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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
    ... mobile communications with access to content located in the cloud. This means that just about everything in our world will be connected, seamless and smart. Our content will follow us no matter what device we're using. Our homes and cars will be extensions of our smartphones 1 2013 Annual Report

  • Page 4
    ...2013 Annual Report and tablets. The highest levels of education will be accessible to millions more people wherever they are located, and advancements in healthcare will occur in ways we haven't yet imagined. The impact of such a connected...will accelerate. Customer expectations for communications ...

  • Page 5
    ... and more efficiently. We expect to start trials this year. Second, an effortless customer experience is fundamental. AT&T has a long history of delivering personal service. Now, we're building on that heritage to create new customer service platforms for a high- AT&T Inc. 3 2013 Annual Report

  • 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
    ... in the second half of 2013 - more markets than any other carrier 1 that happens, customers win, our overall economy grows...communications with confidence. For our part, to provide transparency, we plan to publish a report on the number of law enforcement requests for customer information. At the end...

  • Page 8
    ... such an important role and that is so closely connected to the communities we serve. In addition to delivering great service every day, time and again the men and women of AT&T step up when called upon - in the face of natural disasters, helping young people succeed in school, lending a hand to...

  • Page 9
    ...revenues grew 1.9 percent versus 2012, excluding our divested Advertising Solutions unit AT&T Inc. 7 2013 Annual Report $128.8B 2013 2012 $126.4B Reported $127.4B STRONG EARNINGS GROWTH After adjustments, full-year 2013 EPS was up 8.2 percent - the second straight year of growth above 8 percent...

  • Page 10
    ...Global 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...

  • 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 of...

  • Page 12
    ...and Operating Data Dollars in millions except per share amounts At December 31 and for the year ended: 2013 2012 2011 2010... reporting methodology. The number presented represents 100% of AT&T Mobility wireless subscribers. 3 Broadband connections include U-verse high speed Internet access, DSL ...

  • Page 13
    ... is rapidly evolving from fixed location, voice-oriented services into an industry driven by customer demand for instantly available, databased services (including video). Our products, services and plans are changing as we transition to sophisticated, high-speed, IP-based alternatives. We are...

  • Page 14
    ...) Dollars in millions except per share amounts We expect continued growth 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...

  • Page 15
    ... video, voice services and managed networking to business customers. The former Advertising Solutions segment (sold on May 8, 2012), included our directory operations, which published Yellow and White Pages directories and sold directory advertising, Internet-based advertising and local search. The...

  • Page 16
    ...acquisition of Leap Wireless, which we expect to complete by the end of first quarter 2014. In 2013, we continued to see an increasing number of our postpaid subscribers select smartphones rather than feature phones, which lack general Internet access. Of our total postpaid phone subscriber base, 76...

  • Page 17
    ... chosen the medium- and higher-data plans. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers and minimize subscriber churn. As of December 31, 2013, approximately 77% of our postpaid...

  • Page 18
    ... handset upgrade activity and total device sales. Partially offsetting these increases were the following: • Interconnect and long-distance costs decreased $353 due to third-party credits, lower usage costs and our ongoing network transition to more efficient Ethernet/IP-based technologies in 2013...

  • Page 19
    ... expense, partially offset by lower voice revenue. As we transition from basic voice and data services to sophisticated, high-speed, IP-based alternatives, we expect continued growth in our more advanced IP data products while traditional data and DSL revenues continue to decline. AT&T Inc. | 17

  • Page 20
    ...' high speed Internet access offerings. • Strategic business services, which include VPN, Ethernet, hosting, IP conferencing, VoIP, Ethernetaccess to Managed Internet Service (EaMIS), security services and U-verse provided to business customers, increased $1,105, or 15.0%, in 2013 and $1,029...

  • Page 21
    ... Information Wireline Broadband, Telephone and Video Connections Summary Our broadband, switched access lines and other services provided at December 31, 2013, 2012, and 2011 are shown below and trends are addressed throughout the preceding segment discussion. Percent Change (in 000s) 2013...

  • Page 22
    ... that all our major customer categories will continue to increase their use of Internet-based broadband/data services. We expect continuing declines in traditional access lines and in traditional telephone service revenues. Where available, our U-verse services have proved effective in stemming...

  • Page 23
    .... The rules also imposed transparency requirements on providers of both fixed and mobile broadband Internet access services, requiring public disclosure of information regarding network management practices, performance and commercial terms of their service offerings. In addition, AT&T Inc. | 21

  • Page 24
    ... and 2G data communications. As of December 31, 2013, we served more than 110 million subscribers. We continue to expand the number of locations, including airports and cafés, where customers can access broadband Internet connections using wireless fidelity (local radio frequency commonly referred...

  • Page 25
    ... result in the elimination of virtually all terminating switched access charges and reciprocal compensation payments over a six-year transition. In the order, the FCC also repurposed its high-cost universal service program to encourage providers to deploy broadband facilities in unserved areas. To...

  • Page 26
    ... 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 other smaller telecommunications companies for both long-distance and local services...

  • Page 27
    ... capacity, and switched services to other service providers, primarily large Internet Service Providers using the largest class of nationwide Internet networks (Internet backbone), wireless carriers, Competitive Local Exchange Carriers, regional phone Incumbent Local Exchange Carriers, cable...

  • Page 28
    ..., wireless FCC licenses and trade names are not amortized but tested annually for impairment. We conduct our impairment tests as of October 1. We test goodwill on a reporting unit basis, and our reporting units coincide with our segments. If, due to changes in how we manage the business, we move...

  • Page 29
    ... for $806 in cash, which included closing adjustments. Under the terms of the agreement, we acquired wireless properties, including licenses, network assets, retail stores and approximately 550,000 subscribers. We expect to complete network upgrades and migrate customers to our network in the second...

  • Page 30
    Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Dollars in millions except per share amounts Leap Acquisition In July 2013, we announced an agreement to acquire Leap Wireless International, Inc. (Leap), a provider of prepaid wireless service under ...

  • Page 31
    ... and wireline networks, our U-verse services and support systems for our communications services. Capital expenditures, excluding interest during construction, increased $1,479 from 2012. Our Wireless segment represented 52% of our total spending and increased 3% in 2013. The Wireline segment, which...

  • Page 32
    ...payments. At December 31, 2013, we had $5,498 of debt maturing within one year, substantially all of which was related to long...change. All advances must be repaid no later than the date on which lenders are no longer... then ended. Defaults under both agreements permit the lenders to accelerate required...

  • Page 33
    ... final. • A person acquires beneficial ownership of more than 50% of AT&T common shares or more than a majority of AT&T's directors change in any 24-month... benefits provided to certain active and retired employees and their dependents totaled $5,167 in 2013, with $1,682 paid from plan assets....

  • Page 34
    ... we cannot reasonably estimate the timing or amounts of additional cash payments, if any, at 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...

  • Page 35
    ... 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 notes and debentures. Changes in interest rates can lead to significant...

  • Page 36
    ...them by first addressing general factors, then industry factors and, finally, items specifically applicable to us. The current U.S. economy has changed our customers' buying habits and a failure to adequately respond could materially adversely affect our business. We provide services and products to...

  • Page 37
    ... development of wireless, cable and IP technologies has significantly increased the commercial viability of alternatives to traditional wireline telephone service and enhanced the capabilities of wireless networks. In addition, our customers continue to demand services that can be accessed on mobile...

  • Page 38
    ...each 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...

  • Page 39
    ... that 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, or our customer account support and information systems, could have a material adverse...

  • Page 40
    Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Dollars in millions except per share amounts CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS Information set forth in this report contains forward-looking statements that are subject to ...

  • Page 41
    Consolidated Statements of Income Dollars in millions except 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 ...

  • Page 42
    ...Dollars in millions 2013... taxes of $30, $0 and $183 Available-for-sale securities: Net unrealized gains (losses...15 and $8 Defined benefit postretirement plans: Net actuarial loss from equity ...service credit arising during period, net of taxes of $1,695, $1,378 and $699 Amortization of net prior service...

  • Page 43
    ... and Stockholders' Equity Current Liabilities Debt maturing within one year Accounts payable and accrued liabilities Advanced billings and customer deposits Accrued taxes Dividends payable Total current liabilities Long-Term Debt Deferred Credits and Other Noncurrent Liabilities Deferred income...

  • Page 44
    ... Flows Dollars in millions 2013 2012 2011 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 income...

  • Page 45
    ...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 Issuance of treasury stock Share-based payments...

  • Page 46
    ... fair value. At December 31, 2013, we held $697 in cash and $2,642 in money market funds and other cash equivalents. Revenue Recognition Revenues derived from wireless, local telephone, long distance, data and video services are recognized when services are provided. This is based upon either usage...

  • Page 47
    ...using acquisition accounting, which are initially recorded at fair value (see Note 6). The balance as of December 31, 2013, excluded ...provide us with the exclusive right to utilize certain radio frequency spectrum to provide wireless communications services. While FCC licenses are issued for a fixed...

  • Page 48
    ... 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 which point a final adjustment is made to the accrued switched traffic...

  • Page 49
    ... uses our nationwide network to provide consumer and business customers with wireless data and voice communications services. This segment includes our portion of the results from our mobile payment joint venture marketed as the Isis Mobile WalletTM (ISIS), which is accounted for as an equity method...

  • Page 50
    ...Dollars in millions except per share amounts Segment Results, including a reconciliation to AT&T consolidated results, for 2013, 2012, and 2011 are as follows: At December 31, 2013 and for the year ended Wireless...to long-lived assets 11,191 At December 31, 2012 and for the year ended Wireless ...

  • Page 51
    ... 2013, we announced an agreement to acquire Leap Wireless International, Inc. (Leap), a provider of prepaid wireless service, for fifteen dollars...affiliate of Cerberus Capital Management, L.P. for approximately $740 in cash after closing adjustments, a $200 advance, which was repaid in 2013, and a 47...

  • Page 52
    ... AND OTHER 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...

  • Page 53
    ... assets for impairment annually (see Note 1). Licenses include wireless FCC licenses of $56,399 at December 31, 2013 and $52,318 at December 31, 2012, that provide us with the exclusive right to utilize certain radio frequency spectrum to provide wireless communications services. NOTE 8. EQUITY...

  • Page 54
    ... 2013, we received $200 from the repayment of advances to YP Holdings and $101 from the return of investment in YP Holdings. América Móvil América Móvil is primarily a wireless provider in Mexico with telecommunications investments in the United States, Latin America and Europe. We are a member...

  • 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...

  • Page 56
    ...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 The carrying amounts and estimated fair values of our...

  • Page 57
    ... interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without AT&T Inc. | 55

  • Page 58
    ...changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed...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 ...

  • Page 59
    ...it is more likely than not, based on the technical merits, that the position will ultimately be sustained. For tax positions that meet this recognition threshold, we apply our judgment, taking into account applicable tax laws, our experience in managing tax audits and relevant GAAP, to determine the...

  • Page 60
    ... of $250 as a result of this offer. In October 2013, as part of our 2014 annual benefits enrollment process, we communicated an amendment to our Medicare-eligible retirees that beginning in 2015 AT&T will provide access to retiree health insurance coverage that supplements government-sponsored...

  • Page 61
    ... the change in the value of plan assets for the years ended December 31 and the plans' funded status at December 31: Pension Benefits 2013 2012 Postretirement Benefits 2013 2012 Fair value of plan assets at beginning of year Actual return on plan assets Benefits paid1 Contributions Transfer for...

  • Page 62
    ...compensation levels. The accumulated benefit obligation for our pension plans was $55,077 at December 31, 2013, and $57,010 at December 31, 2012. (9,322) $(9,322) $(13,851) $(21,325) $(28,136) Included in "Accounts payable and accrued liabilities." 2 Included in "Postemployment benefit obligation...

  • Page 63
    ...plan assets of 7.75% for 2014 and 2013 reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the projected benefit obligations. In setting the long-term assumed rate of return, management...fixed income corporate bonds available...

  • Page 64
    ... that these postretirement 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...

  • Page 65
    ...determined by internal appraisals performed by the investment manager, which have been agreed to by an external valuation consultant. Fixed income securities valuation is based upon pricing provided by an external pricing service when such pricing is available. In the event a security is too thinly...

  • Page 66
    ... 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 securities...

  • Page 67
    ...set forth a summary of changes in the fair value of the Level 3 pension and postretirement assets for the year ended December 31, 2013: Fixed... beginning of year Realized gains (losses) Unrealized gains (losses) Transfers in Transfers out Purchases Sales Balance at end of year $21 - 1 1 (1) 5 (1) $26...

  • Page 68
    ...set... sold short and other liabilities at fair value Total plan net assets at fair value Other assets (liabilities)1 Total Plan Net Assets 1 $ 144 56 - 8,291 6,...060 Other assets (liabilities) include amounts receivable, accounts payable and net adjustment for securities lending payable... Fixed ...

  • Page 69
    ...losses) Transfers in Transfers out Purchases Sales Balance at end of year $ 4 (1) 1 - - - (4) $- Fixed Income ...payment elections, among other factors, changes in any of these factors could significantly affect these expected amounts. Due to our move to a group prescription drug provider plan in 2013...

  • Page 70
    ...) Dollars in millions except per share amounts The following table provides information for our supplemental retirement plans with accumulated benefit obligations in excess of plan assets at December 31: 2013 2012 NOTE 13. SHARE-BASED PAYMENTS Under our various plans, senior and other management...

  • Page 71
    ...summary of the status of our nonvested stock units as of December 31, 2013, and changes during the year then ended is presented as...the transfer of 50% or more of the pension plan trust's assets to an entity not under common control with AT&T (collectively, a change of control). The pension plan trust...

  • Page 72
    ... 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 are represented by labor unions as of year-end 2013. We are party to numerous lawsuits, regulatory proceedings and other...

  • Page 73
    ...2013 Calendar Quarter First Second Third Fourth2 Annual Total Operating Revenues Operating Income Net Income Net Income Attributable to AT&T Basic Earnings Per Share Attributable to AT&T1 Diluted Earnings Per Share Attributable to AT&T1 Stock Price High Low Close...postretirement benefit plans (Note ...

  • Page 74
    ... year end, are the responsibility of management, as is all other information included in the Annual Report, unless otherwise indicated. The financial statements of AT&T Inc. (AT&T) have been audited by Ernst & Young LLP, Independent Registered Public Accounting Firm. Management has made available to...

  • Page 75
    ... supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable...

  • Page 76
    ...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 February 21, 2014 expressed an unqualified opinion thereon. Dallas, Texas February...

  • Page 77
    ...2005 Background: Public accounting Matthew K. Rose,... services ...2013 Background: Banking Committees of the Board: (1) Audit (2) Corporate Development and Finance (3) Corporate Governance and Nominating (4) Executive (5) Human Resources (6) Public Policy and Corporate Reputation (Information is provided...

  • Page 78
    ... Executive Vice President and Chief Financial Officer Bill Blase Jr., 58 Senior Executive Vice PresidentHuman...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...

  • Page 79
    ...on the New York Stock Exchange. Ticker symbol: T Annual Report printed on paper containing 30% post-consumer recycled fiber content Information on the Internet Information about AT&T Inc. is available on the Internet at www.att.com Annual Meeting The annual meeting of stockholders will be held at...

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