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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
    ... 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 the...

  • Page 3
    ...INC. | 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...

  • Page 4
    ... of wireline customers to transition to our most advanced network technology and, in the process, significantly reduce our operating costs. Staying ahead of our customers' growing demand for mobile Internet service, particularly video entertainment, requires access to significant wireless radio...

  • Page 5
    ... reach of our current TV business. The acquisition places us in the best position to provide customers with integrated packages of TV, mobile and high-speed Internet services. DIRECTV will also provide us with the best content-owner relationships in the industry. These relationships are critical to...

  • Page 6
    ... we do, we'll move quickly to build a world-class mobile business in a country with a strong economic outlook, a growing middle class and close trade, cultural and geographic ties to the United States. We'll be able to offer customers the first-ever North American Mobile Service area - one seamless...

  • Page 7
    AT&T INC. | 2014 Annual Report 5 DIVERSIF YING OUR REVENUES By the end of 2015, AT&T expects its largest revenue stream will be business (wired and wireless) EOY 2014 Business Mobility Consumer Business (Wired/Wireless) the Internet. This decision helped unleash nearly two decades of amazing...

  • Page 8
    ... | 2014 Annual Report Financial ... value to you will continue to be a hallmark of AT&T. Looking ahead, I'm more confident than ever that we have the right...mobile Internet revolution and building the premier network to meet demand for mobile data Visit att.com/AR-premiernetwork for more information...

  • Page 9
    ...YOY Growth SOLID BUSINESS REVENUE GROWTH Total 2014 revenues from business customers, including wireless and wireline, were $71.9 billion...BILLION IN ANNUALIZED REVENUES AT&T U-verse and strategic business services combined for more than $25 billion in annualized revenues by the end of 2014, and both...

  • Page 10
    ... | 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 3 1.04...

  • Page 11
    ... Financial Statements Notes to Consolidated Financial Statements Report of Management Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting Board of Directors Executive Officers 10 11 42 47 76 77...

  • 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
    ... income for 2012 included an actuarial loss of $9,994. Service revenues decreased $815, or 0.7%, in 2014 and increased $746, or 0.6%, in 2013. The decrease in 2014 was primarily due to growth in our wireless Mobile Share Value plans, continued declines in our legacy wireline voice and data products...

  • Page 14
    ... industry is rapidly evolving from fixed location, voice-oriented services into an industry driven by customer demand for instantly available, databased services (including video). We have been investing heavily to expand our broadband network and upgrade our wireless network to meet this demand...

  • Page 15
    ... voice communications services, U-verse high speed Internet, video and VoIP services and managed networking to business customers. The following sections discuss our operating results by segment. Operations and support expenses include certain network planning and engineering expenses; information...

  • Page 16
    ... of performance for the Wireless segment: Percent Change (in 000s) 2014 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...

  • Page 17
    ...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 connected devices, attract subscribers from other providers and minimize subscriber churn. As of December 31, 2014...

  • Page 18
    .... The increase in 2013 was primarily due to a higher number of subscribers using smartphones and data-centric devices. While we expect 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...

  • Page 19
    ... access lines and other services provided at December 31, 2014, 2013, and 2012 are shown below and trends are addressed throughout the following segment discussion. Percent Change (in 000s) 20143 2013 2012 2014 vs. 2013 2013 vs. 2012 U-verse high speed Internet DSL and Other Broadband Connections...

  • Page 20
    ...-switched data services. The decreases were primarily due to lower demand as customers continue to shift to our most advanced IP-based offerings, such as Ethernet, VPN, U-verse high speed Internet access and managed Internet services, or to other service providers. The lower traditional service...

  • Page 21
    ...revenue growth in 2014 and 2013, respectively. ABS wireless 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...

  • Page 22
    ... 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 access services as telecommunications services, subject to comprehensive regulation under Title II of the Communications Act of 1934...

  • Page 23
    ...with our upgraded backhaul network, we are able to enhance our network capabilities and provide superior mobile broadband speeds for data and video services. Our wireless network also relies on other GSM digital transmission technologies for 3G and 2G data communications. As of December 31, 2014, we...

  • Page 24
    ... lawful websites or applications that compete with the provider's own voice or video telephony services. 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...

  • Page 25
    ... reclassify broadband Internet access service as a telecommunications service to achieve its regulatory goals. In November 2014, the president issued a statement urging the FCC to reclassify both fixed and mobile consumer broadband Internet access services as telecommunications services, subject to...

  • Page 26
    ... customer service standards with required payments if we fail to meet the standards. We continue to lose access lines due to competitors (e.g., wireless, cable and VoIP providers) who can provide comparable services at lower prices because they are not subject to traditional telephone industry...

  • Page 27
    ... change in the provision for uncollectible accounts of approximately $100. Deferred Purchase Price 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...

  • 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
    ...is between $34.90 and $38.58 at closing, then DIRECTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value. DIRECTV is a premier pay TV provider in the United States and Latin America, with a high-quality customer base, the best selection of programming, the...

  • Page 30
    ...download speeds of a small portion of our legacy Unlimited Data Plan customers each month. MBR is an industry-standard practice that is authorized by the FCC and designed to affect only the most dataintensive applications (such as video streaming). Texts, emails, tweets, social media posts, Internet...

  • Page 31
    ... and wireline networks, our U-verse services and support systems for our communications services. Capital expenditures, excluding interest during construction, increased $255 from 2013. Our Wireless segment represented 53% of our total spending and increased 2% in 2014. The Wireline segment, which...

  • Page 32
    ...% Leap convertible senior notes (Leap senior notes) in connection with the Leap acquisition. • April 2014 redemption of Cricket Communications, Inc. 7.750% senior notes with a face value of $1,600 in connection with the Leap acquisition. • July 2014 redemption of $4,393 of debt consisting of all...

  • Page 33
    ..., the payment of dividends, subject to approval by our Board of Directors, the repayment of debt and share repurchases. We plan to fund...ended. Events of default under both agreements are customary for facilities of this nature and result in the acceleration or permit the lenders to accelerate...

  • Page 34
    Management...acceleration or permit the lenders to accelerate, as applicable, required payment...-Month Credit Agreement to provide advances extend from the ...either: • at a variable annual rate equal to: (1) the ... an applicable margin, as set forth in the 18-Month...which case the pricing will be the ...

  • Page 35
    ... is less than 50% or there is a transaction that results in 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 has the right to require AT&T to purchase the preferred equity...

  • Page 36
    ... 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 37
    ...and 10. In managing interest expense, we control our mix of fixed and floating rate...assets and income we report from these sources. ...provide currency at a fixed rate. Our policy is to measure the risk of adverse currency fluctuations by calculating the potential dollar losses resulting from changes...

  • Page 38
    ... in purchasing new services. Customers are changing their buying habits in response to both ongoing economic conditions and technological advances. Should we fail to respond promptly to address these changes in customer demands, we are likely to experience greater pressure on pricing and margins as...

  • Page 39
    ... 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 devices...

  • Page 40
    ...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 41
    ... IT security 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, our customer account support and information systems, or employee and business...

  • Page 42
    Management...to sell our advanced services, a number of these same countries...customers in these countries may be unable to purchase the services we offer or pay for services already provided...employees are represented by labor unions as of year-end 2014. Labor contracts covering many of the employees will...

  • Page 43
    ... the impact 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...

  • Page 44
    Consolidated Statements of Income 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 ...

  • Page 45
    ...2014 ...of taxes of $224, $30 and $0 Available-for-sale securities: Net unrealized gains, net of...$16 and $15 Defined benefit postretirement plans: Net actuarial loss from equity method ...service credit arising during period, net of taxes of $262, $1,695 and $1,378 Amortization of net prior service...

  • Page 46
    ... maturing within one year Accounts payable and accrued liabilities Advanced billings and customer deposits Accrued taxes Dividends payable... 14,000,000,000 authorized at December 31, 2014 and 2013: issued 6,495,231,088 at December 31, 2014 and 2013) Additional paid-in capital Retained earnings ...

  • Page 47
    ...2014 2013 2012 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...change...and Cash Equivalents End of Year The ...

  • Page 48
    ... Balance at beginning of year Issuance of treasury stock Share-based payments Share of equity method investee capital transactions Change related to acquisition of interests held by noncontrolling owners Balance at end of year Retained Earnings Balance at beginning of year Net income attributable...

  • 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
    ... installment receivables. Allowance for Doubtful Accounts We record expense to maintain an allowance for doubtful accounts for estimated losses that result from the failure or inability of our customers to make required payments deemed collectable from the customer when the service was provided...

  • Page 51
    ... 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 52
    ... in the SoftcardTM mobile wallet joint venture. The Wireline segment uses our regional, national and global network to provide consumer and business customers with data and voice communications services, AT&T U-verse® high speed Internet, video and VoIP services and managed networking to business...

  • Page 53
    ..., 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 amortization expenses Total segment operating...

  • Page 54
    .... In January 2015, we submitted winning bids for 251 Advanced Wireless Service (AWS) spectrum in the AWS-3 Auction (FCC Auction 97) for $18,189. We provided the FCC an initial down payment of $921 in October 2014 and paid the remaining down payment of $2,717 on February 13, 2015. We will pay the...

  • Page 55
    ... amortization of software totaling $1,504 in 2014, $2,142 in 2013 and $2,130 in 2012. We periodically assess our network assets for impairment, and our analysis in 2014 indicated no impairment. However, due to declining customer demand for our legacy voice and data products and the migration of our...

  • Page 56
    ... of the asset or asset group. We review indefinite-lived intangible assets for impairment annually (see Note 1). Licenses include wireless FCC licenses that provide us with the exclusive right to utilize certain radio frequency spectrum to provide wireless communications services. 54 | AT&T INC.

  • Page 57
    ...accounted for under the equity method. Our investments in equity affiliates at December 31, 2014...-the-top subscription video services. YP Holdings We hold...YP Holdings América Móvil equity adjustments Other adjustments End of year $ 3,860 226 175 (148) ...have $1,000 of annual put reset securities that...

  • Page 58
    ...31, 2014 and ...annual... margin, as set forth in the...provide...ended. Events of default under both agreements are customary for facilities of this nature and result in the acceleration or permit the lenders to accelerate...change. All advances must be repaid no later than the date on which lenders are no longer...

  • Page 59
    ... available credit) up to an additional $2,000 provided... acceleration or permit the lenders to accelerate, as applicable, required payment ...AT&T's option, either: • at a variable annual rate equal to: (1) the highest of ...%, plus (2) an applicable margin, as set forth in the 18-Month Credit Agreement ...

  • Page 60
    ...provides a three-tiered fair value hierarchy that gives highest priority to unadjusted quoted prices...access. LEVEL 2 Inputs to the valuation methodology include: • Quoted prices for similar assets and liabilities in active markets. • Quoted prices... the reporting date. There have been no changes in...

  • Page 61
    ...fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities was estimated based on quoted market prices...balance sheets. Derivative Financial Instruments We employ derivatives to manage certain market risks, primarily interest rate risk and ...

  • Page 62
    ...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 exchange of the underlying principal...

  • Page 63
    ...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...We update our ... ended December 31, 2014 2013...on the weight of available evidence, it is ...

  • Page 64
    ...our U.S. employees are covered by one of our noncontributory pension plans. The majority of our newly hired employees, longer-service management and some nonmanagement employees participate in cash balance pension programs that include annual or monthly credits based on salary as well as an interest...

  • Page 65
    ... the change in the value of plan assets for the years ended December 31 and the plans' funded status at December 31: Pension Benefits 2014 2013 Postretirement Benefits 2014 2013 Fair value of plan assets at beginning of year Actual return on plan assets Benefits paid1 Contributions Transfer for...

  • Page 66
    ... for benefits included in the separate financial statements of the pension plan at December 31: 2014 2013 Plan assets recognized in the consolidated financial statements Preferred equity interest in Mobility Net assets available for benefits $45,163 9,021 $54,184 $47,238 9,209 $56,447 Amounts...

  • Page 67
    ... 2014 to reflect changes in the plan asset mix. Our long-term rates of return reflect 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...

  • Page 68
    ... historical returns on plan assets, current market information on long-term ...outlook and an assessment of likely long-term trends. Due to historical experience, updated expectations of healthcare industry inflation and changes in physician prescribing patterns, we are lowering our 2015 assumed annual...

  • Page 69
    ... 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 70
    ...available, fair value will be determined based solely upon such quotes provided. Managers will typically use a pricing matrix for determining fair value in cases where an approved pricing service or a broker/dealer is unable to provide a fair valuation for specific fixed...following table sets forth by...

  • Page 71
    ... plan net assets at fair value Other assets (liabilities)1 Total Plan ...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: Fixed...

  • Page 72
    ...following tables set forth by...fixed... sold short and other liabilities at fair value Total plan net assets at fair value Other assets (liabilities)1 Total Plan Net Assets 1 $ 65 - - 9,841 ...Other assets (liabilities) include amounts receivable, accounts payable and net adjustment for securities lending...

  • Page 73
    ...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... table provides information for our supplemental retirement plans with accumulated benefit obligations in excess of plan assets at December 31: 2014 2013 2015...

  • Page 74
    ... status of our nonvested stock units as of December 31, 2014, and changes during the year then ended is presented as follows (shares in millions): Nonvested Stock Units Shares Weighted-Average Grant-Date Fair Value NOTE 13. SHARE-BASED PAYMENTS Under our various plans, senior and other management...

  • Page 75
    ... was not considered outstanding for accounting purposes at year-end, it did not affect the calculation of earnings per share. NOTE 15. ADDITIONAL FINANCIAL INFORMATION December 31, Consolidated Balance Sheets 2014 2013 Accounts payable and accrued liabilities: Accounts payable Accrued payroll and...

  • Page 76
    ... of the arrangement, we continue to bill and collect on behalf of our customers for the receivables sold. The following table sets forth a summary of equipment installment receivables sold during 2014: 2014 NOTE 17. TOWER TRANSACTION On December 16, 2013, we closed our transaction with Crown Castle...

  • Page 77
    ...an ongoing basis, we take into account amounts already accrued on the balance NOTE 19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following tables represent our quarterly financial results: 2014 Calendar Quarter First Second Third Fourth2 Annual Total Operating Revenues Operating Income (Loss...

  • Page 78
    ... 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 79
    ... in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December...

  • Page 80
    ... 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 expressed an unqualified opinion thereon. Dallas, Texas February...

  • Page 81
    ...and Chief Executive Officer United Parcel Service, Inc. ...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...

  • Page 82
    ..., 62 Senior Executive Vice PresidentExternal and Legislative Affairs, AT&T Services, Inc. John Donovan, 54 Senior Executive Vice PresidentAT&T Technology and Operations John Stankey, 52 Group President and Chief Strategy Officer (Information is provided as of February 20, 2015.) 80 | AT&T INC...

  • Page 83
    ... transfer agent for AT&T Inc. at [email protected] or visit the website at www.computershare.com/att Information on the Internet Information about AT&T Inc. is available on the Internet at www.att.com Independent Auditor Ernst & Young LLP 2323 Victory Ave., Suite 2000 Dallas, TX 75219 Annual...

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