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mobilizing our world
AT&T INC. 2013 ANNUAL REPORT

Table of contents

  • Page 1
    mobilizing our world AT&T INC. 2013 ANNUAL REPORT

  • Page 2
    AT&T ONLINE ANNUAL REPORT Experience how we're mobilizing our world at www.att.com/annualreport2013

  • Page 3
    ...-party tests for speed and reliability. We also moved early to open our network to outside innovators and broke new ground with our AT&T Foundry innovation centers, allowing us to deliver more apps and solutions to our customers faster. All of this has helped our company create new growth platforms...

  • Page 4
    ... for some time. And thanks to the hard work of AT&T employees, I'm confident that our company is ready to thrive in this new world, as we did in the first wave of the mobile revolution. STRENGTH IN REVENUE GROWTH DRIVERS AT&T's growth drivers - wireless, wireline data and managed IT services - are...

  • Page 5
    ... said we would expand our U-verse fixed-line broadband service to 57 million customer locations, while delivering even faster speeds. And we laid out plans to extend fiber connections to an additional 1 million business customer locations. I'm pleased to report that we begin 2014 with these efforts...

  • Page 6
    .... 4 2013 Annual Report speed digital age. We're revolutionizing our retail experience by creating stores that are more customer-focused and interactive. And we're taking the online and mobile customer experience to the next level - everything from purchasing to making payments to connecting with...

  • Page 7
    ... call, text and data performance AT&T Inc. 5 2013 Annual Report Nearly 280 million people covered by AT&T 4G LTE SUMMER 2014 93 OF 125 Plan to be essentially complete with LTE deployment by summer 2014 77 % More than half of AT&T's postpaid smartphone customers use an LTE-capable device...

  • Page 8
    ...6 2013 Annual Report The final key to sustained success in our industry is a sound financial foundation, which gives us the ability to continually invest and grow our business for the long term. And at AT&T, we have that foundation. In 2013, we grew revenues to $128.8 billion, increased adjusted...

  • Page 9
    ...39 $2.50 2013 2012 $2.31 Reported $1.25 $ 25B RETURNING VALUE TO OUR OWNERS AT&T's returns to shareowners in 2013 through dividends and share repurchases INVESTING IN OUR BUSINESS AT&T's investment in capital and spectrum to expand and enhance our networks for our customers in 2013 $ 22.7B

  • Page 10
    ... Network Service Provider; Managed Hosting, North America and Communications Outsourcing and Professional Services 2 AT&T received the 2014 Frost & Sullivan M2M Communications Company of the Year Award North America U -VERSE / HOME SOLUTIONS AT&T was the recipient of the 2013 Frost & Sullivan Video...

  • Page 11
    ... Review 2013 Selected Financial and Operating Data Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Financial Statements Notes to Consolidated Financial Statements Report of Management Report of Independent Registered Public Accounting Firm Report...

  • Page 12
    ... outstanding with dilution (000,000) End of period common shares outstanding (000,000) Operating Data Wireless subscribers (000)2 In-region network access lines in service (000)1 Broadband connections (000)3 Number of employees 1 2 $128,752 $ 98,273 $ 30,479 $ 3,940 $ 642 $ 596 $ 9,224 $ 18,553...

  • Page 13
    ... revenues from AT&T U-verse® (U-verse) and strategic business services. Partially offsetting these increases were continued declines in our traditional voice and data services, higher wireless equipment costs and increased expenses supporting U-verse subscriber growth. Operating income for 2012...

  • Page 14
    ... in our wireless and wireline IP-based data revenues as we bundle and price plans with greater focus on data and video services. We expect continued declines in voice revenues and our basic wireline data services as customers choose these nextgeneration services. Cost of services and sales expenses...

  • Page 15
    ... operating revenues as compared to 47% in 2012 and 27% of our 2013 total segment income as compared to 31% in 2012. This segment uses our regional, national and global network to provide consumer and business customers with data and voice communications services, U-verse high-speed broadband, video...

  • Page 16
    ... except per share amounts Wireless Segment Results Percent Change 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 Segment operating revenues Data Voice, text and other service Equipment Total Segment Operating Revenues Segment operating expenses Operations and support Depreciation and amortization...

  • Page 17
    ...on FamilyTalk® plans (family plans), Mobile Share plans or business plans, which provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. During 2013, we introduced additional programs that allow for the purchase of handsets...

  • Page 18
    ... the increased number of subscribers using smartphones and data-centric devices, such as tablets, eReaders, and mobile navigation devices. Data service revenues accounted for approximately 35.3% of our wireless service revenues in 2013, compared to 30.9% in 2012 and 26.2% in 2011. Equipment revenues...

  • Page 19
    ... for customer lists related to acquisitions. Equity in net income (loss) of affiliates for the Wireless segment includes expenses for ISIS, our mobile payment joint venture with Verizon and T-Mobile. Percent Change 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 Segment operating revenues Data Voice...

  • Page 20
    ... services and customer premises equipment, government-related services and outsourcing, which account for approximately 60% of total other revenue in the years reported. Operations and support expenses increased $431, or 1.0%, in 2013 and decreased $154, or 0.4%, in 2012. Operations and support...

  • Page 21
    ... Change (in 000s) 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 U-verse high speed Internet DSL and other broadband connections Total Wireline Broadband Connections1 Total U-verse Video Connections Retail consumer switched access lines U-verse consumer VoIP connections Total Retail Consumer Voice...

  • Page 22
    ... mobile navigation, including car-based services). While price changes may impact revenue and service ARPU, we expect to increase equipment sales under our AT&T Next installment program. We expect that all our major customer categories will continue to increase their use of Internet-based broadband...

  • Page 23
    ... IP-based networks. At the same time, we also seek to ensure that legacy regulations are not extended to broadband or wireless services, which are subject to vigorous competition. In addition, states representing a majority of our local service access lines have adopted legislation that enables new...

  • Page 24
    ...for mobile broadband for the first time. U-verse Services During 2013, we continued to expand our offerings of U-verse high speed Internet and TV services. As of December 31, 2013, we are marketing U-verse services to approximately 27 million customer locations (locations eligible to receive U-verse...

  • Page 25
    ...FCC asking it to open a proceeding to facilitate our transition to all IP-based networks and services to promote consumer interests and incent private investment in broadband infrastructure. On January 30, 2014, the FCC adopted an order authorizing a broad set of voluntary experiments to measure the...

  • Page 26
    ... pre-existing trend toward wireless and Internet use. In most markets, we compete, often on pricing of bundled services, with large cable companies, such as Comcast Corporation, Cox Communications Inc. and Time Warner Cable Inc., for local, high-speed Internet, video and voice services customers and...

  • Page 27
    ... in the expected long-term rate of return would cause 2014 combined pension and postretirement cost to increase $262, which under our accounting policy would be recognized in the current year as part of our fourth-quarter remeasurement of our retiree benefit plans. In 2013, the actual return on our...

  • Page 28
    ... Cost of Capital rate for each reporting unit. The market multiple approach uses a multiple of a company's Earnings Before Interest, Taxes, and Depreciation and Amortization expenses (EBITDA). We determined the multiples of the publicly traded companies whose services are comparable to those offered...

  • Page 29
    ... wireless revenue growth to trend down from our 2013 growth rate of 4.7% to a long-term growth rate that reflects expected long-term inflation trends. We assumed our churn rates will decline in 2014 from our rate of 1.37% in 2013, in line with expected trends in the industry but at a rate comparable...

  • Page 30
    ... Used in Operating Activities During 2013, cash provided by operating activities was $34,796, compared to $39,176 in 2012. Lower operating cash flows in 2013 were due to higher cash tax payments and the timing of working capital payments and wireless device financing related to our AT&T Next program...

  • Page 31
    ... expect lower cash from operations in 2014, in part as the tax rules allowing companies to more rapidly deduct the cost of equipment have ended and our AT&T Next program continues to gain popularity with customers. During 2012, cash provided by operating activities was $39,176 compared to $34,743 in...

  • Page 32
    ... of cash from operations, debt issuances, and asset sales. The timing and mix of debt issuance will be guided by credit market conditions and interest rate trends. Credit Facilities On December 11, 2013, we amended and extended for an additional two-year term our existing $5,000 revolving credit...

  • Page 33
    ... related to prior service credits resulting from amendments to our postretirement benefit plans and increases in debt balances partially offset by share repurchases. A significant amount of our cash outflows are related to tax items and benefits paid for current and former employees. Total taxes...

  • Page 34
    ...certain agreements to purchase goods or services based on termination fees that can be paid to exit the contract. If we elect to exit these contracts, termination fees for all such contracts in the year of termination could be approximately $489 in 2014, $567 in the aggregate for 2015 and 2016, $174...

  • Page 35
    ... contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We do not foresee significant changes in the strategies we use to manage market risk in the near future. Interest Rate Risk The majority of our financial instruments are mediumand long-term fixed-rate...

  • Page 36
    ... throughout the world. The current slow economic recovery in the United States continues to pressure our customers' demand for and ability to pay for existing services, especially local landline service, and their interest in purchasing new services. Customers are changing their buying habits in...

  • Page 37
    ... affecting our business operations. Changes in available technology could increase competition and our capital costs. The telecommunications industry has experienced rapid changes in the past several years. The development of wireless, cable and IP technologies has significantly increased the...

  • Page 38
    .... Increasing competition for wireless customers could adversely affect our operating results. We have multiple wireless competitors in each of our service areas and compete for customers based principally on service/device offerings, price, call quality, coverage area and customer service. In...

  • Page 39
    ... cost less to operate than traditional networks. Our competitors, many of which are newer companies, are deploying this IP-based technology. In order to continue to offer attractive and competitively priced services, we have deployed a new broadband network to offer IP-based voice, data and video...

  • Page 40
    ...from legacy technologies to IP-based infrastructure, universal service, broadband deployment, E911 services, competition policy, net neutrality, unbundled network elements and other wholesale obligations, availability of new spectrum from the FCC on fair and balanced terms, and wireless license...

  • Page 41
    ... per share amounts 2013 2012 2011 Operating Revenues Operating Expenses Cost of services and sales (exclusive of depreciation and amortization shown separately below) Selling, general and administrative Impairment of intangible assets Depreciation and amortization Total operating expenses Operating...

  • Page 42
    Consolidated Statements of Comprehensive Income Dollars in millions 2013 2012 2011 Net income Other comprehensive income, net of tax: Foreign Currency: Foreign currency translation adjustments (includes $(2), $0 and $(1) attributable to noncontrolling interest), net of taxes of $(78), $48 and $(117...

  • Page 43
    ... 31, 2013 2012 Assets Current Assets Cash and cash equivalents Accounts receivable - net of allowances for doubtful accounts of $483 and $547 Prepaid expenses Deferred income taxes Other current assets Total current assets Property, Plant and Equipment - Net Goodwill Licenses Customer Lists and...

  • Page 44
    ... Dispositions Sales (purchases) of securities, net Return of advances to and investments in equity affiliates Other Net Cash Used in Investing Activities Financing Activities Net change in short-term borrowings with original maturities of three months or less Issuance of other short-term borrowings...

  • Page 45
    ... Statements of Changes in Stockholders' Equity Dollars and shares in millions except per share amounts 2013 Shares Amount Shares 2012 Amount Shares 2011 Amount Common Stock Balance at beginning of year Issuance of stock Balance at end of year Additional Paid-In Capital Balance at beginning of year...

  • Page 46
    ... balance waived for the original device. For customers that elect these trade-in programs, we recognize revenue for the entire amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest. As of December 31, 2013, total equipment installment plan...

  • Page 47
    ... December 31, 2012. Wireless devices and accessories, which are valued at the lower of cost or market (determined using current replacement cost) were $1,031 at December 31, 2013, and $888 at December 31, 2012. Property, Plant and Equipment Property, plant and equipment is stated at cost, except for...

  • Page 48
    ... for known rate changes. Such estimates are adjusted monthly to reflect newly available information, such as rate changes and new contractual agreements. Bills reflecting actual incurred information are generally not received within three months subsequent to the end of the reporting period, at...

  • Page 49
    ... marketed as the Isis Mobile WalletTM (ISIS), which is accounted for as an equity method investment. The Wireline segment uses our regional, national and global network to provide consumer and business customers with data and voice communications services, AT&T U-verse® high-speed broadband, video...

  • Page 50
    ..., for 2013, 2012, and 2011 are as follows: At December 31, 2013 and for the year ended Wireless Wireline Advertising Solutions Other Consolidations Consolidated Results Data Voice, text and other Equipment and other Total segment operating revenues Operations and support expenses Depreciation...

  • Page 51
    ... July 11, 2014, which can be extended until January 11, 2015, if certain conditions have not been met by that date. Under certain circumstances, Leap may be required to pay a termination fee or AT&T may be required to provide Leap with a three-year roaming agreement for LTE data coverage in certain...

  • Page 52
    ... INTANGIBLE ASSETS Changes in the carrying amounts of goodwill, by segment (which is the same as the reporting unit for Wireless, Wireline and Advertising Solutions), for the years ended December 31, 2013 and 2012, were as follows: Wireless Wireline Advertising Solutions Other Total Balance as of...

  • Page 53
    ...$2,009 for the year ended December 31, 2011. Amortization expense is estimated to be $364 in 2014, $224 in 2015, $127 in 2016, $60 in 2017, and $34 in 2018. In 2013, we wrote off approximately $6,217 of fully amortized intangible assets (primarily customer lists). In 2012, we wrote off approximately...

  • Page 54
    ... 2015 - 2022 3.00% - 4.99% 2013 - 2045 5.00% - 6.99% 2013 - 2095 7.00% - 9.10% 2013 - 2097 Other Fair value of interest rate swaps recorded in debt Unamortized (discount) premium - net Total notes and debentures Capitalized leases Total long-term debt, including current maturities Current maturities...

  • Page 55
    ... long-term notes and debentures, as of December 31, 2013, and the corresponding weighted-average interest rate scheduled for repayment are as follows: 2014 2015 2016 2017 2018 Thereafter Advances under both agreements would bear interest, at AT&T's option, either: • at a variable annual rate...

  • Page 56
    ... 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, 2012. Long-Term Debt and Other Financial Instruments...

  • Page 57
    ... value leveling for available-for-sale securities and derivatives as of December 31, 2013, and December 31, 2012: December 31, 2013 Level 1 Level 2 Level 3 Total Available-for-Sale Securities Domestic equities International equities Fixed income bonds Asset Derivatives1 Interest rate swaps Cross...

  • Page 58
    ...performance: Effect of Derivatives in the Consolidated Statements of Income Fair Value Hedging Relationships For the years ended December 31, 2013 2012 2011 Interest rate swaps (Interest expense): Gain (Loss) on interest rate swaps $(113) Gain (Loss) on long-term debt 113 $(179) 179 $ 10 (10) 56...

  • Page 59
    ... 31: 2013 2012 Depreciation and amortization $ Intangibles (nonamortizable) Employee benefits Net operating loss and other carryforwards Other - net Subtotal Deferred tax assets valuation allowance Net deferred tax liabilities $ Net long-term deferred tax liabilities Less: Net current deferred tax...

  • Page 60
    ...new approach will allow retirees to choose insurance with the terms, cost and coverage that best fits their needs, while still receiving financial support as determined by AT&T. We expect that the cost to AT&T for retiree medical coverage in 2015 will be comparable to 2014. Future changes in support...

  • Page 61
    ...), the holding company for our wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $9,104 on the contribution date and was valued at $9,209 at December 31, 2013. The trust is entitled to receive cumulative cash...

  • Page 62
    ... Financial Statements (continued) Dollars in millions except per share amounts Amounts recognized on our consolidated balance sheets at December 31 are listed below: Pension Benefits 2013 2012 Postretirement Benefits 2013 2012 Current portion of employee benefit obligation1 Employee benefit...

  • Page 63
    ... benefit cost, we used the following significant weighted-average assumptions: 2013 2012 2011 Discount rate for determining projected benefit obligation at December 31 Discount rate in effect for determining net cost Long-term rate of return on plan assets Composite rate of compensation increase...

  • Page 64
    ... benefit plans be funded annually. The principal investment objectives are to ensure the availability of funds to pay pension and postretirement benefits as they become due under a broad range of future economic scenarios, to maximize long-term investment return with an acceptable level...

  • Page 65
    ... of public companies considered comparable to the private companies being valued. Such market data used to determine adjustments to accounts for cash flows and company-specified issues include current operating performance and future expectations of the investments, changes in market outlook, and...

  • Page 66
    ... amounts receivable, accounts payable and net adjustment for securities lending payable. Postretirement Assets and Liabilities at Fair Value as of December 31, 2013 Level 1 Level 2 Level 3 Total Interest bearing cash Equity securities: Domestic equities International equities Fixed income...

  • Page 67
    ... 31, 2013: Fixed Income Funds Private Equity Funds Real Estate and Real Assets Pension Assets Equities Total Balance at beginning of year Realized gains (losses) Unrealized gains (losses) Transfers in Transfers out Purchases Sales Balance at end of year $ - (3) 3 - - - - $- Fixed Income Funds...

  • Page 68
    ... amounts receivable, accounts payable and net adjustment for securities lending payable. Postretirement Assets and Liabilities at Fair Value as of December 31, 2012 Level 1 Level 2 Level 3 Total Interest bearing cash Equity securities: Domestic equities International equities Fixed income...

  • Page 69
    ... drug provider plan in 2013 for certain of our Medicare eligible retirees and the move to a private exchange market for all remaining Medicare eligible retirees receiving subsidized drug coverage in 2015, AT&T does not expect to be receiving any direct Medicare Part D subsidies for years 2015 and...

  • Page 70
    ... of employee contributions to the savings plans is fulfilled with purchases of our stock on the open market or company cash. Benefit cost is based on the cost of shares or units allocated to participating employees' accounts and was $654, $634 and $636 for the years ended December 31, 2013, 2012 and...

  • Page 71
    ...using our treasury stock. Cash received from stock option exercises was $135 for 2013, $517 for 2012 and $250 for 2011. NOTE 14. STOCKHOLDERS' EQUITY Stock Repurchase Program From time to time, we repurchase shares of common stock for distribution through our employee benefit plans or in connection...

  • Page 72
    ... Statements of Cash Flows 2013 2012 2011 Cash paid during the year for: Interest Income taxes, net of refunds NOTE 17. CONTINGENT LIABILITIES $4,302 1,985 $3,714 458 $3,691 32 No customer accounted for more than 10% of consolidated revenues in 2013, 2012 or 2011. A majority of our employees...

  • Page 73
    ... common shares for the year. Includes an actuarial gain on pension and postretirement benefit plans (Note 12), special termination charges (Note 12) and charges for employee separations (Note 1). 2012 Calendar Quarter First Second Third Fourth2 Annual Total Operating Revenues Operating Income...

  • Page 74
    ... public accounting firm that audited the financial statements included in this Annual Report, has issued an attestation report on the company's internal control over financial reporting. Randall Stephenson Chairman of the Board, Chief Executive Officer and President John J. Stephens Senior...

  • Page 75
    ... 31, 2013 and 2012, and the related consolidated statements of income and comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our...

  • Page 76
    ...States), the consolidated balance sheets of the Company as of December 31, 2013 and 2012, and the related consolidated statements of income and comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2013 and our report dated...

  • Page 77
    ... and freight services Joyce M. Roché, 66 (3,4,5) Author and Retired President and Chief Executive Officer Girls Incorporated Director since 1998 Southern New England Telecommunications Director 1997-1998 Background: Marketing Reuben V. Anderson, 71 (3,4,6) Lead Director Senior Partner Phelps...

  • Page 78
    ..., 61 Senior Executive Vice PresidentExternal and Legislative Affairs, AT&T Services, Inc. John Donovan, 53 Senior Executive Vice PresidentAT&T Technology and Network Operations John Stankey, 51 Group President and Chief Strategy Officer (Information is provided as of February 21, 2014.) 76...

  • Page 79
    ... of first in 56 cities and tied for first in 37 cities out of 125 total cities studied based on RootMetrics ® RootScore® reports for each city in the second half of 2013 of 4 national mobile networks that rely on scores calculated from random samples. Your experiences may vary. The RootMetrics...

  • Page 80
    AT&T Inc. 208 S. Akard St. Dallas, TX 75202 att.com