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mobilizing your world
AT&T INC. 2014 Annual Report

Table of contents

  • Page 1
    mobilizing your world AT&T INC. 2014 Annual Report

  • Page 2
    ifc AT&T INC. | 2014 Annual Report Imagine a world where your life id alwayd connected to people, information and experienced - wherever you are, wherever you're going. A place where life id judt plain better. Welcome to your world ... Mobilized Explore that world at att.com/annualreport2014 On ...

  • Page 3
    ...2014 Annual Report 1 Randall Stephenson Chairman, Chief Executive Officer and President To our investors Fast, secure and mobile connectivity to everything on the Internet - everywhere, at every moment and on every device - is what drives us at AT&T. It is why we build wireless and wired networks...

  • Page 4
    ...this year in a government auction to acquire a near-nationwide block of high-quality spectrum. Why was this important? Over the last eight years, mobile data traffic on our wireless network increased 100,000 percent - driven by people downloading and sharing videos. Less visible to customers today...

  • Page 5
    ...Expanding our video business Earlier, I pointed out that video is driving huge increases in network traffic. That's no surprise when you consider that customers want their video on every screen, whether it's traditional pay TV service, video streamed over an Internet connection or video to a mobile...

  • Page 6
    ...INC. | 2014 Annual Report A new kind of company as companies invest in high-speed mobile networks. That belief has us searching for opportunities to invest in wireless outside the U.S. where the regulatory, investment and economic climate is right. We believe that environment now exists in Mexico...

  • Page 7
    ... of the entire Internet is at best a solution in search of a problem and at worst a threat to the United States' continued global leadership in technology and innovation. EOY 2015 EXPECTED Consumer Mobility U.S. Video & Broadband International Video & Mobility Regulation that looks forward...

  • Page 8
    ...AT&T. Sincerely, Network of the Future Hear how AT&T is leading the mobile Internet revolution and building the premier network to meet demand for mobile data Visit att.com/AR-premiernetwork for more information Randall Stephenson Chairman, Chief Executive Officer and President February 10, 2015

  • Page 9
    ...AT&T U-verse and strategic business services combined for more than $25 billion in annualized revenues by the end of 2014, and both are growing in the double digits, adjusting for the sale of our Connecticut wireline properties U-VERSE $14.5B Total Adjusted Revenues STRATEGIC BUSINESS SERVICES 24...

  • Page 10
    ...&T INC. | 2014 Annual Report Additional Highlights WIRELESS : STRONG CUSTOMER GROWTH In 2014, AT&T delivered the company's best-ever full-year postpaid churn and added nearly twice as many postpaid subscribers as it did in 2013 ~45 MILLION TOTAL WORLDWIDE VIDEO SUBSCRIBERS AFTER DIRECTV CLOSES...

  • Page 11
    ... Review 2014 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
    ... $ 20,302 $ 1.69 $ 18.94 4.57 37.1% 5,913 5,938 5,911 95,536 39,211 16,309 266,590 The number presented represents 100% of AT&T Mobility wireless subscribers. Broadband connections include in-region U-verse high speed Internet access, in-region DSL lines and satellite broadband. 10 | AT&T INC.

  • Page 13
    ...benefit plans and an actuarial gain of $7,584 in 2013. Operating income for 2014 also includes a noncash charge of $2,120 related to an abandonment of network assets, higher wireless equipment costs resulting from higher device sales, increased expenses supporting AT&T U-verse® (U-verse) subscriber...

  • Page 14
    ... services (including video). We have been investing heavily to expand our broadband network and upgrade our wireless network to meet this demand. We have also launched new wireless offerings to give our customers additional choices for data and handset purchase plans. Equipment revenues increased...

  • Page 15
    ... operating revenues as compared to 46% in 2013 and 25% of our 2014 total segment income as compared to 26% in 2013. 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 Internet, video...

  • Page 16
    ...2013 2012 2014 vs. 2013 2013 vs. 2012 Wireless Subscribers1 Postpaid smartphones Postpaid feature phones and data-centric devices Postpaid Prepaid Reseller Connected devices2 Total Wireless Subscribers Net Additions3 Postpaid Prepaid Reseller Connected devices2 Net Subscriber Additions Mobile Share...

  • Page 17
    ...years. About 50% of our Mobile Share accounts have chosen plans with 10 gigabytes or higher. Device connections on our Mobile Share plans now represent almost 70% of our postpaid customer base. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add...

  • Page 18
    ... monthly service revenues to continue to be pressured as customers move to Mobile Share plans, we expect equipment revenues to increase for those subscribers who elect the AT&T Next program. Equipment revenues increased $4,613, or 55.3%, in 2014 and $770, or 10.2%, in 2013. The increase in 2014...

  • Page 19
    ... Change (in 000s) 20143 2013 2012 2014 vs. 2013 2013 vs. 2012 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 20
    ... driven by higher IP data revenue reflecting increased U-verse penetration, customer additions, and migration from our legacy voice and DSL services. In 2014 and 2013, U-verse revenue from consumers increased $1,315 and $1,289 for high-speed Internet access, $1,024 and $995 for video and $384 and...

  • Page 21
    ...revenues consist of services provided to business as well as revenue from wireless customers who pay lower negotiated rates through their employers. Revenue increases in 2014 reflect the impact of equipment installment plans, which resulted in equipment revenue growth of 78.1% compared to prior-year...

  • Page 22
    ... time, we also seek to ensure that legacy regulations are not extended to broadband or wireless services, which are subject to vigorous competition. In November 2014, the president of the United States issued a statement urging the FCC to reclassify both fixed and mobile consumer broadband Internet...

  • Page 23
    ... could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services, unless we are able to obtain more spectrum. Any long-term spectrum solution will require that the FCC make additional spectrum available to the wireless industry to meet...

  • Page 24
    ... customers to use wireless services without roaming on other companies' networks. We believe this seamless access will prove attractive to customers and provide a significant growth opportunity. U-verse Services During 2014, we continued to expand our offerings of U-verse high speed Internet and TV...

  • Page 25
    ...we need to provide our customers with high-quality service in the future. COMPETITION Competition continues to increase for telecommunications and information services. Technological advances have expanded the types and uses of services and products available. In addition, lack of or a reduced level...

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

  • Page 27
    ...decrease in the expected long-term rate of return would cause 2015 combined pension and postretirement cost to increase $250, 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 2014, the actual return...

  • 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
    ...a premier pay TV provider in the United States and Latin America, with a high-quality customer base, the best selection of programming, the best technology for delivering and viewing high-quality video on any device and the best customer satisfaction among major U.S. cable and satellite TV providers...

  • Page 30
    ...retail broadband Internet access service at reasonable market-based prices, including a service of at least 6 Mbps down (where feasible) at guaranteed prices, in areas where we offer wireline broadband service today, and (4) offering, for three years after closing, standalone DIRECTV satellite video...

  • Page 31
    ...activities was $31,338, compared to $34,796 in 2013. Lower operating cash flows in 2014 were primarily due to wireless device financing related to AT&T Next, which results in cash collection over the installment period instead of at the time of sale, increased inventory levels and retirement benefit...

  • Page 32
    ... Dollars in millions except per share amounts Cash Used in or Provided by Financing Activities We paid dividends of $9,552 in 2014, $9,696 in 2013, and $10,241 in 2012, primarily reflecting the decline in shares outstanding due to our repurchase activity, partially offset by dividend rate increases...

  • Page 33
    .... We plan to fund our financing uses of cash through a combination 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 We have a $5,000 revolving credit agreement with...

  • Page 34
    .... The 18-Month Credit Agreement As with the Syndicated Credit Agreement, advances under the 18-Month Credit Agreement would be used for general corporate purposes, including acquisition related payments. Amounts borrowed under the 18-Month Credit Agreement will be due and payable on the date that is...

  • Page 35
    ... plans and a charge for our abandonment of certain network assets; and additional stock repurchases. A significant amount of our cash outflows are related to tax items and benefits paid for current and former employees. Total taxes incurred, collected and remitted by AT&T during 2014, 2013, and 2012...

  • Page 36
    ... this time. See Note 11 for additional information. 4 We calculated the minimum obligation for 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...

  • Page 37
    ... dollar losses resulting from changes in exchange rates that have a reasonable probability of occurring. We cover the exposure that results from changes that exceed acceptable amounts. For the purpose of assessing specific risks, we use a sensitivity analysis to determine the effects that market...

  • Page 38
    ... pricing and margins as we continue to compete for customers who would have even less discretionary income. Adverse changes in medical costs and the U.S. securities markets and a further decline in interest rates could materially increase our benefit plan costs. Our costs to provide current benefits...

  • Page 39
    ... networks. In addition, our customers continue to demand services that can be accessed on mobile devices, especially video services. In order to remain competitive, we continue to deploy sophisticated wireline and wireless networks, as well as research other new technologies. If the new technologies...

  • Page 40
    ...of our service areas and compete for customers based principally on service/device offerings, price, call quality, coverage area and customer service. In addition, we are facing growing competition from providers offering services using alternative wireless technologies and IP-based networks as well...

  • Page 41
    ...affect our wireline and wireless networks, including telephone switching offices, microwave links, third-party-owned local and long-distance networks on which we rely, our cell sites or other equipment, our customer account support and information systems, or employee and business records could have...

  • Page 42
    ... employees expired, and we may experience additional work stoppages in 2015. A work stoppage could adversely affect our business operations, including a loss of revenue and strained relationships with customers, and we cannot predict the length of any such strike. We cannot predict the new contract...

  • Page 43
    ... on customer demand and our ability and our suppliers' ability to access financial markets at favorable rates and terms. • Changes in available technology and the effects of such changes, including product substitutions and deployment costs. • Increases in our benefit plans' costs, including...

  • Page 44
    ... Dollars in millions except per share amounts 2014 2013 2012 Operating Revenues Service Equipment Total operating revenues Operating Expenses Cost of services and sales (exclusive of depreciation and amortization shown separately below) Selling, general and administrative Abandonment of network...

  • Page 45
    ... of $18, $16 and $15 Defined benefit postretirement plans: Net actuarial loss from equity method investees arising during period, net of taxes of $0, $0 and $(32) Reclassification adjustment included in net income, net of taxes of $11, $7 and $0 Net prior service credit arising during period, net of...

  • Page 46
    Consolidated Balance Sheets Dollars in millions except per share amounts December 31, 2014 2013 Assets Current Assets Cash and cash equivalents Accounts receivable - net of allowances for doubtful accounts of $454 and $483 Prepaid expenses Deferred income taxes Other current assets Total current ...

  • Page 47
    ... benefits Abandonment of network assets Changes in operating assets and liabilities: Accounts receivable Other current assets Accounts payable and accrued liabilities Retirement benefit funding Other âˆ' net Total adjustments Net Cash Provided by Operating Activities Investing Activities...

  • Page 48
    ...Dollars and shares in millions except per share amounts 2014 Shares Amount Shares 2013 Amount Shares 2012 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 Issuance of treasury stock Share-based payments...

  • Page 49
    ... and affiliates operate in the communications services industry both domestically and internationally, providing wireless communications services, traditional wireline voice services, data/broadband and Internet services, video services, telecommunications equipment, managed networking and wholesale...

  • Page 50
    ... of cost or market (determined using current replacement cost) were $1,858 at December 31, 2014, and $1,031 at December 31, 2013. Property, Plant and Equipment Property, plant and equipment is stated at cost, except for assets acquired using acquisition accounting, which are initially recorded at...

  • Page 51
    ... from historical data and adjusted 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...

  • Page 52
    ... with data and voice communications services, AT&T U-verse® high speed Internet, video and VoIP services and managed networking to business customers. The Corporate and Other column includes unallocated corporate expenses, which includes costs to support corporate-driven activities and operations...

  • Page 53
    ... to AT&T consolidated results, for 2014, 2013, and 2012 are as follows: At December 31, 2014 and for the year ended Wireless Wireline Advertising Solutions Corporate and Other Consolidated Results Service Equipment Total segment operating revenues Operations and support expenses Depreciation and...

  • Page 54
    ... of programming, the best technology for delivering and viewing high-quality video on any device and the best customer satisfaction among major U.S. cable and satellite TV providers. The merger agreement was adopted by DIRECTV's stockholders on September 25, 2014 and remains subject to review by...

  • Page 55
    ... and equipment used in operations are leased under operating or capital leases. Rental expenses under operating leases were $4,345 for 2014, $3,683 for 2013, and $3,507 for 2012. At December 31, 2014, the future minimum rental payments under noncancelable operating leases for the years 2015 through...

  • Page 56
    ...December 31, 2013, and $1,210 for the year ended December 31, 2012. Amortization expense is estimated to be $350 in 2015, $244 in 2016, $177 in 2017, $57 in 2018, and $28 in 2019. In 2014, we wrote off approximately $2,850 of fully amortized intangible assets (primarily customer lists). In 2013, we...

  • Page 57
    ... earnings from equity affiliates were $88 and $3,346 at December 31, 2014 and 2013. Current maturities of long-term debt Commercial paper Bank borrowings1 Total 1 $6,051 - 5 $6,056 $5,477 20 1 $5,498 Outstanding balance of short-term credit facility of a foreign subsidiary. AT&T INC. | 55

  • Page 58
    ... Financial Statements (continued) Dollars in millions except per share amounts Debt Refinancing During 2014, we received net proceeds of $15,926 from the issuance of $16,013 in long-term debt in various markets, with an average weighted maturity of approximately 13 years and a weighted average...

  • Page 59
    .... The 18-Month Credit Agreement As with the Syndicated Credit Agreement, advances under the 18-Month Credit Agreement would be used for general corporate purposes, including acquisition related payments. Amounts borrowed under the 18-Month Credit Agreement will be due and payable on the date that is...

  • Page 60
    ... on AT&T's credit rating. The Applicable Margin for a Base Rate Advance under the 18-Month Credit Agreement will be 0%. In the event that AT&T's unsecured senior long-term debt ratings are split by S&P, Moody's and Fitch, then the Applicable Margin will be determined by the highest rating, unless...

  • Page 61
    ... value leveling for available-for-sale securities and derivatives as of December 31, 2014, and December 31, 2013: December 31, 2014 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 62
    ... In the years ended December 31, 2014, and December 31, 2013, 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...

  • Page 63
    ... of the change in our UTB balance from January 1 to December 31 for 2014 and 2013 is as follows: Federal, State and Foreign Tax 2014 2013 Interest rate swaps (Interest expense): Gain (Loss) on interest rate swaps Gain (Loss) on long-term debt $(29) 29 $(113) 113 $(179) 179 In addition, the net...

  • Page 64
    .... The plan was further amended in 2014 to include access to dental benefits through the private insurance marketplace. This 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...

  • Page 65
    ... the terms of the postretirement benefit plan to employee service rendered to the valuation date. The following table presents this reconciliation and shows the change in the projected benefit obligation for the years ended December 31: Pension Benefits 2014 2013 Postretirement Benefits 2014 2013...

  • Page 66
    ... interest in AT&T Mobility II LLC, the primary 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 $9,021 at December 31, 2014. The trust...

  • Page 67
    ... rating organizations, denominated in U.S. dollars, and neither callable, convertible nor index linked. For the year ended December 31, 2014, when compared to the year ended December 31, 2013, we decreased our pension discount rate by 0.70%, resulting in an increase in our pension plan benefit...

  • Page 68
    ... plans are remeasured. Composite Rate of Compensation Increase Our expected composite rate of compensation increase cost of 3.00% in 2015 and 2014 reflects the long-term average rate of salary increases. Mortality Tables At December 31, 2014 we updated our assumed mortality rates to reflect our best...

  • Page 69
    ... of public companies considered comparable to the private companies being valued. Such market data used to determine adjustments to accounts for cash flows and companyspecified issues include current operating performance and future expectations of the investments, changes in market outlook, and...

  • Page 70
    ... external market data, including the current credit rating for the bonds, credit spreads to Treasuries for each credit rating, sector add-ons or credits, issue specific add-ons or credits as well as call or other options. Purchases and sales of securities are recorded as of the trade date. Realized...

  • Page 71
    ... The tables below set forth a summary of changes in the fair value of the Level 3 pension and postretirement assets for the year ended December 31, 2014: Fixed Income Funds Private Equity Funds Real Estate and Real Assets Pension Assets Equities Total Balance at beginning of year Realized gains...

  • Page 72
    ... 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 73
    ... accumulated benefit obligations in excess of plan assets at December 31: 2014 2013 2015 2016 2017 2018 2019 Years 2020 - 2024 $ 5,741 4,184 4,144 4,066 4,010 19,753 $2,134 2,063 2,000 1,962 1,952 9,324 Supplemental Retirement Plans We also provide certain senior- and middle-management employees...

  • Page 74
    ... 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, $654 and $634 for the years ended December 31, 2014, 2013 and 2012. Performance stock...

  • Page 75
    ... using our treasury stock. Cash received from stock option exercises was $43 for 2014, $135 for 2013 and $517 for 2012. 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 76
    ... to significant interest rate risk. NOTE 16. 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...

  • Page 77
    ... versus the weighted-average common shares for the year. Includes an actuarial loss on pension and postretirement benefit plans (Note 12) and asset abandonment charges (Note 6). 2013 Calendar Quarter First Second Third Fourth2 Annual Total Operating Revenues Operating Income Net Income Net Income...

  • Page 78
    ... 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 79
    ...), the Company's internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 20, 2015 expressed...

  • Page 80
    ... balance sheets of the Company as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2014 and our report dated February 20, 2015...

  • Page 81
    ... June 2014 Background: Technology, public policy Beth E. Mooney, 60 (2,6) Chairman and Chief Executive Officer KeyCorp Director since 2013 Background: Banking (5) Human Resources (6) Public Policy and Corporate Reputation (Information is provided as of March 10, 2015.) *Retiring April 24, 2015 AT...

  • Page 82
    ...Global Marketing Officer David Huntley, 56 Chief Compliance Officer John Stephens, 55 Senior Executive Vice President and Chief Financial Officer Bill Blase Jr., 59 Senior Executive Vice PresidentHuman Resources Ralph de la Vega, 63 President and Chief Executive Officer, AT&T Mobile and Business...

  • Page 83
    ... LTE signal strength. LTE not available everywhere. 2 Total 2009-2014 investment including capital investments and acquisitions of wireless spectrum and operations. 3 Includes AT&T's 5.9 million U-verse video subscribers as of December 31, 2014 and DIRECTV's 39.1 million subscribers in the U. S. and...

  • Page 84
    AT&T Inc. 208 S. Akard St., Dallas, TX 75202 att.com