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mobilizing your world
AT&T Inc. 2015 Annual Report

Table of contents

  • Page 1
    mobilizing your world AT&T Inc. 2015 Annual Report

  • Page 2

  • Page 3
    ... Officer and President TO OUR INVESTORS 2015 was an eventful year for our company. We closed our acquisition of DIRECTV and bought two companies that give us access to the Mexican wireless market. We were successful in the U.S. government's auction of wireless airwaves, enhancing our industry-best...

  • Page 4
    ... for delivering the integrated mobile, video and data solutions our customers want. Today, every time our customers access their content, we use one or all of the following technologies to connect them - wireless LTE, Wi-Fi, satellite, IP networks and fiber optics. But our customers should not know...

  • Page 5
    ...most network traffic at the lowest marginal cost in the industry. Additionally, we're streamlining operations, simplifying offers, getting the best prices from our supply chain, automating customer self-service and making more interactions digital to reduce the time it takes to provide service. And...

  • Page 6
    ... own, as needed, on a near real-time basis. And our AT&T NetBond® service provides a highly secure connection from the mobile handset to a customer's cloud provider of choice, offering end-to-end security. We also offer a global wireless solution that allows businesses to connect everything from...

  • Page 7
    ... of the mobility market is working, allowing us to effectively utilize our assets and investments, and operate profitably in all categories. Finally, our International segment - which now comprises our wireless operations in Mexico and DIRECTV in Latin America - offers us additional opportunities...

  • Page 8
    ... around 15% of our service revenues. In 2014, as we invested significantly to build out our wireless, fiber and IP networks, our dividend payout as a percentage of cash flows moved above our historic average. But in 2015, our ratio moved back in line with our normal targeted levels, as we completed...

  • Page 9
    ... from DIRECTV and our wireless operations in Mexico, will help us continue the strong momentum we had in 2015. Last year, we grew revenues, expanded margins and increased earnings in one of the most transformative years in our company's history. We also achieved strong free cash flow as we...

  • Page 10
    ... areas - from technology and capital markets, to public affairs and marketing. We have a board with the right mix of backgrounds, perspectives and skill sets to provide informed counsel on strategic moves in a rapidly changing industry. The board thoroughly reviews and approves our strategic plans...

  • Page 11
    ...FINANCIAL REVIEW 2015 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 Accounting Firm Report...

  • Page 12
    ...outstanding with dilution (000,000) End of period common shares outstanding (000,000) Operating Data Total wireless customers (000) Video connections (000) In-region network access lines in service (000) Broadband connections (000) Number of employees 1 $146,801 $122,016 $ 24,785 $ 4,120 $ 79 $ (52...

  • Page 13
    ... to purchase devices through installment payment agreements which entitles them to a lower service rate in our wireless Mobile Share plans, continued declines in our legacy wireline voice and data products and the October 2014 sale of our Connecticut operations, partially offset by strong revenues...

  • Page 14
    ... assets, higher wireless equipment costs resulting from higher device sales and customers choosing higher-priced devices, increased expenses supporting U-verse subscriber growth, and continued declines in our traditional voice and data services. Interest expense increased $507, or 14.0%, in 2015 and...

  • Page 15
    ... segment accounted for approximately 24% of our 2015 total segment operating revenues as compared to 17% in 2014 and 7% of our 2015 total segment contribution as compared to a loss in 2014. This segment provides video, Internet and voice communication services to residential customers located in...

  • Page 16
    ...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 entertainment and home monitoring services. The International segment accounted for approximately 3% of our 2015 total segment operating revenues...

  • Page 17
    ... voice and data services and foreign exchange pressures. Wireless service revenues increased $505, or 1.7%, in 2015 and $486, or 1.6%, in 2014. The revenue increases reflect smartphone and tablet gains as well as customer migrations from our Consumer Mobility segment. Business wireless subscribers...

  • Page 18
    ... Dollars in millions except per share amounts Entertainment Group Segment Results Percent Change 2015 2014 2013 2015 vs. 2014 2014 vs. 2013 Segment operating revenues Video entertainment High-speed Internet Legacy voice and data services Other service and equipment Total Segment Operating Revenues...

  • Page 19
    ... due to fewer U-verse sales promotions in the year and churn of video customers, some of whom also purchased broadband service. When compared to 2013, IP broadband connections increased 20.0%, to 11.4 million connections at December 31, 2014. Legacy voice and data service revenues decreased $1,678...

  • Page 20
    ... allow for discounted monthly service charges under our Mobile Share plans and the migration of subscribers to Business Solutions. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 4.0% in 2015 and 5.4% for 2014. Prepaid wireless...

  • Page 21
    ... of service decreased $209 primarily due to incollect roaming fee rate declines, which were partially offset by increased data volume. Increased operations and support expenses in 2014 were primarily due to the following: • Equipment costs increased $613, reflecting increased sales and customers...

  • Page 22
    ... Change (in 000s) 2015 2014 2013 2015 vs. 2014 2014 vs. 2013 Wireless Subscribers1 Postpaid smartphones Postpaid feature phones and data-centric devices Postpaid Prepaid5 Reseller Connected devices2 Total Wireless Subscribers Net Additions Postpaid Prepaid5 Branded Net Adds Reseller Connected...

  • Page 23
    ... Mobile Share accounts have chosen data plans with 10 gigabytes or higher. Device connections on our Mobile Share plans now represent over 79% of our postpaid customer base. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices...

  • Page 24
    ...-based networks. At the same time, we also seek to ensure that legacy regulations are not further extended to broadband or wireless services, which are subject to vigorous competition. In February 2015, the FCC released an order reclassifying both fixed and mobile consumer broadband Internet access...

  • Page 25
    ... of these new and more sophisticated technologies. In particular, we intend to continue to focus on expanding our high-speed Internet and video offerings and on developing IP-based services that allow customers to unite their home or business fixed services with their mobile service. During 2016, we...

  • Page 26
    ...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 the expanding...

  • Page 27
    ... technologies, or promote a different business model (such as advertising based). In response to these competitive pressures, for a number of years we have used a bundling strategy that rewards customers who consolidate their services (e.g., telephone, high-speed Internet, wireless and video...

  • Page 28
    ... in the expected longterm rate of return would cause 2016 combined pension and postretirement cost to increase $232, which under our accounting policy would be adjusted to actual returns in the current year as part of our fourth-quarter remeasurement of our retiree benefit plans. In 2015, the actual...

  • Page 29
    ... value discounted using an appropriate weighted average cost of capital rate for each reporting unit. The market multiple approach uses a multiple of a company's EBITDA. We determined the multiples of the publicly traded companies whose services are comparable to those offered by the reporting unit...

  • Page 30
    ... using usage-based allowances or other retail terms and conditions on our fixed broadband Internet access service, as defined in the order, to discriminate in favor of our own online video services. We can and will continue to offer discounts on integrated bundles of our video and fixed broadband...

  • Page 31
    ...2015, the FCC issued a Notice of Apparent Liability and Order (NAL) to AT&T Mobility, LLC concerning our MBR policy that applies to Unlimited Data Plan customers. The NAL alleges that we violated the FCC's Open Internet Transparency Rule by using the term "unlimited" in connection with the offerings...

  • Page 32
    ... from our sale and transfer of certain equipment installment receivables to third parties and long-term debt issuances. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses; acquisitions of wireless spectrum, DIRECTV...

  • 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 On December 11, 2015, we entered into a five-year, $12...

  • Page 34
    ... required payment and which would increase the Applicable Margin by 2.00% per annum. The 18-Month Credit Agreement In March 2015, AT&T borrowed all amounts available under the 18-Month Credit Agreement. Amounts borrowed under the 18-Month Credit Agreement will be due and payable on September 2, 2016...

  • Page 35
    ... income due to foreign currency translation adjustments. 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 2015, 2014, and 2013 were $21,501, $20,870 and $21,004. These...

  • Page 36
    ...Contractual Obligations Payments Due By Period Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Long-term debt obligations1 Interest payments on long-term debt Finance obligations2 Operating lease obligations Unrecognized tax benefits3 Purchase obligations4 Total Contractual Obligations...

  • Page 37
    ... exchange rates. These risks, along with other business risks, impact our cost of capital. It is our policy to manage our debt structure and foreign exchange exposure in order to manage capital costs, control financial risks and maintain financial flexibility over the long term. In managing market...

  • Page 38
    ... last several years. While annual market returns and increased volatility have pressured asset returns in the short-term, we expect long-term market returns to stabilize. During 2015, the overall bond rates increased, which results in lower benefit obligations. In calculating the costs included on...

  • Page 39
    ... access to adequate spectrum, deployment of new technology and offering attractive services to customers. The wireless industry is undergoing rapid and significant technological changes and a dramatic increase in usage, in particular demand for and usage of data, video and other non-voice services...

  • 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
    ... against cable operators as well as other technology, media and communications companies. In addition, we believe the acquisition will result in cost savings, especially in the area of video content costs, and other potential synergies, enabling us to expand and enhance our broadband deployment...

  • Page 42
    ... 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 43
    ... Statements of Income Dollars in millions except per share amounts 2015 2014 As Adjusted 2013 Operating Revenues Service Equipment Total operating revenues Operating Expenses Cost of services and sales Equipment Broadcast, programming and operations Other cost of services (exclusive of depreciation...

  • Page 44
    ... adjustment included in net income, net of taxes of $20, $18 and $16 Defined benefit postretirement plans: Amortization of net prior service credit included in net income, net of taxes of $(523), $(588) and $(480) Net prior service credit arising during period, net of taxes of $27, $262 and $1,695...

  • Page 45
    ... 31, 2015 2014 As Adjusted Assets Current Assets Cash and cash equivalents Accounts receivable - net of allowances for doubtful accounts of $704 and $454 Prepaid expenses Other current assets Total current assets Property, Plant and Equipment - Net Goodwill Licenses Customer Lists and Relationships...

  • Page 46
    ... Dollars in millions 2015 2014 As Adjusted 2013 Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Undistributed earnings from investments in equity affiliates Provision for uncollectible accounts Deferred...

  • Page 47
    ... except per share amounts 2015 Shares Amount Shares 2014 Amount Shares As Adjusted 2013 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 Change related to...

  • Page 48
    ... video, broadband Internet and wireline voice services and is considered preferable in that it provides an accurate reflection of assets (i.e., the contractual customer relationship obtained through the set-up and installation) generated by those specific business activities. Our new accounting...

  • Page 49
    ... 31, 2013 or for the year ended Other cost of services Income tax expense Net Income Net Income Attributable to AT&T Basic Earnings per Share Attributable to AT&T Diluted Earnings per Share Attributable to AT&T Other current assets Other Assets Long-term debt Deferred income taxes Total Assets Total...

  • Page 50
    ...) Dollars in millions except per share amounts 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." These standards replace existing...

  • Page 51
    reduction of revenue. Revenues related to nonrefundable, upfront service activation and setup fees are deferred and recognized over the associated service contract period or customer life. Revenue recognized from contracts that bundle services and equipment is limited to the lesser of the amount ...

  • Page 52
    ... cost. Moreover, we have determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful lives of our wireless licenses. Orbital slots represent the space in which we operate the broadcast satellites that support our digital video...

  • Page 53
    ... and our method used to estimate service and interest cost components. NOTE 2. EARNINGS PER SHARE A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share is shown in the table below: Year Ended December 31, 2015 2014 2013 Numerators Numerator...

  • Page 54
    ... reflect available funds for distributions, reinvestment or other discretionary uses. The Business Solutions segment provides services to business, governmental and wholesale customers and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP...

  • Page 55
    ... 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...

  • Page 56
    ... income (loss) to "Income Before Income Taxes" reported on our consolidated statements of income: 2015 2014 2013 Business Solutions Entertainment Group Consumer Mobility International Segment Operating Income Reconciling Items: Corporate and Other Merger and integration charges Amortization of...

  • Page 57
    ...set of assets and achieve substantial cost synergies over time, as well as generate revenue from pay television in Latin America. Our distribution scale will enable us to offer consumers bundles including video, high-speed broadband and mobile services, using all the sales channels of both companies...

  • Page 58
    ... of $1,060 recorded in DIRECTV's consolidated statement of operations for the six-month period ended June 30, 2015. Prior to DIRECTV's June 30, 2015 change to the SIMADI exchange rate, operating results for the six months ended June 30, 2015 were measured using the SICAD exchange rate which 56...

  • Page 59
    ...for Business Solutions, Entertainment Group and Consumer Mobility. The International segment has three reporting units: Mexico Wireless, Brazil and PanAmericana. $124,450 $112,898 Includes certain network software. Our depreciation expense was $19,289 in 2015, $17,773 in 2014 and $17,722 in 2013...

  • Page 60
    ...certain radio frequency spectrum to provide wireless communications services, similar licenses in Mexico and orbital slots representing the space in which we operate the broadcast satellites that support our digital video entertainment service offerings. Amortized intangible assets are definite-life...

  • Page 61
    ... 9.50% 2015 - 2097 Other Fair value of interest rate swaps recorded in debt Unamortized (discount) premium - net Unamortized issuance costs Total notes and debentures Capitalized leases Other Total long-term debt, including current maturities Current maturities of long-term debt Total long-term debt...

  • Page 62
    ... by the holders at the next opportunity. Outstanding balance of short-term credit facility of a foreign subsidiary. Financing Activities During 2015, we issued $33,969 in long-term debt in various markets, with an average weighted maturity of approximately 12 years and a weighted average coupon of...

  • Page 63
    ... required payment and which would increase the Applicable Margin by 2.00% per annum. The 18-Month Credit Agreement In March 2015, AT&T borrowed all amounts available under the 18-Month Credit Agreement. Amounts borrowed under the 18-Month Credit Agreement will be due and payable on September 2, 2016...

  • Page 64
    ... of December 31, 2015, and December 31, 2014: December 31, 2015 Level 1 Level 2 Level 3 Total Available-for-Sale Securities Domestic equities International equities Fixed income bonds Asset Derivatives1 Interest rate swaps Cross-currency swaps Foreign exchange contracts Liability Derivatives1 Cross...

  • Page 65
    ...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...

  • Page 66
    ... In the years ended December 31, 2015, and December 31, 2014, 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 67
    ...the weight of available evidence, it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. Our valuation allowances at December 31, 2015 and 2014 related primarily to state and foreign net operating losses and state credit carryforwards. The increase in our...

  • Page 68
    ... a cash balance plan with negotiated annual pension band credits as well as interest credits. Most nonmanagement employees can elect to receive their pension benefits in either a lump sum payment or an annuity. Effective January 1, 2015, the pension plan was amended so that new management hires are...

  • Page 69
    ...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 2015 2014 Postretirement Benefits 2015 2014 Benefit obligation...

  • Page 70
    ...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 $8,714 at December 31, 2015. The trust is entitled to receive cumulative cash...

  • Page 71
    ... of return on several hundred high-quality, fixed income corporate bonds available at the measurement date. These spot rates align to each of the projected benefit obligations and service cost cash flows. The service cost component relates to the active participants in the plan, so the relevant cash...

  • Page 72
    ... postretirement benefits, the single effective interest rate used for periodic service and interest costs during 2015 are 4.60% and 3.30%. Expected Long-Term Rate of Return Our expected longterm rate of return on pension plan assets is 7.75% for 2016 and 2015. Our expected long-term rate of return...

  • Page 73
    ... 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 74
    ...(continued) Dollars in millions except per share amounts 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 gains and losses on sales of securities are determined on the...

  • Page 75
    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, 2015: Fixed Income Funds Private Equity Funds Real Estate and Real Assets Pension Assets Equities Total Balance at beginning of year Realized gains (...

  • Page 76
    ...Level 3 pension and postretirement assets for the year ended December 31, 2014: Pension Assets Equities Fixed Income Funds Private Equity Funds Real Estate and Real Assets Total Balance at beginning of year Realized gains (losses) Unrealized gains (losses) Transfers in Transfers out Purchases Sales...

  • Page 77
    ...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 $653, $654 and $654 for the years ended December 31, 2015, 2014 and 2013. NOTE 13. SHARE-BASED PAYMENTS Under our various plans...

  • Page 78
    ...compensation cost related to nonvested share-based payment arrangements granted. That cost is expected to be recognized over a weighted-average period of 2.15 years. The total fair value of shares vested during the year was $450 for 2015, compared to $327 for 2014 and $336 for 2013. It is our policy...

  • Page 79
    ... 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...

  • Page 80
    ...No customer accounted for more than 10% of consolidated revenues in 2015, 2014 or 2013. Labor Contracts As of January 31, 2016, we employed approximately 281,000 persons. Approximately 45 percent of our employees are represented by the Communications Workers of America, the International Brotherhood...

  • Page 81
    ...37 Amounts have been adjusted for the voluntary change in accounting policy (Note 1). Includes an actuarial gain on pension and postretirement benefit plans (Note 12). Quarterly earnings per share impacts may not add to full-year earnings per share impacts due to the difference in weighted-average...

  • Page 82
    ... assessment of internal control over financial reporting the operations and related assets of DIRECTV and Mexico wireless operations (Mexico), which we acquired in 2015. At December 31, 2015 and for the period from acquisition through December 31, 2015, total assets and operating revenues subject to...

  • Page 83
    ...to change its method of accounting for customer set-up and installation costs for its video, broadband Internet and wireline voice services in 2015. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control...

  • Page 84
    ... control over financial reporting did not include the internal controls of its DIRECTV and Mexico wireless businesses, which are included in the December 31, 2015 consolidated financial statements of the Company. DIRECTV constituted 20.3% of total assets and 9.9% of total revenues for the year...

  • Page 85
    ... Former Chairman of the Federal Communications Commission Director since 2014 Background: Law, telecommunications, public policy Cynthia B. Taylor, 54 (1,6) President and Chief Executive Officer Oil States International, Inc. Director since 2013 Background: Public accounting, oil and gas AT&T INC...

  • Page 86
    ... Vice President and Global Marketing Officer John Stankey, 53 Chief Executive OfficerAT&T Entertainment Group, AT&T Services, Inc. Bill Blase Jr., 60 Senior Executive Vice PresidentHuman Resources John Donovan, 55 Chief Strategy Officer and Group PresidentAT&T Technology and Operations David...

  • Page 87
    ... retirement account. For more information, call 1-800-351-7221. Stock Trading Information AT&T Inc. is listed on the New York Stock Exchange. Ticker symbol: T Information on the Internet Information about AT&T Inc. is available on the Internet at www.att.com Annual Meeting The annual meeting...

  • Page 88