.
 
21

AT&T INC.
MARCH 31, 2016

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts

Selected Financial and Operating Data
           
   
March 31, 
Subscribers and connections in (000s)
 
2016
   
2015
 
Domestic wireless subscribers
   
130,445
     
121,772
 
Mexican wireless subscribers
   
9,213
     
5,728
 
North American wireless subscribers
   
139,658
     
127,500
 
 
               
North American branded subscribers
   
98,158
     
91,448
 
North American branded net additions
   
1,195
     
539
 
 
               
Domestic satellite video subscribers
   
20,112
     
-
 
U-verse video subscribers
   
5,260
     
5,993
 
Latin America satellite video subscribers
   
12,436
     
-
 
Total video subscribers
   
37,808
     
5,993
 
 
               
Total domestic broadband connections
   
15,764
     
16,097
 
 
               
Network access lines in service
   
15,975
     
18,949
 
U-Verse VoIP connections
   
5,484
     
5,200
 
 
               
Debt ratio
   
51.2
%
   
51.5
%
Net Debt Ratio
   
47.3
%
   
49.1
%
Ratio of earnings to fixed charges
   
4.22
     
4.30
 
Number of AT&T employees 
   
280,870
     
250,790
 
1 Excludes subscribers of our International segment equity investments in SKY Mexico.
2 Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders' equity) and do not consider cash available to pay down debt. See our "Liquidity and Capital Resources" section for discussion.
3 Net debt ratios are calculated by deriving total debt (debt maturing within one year plus long-term debt) less cash available by total capital (total debt plus total stockholders' equity).
4 See Exhibit 12.

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 operating segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our operating segments based on segment contribution, which consists of operating income, excluding acquisition-related costs and other significant items, and equity in net income of affiliate for investments managed within each operating segment. We have four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.

We also evaluate segment performance based on segment operating income before depreciation and amortization, which we refer to as EBITDA and/or EBITDA margin. 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 cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is operating income before depreciation and amortization, divided by total revenues.

The Business Solutions segment provides services to business, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively referred to as strategic business services; as well as traditional data and voice products. We utilize our wireless and wired networks (referred to as "wired" or "wireline") to provide a complete communications solution to our business customers.
 
22

AT&T INC.
MARCH 31, 2016

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts

The Entertainment Group segment provides video, Internet, voice communication and interactive and targeted advertising services to customers located in the U.S. or in U.S. territories. We utilize our copper and IP-based wired network and/or our satellite technology.

The Consumer Mobility segment provides nationwide wireless service to consumers and wireless wholesale and resale subscribers located in the U.S. or in U.S. territories. We utilize our U.S. wireless network to provide voice and data services, including high-speed Internet, video, and home monitoring services.

The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.

Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as an international satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by operating segment, and therefore asset information and capital expenditures by operating segment are not presented. Depreciation is allocated based on network usage or asset utilization by segment.

We discuss capital expenditures in "Liquidity and Capital Resources."

Business Solutions
                 
Segment Results
                 
   
First Quarter
 
   
2016
   
2015
   
Percent
Change
 
 
Segment operating revenues
                 
     Wireless service
 
$
7,855
   
$
7,515
     
4.5
%
     Fixed strategic services
   
2,786
     
2,549
     
9.3
 
     Legacy voice and data services
   
4,338
     
4,754
     
(8.8
)
     Other service and equipment
   
859
     
846
     
1.5
 
     Wireless equipment
   
1,771
     
1,893
     
(6.4
)
Total Segment Operating Revenues
   
17,609
     
17,557
     
0.3
 
                         
Segment operating expenses
                       
     Operations and support
   
10,802
     
11,073
     
(2.4
)
     Depreciation and amortization
   
2,508
     
2,342
     
7.1
 
Total Segment Operating Expenses
   
13,310
     
13,415
     
(0.8
)
Segment Operating Income
   
4,299
     
4,142
     
3.8
 
Equity in Net Income (Loss) of Affiliates
   
-
     
-
     
-
 
Segment Contribution
 
$
4,299
   
$
4,142
     
3.8
%

 
23

AT&T INC.
MARCH 31, 2016

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
The following table highlights other key measures of performance for the Business Solutions segment:
 
       
   
First Quarter
 
   
2016
   
2015
 
Percent
Change
 
(in 000s)
Business Wireless Subscribers
               
Postpaid
   
48,844
     
45,959
     
6.3
  %
Reseller
   
64
     
14
     
-
 
Connected devices 1
   
26,863
     
20,972
     
28.1
 
Total Business Wireless Subscribers
   
75,771
     
66,945
     
13.2
 
                         
Business Wireless Net Additions 2
                       
Postpaid
   
133
     
297
     
(55.2
)
Reseller
   
(22
)
   
3
     
-
 
Connected devices 1
   
1,578
     
1,024
     
54.1
 
Business Wireless Net Subscriber Additions
   
1,689
     
1,324
     
27.6
 
                         
Business Wireless Postpaid Churn 2, 3
   
1.02%
 
   
0.90%
 
12 BP
 
                         
Business IP Broadband Connections
   
928
     
849
     
9.3
 
Business IP Broadband Net Additions
   
17
     
27
     
(37.0
) %
1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.  
2 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
 
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period.  
 
Operating revenues increased $52, or 0.3%, in the first quarter of 2016. Revenue growth was driven by wireless service revenues and increased fixed strategic business services. Revenue increases were partially offset by continued declines in our legacy voice and data products, lower equipment revenue and foreign exchange pressures.

Wireless service revenues increased $340, or 4.5%, in the first quarter of 2016. The revenue increase is primarily due to customer migrations from our Consumer Mobility segment and reflects smartphone and tablet gains.

At March 31, 2016, we served 75.8 million subscribers, an increase of 13.2% from the prior year. Postpaid subscribers increased 6.3% from the prior year reflecting the addition of new customers as well as migrations from our Consumer Mobility segment, partially offset by continuing competitive pressures in the industry. Connected devices, which have lower average revenue per average subscriber (ARPU) and churn, increased 28.1% from the prior year reflecting growth in business customers using tracking, monitoring and other sensor-embedded devices on their equipment.

The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. In the first quarter, business wireless postpaid churn increased to 1.02% in 2016 from 0.90% in 2015.

Fixed strategic services revenues increased $237, or 9.3%, in the first quarter of 2016. Our revenues, which were negatively impacted by foreign exchange rates, increased in the first quarter of 2016 due to increases in: Ethernet of $65, AT&T Dedicated Internet (formally known as Ethernet access to Managed Internet Services) of $54, U-verse services of $50, and VPN of $26.
 
24

AT&T INC.
MARCH 31, 2016

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts

Legacy wired voice and data service revenues decreased $416, or 8.8%, in the first quarter of 2016. Traditional data revenues in the first quarter of 2016 decreased $229 and long-distance and local voice revenues decreased $183. The decreases were primarily due to lower demand as customers continue to shift to our more advanced IP-based offerings or our competitors.

Other service and equipment revenues increased $13, or 1.5%, in the first quarter of 2016. Other service revenues include project-based revenue, which is nonrecurring in nature, as well as revenues from other managed services, outsourcing, government professional service and customer premises equipment.

Wireless equipment revenues decreased $122, or 6.4%, in the first quarter of 2016. The decrease in equipment revenues resulted from a decrease in handsets sold to postpaid customers and increased promotional activities during the quarter. The decreases were partially offset by an increase in purchases of devices on installment payment agreements rather than the device subsidy model.

Operations and support expenses decreased $271, or 2.4%, in the first quarter of 2016. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.

The first quarter decrease was primarily due to declines of $170 in wireless equipment and $161 in wireless commissions costs, reflecting a decrease in sale volumes and upgrade transactions, as well as lower average commission rates. Access costs also declined $59, resulting from lower interconnect and roaming costs. Partially offsetting these decreases were higher advertising expenses, wireless handset insurance claims and bad debt expense driven by a higher AT&T NextSM (AT&T Next) subscriber base.

Depreciation expense increased $166, or 7.1%, in first quarter of 2016. The increases were primarily due to ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets.

Operating income increased $157, or 3.8%, in the first quarter of 2016. Our Business Solutions segment operating income margin in the first quarter increased from 23.6% in 2015 to 24.4% in 2016. Our Business Solutions EBITDA margin in the first quarter increased from 36.9% in 2015 to 38.7% in 2016.
 
Entertainment Group
                 
Segment Results
                 
   
First Quarter
 
   
2016
   
2015
   
Percent
 Change
 
 
Segment operating revenues
                 
     Video entertainment
 
$
8,904
   
$
1,871 
     
-
 
     High-speed Internet
   
1,803
     
1,553 
     
16.1
 
     Legacy voice and data services
   
1,313
     
1,612 
     
(18.5
)
     Other service and equipment
   
638
     
624 
     
2.2
 
Total Segment Operating Revenues
   
12,658
     
5,660 
     
-
 
                         
Segment operating expenses
                       
     Operations and support
   
9,578
     
4,859 
     
97.1
 
     Depreciation and amortization
   
1,488
     
1,065 
     
39.7
 
Total Segment Operating Expenses
   
11,066
     
5,924 
     
86.8
 
Segment Operating Income (Loss)
   
1,592
     
(264)
 
   
-
 
Equity in Net Income (Loss) of Affiliates
   
3
     
(6)
 
   
-
 
Segment Contribution
 
$
1,595
   
$
(270)
 
   
-
 

25

AT&T INC.
MARCH 31, 2016

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
The following table highlights other key measures of performance for the Entertainment Group segment:

 
 
First Quarter
 
 
 
2016
   
2015
   
Percent
Change
 
(in 000s)
Video Connections
                 
   Satellite
   
20,112
     
-
     
-
 
   U-verse
   
5,232
     
5,969
     
(12.3
)
Total Video Connections
   
25,344
     
5,969
     
-
 
 
                       
Video Net Additions  
                       
   Satellite
   
328
     
-
     
-
 
   U-verse
   
(382
)
   
49
     
-
 
Net Video Additions
   
(54
)
   
49
     
-
 
 
                       
Broadband Connections
                       
   IP
   
12,542
     
11,796
     
6.3
 
   DSL
   
1,749
     
2,741
     
(36.2
)
Total Broadband Connections
   
14,291
     
14,537
     
(1.7
)
 
                       
Broadband Net Additions
                       
   IP
   
186
     
413
     
(55.0
)
   DSL
   
(181
)
   
(320
)
   
43.4
 
Net Broadband Additions
   
5
     
93
     
(94.6
)
 
                       
Retail Consumer Switched Access Lines
   
6,888
     
8,660
     
(20.5
)
U-verse Consumer VoIP Connections
   
5,225
     
5,009
     
4.3
 
Total Retail Consumer Voice Connections
   
12,113
     
13,669
     
(11.4
) %
       
Operating revenues increased $6,998 in the first quarter of 2016, largely due to our acquisition of DIRECTV in the third quarter of 2015. Also contributing to the increase was continued strong growth in consumer IP broadband, which more than offset lower revenues from legacy voice and data products.

Video entertainment revenues increased $7,033 in the first quarter of 2016. The first quarter increase was primarily related to our acquisition of DIRECTV. We are now focusing our sales efforts on satellite service as there are lower content costs for satellite subscribers. U-verse video revenue was flat in the first quarter of 2016, primarily due to a 12.3% decrease in U-verse video connections, when compared to 2015.

High-speed Internet revenues increased $250, or 16.1%, in the first quarter of 2016. When compared to 2015, IP broadband connections increased 6.3%, to 12.5 million connections at March 31, 2016; however, first quarter net additions were lower due to fewer U-verse sales promotions in the year. The churn of video customers also contributed to lower net additions as a portion of those video subscribers also choose to disconnect their IP broadband service.

Legacy voice and data service revenues decreased $299, or 18.5%, in the first quarter of 2016. At March 31, 2016, legacy voice and data services represented approximately 10% of our total Entertainment Group revenue, and reflect a decrease of $179 in long-distance and local voice revenues, and $120 in traditional data revenues. The decreases reflect our continued migration of customers to our more advanced IP-based offerings or to competitors. At March 31, 2016, approximately 12% of our broadband connections were DSL compared to nearly 19% at March 31, 2015.
 
26

AT&T INC.
MARCH 31, 2016

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts

Operations and support expenses increased $4,719, or 97.1%, in the first quarter of 2016. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and providing video content, as well as personnel charges for compensation and benefits.

The first quarter increase was primarily due to our acquisition of DIRECTV in the third quarter of 2015, which increased our first quarter Entertainment Group expenses by $4,823. The DIRECTV related increases were primarily due to the recognition of additional content costs for satellite subscribers, customer support and service related charges and advertising expenses.

Partially offsetting the increased expenses were lower employee charges resulting from ongoing workforce reductions and our focus on cost initiatives.

Depreciation expense increased $423, or 39.7%, in the first quarter of 2016. The increase was primarily due to our acquisition of DIRECTV and ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets.

Operating income increased $1,856 in the first quarter of 2016. Our Entertainment Group segment operating income margin increased from (4.7)% in 2015 to 12.6% in 2016. Our Entertainment Group segment EBITDA margin in the first quarter increased from 14.2% in 2015 to 24.3% in 2016.

Consumer Mobility
                 
Segment Results
                 
   
First Quarter
 
   
2016
   
2015
   
Percent
Change
 
 
Segment operating revenues
                 
     Service
 
$
6,943
   
$
7,297
     
(4.9
) %
     Equipment
   
1,385
     
1,481
     
(6.5
)
Total Segment Operating Revenues
   
8,328
     
8,778
     
(5.1
)
                         
Segment operating expenses
                       
     Operations and support
   
4,912
     
5,541
     
(11.4
)
     Depreciation and amortization
   
922
     
1,002
     
(8.0
)
Total Segment Operating Expenses
   
5,834
     
6,543
     
(10.8
)
Segment Operating Income
   
2,494
     
2,235
     
11.6
 
Equity in Net Income (Loss) of Affiliates
   
-
     
-
     
-
 
Segment Contribution
 
$
2,494
   
$
2,235
     
11.6
  %

 
27

AT&T INC.
MARCH 31, 2016

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
The following table highlights other key measures of performance for the Consumer Mobility segment:
 
 
                 
   
First Quarter
 
 
 
2016
   
2015
   
Percent
Change
 
(in 000s)
Consumer Mobility Subscribers
                 
   Postpaid
   
28,294 
     
30,216 
     
(6.4
) %
   Prepaid
   
12,171 
     
10,037 
     
21.3
 
Branded
   
40,465