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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
    ... Chairman, Chief Executive 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...

  • Page 4
    ... 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 or care about...

  • Page 5
    ...experience, we build "effortless" into every touch point. Whether a customer is searching for a product, viewing content, interacting with customer care or having service installed - it must be simple, seamless and effortless. To make effortless a competitive advantage requires continuous investment...

  • Page 6
    ...200 countries and territories. AT&T's Entertainment Group is our secondlargest segment following last year's DIRECTV acquisition. We're now the largest pay TV provider in the United States and the world. That, combined with our nationwide mobility business and high-speed Internet service available...

  • Page 7
    ... Global Marketing Officer; David McAtee II, Senior Executive Vice President and General Counsel; Ralph de la Vega, Vice Chairman, AT&T Inc. and Chief Executive Officer, AT&T Business Solutions and AT&T International, LLC; John Stankey, Chief Executive Officer-AT&T Entertainment Group, AT&T Services...

  • Page 8
    mobile device in the United States and Canada, as if they were in Mexico. And it's all enabled by our network's ability to provide fast and highly secure mobile LTE connectivity to 355 million people and businesses in the United States and Mexico. Meanwhile, our DIRECTV operations in Latin America ...

  • Page 9
    ... that require investment above what's anticipated today. But we're a company that's never been afraid to take the long-term view of our business, and that won't change. Above all, we're committed to sustaining the long-term health of our business so we can deliver above-market returns to...

  • Page 10
    ... skill sets to provide informed counsel on strategic moves in a rapidly changing industry. The board thoroughly reviews and approves our strategic plans in multiple sessions throughout the year. Those sessions encourage extensive board discussion and debate to ensure the management team is executing...

  • Page 11
    ... 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 of Independent Registered Public Accounting Firm Board of Directors Executive Officers 10 11...

  • Page 12
    ...(000,000) Weighted-average common shares 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...

  • Page 13
    ...&T U-verse® (U-verse) services. The decrease in 2014 was primarily due to customers choosing 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...

  • Page 14
    ... of $7,584 in 2013. Operating income for 2014 also included a noncash charge of $2,120 related to an abandonment of network assets, higher wireless equipment costs resulting from higher device sales and customers choosing higher-priced devices, increased expenses supporting U-verse subscriber growth...

  • Page 15
    ... and broadband, collectively referred to as strategic business services, as well as traditional data and voice products. We utilize our wireless and wired network and are marketed to provide a complete communications solution to our business customers. The Entertainment Group segment accounted for...

  • Page 16
    ... 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 Business Solutions Segment Results using official exchange...

  • Page 17
    ... exchange rates. Wireless equipment revenues increased $912, or 13.0%, in 2015 and $3,081, or 77.8%, in 2014. The increase was primarily due to the increase in handsets sold under our AT&T NextSM (AT&T Next) program and the increase in sales of higher-priced smartphones. Operations and support...

  • Page 18
    ...Condition and Results of Operations (continued) 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...

  • Page 19
    ... 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, or...

  • Page 20
    ...related to the increase in devices sold under our AT&T Next program and the increase in sales of higher-priced smartphones. Operations and support expenses decreased $2,414, or 10.1%, in 2015 and increased $1,346, or 6.0%, in 2014. Operations and support expenses consist of costs incurred to provide...

  • Page 21
    ... support expenses in 2014 were primarily due to the following: • Equipment costs increased $613, reflecting increased sales and customers choosing more expensive smartphones. • Handset insurance cost increased $283 due to an increase in the cost of replacement phones. • Network costs increased...

  • Page 22
    ... AT&T Mobility: Percent 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...

  • Page 23
    ... periods with an increasing portion of these subscribers receiving unlimited voice and texting services in conjunction with data services purchased through our Mobile Share plans. Approximately 69% of all postpaid smartphone gross ads and upgrades during 2015 chose AT&T Next. While BYOD customers...

  • Page 24
    ... of Internet-based broadband/data services. We expect continuing declines in traditional telephone service revenues. We expect our 2015 acquisitions of DIRECTV and wireless properties in Mexico to increase revenues, although we expect to incur significant integration costs in the same period. 2016...

  • Page 25
    ...then international video and mobility. Integration of Data/Broadband and Entertainment Services As the communications industry continues to move toward Internet-based technologies that are capable of blending wireline, satellite and wireless services, we plan to offer services that take advantage of...

  • Page 26
    ... other wireless communications services and resellers of those services. In addition, we face competition from providers who offer voice, text messaging and other services as applications on data networks. More than 98 percent of the U.S. population live in areas with at least three mobile telephone...

  • Page 27
    ...' wireless, satellite 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 services and...

  • Page 28
    ...50% decrease 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...

  • Page 29
    ... 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 and then calculated a weighted-average...

  • Page 30
    ... are required to refrain from 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...

  • Page 31
    ... June 17, 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...

  • Page 32
    ... 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 funding. Proceeds from the sale of equipment installment receivables and...

  • Page 33
    ...advantage of lower market interest rates and undertook several activities related to our long-term debt which caused our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, to decrease from 4.2% at December 31, 2014 to 4.0% at December 31, 2015...

  • Page 34
    ... payable on September 2, 2016. In September 2015, we partially repaid the amount borrowed. Advances bear interest at a rate equal to: (i) the LIBOR for deposits in dollars (adjusted upwards to reflect any bank reserve costs) for a period of one, two, three or six months, as applicable, plus (ii) the...

  • Page 35
    ...sales of certain equipment installment receivables and real estate holdings. We plan to continue to explore monetization opportunities in 2016. In September 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding company for our wireless...

  • Page 36
    ... price in cash or shares of AT&T common stock or a combination thereof. CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES Current accounting standards require us to disclose our material obligations and commitments to making future payments under contracts, such as debt and lease agreements...

  • 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
    ... 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 our financial statements of providing benefits under our plans, we have...

  • Page 39
    ...subscription to access mobile programming, an increasing number of customers are also using mobile devices as the sole means of viewing video and an increasing number of non-traditional video providers are developing content and technologies to satisfy that demand. In order to remain competitive, we...

  • Page 40
    ... area, we also face current and potential litigation relating to alleged adverse health effects on customers or employees who use such technologies including, for example, wireless devices. We may incur significant expenses defending such suits or government charges and may be required to pay...

  • Page 41
    ...provide an integrated bundle of broadband, video and wireless services enabling us to compete more effectively 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...

  • Page 42
    ... relating to spectrum use, licensing, obtaining additional spectrum, technical standards and deployment and usage, including network management rules. • Our ability to manage growth in wireless data services, including network quality and acquisition of adequate spectrum at reasonable costs...

  • 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
    ...Dollars in millions 2015 2014 As Adjusted 2013...224 and $30 Available-for-sale securities: Net unrealized gains, net of...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...

  • Page 45
    ... Dollars in millions except per share amounts December 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...

  • Page 46
    ... net of impairments Actuarial (gain) loss on pension and postretirement 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...

  • Page 47
    ...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 acquisition...

  • Page 48
    ...results of DIRECTV and wireless properties in Mexico for the period from acquisition through December 31, 2015. Our subsidiaries and affiliates operate in the communications and digital entertainment services industry, providing services and equipment that deliver voice, video and broadband services...

  • Page 49
    ... of New ASUs As Adjusted At December 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...

  • Page 50
    ... in money market funds and other cash equivalents. Revenue Recognition Revenues derived from wireless, fixed telephone, data and video services are recognized when services are provided. This is based upon either usage (e.g., minutes of traffic/bytes of data processed), period of time (e.g., monthly...

  • Page 51
    ...the arrangement. We offer to 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, after having paid a specified number of installments, and have the remaining unpaid balance...

  • Page 52
    ...market price information for national wireless licenses. Brand names are tested by comparing the book value to a fair value calculated using a discounted cash flow approach on a presumed royalty rate derived from the revenues related to the brand name. Intangible assets that have finite useful lives...

  • Page 53
    ...actual incurred information are generally not received within three months subsequent to the end of the reporting period, at which point a final adjustment is made to the accrued switched traffic compensation expense. Dedicated traffic compensation costs are estimated based on the number of circuits...

  • Page 54
    ... 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...

  • Page 55
    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 network and are marketed to provide a complete communications solution to our business customers. The Entertainment ...

  • Page 56
    ...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 intangibles acquired Actuarial gain (loss) Employee...

  • Page 57
    ...bundles including video, high-speed broadband and mobile services, using all the sales channels of both companies. We believe the combined company will be a content distribution leader across mobile, video and broadband platforms. Under the merger agreement, each share of DIRECTV stock was exchanged...

  • Page 58
    ... in licenses, $715 in property, plant and equipment, $374 in customer lists, $26 in trade names and $972 of goodwill. The goodwill was allocated to our International segment. AWS-3 Auction In January 2015, we submitted winning bids for 251 Advanced Wireless Service (AWS) spectrum licenses in the AWS...

  • 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
    ...Wireless license additions in 2015 were primarily related to FCC Auction 97, with the remainder originating from our Mexico business acquisitions and various spectrum license purchases. The increase in orbital slots and trade names was primarily due to the DIRECTV acquisition. (See Note 5) We review...

  • Page 61
    ... 2015 and 2014. The weighted-average interest rate of our entire long-term debt portfolio, including the impact of derivatives, decreased from 4.2% at December 31, 2014 to 4.0% at December 31, 2015. Other debt includes financing arrangements we have in Mexico for the construction of wireless network...

  • Page 62
    ...term debt include debt that may be put back to us by the holders in 2016. We have $1,000 of annual put reset securities that may be put each April until maturity in 2021. If the holders do not require us to repurchase the securities, the interest rate will be reset based on current market conditions...

  • Page 63
    ... payable on September 2, 2016. In September 2015, we partially repaid the amount borrowed. Advances bear interest at a rate equal to: (i) the LIBOR for deposits in dollars (adjusted upwards to reflect any bank reserve costs) for a period of one, two, three or six months, as applicable, plus (ii) the...

  • Page 64
    ...-for-sale securities and derivatives as 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...

  • Page 65
    ... 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...

  • Page 66
    ...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 the benchmark...

  • Page 67
    ...83 for 2015, $(64) for 2014, and $35 for 2013. We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. As a large taxpayer, our income tax returns are regularly audited by the Internal Revenue Service (IRS) and other taxing authorities. The IRS...

  • Page 68
    ...-eligible employees to elect a full lump sum payment of their accrued pension if they retired as of December 30, 2013. The lump sum value was calculated using the August 2012 discount rates for some pension programs and was equal to the cash balance amount for the management new hire pension program...

  • Page 69
    conditions, government actions, marketplace changes and the general consumer inflation rate. In the fourth quarter of 2014, we changed the method we use to estimate the service and interest components of net periodic benefit cost for pension (as of October 1, 2014) and other postretirement benefits ...

  • 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
    ... 2015 2014 2013 Weighted-average discount rate for determining projected benefit obligation at December 31 Discount rate in effect for determining service cost Discount rate in effect for determining interest cost1 Long-term rate of return on plan assets Composite rate of compensation increase...

  • 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 on...

  • Page 73
    ... day of the year. If no sale was reported on that date, they are valued at the last reported bid price. 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. Shares...

  • Page 74
    ...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 basis of average cost. Interest...

  • Page 75
    ... obligations/REMICS Corporate and other fixed income instruments and funds Government and municipal bonds Private equity funds Real estate and real assets Commingled funds Securities lending collateral Receivable for variation margin Purchased options Assets at fair value Investments sold short and...

  • Page 76
    ..., accounts payable and net adjustment for securities lending payable. 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: Pension Assets Equities Fixed Income Funds Private Equity Funds Real Estate...

  • Page 77
    ... 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, senior and other management...

  • Page 78
    ...$175 for 2013. 2015 2014 2013 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 with certain acquisitions. In July 2012, our Board of Directors authorized the repurchase...

  • Page 79
    ...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 December 31, 2015 and December 31, 2014, gross...

  • 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
    ... 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 common shares for the quarters...

  • Page 82
    ... and by communication programs aimed at ensuring that its policies, standards and managerial authorities are understood throughout the organization. The Audit Committee of the Board of Directors meets periodically with management, the internal auditors and the independent auditors to review the...

  • 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
    ...of Management. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and...

  • 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
    ... la Vega, 64 Vice Chairman, AT&T Inc. and Chief Executive Officer, AT&T Business Solutions and AT&T International, LLC Lori Lee, 50 Senior Executive Vice President and Global Marketing Officer John Stankey, 53 Chief Executive OfficerAT&T Entertainment Group, AT&T Services, Inc. Bill Blase Jr., 60...

  • 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 of...

  • Page 88