NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used should maximize the use of observable inputs and minimize the use of unobservable inputs.
The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine 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, 2012.2013.
The carrying amounts and estimated fair values of our long-term debt, including current maturities and other financial instruments, are summarized as follows:
NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
RESULTS OF OPERATIONS
For ease of reading, AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications services industry both in the United States and internationally, providing wireless and wireline telecommunication services and equipment. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2012.2013. A reference to a “Note” in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period’s presentation.
Consolidated Results Our financial results in the thirdsecond quarter and for the first ninesix months of 20132014 and 20122013 are summarized as follows:
| | Third Quarter | | | Nine-Month Period | | | Second Quarter | | | Six-Month Period | |
| | 2013 | | | 2012 | | | Percent Change | | | 2013 | | | 2012 | | | Percent Change | | | 2014 | | | 2013 | | | Percent Change | | | 2014 | | | 2013 | | | Percent Change | |
|
Operating Revenues | | $ | 32,158 | | | $ | 31,459 | | | | 2.2 | % | | $ | 95,589 | | | $ | 94,856 | | | | 0.8 | % | | $ | 32,575 | | | $ | 32,075 | | | | 1.6 | % | | $ | 65,051 | | | $ | 63,431 | | | | 2.6 | % |
Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of services and sales | | | 13,403 | | | | 12,602 | | | | 6.4 | | | | 39,227 | | | | 37,673 | | | | 4.1 | | | | 14,212 | | | | 13,270 | | | | 7.1 | | | | 27,533 | | | | 25,824 | | | | 6.6 | |
Selling, general and administrative | | | 7,952 | | | | 8,308 | | | | (4.3 | ) | | | 24,406 | | | | 24,657 | | | | (1.0 | ) | | | 8,197 | | | | 8,121 | | | | 0.9 | | | | 16,457 | | | | 16,454 | | | | - | |
Depreciation and amortization | | | 4,615 | | | | 4,512 | | | | 2.3 | | | | 13,715 | | | | 13,571 | | | | 1.1 | | | | 4,550 | | | | 4,571 | | | | (0.5 | ) | | | 9,167 | | | | 9,100 | | | | 0.7 | |
Total Operating Expenses | | | 25,970 | | | | 25,422 | | | | 2.2 | | | | 77,348 | | | | 75,901 | | | | 1.9 | | | | 26,959 | | | | 25,962 | | | | 3.8 | | | | 53,157 | | | | 51,378 | | | | 3.5 | |
Operating Income | | | 6,188 | | | | 6,037 | | | | 2.5 | | | | 18,241 | | | | 18,955 | | | | (3.8 | ) | | | 5,616 | | | | 6,113 | | | | (8.1 | ) | | | 11,894 | | | | 12,053 | | | | (1.3 | ) |
Income Before Income Taxes | | | 5,500 | | | | 5,442 | | | | 1.1 | | | | 16,624 | | | | 16,990 | | | | (2.2 | ) | | | 6,106 | | | | 5,794 | | | | 5.4 | | | | 11,757 | | | | 11,124 | | | | 5.7 | |
Net Income | | | 3,905 | | | | 3,701 | | | | 5.5 | | | | 11,558 | | | | 11,318 | | | | 2.1 | | | | 3,621 | | | | 3,880 | | | | (6.7 | ) | | | 7,355 | | | | 7,653 | | | | (3.9 | ) |
Net Income Attributable to AT&T | | $ | 3,814 | | | $ | 3,635 | | | | 4.9 | % | | $ | 11,336 | | | $ | 11,121 | | | | 1.9 | % | | $ | 3,547 | | | $ | 3,822 | | | | (7.2 | ) % | | $ | 7,199 | | | $ | 7,522 | | | | (4.3 | ) % |
Overview
Operating income increased $151,decreased $497, or 2.5%8.1%, in the thirdsecond quarter and decreased $714,$159, or 3.8%1.3%, for the first ninesix months of 2013. Both operating revenues and expenses2014. Operating income in the first nine monthssecond quarter reflects lower wireless service revenues resulting from the popularity of 2012 include resultsMobile Share plans, continued decline in legacy voice and data product revenues as well as higher AT&T U-verse® (U-verse) content costs. This decline is partially offset by higher wireless equipment revenue for device sales under our sold Advertising Solutions segment, which had a negative impact on comparisons to operating income for the first nine months of 2013. Operating income increased in the third quarter reflectingAT&T NextSM (AT&T Next) program as well as continued growth in wireless data and equipment revenues, increased revenues from AT&T U-verse® (U-verse)our U-verse and strategic services, and gains realized on spectrum transactions. These increases were partially offset by continued declines in our traditional voice and data services, higher wireless equipment costs, increased expenses for new product development as well as increased expenses supporting U-verse subscriber growth. Operating income for the first nine months was driven by the same factors as for the quarter; however it was also impacted by higher wireless commission expenses and the sale of our Advertising Solutions segment.business services. Our operating income margin inresults include the third quarter was 19.2% in both 2012 and 2013 and foroperations of Leap Wireless International, Inc. (Leap) from March 13, 2014, the first nine months decreased from 20.0% in 2012 to 19.1% in 2013.date of acquisition.
Operating revenues increased $699,$500, or 2.2%1.6%, in the thirdsecond quarter and $733,$1,620, or 0.8%2.6%, for the first ninesix months of 2013. Wireless data and2014. Growth in wireless revenues reflected the continuing trend by our postpaid subscribers to choose devices on installment purchase rather than the device subsidy model, which resulted in increased equipment revenues increased, reflecting the increasing percentage of wireless subscribers choosing smartphones. Continued growth in U-verse services from residential customers and strategic services also contributed to higher operating revenues. The revenue increases wererecognized for device sales, partially offset by continued declines in wirelinelower wireless service revenues. Wireline revenues were slightly lower and continue to be driven by service revenues from our U-verse services and strategic business services, which almost offset decreases from our legacy voice and wireless voice and text revenues. The sale of our Advertising Solutions segment also contributed to lower revenues for the first nine months.data products.
As theThe telecommunications industry continues to evolveis rapidly evolving from fixed location, voice-oriented services into an industry driven by customer demand for instantly available, data-based services technology, and efficiencies, our(including video). Our products, services and plans have also changedare changing as we transition from traditional voice and basic data services to sophisticated, high-speed, IP-based alternatives. This transitionIn addition to re-designing our networks to accommodate these new demands and to take advantage of related technological efficiencies, we are also repositioning our offerings will result inwireless model by moving to simple pricing and no-device-subsidy plans. We expect continued growth in our wireless and wireline IP-based data revenuesservices as we bundle and price plans with greater focus on the data services that our customers desire, provide new products and services, and transition customers from their current traditional services.video offerings. We expect continued declines in voice revenuesservices and our basic wireline data services as customers choose these next-generation services.
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Cost of services and sales expenses increased $801,$942, or 6.4%7.1%, in the thirdsecond quarter and $1,554,$1,709, or 4.1%6.6%, for the first ninesix months of 2013.2014. The increases were primarily due to customers choosing higher-priced devices, which contributed to increased wireless equipment costs related to device sales, increasedand handset insurance costs. The increases also reflect higher wireless network costs and wireline costs attributable to U-verse subscriber growth and wireless network costs. The increases were partially offset by decreased wireless interconnect and long-distance costs, and lower costs associated with Universal Service Fund (USF) fees. For the first nine months offsets also included the sale of the Advertising Solutions segment.employee-related charges.
Selling, general and administrative expenses decreased $356,increased $76, or 4.3%0.9%, in the thirdsecond quarter and $251, or 1.0%,$3 for the first ninesix months of 2013.2014. The decreasesincreases were primarily due to gains on spectrum transactions, decreased wireline employeeincreased nonemployee related expenses related to information technology enhancements, and higher selling (other than commissions) and administrative expenses in our Wireless segment. Partially offsetting the increases were lower commissions expenses and lower financing-relatedemployee-related costs associated within our pension and postretirement benefits (referred to as Pension/OPEB expenses) and, for the first nine months, the sale of the Advertising SolutionsWireline segment. These lower expenses were partially offset by increased commissions related to smartphone upgrades, wireless selling and administrative expenses and higher wireline contract service expenses.
Depreciation and amortization expenses increased $103,expense decreased $21, or 2.3%0.5%, in the thirdsecond quarter and $144,increased $67, or 1.1%0.7%, for the first ninesix months of 2013. Expenses increased2014. The second-quarter decrease was primarily due to ongoing capital spending for network upgrades and expansion, partially offset byan increase in the useful life of non-network software, an increase in fully depreciated assets and lower amortization of intangibles for customer lists related to acquisitions.acquisitions, which were partially offset by ongoing capital spending for network upgrades and expansion and additional expense for assets acquired from Leap. The sale of our Advertising Solutions segment also contributed to lower depreciation and amortization expensesincrease for the first nine months.six months was primarily due to increased capital spending for network upgrades and expansion.
Interest expense increased $5,$56, or 0.6%6.8%, in the thirdsecond quarter and decreased $143,$89, or 5.4%, for the first ninesix months of 2013.2014. The increase in the third quarter wasincreases were primarily due to higher average debt balancesinterest related to our December 2013 tower transaction, partially offset by lower average interest rates. The decrease for the first nine months reflects our prior-year debtincurred as a result of 2013 refinancing activity, which contributed to lower average interest rates in 2013 and one-time charges associated with the early redemption of debt in 2012. These decreases were partially offset by higher average debt balances.activity.
Equity in net income of affiliates decreased $91,$116, or 50.0%53.2%, in the thirdsecond quarter and $43,$213, or 8.0%52.9%, for the first ninesix months of 2013.2014. Decreased equity in net income of affiliates in the thirdsecond quarter, and for the first six months, was primarily due to decreased earnings at América Móvil, S.A. de C.V. (América Móvil) and YP Holdings LLC (YP Holdings). Decreased equityThe second-quarter 2014 results also reflect our change in net income of affiliatesaccounting for the first nine months was primarily due to foreign exchange impacts at América Móvil partially offset by earnings from YP Holdings.(see Note 7).
| | Second Quarter | | | Six-Month Period | |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | |
América Móvil | | $ | 99 | | | $ | 174 | | | $ | 153 | | | $ | 325 | |
YP Holdings | | | 31 | | | | 63 | | | | 85 | | | | 115 | |
Mobile Wallet Joint Venture | | | (29 | ) | | | (19 | ) | | | (49 | ) | | | (37 | ) |
Other | | | 1 | | | | - | | | | 1 | | | | - | |
Equity in Net Income of Affiliates | | $ | 102 | | | $ | 218 | | | $ | 190 | | | $ | 403 | |
Other income (expense) – net We had other income of $50$1,269 in the thirdsecond quarter and $370$1,414 for the first ninesix months of 2013,2014, compared to other income of $47$288 in the thirdsecond quarter and $122$320 for the first ninesix months of 2012.2013. Results in the thirdsecond quarter and for the first ninesix months of 2013 included interest and dividend income of $14 and $54 and leveraged lease income of $6 and $21, respectively. Income for the first nine months of 2013 also2014 included a net gain on the sale of América Móvil shares and other investments of $272.$1,245 and $1,367, interest and dividend income of $23 and $36 and leveraged lease income of $7 and $13, respectively.
Other income in the thirdsecond quarter and for the first ninesix months of 20122013 included interest and dividend income of $17 and $51 and leveraged lease income of $5 and $46 and a net gain on the sale of América Móvil shares and other investments of $83$249 and $82,$260, interest and dividend income of $23 and $40 and leveraged lease income of $10 and $15, respectively. This income was partially offset by a third-quarter investment impairment of $55.
Income taxes decreased $146,increased $571, or 8.4%29.8%, in the thirdsecond quarter and $606,$931, or 10.7%26.8%, for the first ninesix months of 2013.2014. Our effective tax rate was 29.0%40.7% for the thirdsecond quarter and 30.5%37.4% for the first ninesix months of 2013,2014, as compared to 32.0%33.0% for the thirdsecond quarter and 33.4%31.2% for the first ninesix months of 2012.2013. The decreaseincrease in effective tax rate for both the thirdsecond quarter and the first ninesix months was primarily due to recognitionthe sale of benefits relatedAmérica Móvil shares in 2014. We had previously assumed that undistributed earnings for our investment in América Móvil would be returned through dividends that, when received, would qualify for foreign tax credits. As a result of our strategic decision to sell this equity position in connection with our pending acquisition of DIRECTV, these foreign tax audit settlements and prior-year asset sales.credits were not available to be realized.
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Selected Financial and Operating Data | | | | | | | | | |
| September 30, | | June 30, | |
| 2013 | | 2012 | |
Wireless subscribers (000) | 109,460 | | 105,871 | |
Network access lines in service (000) | 25,680 | | 30,443 | |
Total wireline broadband connections (000) | 16,427 | | 16,392 | |
Subscribers and connections in (000s) | | | 2014 | | | 2013 | |
Wireless subscribers | | | | 116,634 | | | | 107,884 | |
Network access lines in service | | | | 22,547 | | | | 26,849 | |
U-Verse VoIP connections | | | | 4,411 | | | | 3,379 | |
Total wireline broadband connections | | | | 16,448 | | | | 16,453 | |
Debt ratio1 | 46.9% | | 38.6% | | | 47.6 | % | | | 46.6 | % |
Ratio of earnings to fixed charges2 | 5.43 | | 5.36 | | | 5.53 | | | | 5.51 | |
Number of AT&T employees | 246,740 | | 241,130 | | | 248,170 | | | | 245,350 | |
1 | 1 Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders’ equity) and do not consider cash available to pay down debt. See our “Liquidity and Capital Resources” section for discussion.
|
Segment Results
Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. Our operating segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our operating segments based on segment income before income taxes. We make our capital allocation decisions based on theour strategic needsdirection of the business, needs of the network (wireless or wireline) providedproviding services and demands to provide emerging services to our customers. Actuarial gains and losses from pension and other postemploymentpostretirement benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are not included in each segment’s reportable results. The customers and long-lived assets of our reportable segments are predominantly in the United States. We have threetwo reportable segments: (1) Wireless and (2) Wireline and (3) Other. Our operating results prior to May 9, 2012, also included Advertising Solutions, which was previously a reportable segment.Wireline.
The Wireless segment 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 paymentwallet joint venture marketed as the ISIS Mobile WalletTM (ISIS), which is accounted for as an equity method investment.
The Wireline segment uses our regional, national and global network to provide consumer and business customers with data and voice communications services, U-verse high-speed broadband,high speed Internet, video voiceand VoIP services and managed networking to business customers. Additionally, commissions on sales of satellite television services offered through our agency arrangements are included in the segment.
The Advertising Solutions segment included our directory operations, which published Yellow and White Pages directories and sold directory advertising, Internet-based advertising and local search through May 8, 2012.
The Other segment includes our portion of the results from our international equity investment, our equity interest in YP Holdings, and costs to support corporate-driven activities and operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.
The following sections discuss our operating results by segment. Operations and support expenses include certain network planning and engineering expenses; information technology; our repair technicians and repair services; property taxes; bad debt expense; advertising costs; sales and marketing functions, including customer service centers; real estate costs, including maintenance and utilities on all buildings; credit and collection functions; and corporate support costs, such as finance, legal, human resources and external affairs. Pension and postretirement service costs, net of amounts capitalized as part of construction labor, are also included to the extent that they are associated with employees who perform these functions.
We discuss capital expenditures for each segment in “Liquidity and Capital Resources.”
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Wireless | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | | Nine-Month Period | | | Second Quarter | | | Six-Month Period | |
| | 2013 | | | 2012 | | | Percent Change | | | 2013 | | | 2012 | | | Percent Change | | | 2014 | | | 2013 | | | Percent Change | | | 2014 | | | 2013 | | | Percent Change | |
|
Segment operating revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Data | | $ | 5,509 | | | $ | 4,686 | | | | 17.6 | % | | $ | 15,990 | | | $ | 13,392 | | | | 19.4 | % | |
Voice, text and other service | | | 9,951 | | | | 10,220 | | | | (2.6) | | | | 29,902 | | | | 30,845 | | | | (3.1) | | |
Service | | | $ | 15,148 | | | $ | 15,370 | | | | (1.4 | ) % | | $ | 30,535 | | | $ | 30,432 | | | | 0.3 | % |
Equipment | | | 2,020 | | | | 1,726 | | | | 17.0 | | | | 5,570 | | | | 4,884 | | | | 14.0 | | | | 2,782 | | | | 1,921 | | | | 44.8 | | | | 5,261 | | | | 3,550 | | | | 48.2 | |
Total Segment Operating Revenues | | | 17,480 | | | | 16,632 | | | | 5.1 | | | | 51,462 | | | | 49,121 | | | | 4.8 | | | | 17,930 | | | | 17,291 | | | | 3.7 | | | | 35,796 | | | | 33,982 | | | | 5.3 | |
Segment operating expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | 10,982 | | | | 10,432 | | | | 5.3 | | | | 31,932 | | | | 30,000 | | | | 6.4 | | | | 11,568 | | | | 10,770 | | | | 7.4 | | | | 22,450 | | | | 20,950 | | | | 7.2 | |
Depreciation and amortization | | | 1,875 | | | | 1,730 | | | | 8.4 | | | | 5,553 | | | | 5,092 | | | | 9.1 | | | | 2,035 | | | | 1,843 | | | | 10.4 | | | | 3,966 | | | | 3,678 | | | | 7.8 | |
Total Segment Operating Expenses | | | 12,857 | | | | 12,162 | | | | 5.7 | | | | 37,485 | | | | 35,092 | | | | 6.8 | | | | 13,603 | | | | 12,613 | | | | 7.8 | | | | 26,416 | | | | 24,628 | | | | 7.3 | |
Segment Operating Income | | | 4,623 | | | | 4,470 | | | | 3.4 | | | | 13,977 | | | | 14,029 | | | | (0.4) | | | | 4,327 | | | | 4,678 | | | | (7.5 | ) | | | 9,380 | | | | 9,354 | | | | 0.3 | |
Equity in Net Income (Loss) of Affiliates | | | (18) | | | | (17) | | | | (5.9) | | | | (55) | | | | (45) | | | | (22.2) | | |
Equity in Net Income (Loss) of | | | | | | | | | | | | | | | | | | | | | | | | | |
Affiliates | | | | (29 | ) | | | (19) | | | | (52.6 | ) | | | (49 | ) | | | (37) | | | | (32.4 | ) |
Segment Income | | $ | 4,605 | | | $ | 4,453 | | | | 3.4 | % | | $ | 13,922 | | | $ | 13,984 | | | | (0.4) | % | | $ | 4,298 | | | $ | 4,659 | | | | (7.7 | ) % | | $ | 9,331 | | | $ | 9,317 | | | | 0.2 | % |
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
The following table highlights other key measures of performance for the Wireless segment: | |
| | | | | | | | | | |
| | Second Quarter | | | Six-Month Period | |
| | 2014 | | | 2013 | | | Percent Change | | | 2014 | | | 2013 | | | Percent Change | |
(in 000s) |
Wireless Subscribers 1 | | | | | | | | | | | | 116,634 | | | | 107,884 | | | | 8.1 | % |
Postpaid smartphones | | | | | | | | | | | | 54,629 | | | | 49,462 | | | | 10.4 | |
Postpaid feature phones and data-centric | | | | | | | | | | | | | | | | | | | | | |
devices | | | | | | | | | | | | 19,703 | | | | 21,816 | | | | (9.7 | ) |
Postpaid | | | | | | | | | | | | 74,332 | | | | 71,278 | | | | 4.3 | |
Prepaid | | | | | | | | | | | | 11,343 | | | | 7,084 | | | | 60.1 | |
Reseller | | | | | | | | | | | | 13,756 | | | | 14,330 | | | | (4.0 | ) |
Connected devices 2 | | | | | | | | | | | | 17,203 | | | | 15,192 | | | | 13.2 | |
Total Wireless Subscribers | | | | | | | | | | | | 116,634 | | | | 107,884 | | | | 8.1 | |
| | | | | | | | | | | | | | | | | | | | | |
Net Additions 3 | | | | | | | | | | | | | | | | | | | | | |
Postpaid | | | 1,026 | | | | 551 | | | | 86.2 | % | | | 1,651 | | | | 847 | | | | 94.9 | |
Prepaid | | | (405 | ) | | | 11 | | | | - | | | | (455 | ) | | | (173) | | | | - | |
Reseller | | | (162 | ) | | | (414) | | | | 60.9 | | | | (368 | ) | | | (666) | | | | 44.7 | |
Connected devices2 | | | 175 | | | | 484 | | | | (63.8 | ) | | | 868 | | | | 915 | | | | (5.1 | ) |
Net Subscriber Additions | | | 634 | | | | 632 | | | | 0.3 | | | | 1,696 | | | | 923 | | | | 83.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Mobile Share connections | | | | | | | | | | | | | | | 41,291 | | | | 13,077 | | | | - | |
Smartphones sold under our installment | | | | | | | | | | | | | | | | | | | | | | | | |
program during period | | | 3,142 | | | | - | | | | - | | | | 6,010 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Churn4 | | | 1.47% | | | | 1.36% | | | 11 BP | | | | 1.43% | | | | 1.37% | | | 6 BP | |
Postpaid Churn4 | | | 0.86% | | | | 1.02% | | | (16) BP | | | | 0.96% | | | | 1.03% | | | (7) BP | |
The following table highlights other key measures of performance for the Wireless segment: | |
| | | Third Quarter | | | Nine-Month Period | |
| | | | | | | | | | | | | | | | | | | |
(Subscribers in 000s) | | 2013 | | | 2012 | | | Change | | | 2013 | | | 2012 | | | Change | |
Wireless Subscribers1 | | | | | | | | | | | | 109,460 | | | | 105,871 | | | | 3.4 | % |
| Gross Subscriber Additions2 | | | 5,251 | | | | 4,914 | | | | 6.9 | % | | | 14,978 | | | | 15,162 | | | | (1.2) | |
| Net Subscriber Additions2 | | | 989 | | | | 678 | | | | 45.9 | | | | 1,912 | | | | 2,670 | | | | (28.4) | |
| Total Churn3 | | | 1.31 | % | | | 1.34 | % | | (3) BP | | | | 1.35 | % | | | 1.33 | % | | 2 BP | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Postpaid Smartphone Subscribers | | | | | | | | | | | | | | | 50,637 | | | | 44,528 | | | | 13.7 | % |
Postpaid Data-Centric Device and Other Phone Subscribers | | | | | | | | | | | | | | | 21,395 | | | | 25,219 | | | | (15.2) | |
Total Postpaid Subscribers | | | | | | | | | | | | | | | 72,032 | | | | 69,747 | | | | 3.3 | |
| Net Postpaid Subscriber Additions2 | | | 363 | | | | 151 | | | | - | | | | 1,210 | | | | 658 | | | | 83.9 | |
| Postpaid Churn3 | | | 1.07 | % | | | 1.08 | % | | (1) BP | | | | 1.04 | % | | | 1.05 | % | | (1) BP | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Prepaid Subscribers | | | | | | | | | | | | | | | 7,425 | | | | 7,545 | | | | (1.6) | % |
| Net Prepaid Subscriber Additions2 | | | 192 | | | | 77 | | | | - | | | | 19 | | | | 294 | | | | (93.5) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Reseller Subscribers | | | | | | | | | | | | | | | 14,089 | | | | 14,573 | | | | (3.3) | % |
| Net Reseller Subscriber Additions2 | | | (285 | ) | | | 137 | | | | - | | | | (951 | ) | | | 793 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Connected Device Subscribers4 | | | | | | | | | | | | | | | 15,914 | | | | 14,006 | | | | 13.6 | % |
| Net Connected Device Subscriber Additions | | | 719 | | | | 313 | | | | - | | | | 1,634 | | | | 925 | | | | 76.6 | |
1 | Represents 100% of AT&T Mobility wireless subscribers. | |
2 | Excludes merger and acquisition-related additions during the period. | |
3 | Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period. | |
4 | Includes data-centric devices such as eReaders, automobile monitoring systems, and fleet management - excludes tablet subscribers, which are primarily reflected in our postpaid subscriber category, with the remainder in prepaid. | |
1 | Represents 100% of AT&T Mobility wireless subscribers. |
2 | Includes data-centric devices (eReaders and automobile monitoring systems). Excludes tablets, which are primarily included in postpaid. |
3 | Excludes merger and acquisition-related additions during the period. |
4 | Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period. |
Wireless Subscriber Relationships
As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative services, plans and devices and a wireless network that has sufficient spectrum and capacity to support these innovations and make them available to more subscribers.on as broad a geographic basis as possible. To attract and retain subscribers in a maturing market, we offer a broad handset line andhave launched a wide variety of service plans.plans, including Mobile Share and AT&T NextSM (AT&T Next). While we have historically focused on attracting and retaining postpaid subscribers, we have recently increased our focus on prepaid subscribers with our acquisition of Leap.
As technology evolves, rapid changes are occurring inAt June 30, 2014, we served 116.6 million subscribers (including approximately 4.5 million Cricket subscribers from our March 13, 2014 acquisition of Leap), an increase of 8.1% from the handset and device industry with the continual introduction of new models or significant revisions of existing models. We believe a broad offering of a wide variety of smartphones reduces dependence on any single operating system or manufacturer as these products continue to evolve in terms of technology and subscriber appeal. In the first nine months of 2013, we continued to see increasing use of smartphones by our postpaid subscribers. Of our total postpaid phoneprior year. Our subscriber base 74.7% (or 50.6 million subscribers) use smartphones, upconsists primarily of postpaid accounts. Our prepaid services, which include results from 66.1% (or 44.5 million subscribers) a year earlier. As is common inservices sold under the industry, most of our subscribers’ phonesCricket brand, are designed to work only with our wireless technology, requiring subscribers who desire to move to a new carrier with a different technology to purchase a new device.monthly, pay-as-you-go services.
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
ARPUOurTotal ARPU (average service revenue per average wireless subscribers) was down 8.9 % in the second quarter and 5.5% for the first six months of 2014. Postpaid ARPU was down 9.6% and 5.5% when compared to the second quarter and first six months of 2013, primarily due to the attractive Mobile Share Value pricing. As we adjust our service offerings and pricing structures, management believes that postpaid phone-only ARPU plus Next subscriber installment billings (postpaid phone-only ARPU plus AT&T Next) is a better representation of the monthly economic value per postpaid subscriber. For the quarter and six months, postpaid phone-only ARPU decreased 7.7% and 3.7% versus the year-ago periods and postpaid phone-only ARPU plus AT&T Next decreased 4.7% and 1.4% compared to the same periods last year.
Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total churn was higher in the second quarter and for the first six months of 2014 due to the expected pressure in prepaid with the transition of Cricket subscribers typically sign a two-year contract, which includes discounted handsetsto our network. Postpaid churn was lower for both the second quarter and early termination fees.the first six months.
Postpaid
Postpaid subscribers increased 1.4% during the second quarter and 4.3% when compared to June 30, 2013. At June 30, 2014, 80% of our postpaid phone subscriber base used smartphones, compared to 73% at June 30, 2013. About 90%95% of our postpaid smartphone subscribers are on FamilyTalk® Plans (family plans), Mobile Share plans or business plans, whichthat provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. We offer our Mobile to Any Mobile feature, which enables our subscribers on these and other qualifying plans to make unlimited mobile calls to any mobile number in the United States, subject to certain conditions. We also offer data plans at different price levels (usage-based data plans) to attract a wide variety of subscribers and to differentiate us from our competitors. Our postpaid subscribers on data plans increased 12.0% year over year. A growing percentage of our postpaid smartphone subscribers are on usage-based data plans, with 72.0% (or 36.4 million)approximately 80% on these plans as compared to 71% in the prior year, and about 49% of September 30, 2013, up from 63.9% (or 28.5 million) as of September 30, 2012. About 80% of subscribers on usage-based data plansour Mobile Share accounts have chosen the higher-priced10 gigabyte or higher plans. We recently expandedDevice connections on our Mobile Share data plans to include additional, larger usage levels, and we have introduced a program allowing subscribers to more frequently upgrade handsets using an installment payment plan. Participation in these plans continues to increase.now represent about 56% 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 SeptemberJune 30, 2013, about 70%2014, approximately 84% of our postpaid smartphone subscribers use a 4G-capable device (i.e., a device that would operate on our HSPA+ or LTE network), and about 42%63% of our postpaid smartphone subscribers use an LTE device. Due
Historically, our postpaid customers have signed two-year service contracts for subsidized handsets. However, through our Mobile Share plans, we have recently begun offering postpaid services at lower prices for those customers who either bring their own devices or participate in our AT&T Next program. Our AT&T Next program allows for postpaid subscribers to substantial increasespurchase certain devices in installments over a period of up to 24 months. Additionally, after a specified period of time they also have the right to trade in the demandoriginal device for wirelessa new device and have the remaining unpaid balance satisfied. For customers that elect these trade-in programs, at the time of the sale, we recognize equipment revenue for the amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest. A significant percentage of our customers on the AT&T Next program pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers. In the United States,second quarter of 2014, we began offering the AT&T is facing significant spectrumNext program through other distributors and capacity constraints on its wireless network in certain markets. We expect such constraintswe plan to increase and expand the offering to additional markets indistributors, which is expected to further accelerate the coming years. While we are continuing to invest significant capital in expanding our network capacity, our capacity constraints could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services, unless we are able to obtain more spectrum. Any long-term spectrum solution will require that the Federal Communications Commission (FCC) make new or existing spectrum available to the wireless industry to meet the expanding needs of our subscribers. We will continue to attempt to address spectrum and capacity constraintsimpacts on a market-by-market basis.service revenues.
Wireless MetricsPrepaid
Subscriber Additions AsIn March 2014, we completed our acquisition of September 30, 2013, we served 109.5Leap, which included approximately 4.5 million wirelessprepaid subscribers an increaseat closing. Prepaid subscribers decreased 4.0% during the second quarter due to expected transition of 3.4%Cricket subscribers. Excluding merger and acquisition related additions, prepaid subscribers decreased 3.9% when compared to the prior year. Gross subscriber additions (gross additions) in the third quarter were 6.9% higher than in the third quarterJune 30, 2013. As of 2012, primarily due to increased smartphone salesJuly 31, we have approximately 1 million Leap and growth in the connected device subscriber base. Gross additions for the first nine months of 2013 were 1.2% lower than the comparable period of the prior year, reflecting competition in the wireless industry and market saturation, which we expect will continue to limit the rate of growth in the industry’s subscriber base. Higher net subscriber additions (net additions) in the third quarter were primarily due to growth in smartphone sales and the connected device subscriber base. Lower net subscriber additions (net additions) for the first nine months of 2013 were primarily attributable to losses in reseller low-revenue accounts.
The increases in net postpaid additions reflect the migration of prepaid tablet subscribers to our postpaid plans, contributing to an increase in postpaid tablet subscribers of 388,000 in the third quarter and 1,151,000 for the first nine months of 2013. The introduction of LTE-capable GoPhones and new pricing plans contributed to the increase in net prepaid additions when compared to the third quarter of 2012.
Average service revenue per user (ARPU) – Postpaid increased 1.5% in the third quarter and 1.4% for the first nine months of 2013. Postpaid data services ARPU increased 16.6% in the third quarter and 17.4% for the first nine months of 2013, reflecting greater use of smartphones and data-centric devices by our subscribers.
The growth in postpaid data services ARPU was partially offset by a 5.1% decrease in postpaid voice, text and other service ARPU in the third quarter and 5.3% decrease for the first nine months of 2013. Voice, text and other service ARPU declined due to lower access and airtime charges, triggered in part by postpaidformer Aio subscribers on our discount plans and lower roaming revenues.
ARPU – Total increased 0.9% in the third quarter and 0.7% for the first nine months of 2013, reflecting growth in data services as more subscribers are using smartphones and tablets and choosing higher-priced usage-based data plans. Data services ARPU increased 14.3% in the third quarter and 15.9% for the first nine months of 2013. Voice, text and other service ARPU declined 5.3% in the third quarter and 5.9% for the first nine months of 2013 primarily due to voice access and usage trends and a shift toward a greater percentage of data-centric devices, as well as lower regulatory fees. We expect continued growth in data services ARPU as more subscribers use smartphones and data-centric devices and continue to choose higher-priced usage-based data plans. As technology and devices evolve, we also expect continued pressure on voice, text and other service ARPU.GSM network.
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Churn The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. The total churn rate was lower in the third quarter with higher net postpaid additions and improvements in net connected device additions. A higher total churn rate for the first nine months of 2013 was primarily associated with the disconnection of reseller low-revenue accounts. The postpaid churn rate was slightly lower in the third quarter and for the first nine months of 2013.
Operating Results
Our Wireless segment operating income margin in the thirdsecond quarter decreased from 26.9%27.1% in 20122013 to 26.4%24.1% in 20132014 and for the first ninesix months decreased from 28.6%27.5% in 20122013 to 27.2%26.2% in 2013.2014. Our Wireless segment operating income increased $153,decreased $351, or 3.4%7.5%, in the thirdsecond quarter and decreased $52,increased $26, or 0.4%0.3%, for the first ninesix months of 2013.2014. The decreases in operating margin and year-to-date operating income in the second quarter reflected higher costs associated with upgrade activitythe increasing popularity of Mobile Share plans, promotional activities and subsidies associated with growing smartphone sales, partially offset by continued data revenue growth.new business initiatives. The increase in third-quartersegment operating income reflected continuedfor the first six months was primarily driven by overall growth in the number of subscribers using smartphones with larger data growth and higher smartphone sales and upgrades, partiallyplans, which was mostly offset by the costs of higher smartphone saleslower service revenues from Mobile Share plans and upgrade activity.new business initiatives.
Voice, text and otherService service revenues decreased $269,$222, or 2.6%1.4%, in the thirdsecond quarter and $943,increased $103, or 3.1%0.3%, for the first ninesix months of 2013. While we had a 3.4% year-over-year2014. The decrease in the second quarter is due to customers shifting to no-device subsidy plans, which allow for discounted monthly service charges under our Mobile Share plans. This decrease was largely offset by revenues from Cricket subscribers that were not included in our 2013 results. The increase in the number of wireless subscribers, these revenues continue to decline due to lower access and airtime charges.
Data service revenues increased $823, or 17.6%, in the third quarter and $2,598, or 19.4%, for the first ninesix months of 2013. The increases werewas primarily due to the increased number of subscribers using smartphones with larger data plans and data-centric devices, such as tablets, eReaders, and mobile navigation devices. Datarevenues from Cricket subscribers, which were partially offset by the expanding Mobile Share plans. While we expect monthly service revenues accountedto continue to be pressured as customers move to Mobile Share plans, we expect equipment revenues to increase for 34.8% of our wireless service revenues forthose subscribers who elect the first nine months of 2013, compared to 30.3% last year.AT&T Next program.
Equipment revenues increased $294,$861, or 17.0%44.8%, in the thirdsecond quarter and $686,$1,711, or 14.0%48.2%, for the first ninesix months of 2013 due2014. The increases were primarily related to year-over-year increasesdevices sold under our AT&T Next program. During the second quarter, with the launch of the AT&T Next program through other distributors we began deferring the recognition of equipment revenue and costs until the device is sold to the end subscriber and the trade-in right is conveyed. This lag in smartphone sales as a percentagetiming of total device sales to postpaid subscribers and higher device upgrades.the recognition of the sale resulted in lower revenue through these distributors during the second quarter of 2014.
Operations and support expenses increased $550,$798, or 5.3%7.4%, in the thirdsecond quarter and $1,932,$1,500, or 6.4%7.2%, forin the first ninesix months of 2013.2014. The increases in the thirdsecond quarter and for the first ninesix months were primarily due to the following:
· | Equipment costs increased $521 and $1,526 reflecting an increase in upgrade activity and total device sales, as well as the sales of more expensive smartphones. |
· | Commission expenses increased $105 and $316 due primarily to higher upgrade activity and total device sales and a year-over-year increase in smartphone sales as a percentage of total device sales.
|
· | Selling expenses (other than commissions) and administrative expenses increased $36$416 and $377$699 due primarily to increases of: $35$177 and $197$165 primarily due to legal costs and accruals including fees and costs related to acquisitions; $65 and $110 in employee-related costs; $138sales expense; $41 and $56 in advertising costs for the first nine months of 2013;bad debt expense; $36 and $40$96 in customer service expense; $32 and $148$68 in information technology costs in conjunction with ongoing support systems development. Partially offsettingdevelopment; and $22 and $48 in marketing expense. Each of these increases were bad debt expense declinesincluded additional costs related to the acquisition of $36 and $138.Leap. |
· | Network system costs increased $32$242 and $187$353 due to higher network traffic and personnel-related network support costs and cell site related costs in conjunction with our network enhancement efforts. |
· | Equipment costs increased $175 and $544 reflecting the sales of more expensive smartphones. |
· | Handset insurance cost increased $84 and $163 due to an increase in the cost of replacement phones. |
Partially offsetting these increases were lower commission expenses of $240 and $340 primarily due to the following:
· | Interconnect and long-distance costs decreased $114 and $326 due to third-party credits and lower usage costs in the current period. |
· | USF fees decreased $4 and $102 primarily due to federal rate decreases, which are offset by lower USF revenues. |
decline in upgrade transactions and lower average commission rates.
Depreciation and amortization expenses increased $145,$192, or 8.4%10.4%, in the thirdsecond quarter and $461,$288, or 9.1%7.8%, for the first ninesix months of 2013.2014. Depreciation expense increased $213,$193, or 13.2%10.8%, in the thirdsecond quarter and $670,$339, or 14.3%9.6%, for the first ninesix months primarily due to ongoing capital spending for network upgrades and expansion. Amortization expense decreased $68,$1, or 59.1%1.6%, in the thirdsecond quarter and $209,$51, or 52.8%36.4%, for the first ninesix months primarily due to lowerthe fact we have fully amortized customer lists acquired in our acquisition of BellSouth Corporation. The change in the second quarter includes higher amortization of intangibles for customer lists related to acquisitions.our acquisition of Leap.
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Wireline | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | | Six-Month Period | |
| | 2014 | | | 2013 | | | Percent Change | | | 2014 | | | 2013 | | | Percent Change | |
|
Segment operating revenues | | | | | | | | | | | | | | | | | | |
Service | | $ | 14,408 | | | $ | 14,482 | | | | (0.5 | ) % | | $ | 28,797 | | | $ | 28,863 | | | | (0.2 | ) % |
Equipment | | | 229 | | | | 291 | | | | (21.3 | ) | | | 441 | | | | 565 | | | | (21.9 | ) |
Total Segment Operating Revenues | | | 14,637 | | | | 14,773 | | | | (0.9 | ) | | | 29,238 | | | | 29,428 | | | | (0.6 | ) |
Segment operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | 10,700 | | | | 10,417 | | | | 2.7 | | | | 21,157 | | | | 20,752 | | | | 2.0 | |
Depreciation and amortization | | | 2,514 | | | | 2,722 | | | | (7.6 | ) | | | 5,198 | | | | 5,410 | | | | (3.9 | ) |
Total Segment Operating Expenses | | | 13,214 | | | | 13,139 | | | | 0.6 | | | | 26,355 | | | | 26,162 | | | | 0.7 | |
Segment Operating Income | | | 1,423 | | | | 1,634 | | | | (12.9 | ) | | | 2,883 | | | | 3,266 | | | | (11.7 | ) |
Equity in Net Income of Affiliates | | | - | | | | - | | | | - | | | | 1 | | | | 1 | | | | - | |
Segment Income | | $ | 1,423 | | | $ | 1,634 | | | | (12.9 | ) % | | $ | 2,884 | | | $ | 3,267 | | | | (11.7 | ) % |
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Supplemental Information
Wireline Broadband, Telephone and Video Connections Summary
Our broadband, switched access lines and other services provided at June 30, 2014 and 2013 are shown below and trends are addressed throughout this segment discussion.
| | June 30, | | | June 30, | | | Percent | |
(in 000s) | | 2014 | | | 2013 | | | Change | |
U-verse high speed Internet | | | 11,497 | | | | 9,090 | | | | 26.5 | % |
DSL and Other Broadband Connections | | | 4,951 | | | | 7,363 | | | | (32.8 | ) |
Total Wireline Broadband Connections1 | | | 16,448 | | | | 16,453 | | | | - | |
| | | | | | | | | | | | |
Total U-verse Video Connections | | | 5,851 | | | | 5,001 | | | | 17.0 | |
| | | | | | | | | | | | |
Retail Consumer Switched Access Lines | | | 10,935 | | | | 13,983 | | | | (21.8 | ) |
U-verse Consumer VoIP Connections | | | 4,379 | | | | 3,379 | | | | 29.6 | |
Total Retail Consumer Voice Connections | | | 15,314 | | | | 17,362 | | | | (11.8 | ) |
| | | | | | | | | | | | |
Switched Access Lines | | | | | | | | | | | | |
Retail Consumer | | | 10,935 | | | | 13,983 | | | | (21.8 | ) |
Retail Business | | | 9,808 | | | | 10,904 | | | | (10.1 | ) |
Retail Subtotal | | | 20,743 | | | | 24,887 | | | | (16.7 | ) |
| | | | | | | | | | | | |
Wholesale Subtotal | | | 1,581 | | | | 1,687 | | | | (6.3 | ) |
| | | | | | | | | | | | |
Total Switched Access Lines2 | | | 22,547 | | | | 26,849 | | | | (16.0 | ) % |
1 | Total wireline broadband connections include DSL, U-verse high speed Internet and satellite broadband. |
2 | Total switched access lines includes access lines provided to national mass markets and private payphone service providers of 223 at June 30, 2014 and 276 at June 30, 2013. |
Operating Results
Our Wireline segment operating income margin in the second quarter decreased from 11.1% in 2013 to 9.7% in 2014, and for the first six months decreased from 11.1% in 2013 to 9.9% in 2014. Our Wireline segment operating income decreased $211, or 12.9%, in the second quarter and $383, or 11.7%, for the first six months of 2014. The decrease in operating margins and income was driven primarily by continued decrease in our legacy voice and data products and increased U-verse content costs, largely offset by increased revenues from our U-verse and strategic business services.
Service revenues decreased $74, or 0.5%, in the second quarter and $66, or 0.2%, for the first six months of 2014. Lower service revenues from business customers, which include integration, government-related and outsourcing services, were largely offset by higher service revenues from our residential customers.
Business
Service revenues from business customers decreased $197, or 2.3%, in the second quarter and $379, or 2.2%, for the first six months of 2014. The revenue decreases were due to a $115 and $264 decrease in long-distance and local voice revenues and a $329 and $644 decrease in traditional data revenues, which include circuit-based and packet-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. The lower traditional service revenues were largely offset by higher demand for our next generation services. Strategic business service revenues, which include VPNs, Ethernet, hosting, IP conferencing, VoIP, Ethernet-access to Managed Internet Service (EaMIS), security services, and U-verse services provided to business customers increased $283, or 13.5%, in the second quarter and $601, or 14.7%, for the first six months of 2014. In the second quarter and for the first six months, revenue from VPN increased $88 and $188, Ethernet increased $85 and $165, U-verse services increased $34 and $78 and EaMIS increased $37 and $73.
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
ConsumerWireline | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | | Nine-Month Period | |
| | 2013 | | | 2012 | | | Percent Change | | | 2013 | | | 2012 | | | Percent Change | |
|
Segment operating revenues | | | | | | | | | | | | | | | | | | |
Data | | $ | 8,457 | | | $ | 7,987 | | | | 5.9 | % | | $ | 25,019 | | | $ | 23,722 | | | | 5.5 | % |
Voice | | | 5,023 | | | | 5,563 | | | | (9.7 | ) | | | 15,470 | | | | 17,151 | | | | (9.8 | ) |
Other | | | 1,190 | | | | 1,264 | | | | (5.9 | ) | | | 3,609 | | | | 3,777 | | | | (4.4 | ) |
Total Segment Operating Revenues | | | 14,670 | | | | 14,814 | | | | (1.0 | ) | | | 44,098 | | | | 44,650 | | | | (1.2 | ) |
Segment operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | 10,385 | | | | 10,246 | | | | 1.4 | | | | 31,137 | | | | 30,849 | | | | 0.9 | |
Depreciation and amortization | | | 2,736 | | | | 2,774 | | | | (1.4 | ) | | | 8,146 | | | | 8,348 | | | | (2.4 | ) |
Total Segment Operating Expenses | | | 13,121 | | | | 13,020 | | | | 0.8 | | | | 39,283 | | | | 39,197 | | | | 0.2 | |
Segment Operating Income | | | 1,549 | | | | 1,794 | | | | (13.7 | ) | | | 4,815 | | | | 5,453 | | | | (11.7 | ) |
Equity in Net Income (Loss) of Affiliates | | | - | | | | - | | | | - | | | | 1 | | | | (1) | | | | - | |
Segment Income | | $ | 1,549 | | | $ | 1,794 | | | | (13.7 | ) % | | $ | 4,816 | | | $ | 5,452 | | | | (11.7 | ) % |
Operating Results
Our Wireline segment operating income marginService revenues from residential customers increased $175, or 3.1%, in the thirdsecond quarter decreasedand $415, or 3.8%, for the first six months of 2014. The increases were driven by higher IP data revenue reflecting increased U-verse penetration, customer additions, and migration from 12.1% in 2012 to 10.6% in 2013,our legacy voice and DSL services. In the second quarter and for the first ninesix months, U-verse revenue from consumers increased $341 and $702 for high-speed Internet access, $265 and $541 for video and $94 and $205 for voice. These increases were partially offset by a decrease of $187 and $352 in DSL revenue as customers continue to shift to our strategic high-speed Internet access offerings, and a $347 and $700 decrease in traditional voice revenues.
Equipment revenues decreased from 12.2% in 2012 to 10.9% in 2013. Segment operating income decreased $245,$62, or 13.7%21.3%, in the thirdsecond quarter of 2014, and $638,$124, or 11.7%21.9%, for the first ninesix months of 2013. The decrease in operating margins and income was driven primarily by lower voice revenue and higher operations and support expense, partially offset by data revenue growth and lower depreciation and amortization expenses.
Data revenues increased $470, or 5.9%, in the third quarter and $1,297, or 5.5%, for the first nine months of 2013. Data revenues accounted for approximately 57% of wireline operating revenues for the first nine months of 2013 and 53% for the first nine months of 2012. Data revenue includes IP, strategic business and traditional data services.
· | IP data revenues (excluding strategic business services below) increased $428, or 11.5%, in the third quarter and $1,237, or 11.4%, for the first nine months of 2013 primarily driven by higher U-verse penetration, customer additions, and migration from our legacy voice and DSL services. In the third quarter and for the first nine months U-verse revenue from consumer customers increased $318 and $957 for high speed Internet access, $244 and $736 for video and $76 and $198 for voice, respectively. These increases were partially offset by a decrease of $191 and $557 in DSL revenue as customers continue to shift to our U-verse or competitors’ high speed Internet access offerings. We expect DSL revenue to continue to decline as a percentage of our overall data revenues. |
· | Strategic business services, which include VPNs, Ethernet, hosting, IP conferencing, VoIP, Ethernet-access to Managed Internet Service (EaMIS), security services, and U-verse services provided to business customers, increased $293, or 15.7%, in the third quarter and $772, or 14.1%, for the first nine months of 2013 primarily driven by migration from our legacy services. In the third quarter and for the first nine months revenue from Ethernet increased $76 and $215, VPN increased by $116 and $251, U-verse services increased $32 and $103, VoIP increased $27 and $78 and EaMIS increased $22 and $78, respectively. |
· | Traditional data revenues, which include circuit-based and packet-switched data services, decreased $251, or 10.5%, in the third quarter and $719, or 9.7%, for the first nine months of 2013. This decrease was primarily due to lower demand as customers continue to shift to more advanced IP-based technology such as Ethernet, VPN, U-verse High Speed Internet access and managed Internet services. We expect these traditional services to continue to decline as a percentage of our overall data revenues. |
AT&T INC.
SEPTEMBER 30, 2013
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amountsVoice revenues decreased $540, or 9.7%, in the third quarter and $1,681, or 9.8%, for the first nine months of 2013 primarily due to declining demand for traditional voice services by our consumer and business customers. Included in voice2014. Our equipment revenues are revenues from local voice, long-distance (including international) and local wholesale services. Voice revenues do not include VoIP revenues, which are included in data revenues.· | Local voice revenues decreased $341, or 9.9%, in the third quarter and $1,051, or 9.9%, for the first nine months of 2013. The decrease was driven primarily by a 15.6% decline in total switched access lines. We expect our local voice revenue to continue to be negatively affected by competition from alternative technologies, primarily wireless and VoIP. |
· | Long-distance revenues decreased $192, or 10.3%, in the third quarter and $617, or 10.7%, for the first nine months of 2013. Lower demand for long-distance service from our business and consumer customers decreased revenues $158 in the third quarter and $514 for the first nine months of 2013. Additionally, expected declines in the number of our national mass-market customers decreased revenues $33 in the third quarter and $103 for the first nine months of 2013. |
Other operating revenues decreased $74, or 5.9%, in the third quarter and $168, or 4.4%, for the first nine months of 2013. Major items included in other operating revenues are integration services and customer premises equipment, government-related services and outsourcing, which account for approximately 60% of total other revenue for the periods reported.mainly attributable to our business customers.
Operations and support expenses increased $139,$283, or 1.4%2.7%, in the thirdsecond quarter and $288,$405, or 0.9%2.0%, for the first ninesix months of 2013.2014. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.
The increaseincreases in the third quarter of 2013 wasexpenses were primarily due to increased cost of sales of $167, primarily$111 and $253, related to U-verse related content fees; higher nonemployee expenses contract services of $56,$155 and $242 in conjunction with Project Velocity IP (VIP) investments, information technology enhancements and U-verse business growth; higher Universal Service Fund (USF) fees of $44 and $103, which are offset by higher USF revenues; higher materials and supplies expenseenergy costs of $32.$34 and $74; and higher traffic compensation costs of $28 and $67. These increases were partially offset by lower employee related expenses of $138.
The increase for the first nine months of 2013 was primarily due to increased cost of sales of $533, primarily related to U-verse related expenses, contract services of $166, and advertising expense of $131. These increases were partially offset by lower employee related expenses of $382$69 and USF fees of $122, which are offset by lower USF revenue.$278, reflecting ongoing workforce reduction initiatives.
Depreciation and amortization expenses decreased $38,$208, or 1.4%7.6%, in the thirdsecond quarter and $202,$212, or 2.4%3.9%, for the first ninesix months of 2013. The decrease was2014. Depreciation expense decreased $172, or 6.6%, in the second quarter and $140, or 2.7%, for the first six months of 2014 primarily relateddue to the increase in the useful life of non-network software, partially offset by ongoing capital spending for network upgrades and expansion. Amortization expense decreased $36, or 32.1%, and $72, or 30.9%, for the first six months of 2014 primarily due to lower amortization of intangibles for the customer lists associated with acquisitions and lower depreciation as assets become fully depreciated.acquisitions.
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Supplemental Information
Wireline Broadband, Telephone and Video Connections Summary
Our broadband, switched access lines and other services provided at September 30, 2013 and 2012 are shown below and trends are addressed throughout the preceding segment discussion.
| | September 30, | | | September 30, | | | Percent | |
(in 000s) | | 2013 | | | 2012 | | | Change | |
U-verse High Speed Internet | | | 9,745 | | | | 7,108 | | | | 37.1 | % |
DSL and Other Broadband Connections | | | 6,682 | | | | 9,284 | | | | (28.0 | ) |
Total Wireline Broadband Connections1 | | | 16,427 | | | | 16,392 | | | | 0.2 | |
| | | | | | | | | | | | |
Total U-verse Video Connections | | | 5,266 | | | | 4,344 | | | | 21.2 | |
| | | | | | | | | | | | |
Retail Consumer Switched Access Lines | | | 13,133 | | | | 16,486 | | | | (20.3 | ) |
U-verse Consumer VoIP Connections | | | 3,616 | | | | 2,733 | | | | 32.3 | |
Total Retail Consumer Voice Connections | | | 16,749 | | | | 19,219 | | | | (12.9 | ) |
| | | | | | | | | | | | |
Switched Access Lines | | | | | | | | | | | | |
Retail Consumer | | | 13,133 | | | | 16,486 | | | | (20.3 | ) |
Retail Business | | | 10,633 | | | | 11,784 | | | | (9.8 | ) |
Retail Subtotal | | | 23,766 | | | | 28,270 | | | | (15.9 | ) |
| | | | | | | | | | | | |
Wholesale Subtotal | | | 1,654 | | | | 1,848 | | | | (10.5 | ) |
| | | | | | | | | | | | |
Total Switched Access Lines2 | | | 25,680 | | | | 30,443 | | | | (15.6 | ) % |
1 | Total wireline broadband connections include DSL, U-verse High Speed Internet and satellite broadband. |
2 | Total switched access lines includes access lines provided to national mass markets and private payphone service providers of 260 at September 30, 2013 and 325 at September 30, 2012. |
Advertising Solutions | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine-Month Period | |
| 2013 | | 2012 | | | Percent Change | | 2013 | | 2012 | | | Percent Change | |
Total Segment Operating Revenues | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | 1,049 | | | | - | |
Segment operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | - | | | | - | | | | - | | | | - | | | | 773 | | | | - | |
Depreciation and amortization | | | - | | | | - | | | | - | | | | - | | | | 106 | | | | - | |
Total Segment Operating Expenses | | | - | | | | - | | | | - | | | | - | | | | 879 | | | | - | |
Segment Income | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | 170 | | | | - | |
On May 8, 2012, we completed the sale of our Advertising Solutions segment to an affiliate of Cerberus Capital Management, L.P.
AT&T INC.
SEPTEMBER 30, 2013
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amountsOther | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine-Month Period | |
| 2013 | | 2012 | | | Percent Change | | 2013 | | 2012 | | | Percent Change | |
|
Total Segment Operating Revenues | | $ | 8 | | | $ | 13 | | | | (38.5) | % | | $ | 29 | | | $ | 36 | | | | (19.4) | % |
Total Segment Operating Expenses | | | (8) | | | | 240 | | | | - | | | | 580 | | | | 733 | | | | (20.9) | |
Segment Operating Income (Loss) | | | 16 | | | | (227) | | | | - | | | | (551) | | | | (697) | | | | 20.9 | |
Equity in Net Income of Affiliates | | | 109 | | | | 199 | | | | (45.2) | | | | 548 | | | | 583 | | | | (6.0) | |
Segment Income (Loss) | | $ | 125 | | | $ | (28) | | | | - | | | $ | (3) | | | $ | (114) | | | | 97.4 | % |
The Other segment includes our portion of the results from América Móvil, our equity interest in YP Holdings, and costs to support corporate-driven activities and operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.
Segment operating revenues decreased $5, or 38.5%, in the third quarter and $7, or 19.4%, for the first nine months of 2013. Operating revenues are from leased equipment programs.
Segment operating expenses decreased $248 in the third quarter and $153, or 20.9%, for the first nine months of 2013. Operating expenses in the third quarter and for the first nine months of 2013 include gains of $293 associated with the transfers of Advanced Wireless Service (AWS) licenses as part of our 700 MHz spectrum acquisitions. Lower operating expenses were also due to lower Pension/OPEB financing costs, which were partially offset by higher new product development expenses and higher corporate support and capital leasing operations costs.
Equity in net income of affiliates decreased $90, or 45.2%, in the third quarter and $35, or 6.0%, for the first nine months of 2013. Decreased equity in net income of affiliates in the third quarter was primarily due to reduced earnings from América Móvil and YP Holdings. The decrease for the first nine months was primarily due to foreign exchange impacts at América Móvil, partially offset by earnings from YP Holdings.
Our equity in net income of affiliates by major investment is listed below:
| | Third Quarter | | Nine-Month Period |
| | 2013 | | 2012 | | 2013 | | 2012 |
América Móvil | $ | 85 | | $ | 126 | | $ | 410 | | $ | 490 |
YP Holdings | | 23 | | | 75 | | | 138 | | | 94 |
Other | | 1 | | | (2) | | | - | | | (1) |
Other Segment Equity in Net Income of Affiliates | $ | 109 | | $ | 199 | | $ | 548 | | $ | 583 |
AT&T INC.
SEPTEMBER 30, 2013
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amountsOTHER BUSINESS MATTERS
U-verse Services As part of September 30, 2013,Project VIP, we are marketing U-verse servicesplan to expand our IP-broadband service to approximately 26.057 million customer locations (locations eligible to receive U-verse service).locations. As of SeptemberJune 30, 2013,2014, we had 10.011.8 million total U-verse subscribers (high-speed Internet and video), including 9.711.5 million Internet and 5.35.9 million video subscribers (subscribers to both services are only counted once in the total). As part of Project Velocity IP (VIP), we plan to expand our U-verse services to a total of approximately 33 million customer locations and expect to be essentially complete by year-end 2015.
We believe that our U-verse TV service is a “video service” under the Federal Communications Act. However, some cable providers and municipalities have claimed that certain IP services should be treated as a traditional cable service and therefore subject to the applicable state and local cable regulation. Petitions have been filed at the FCCFederal Communications Commission (FCC) alleging that the manner in which we provision “public, educational and governmental” (PEG) programming over our U-verse TV service conflicts with federal law, and a lawsuit has been filed in a California state superior court raising similar allegations under California law. If courts having jurisdiction where we have significant deployments of our U-verse services were to decide that federal, state and/or local cable regulation were applicable to our U-verse services, or if the FCC, state agencies or the courts were to rule that we must deliver PEG programming in a manner substantially different from the way we do today or in ways that are inconsistent with our current network architecture, it could have a material adverse effect on the cost and extent of our U-verse offerings.
Atlantic Tele-Network, Inc. TransactionDIRECTV Acquisition In September 2013, we acquired Atlantic Tele-Network, Inc.’s U.S. retail wireless operations, operated under the Alltel brand, for $806 in cash, which includes closing adjustments. Under the terms of the agreement, we acquired wireless properties, including licenses, network assets, retail stores and approximately 550,000 subscribers.
Spectrum Acquisitions In September 2013, we acquired spectrum in the 700 MHz B band from Verizon Wireless for $1,900 in cash and an assignment of AWS spectrum licenses in five markets. The 700 MHz licenses acquired by AT&T cover 42 million people inOn May 18, states.
Leap Acquisition In July 2013,2014, we announced an agreement to acquire Leap Wireless International, Inc. (Leap),DIRECTV in a provider of prepaid wireless service,stock-and-cash transaction for fifteenninety-five dollars per outstanding share of Leap’sDIRECTV’s common stock, or approximately $1,260, plus one non-transferable contingent value right (CVR) per share. The CVR will entitle each Leap stockholder to a pro rata share$48,500 at the date of the net proceeds of the future sale of the Chicago 700 MHz A-band FCC license held by Leap.announcement. As of June 30, 2013, Leap2014, DIRECTV had approximately $2,700$17,691 in net debt. Each DIRECTV shareholder will receive cash of debt, net$28.50 per share and $66.50 per share in our stock. The stock portion will be subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if our stock price is below $34.90 per share at closing and 1.724 AT&T shares if our stock price is above $38.58 at closing. If our stock price is between $34.90 and $38.58 at closing, then DIRECTV shareholders will receive a number of cash. Undershares between 1.724 and 1.905, equal to $66.50 in value. DIRECTV is a premier pay TV provider in the termsUnited States and Latin America, with a high-quality customer base, the best selection of programming, the agreement, we will acquire all of Leap’s stockbest technology for delivering and thereby, acquire all of its wireless properties, including spectrum licenses, network assets, retail storesviewing high-quality video on any device and approximately 5 million subscribers. Leap’s spectrum licenses include Personal Communications Services (PCS)the best customer satisfaction among major U.S. cable and AWS bands and are largely complementary to our licenses. Leap’s network covers approximately 96 million people in 35 states and consists of a 3G CDMA network and an LTE network covering approximately 21 million people.satellite TV providers.
The merger agreement was approvedmust be adopted by more than 99 percent of votes cast by Leap’sDIRECTV’s stockholders on October 30, 2013. The transactionand is subject to review by the FCC and the Department of Justice (DOJ). The review processand to other closing conditions. It is underway at both agencies.also a condition that all necessary consents by certain state public utility commissions and foreign governmental entities have been obtained and are in full force and effect. We have obtained all required state regulatory consents. The transaction is expected to close inwithin 12 months of the first quarter of 2014.announcement. The agreement provides both parties with certain mutual termination rights for us and DIRECTV, including the right of either party to terminate the agreement if the transaction doesmerger is not closeconsummated by July 11, 2014, which can be extended until January 11,May 18, 2015, subject to extension in certain cases to a date no later than November 13, 2015. Either party may also terminate the agreement if certain conditions havethe DIRECTV stockholders' approval has not been met byobtained at a duly convened meeting of DIRECTV stockholders or an order permanently restraining, enjoining, or otherwise prohibiting consummation of the merger becomes final and non-appealable. In addition, we may terminate the agreement if the DIRECTV board of directors changes its recommendation of the merger in a manner adverse to AT&T prior to the DIRECTV stockholders’ approval having been obtained. The parties also have agreed that date.in the event that DIRECTV’s agreement for the “NFL Sunday Ticket” service is not renewed substantially on the terms discussed between the parties, the Company may elect not to consummate the Merger, but the Company will not have a damages claim arising out of such failure so long as DIRECTV used its reasonable best efforts to obtain such renewal. Under certain circumstances Leaprelating to a competing transaction, DIRECTV may be required to pay a termination fee to us in connection with or AT&T may be required to provide Leap withfollowing a three-year roaming agreement for LTE data coverage in certain Leap markets lacking LTE coverage, if the transaction does not close. If Leap enters into the roaming agreement, AT&T will then have the option within 30 days after entry into the roaming agreement to purchase certain specified Leap spectrum assets. If AT&T does not exercise its right to purchase alltermination of the specified Leap spectrum assets, Leap can then within 60 days after expiration of AT&T’s option require AT&Tagreement.
Based on synergies we expect to purchase allrealize with the acquisition, we have also committed to the following upon closing of the specified spectrum assets.transaction: (1) expanding and enhancing our deployment of both wireline and fixed wireless broadband to at least 15 million customer locations across 48 states, with most of the locations in underserved rural areas, (2) adhering to the FCC’s Open Internet protections established in 2010 for three years after closing, regardless of whether the FCC re-establishes such protections for other industry participants following the D.C. Circuit’s vacating of those rules, (3) for three years after closing, offering standalone retail broadband Internet access service at reasonable market-based prices, including a service of at least 6 Mbps down (where feasible) at guaranteed prices, in areas where we offer wireline broadband service today, and (4) offering, for three years after closing, standalone DIRECTV satellite video service at nationwide package prices that do not differ between customers in AT&T’s wireline footprint and customers outside our current 22-state wireline footprint.
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Tower Transaction Connecticut Wireline DispositionOn October 20, In December 2013, we announced an agreement with Crown Castle International Corp. (Crown Castle)agreed to sell our incumbent local exchange operations in which Crown Castle will haveConnecticut to Frontier Communications Corporation for $2,000 in cash. These Connecticut operations represent approximately $1,200 in annual revenues as of 2013. The transaction was approved by the exclusive rights to leaseFCC on July 25, 2014 and operate approximately 9,100is pending before the Connecticut Public Utilities Regulatory Authority and purchase approximately 600 of our wireless towers for $4,850. Underother state regulatory authorities. We expect the terms of the leases, Crown Castle will have exclusive rights to lease and operate the towers over an average term of approximately 28 years. As the leases expire, Crown Castle will have fixed price purchase options for these towers totaling approximately $4,200, based on their estimated fair market values at the end of the lease terms. We will sublease capacity on the towers from Crown Castle for a minimum of 10 years at current market rates, with options to renew. We plan to account for the proceeds as a financing obligation and expect this transaction to close by year-end 2013,in the fourth quarter of 2014, subject to standardcustomary closing conditions. We anticipate the cash tax impact of the transaction would be partially offset by the availability of capital loss carryforwards.
Environmental On March 29, 2012, attorneys in an investigation led by the California Attorney General’s Office informed us of claimed violations of California state hazardous waste statutes arising from the disposal of batteries, aerosol cans, and electronic waste at various California facilities. We are analyzing the claims while cooperating with investigators and implementing remedial measures where appropriate. At this time, we anticipate we will face civil penalties in excess of one hundred thousand dollars, but we do not anticipate such fines would be in an amount that would be material.
COMPETITIVE AND REGULATORY ENVIRONMENT
Overview AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided, and regulation is generally limited to operational licensing authority for the provision of services to enterprise customers.
In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumers.consumer welfare. However, since the Telecom Act was passed, the FCC and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. We are pursuing, at both the state and federal levels, additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers, including initiatives to transition services from traditional networks to all IP-based networks. At the same time, we also seek to ensure that legacy regulations are not extended to broadband or wireless services, which are subject to vigorous competition.
In addition, states representing a majority of our local service access lines have adopted legislation that enables new video entrants to acquire a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or even thousands of municipal-approved franchises) to offer competitive video services. We also are supporting efforts to update and improve regulatory treatment for retail services. Regulatory reform and passage of legislation is uncertain and depends on many factors.
We provide wireless services in robustly competitive markets, but those services are subject to substantial and increasing governmental regulation. Wireless communications providers must obtain licenses from the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of the spectrum. While wireless communications providers’ prices and service offerings are generally not subject to state regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer protection.
The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. Government to make more spectrum available. In February 2012, Congress set forth specific spectrum blocks to be auctioned and licensed by February 2015 (the “AWS-3 Auction”), and also authorized the FCC to conduct an “incentive auction,” to make available for wireless broadband use certain spectrum that is currently used by broadcast television licensees.licensees (the “600 MHz Auction”). The FCC has initiated proceedings to establish rules that would govern this process. It also initiatedthese auctions. The AWS-3 Auction is expected to begin in the second half of 2014. We intend to bid at least $9,000 in connection with the 600 MHz auction, provided there is sufficient spectrum available in the auction to give us a viable path to at least a 2x10 MHz nationwide spectrum footprint.
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
In May 2014, in a separate proceeding, to reviewthe FCC issued an order revising its policies governing mobile spectrum holdings and consider whether there should be limitsholdings. The FCC rejected the imposition of caps on the amount of spectrum any carrier could acquire, retaining its case by case review policy. Moreover, it increased the amount of spectrum that could be acquired before exceeding an aggregation “screen” that would automatically trigger closer scrutiny of a wireless service provider may possess.proposed transaction. On the other hand, it indicated that it will separately consider an acquisition of “low band” spectrum that exceeds one third of the available low band spectrum as presumptively harmful to competition. In addition, the FCC imposed limits on certain bidders in the 600 MHz Auction, including AT&T, restricting them from bidding on up to 40 percent of the available spectrum in the incentive auction in markets that cover as much as 70-80 percent of the U.S. population. On balance, the order and the new spectrum screen should allow AT&T to obtain additional spectrum to meet our customers’ needs, but because AT&T uses more “low band” spectrum in its network than some other national carriers, the separate consideration of low band spectrum acquisitions might affect AT&T’s ability to expand capacity in these bands (“low band” spectrum has better propagation characteristics than “high band” spectrum). We seek to ensure that we have the opportunity, through the incentive auction process and otherwise, to obtain the spectrum we need to provide our customers with high-quality service.service in the future.
Due to substantial increases in the demand for wireless service in the United States, AT&T is facing significant spectrum and capacity constraints on its wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. While we are continuing to invest significant capital in expanding our network capacity, our capacity constraints could affect the quality of existing data and voice services and our ability to launch new, advanced wireless communications providers’ prices and service offeringsbroadband services, unless we are generally not subjectable to state regulation, states sometimesobtain more spectrum. Any long-term spectrum solution will require that the FCC make new or existing spectrum available to the wireless industry to meet the expanding needs of our subscribers. We will continue to attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer protection.address spectrum and capacity constraints on a market-by-market basis.
Net Neutrality In January 2014, the D.C. Circuit released its decision on Verizon’s appeal of the FCC’s Net Neutrality rules. Those rules prohibited providers of fixed, mass market Internet access service from blocking access to lawful content, applications, services or non-harmful devices. The rules prohibited providers of mobile broadband Internet access service from blocking consumers from accessing 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 practices, performance and commercial terms of their service offerings. In addition, the rules prohibited providers of fixed (but not mobile) broadband Internet access service from unreasonably discriminating in their transmission of lawful network traffic.
In its decision, the court found the FCC had authority under section 706 of the Act (which directs the FCC and state commissions to promote broadband deployment) to adopt rules designed to preserve the open Internet, but vacated and remanded the antidiscrimination and no-blocking rules on the ground that they impermissibly imposed common carrier regulation on broadband Internet access service. The court held that, having declared broadband Internet access services to be information services, the FCC could not regulate them as telecommunications services. The court did not vacate the transparency rules.
The invalidation of the no-blocking and antidiscrimination rules means that broadband Internet access providers have greater flexibility in their provision of mass market services. However, the court’s finding that section 706 provides the FCC independent authority to adopt rules to promote broadband deployment appears to give the FCC broad authority to regulate the Internet and, more generally, IP-based services, provided the FCC finds such regulation promotes deployment of broadband infrastructure. In addition, because section 706(a) grants authority to both the FCC and the states to adopt rules to promote broadband deployment, states could attempt to rely on that provision to regulate broadband services, although the states’ authority to do so appears to be narrower than the FCC’s. On May 15, 2014, the FCC released a notice of proposed rulemaking in response to the D.C. Circuit’s January decision that also asks wide-ranging questions that appear to re-open settled issues. Most significantly, the Commission asks whether it has sufficient authority under section 706 to reestablish protections against discrimination and blocking on broadband Internet access services or whether it needs to reclassify broadband Internet access service as a telecommunications service to achieve its regulatory goals. If the FCC were to reclassify broadband as a telecommunications service, or the FCC and/or the states were to impose additional regulation of the Internet or broadband services, it could have a material adverse impact on our broadband services and operating results.
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Intercarrier Compensation/Universal Service In October 2011, the FCC adopted an order fundamentally overhauling its high-cost universal service program, through which it disburses approximately $4,500 per year to carriers providing telephone service in high-cost areas, and its existing intercarrier compensation (ICC) rules, which govern payments between carriers for the exchange of traffic. The order adoptedadopts rules to address immediately address certain practices that artificially increase ICC payments, as well as other practices to avoid such payments. The order also establishedestablishes a new ICC regime that will 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 accomplish this goal, the FCC will transitionis transitioning support amounts disbursed through its existing high-cost program to its new Connect America Fund which eventually will award targeted high-cost support amounts(CAF). In 2013, the FCC awarded us approximately $100 in new CAF funding to providers through a competitive process. We support many aspectsdeploy broadband in unserved areas. On May 23, 2014, the United States Court of the order and new rules. AT&T and other parties have filed appeals of the FCC’s rules, which are pending inAppeals for the Tenth Circuit Court of Appeals. Our appealdenied all challenges only certain, narrow aspects ofto the order; AT&T interveneduniversal service and intercarrier compensation rules adopted in support of the broad framework adopted by2011 order. Two petitions for rehearing on discrete issues affirmed in the order. Oral argument on the appeal will take place November 19, 2013.court’s decision are pending. We do not expect the FCC’s rules to have a material impact on our operating results.
Transition to IP-Based Network In November 2012, we announced plans to significantly expand and enhance our wireless and wireline broadband networks to support future IP data growth and new services (referred to as Project VIP). In conjunction with Project VIP, we filed a petition with the FCC asking it to open a proceeding to facilitate the “telephone” industry’sour transition from traditional transmission platforms and services to all IP-based networks and services. Our petition asks the FCC to conduct trial runs of the transition to next-generation services including the upgrading of traditional telephone facilities and offerings and their replacement with IP-based alternatives. The objective of the trials is to inform policymakers and other stakeholders regarding the technological and policy dimensions of the IP transition and, in the process, identify the regulatory reforms needed to promote consumer interests and preserveincentivize private incentives to upgrade America’sinvestment in broadband infrastructure. In May 2013, the FCC’s Technology Transition Task Force sought comment on potential trials to obtain data to assistJanuary 2014, the FCC adopted an order authorizing a broad set of voluntary experiments to measure the impact on consumers of the IP transition. Among other things, the order invites providers to submit proposals for all-IP trials in managingdiscrete geographic areas. In February 2014, AT&T filed a detailed plan for two such trials. In June 2014, the FCC staff presented a status report on the AT&T trial to the commissioners. We do not expect any formal FCC action on the AT&T proposal at this time. We expect this transition to next-generation networks. We expect to transition wireline customers to an all IP-based network by 2020.take several years.
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
LIQUIDITY AND CAPITAL RESOURCES
We had $1,371$11,305 in cash and cash equivalents available at SeptemberJune 30, 2013.2014. Cash and cash equivalents included cash of $490$1,756 and money market funds and other cash equivalents of $881.$9,549. In the first ninesix months of 2013,2014, cash outflowsinflows were primarily provided by cash receipts from operations and long-term debt issuances, with additional cash from the monetization of our investment in América Móvil and other assets. These inflows were largely offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, funding capital expenditures, dividends to stockholders, debt redemptions, stock repurchases and the acquisition of operations and wireless spectrum. Cash flows were also used to return value to stockholders through dividends and stock repurchases. We discuss many of these factors in detail below.
Cash Provided by or Used in Operating Activities
During the first ninesix months of 2013,2014, cash provided by operating activities was $26,879,$16,869, compared to $28,656$17,711 for the first ninesix months of 2012.2013. Lower operating cash flows reflectedin 2014 were primarily due to increased incomeinventory levels, retirement benefit funding and wireless device financing related to our AT&T Next program, which results in cash collection over the installment period instead of at the time of sale. In June 2014, we entered into uncommitted agreements to periodically sell certain equipment installment receivables for cash and future consideration (see Note 8). Proceeds from the sale of equipment installment receivables and the timing of working capital payments partially offset the decline in operating cash flows. We expect lower cash from operations in 2014 as our AT&T Next program continues to gain popularity with customers, we incur Leap integration costs, and for increased tax payments resulting from prior-year deductions for our contribution to the pension plan and for changes in tax rules that allowed for us to more rapidly deduct the cost of approximately $1,183 in 2013. equipment.
Cash Used in or Provided by Investing Activities
For the first ninesix months of 2013,2014, cash used in investing activities totaled $18,660, which$7,701 and consisted primarily of $15,565$11,649 for capital expenditures, (excludingexcluding interest during construction),construction, and wireless spectrum and operations$857 for the acquisitions of $3,984.Leap, other operations and spectrum. These expenditures were partially offset by cash receipts of approximately $771$4,885 from the sale of a portion of our shares in América Móvil, $200 from the repayment of advances to YP Holdings and $101 from the return of investment in YP Holdings.vil.
Virtually all of our capital expenditures are spent on our wireless and wireline networks, our U-verse services and support systems for our communications services. Capital spendingexpenditures, excluding interest during construction, increased $1,984 in ourthe first six months. Our Wireless segment of $8,231 represented 53%56% of our total spending and increased 14%24% in the first ninesix months. Wireless expenditures were primarily used for network capacity expansion, integration and the deployment of LTE equipment upgrades and our High-Speed Downlink Packet Access network. The Wireline segment, which includes U-verse services, represented 47%44% of the total capital expenditures and increased 15%17% in the first ninesix months, primarily reflecting our ongoing implementation of Project VIP.
We continue to expect our capital expenditures during 20132014 to be in the $21,000 rangerange. We expect 2014 to be our peak investment year for Project VIP and expect capital expenditures for 2014anticipate our Wireless and 2015Wireline segments’ spend to each be in the $20,000 range.proportionally consistent to 2013.
Cash Used in or Provided by Financing Activities
For the first ninesix months of 2013, our2014, cash used in financing activities totaled $1,202 and included net proceeds of $6,416$8,564 from the following long termlong-term debt issuances:
· | February 2013March 2014 issuance of $1,000$1,100 of 0.900%2.300% global notes due 20162019, $1,000 of 3.900% global notes due 2024 and $1,250$400 of floating rate global notes due 2016.2019. The floating rate for the notenotes is based upon the three-month London Interbank Offered Rate (LIBOR), reset quarterly, plus 38.567 basis points. |
· | March 20132014 issuance of $500 of 1.400%floating rate global notes due 2017. |
· | March 2013 issuance of €1,250 of 2.500% global The floating rate for the notes due 2023 (equivalent to $1,626 when issued) and €400 of 3.550% global notes due 2032 (equivalent to $520 when issued).is based upon the three-month LIBOR, reset quarterly, plus 42 basis points. |
· | May 20132014 draw of $750 on a private financing agreement with Export Development Canada due 2017. The agreement is designed to encourage the purchase of Canadian-sourced equipment. The agreement contains terms similar to that provided under our revolving credit arrangements, discussed below; the interest rate was privately negotiated at market rates. The rate for this agreement is based upon the three-month LIBOR, reset quarterly, plus 50 basis points. |
· | June 2014 issuance of £1,000$2,000 of 4.250%4.800% global notes due 20432044. |
· | June 2014 issuance of €1,600 (equivalent to approximately $1,560$2,181 when issued). of 2.400% global notes due 2024 and €500 (equivalent to $681 when issued) of 3.375% global notes due 2034. |
In March 2013, we repaid €1,250 of 4.375% notes (equivalent to $1,641 when repaid) and $147 of 6.5% notes. In July 2013, we repaid $300 of 7.375% notes. Additionally, in August 2013, we announced the redemption of $550 of 6.625% notes, which was completed in October 2013.
In May 2013, we completed a repurchase authorization that was approved by our Board of Directors in July 2012. In March 2013, our Board of Directors authorized the repurchase of an additional 300 million shares of our common stock. During the first nine months of 2013, we repurchased 312 million shares for $11,134 under these authorizations. At the end of the third quarter, we had 216 million shares remaining on the March 2013 authorization. We expect to make future repurchases opportunistically.
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
For the first six months of 2014, we redeemed $3,508 of debt, primarily consisting of the following:
· | March 2014 redemption of $1,814 of Cricket Communications, Inc. term loans and $38 of 4.500% Leap convertible 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. |
In July 2014, we redeemed $4,393 of debt consisting of all of the outstanding BellSouth 5.200% notes due 2014, AT&T 0.875% global notes due 2015, AT&T 5.625% global notes due 2016, and BellSouth 5.200% notes due 2016 as well as $750 in principal amount of the outstanding AT&T 2.500% global notes due 2015.
Our weighted average interest rate of our long-term debt portfolio was approximately 4.4% as of June 30, 2014, and 4.5% as of December 31, 2013. We had $83,548 of total notes and debentures outstanding at June 30, 2014, which included Euro, British pound sterling and Canadian dollar denominated debt of approximately $21,240.
Since the first quarter of 2012, we have been buying back shares of AT&T common stock under three previous 300 million share repurchase authorizations approved by our Board of Directors. During the first six months of 2014, we repurchased approximately 42 million shares for $1,396. In March 2014, our Board of Directors approved a fourth authorization to repurchase 300 million shares of our common stock, which has no expiration date. As of June 30, 2014, we had approximately 421 million shares remaining from the authorizations. We expect to make future repurchases opportunistically.
We paid dividends of $7,325$4,784 during the first ninesix months of 2013,2014, compared with $7,738$4,930 for the first ninesix months of 2012,2013, primarily reflecting the decline in shares outstanding due to our repurchases during the year, whichrepurchase activity, partially offset by the increase in the quarterly dividend approved by our Board of Directors in November 2012.December 2013. Dividends declared by our Board of Directors totaled $0.45$0.46 per share in the thirdsecond quarter of 2013 and $1.35$0.92 per share for the first ninesix months of 20132014 and $0.44 per share$0.45 in the thirdsecond quarter and $1.32$0.90 per share for the first ninesix months of 2012.2013. Our dividend policy considers the expectations and requirements of stockholders, internal requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.
At SeptemberJune 30, 2013,2014, we had $7,873$10,482 of debt maturing within one year, $5,999$10,291 of which were related to long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:
· | $1,000 of annual put reset securities issued by BellSouth Corporation (BellSouth) that may be put back to us each April until maturity in 2021. |
· | An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the zero-coupon note (issued for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,030. |
We have two revolving credit agreements with a syndicate of banks: a $5,000 agreement expiring in December 20162018 and a $3,000 agreement expiring in December 2017. Advances under either agreement may be used for general corporate purposes. Advances are not conditioned on the absence of a material adverse change. All advances must be repaid no later than the date on which lenders are no longer obligated to make any advances under each agreement. Under each agreement, we can terminate, in whole or in part, amounts committed by the lenders in excess of any outstanding advances; however, we cannot reinstate any such terminated commitments. Under each agreement, we must maintain a debt-to-EBITDA, including modifications described in the agreement, ratio of not more than three-to-one as of the last day of each fiscal quarter for the four quarters then ended. Both agreements also contain a negative pledge covenant, which generally provides that if we pledge assets or permit liens on our property, then any advances must also be secured. At SeptemberJune 30, 2013,2014, we had no advances outstanding under either agreement and were in compliance with all covenants under each agreement.
Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders’ equity. Our capital structure does not include any debt issued by América Móvil or YP Holdings.Holdings and other investees. At SeptemberJune 30, 2013,2014, our debt ratio was 46.9%47.6%, compared to 38.6%46.6% at SeptemberJune 30, 2012,2013, and 43.0%45.0% at December 31, 2012.2013. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances.issuances, debt in connection with acquisitions and stock repurchases.
AT&T INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
During 2014, we also received approximately $4,994 from the monetization of various nonstrategic assets. A majority of that cash was attributable to sales of our investment in América Móvil and real estate holdings. We plan to continue to explore similar opportunities in the remainder of 2014.
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 business, to the trust used to pay pension benefits under our qualified pension plans. In July 2014, the U.S. Department of Labor (DOL) published in the Federal Register their final retroactive approval of our voluntary contribution.
The preferred equity interest preliminarily valued between $9,200 and $9,500, had a value of $9,104 on the contribution date, does not have any voting rights and has a liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of $560 per annum, which will be distributed quarterly in equal amounts. We distributed $280 to the trust during the six months ended June 30, 2014. So long as we make the distributions, wethe terms of the preferred equity interest will have nonot impose any limitations on our ability to declare a dividend, or repurchase shares. At the time of the contribution of the preferred equity interest, we made an additional cash contribution of $175 and have agreed to annual cash contributions of $175 no later than the due date for our federal income tax return for each of 2014, 2015 and 2016. These contributions, combined with our existing pension assets, are essentially equivalent to the expected pension obligation at year-end.
AT&T INC.
SEPTEMBERJUNE 30, 20132014
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amountsThe preferred equity interest is not transferable by the trust except through its put and call features. After a period of five years from the contribution or, if earlier, the date upon which the pension plan trust is fully funded as determined under Employee Retirement Income Security Act of 1974, as amended (ERISA), AT&T has a right to purchase from the pension plan trust some or all the preferred equity interests at the greater of their fair market value or minimum liquidation value plus any unpaid cumulative dividends. In addition, AT&T will have the right to purchase the preferred equity interests in the event AT&T’s ownership of Mobility is less than fifty percent (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 interests at the greater of their fair market value or minimum liquidation value plus any unpaid cumulative dividends, and in installments, as specified in the contribution agreement upon the occurrence of any of the following: (1) at any time if the ratio of debt to total capitalization of Mobility exceeds that of AT&T, (2) the date on which AT&T Inc. is rated below investment grade for two consecutive calendar quarters, (3) upon a change of control if AT&T does not exercise its purchase option, or (4) at any time after a seven-year period from the contribution date. In the event AT&T elects or is required to purchase the preferred equity interests, AT&T may elect to settle the purchase price in shares of AT&T common stock.
On September 9, 2013, the DOL published a proposed exemption that authorizes retroactive approval of this voluntary contribution. The proposal is open for public comment for 55 days from the publication date. Our retirement benefit plans, including required contributions, are subject to the provisions of ERISA.
AT&T INC.
SEPTEMBER 30, 2013
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
At SeptemberJune 30, 2013,2014, we had interest rate swaps with a notional value of $4,750$6,350 and a fair value of $212.$203.
We have fixed-to-fixed cross-currency swaps on foreign-currency-denominated debt instruments with a U.S. dollar notional value of $14,136$20,650 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $1,100$1,508 at SeptemberJune 30, 2013. We have foreign exchange contracts with a notional value of $4 and a net fair value of less than $1 at September 30, 2013.2014.
Item 4. Controls and Procedures
The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures as of SeptemberJune 30, 2013.2014. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant’s disclosure controls and procedures were effective as of SeptemberJune 30, 2013.2014.
AT&T INC.
SEPTEMBERJUNE 30, 20132014
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the “Risk Factors” section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.
The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:
· | Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including 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, including increases due to adverse changes in the United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates,rates; adverse medical cost trends, and unfavorable or delayed implementation of healthcare legislation, regulations or related court decisions; and our inability to receive retroactive approval from the DOL of our voluntary contribution of a preferred interest in our wireless business.decisions. |
· | The final outcome of FCC and other federal or state agency proceedings (including judicial review, if any, of such proceedings) involving issues that are important to our business, including, without limit, intercarrier compensation, interconnection obligations, the transition from legacy technologies to IP-based infrastructure, universal service, broadband deployment, E911 services, competition policy, net neutrality, unbundled network elements and other wholesale obligations, availability of new spectrum from the FCC on fair and balanced terms, and wireless license awards and renewals. |
· | The final outcome of state and federal legislative efforts involving issues that are important to our business, including deregulation of IP-based services, relief from Carrier of Last Resort obligations, and elimination of state commission review of the withdrawal of services. |
· | Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs. |
· | Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies (e.g., cable, wireless and VoIP) and our ability to maintain capital expenditures. |
· | The extent of competition and the resulting pressure on customer and access line totals and wireline and wireless operating margins. |
· | Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our wireless and wireline markets. |
· | The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and nonregulation of comparable alternative technologies (e.g., VoIP). |
· | The continued development of attractive and profitable U-verse service offerings; the extent to which regulatory, franchise fees and build-out requirements apply to this initiative; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings. |
· | Our continued ability to attract and offer a diverse portfolio of wireless devices, some on an exclusive basis. |
· | The availability and cost of additional wireless spectrum and regulations and conditions 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 and terms. |
· | The outcome of pending, threatened or potential litigation, including patent and product safety claims by or against third parties. |
· | The impact on our networks and business from major equipment failures; security breaches related to the network or customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers; or severe weather conditions, natural disasters, pandemics, energy shortages, wars or terrorist attacks. |
· | The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards. |
· | The issuance by the Internal Revenue Service and/or state tax authorities of new tax regulations or changes to existing standards and actions by federal, state or local tax agencies and judicial authorities with respect to applying applicable tax laws and regulations and the resolution of disputes with any taxing jurisdictions. |
· | Our pending acquisition of DIRECTV. |
· | Our ability to adequately fund our wireless operations, including payment for additional spectrum, network upgrades and technological advancements. |
· | Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments. |
· | The uncertainty surrounding further congressional action to address spending reductions, which may result in a significant reduction in government spending and reluctance of businesses and consumers to spend in general and on our products and services specifically, due to this fiscal uncertainty. |
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.
AT&T INC.
PART II – OTHER INFORMATION
Dollars in millions except per share amounts
Item 1A. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the third quarter 2013, there were no such material developments.The additional Risk Factor below reflects our pending acquisition of DIRECTV (See “Other Business Matters”).
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | | |
| | | | | | | | | | |
(c) A summary of our repurchases of common stock during the third quarter of 2013 is as follows: | | |
| | | | | | | | | | |
Period | | (a) Total Number of Shares (or Units) Purchased 1,2 | | (b) Average Price Paid Per Share (or Unit) | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs 1 | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs |
| | | | | | | | | | |
July 1, 2013 - July 31, 2013 | | 24,608,211 | | $ | 35.62 | | 24,600,000 | | 246,947,551 |
August 1, 2013 - August 31, 2013 | | 16,500,137 | | | 34.26 | | 16,500,000 | | 230,447,551 |
September 1, 2013 - September 30, 2013 | | 14,001,278 | | | 33.93 | | 14,000,000 | | 216,447,551 |
Total | | 55,109,626 | | $ | 34.78 | | 55,100,000 | | |
1 | In March 2013, our Board of Directors authorized the repurchase of up to 300 million shares of our common stock. In July 2012, our Board of Directors also authorized the repurchase of up to 300 million shares of our common stock, which we completed in May 2013. |
| The March 2013 authorization has no expiration date. |
2 | Of the shares repurchased, 9,626 shares were acquired through the withholding of taxes on the vesting of restricted stock or through the payment in stock of taxes on the exercise price of options. |
The impact of our pending acquisition of DIRECTV, including our ability to obtain governmental approvals on favorable terms including any required divestitures; the risk that the businesses will not be integrated successfully; the risk that the cost savings and any other synergies from the acquisition may not be fully realized or may take longer to realize than expected; our costs in financing the acquisition and potential adverse effects on our share price and dividend amount due to the issuance of additional shares; the addition of DIRECTV’s existing debt to our balance sheet; disruption from the acquisition making it more difficult to maintain relationships with customers, employees or suppliers; and competition and its effect on pricing, spending, third party relationships and revenues.
As discussed in Other Business Matters, on May 18, 2014, we agreed to acquire DIRECTV for approximately $48,500. We believe that the acquisition will give us the scale, resources and ability to deploy video technology to more customers than otherwise possible and to 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 content costs, and other potential synergies, enabling us to expand and enhance our broadband deployment and provide more video options across multiple fixed and mobile devices.
Achieving these results will depend upon obtaining governmental approvals on favorable terms within the time limits contemplated by the parties. Delays in closing, including as a result of delays in obtaining regulatory approval could divert attention from ongoing operations on the part of management and employees, adversely affecting customers and suppliers and therefore revenues. If such approvals are obtained and the transaction is consummated, then we must integrate a large number of video network and other operational systems and administrative systems, which may involve significant management time and create uncertainty for employees, customers and suppliers. The integration process may also result in significant expenses and charges against earnings, both cash and noncash. While we have successfully merged large companies into our operations in the past, delays in the process could have a material adverse effect on our revenues, expenses, operating results and financial condition. This acquisition also will increase the amount of debt on our balance sheet (both from DIRECTV’s debt and the indebtedness needed to pay a portion of the purchase price) leading to additional interest expense and, due to additional shares being issued, will result in additional cash being required for any dividends declared. Both of these factors could put pressure on our financial flexibility to continue capital investments, develop new services and declare future dividends. In addition, events outside of our control, including changes in regulation and laws as well as economic trends, could adversely affect our ability to realize the expected benefits from this acquisition.
AT&T INC.
PART II – OTHER INFORMATION
Dollars in millions except per share amounts
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) A summary of our repurchases of common stock during the second quarter of 2014 is as follows: |
| | | | | | | | | | |
Period | | (a) Total Number of Shares (or Units) Purchased 1,2 | | (b) Average Price Paid Per Share (or Unit) | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs 1 | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs |
| | | | | | | | | | |
April 1, 2014 - April 30, 2014 | | 4,500,637 | | $ | 35.43 | | 4,500,000 | | 420,750,000 |
May 1, 2014 - May 31, 2014 | | 7,793 | | | - | | - | | 420,750,000 |
June 1, 2014 - June 30, 2014 | | 12,851 | | | - | | - | | 420,750,000 |
Total | | 4,521,281 | | $ | 35.43 | | 4,500,000 | | |
1 | In March 2014, our Board of Directors approved a fourth authorization to repurchase up to 300 million shares of our common stock. |
| In March 2013, our Board of Directors approved a third authorization to repurchase of up to an additional 300 million shares of our common stock. The authorizations have no expiration date. |
2 | Of the shares repurchased, 21,281 shares were acquired through the withholding of taxes on the vesting of restricted stock or through the payment in stock of taxes on the exercise price of options. |
AT&T INC.
Item 6. Exhibits
Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610.
| |
10-qqq | Agreement and Plan of Merger, dated as of July 12, 2013, by and among Leap Wireless International, Inc., AT&T Inc., Laser, Inc. and Mariner Acquisition Sub Inc. (Exhibit 10.1 to Form 8-K dated July 12, 2013.) |
10-rrr | Form of Voting Agreement, dated as of July 12, 2013, by and among AT&T Inc., Leap Wireless International, Inc. and the stockholders listed on Schedule I thereto. (Exhibit 10.2 to Form 8-K dated July 12, 2013.) |
10-sss | Form of CVR Agreement, by and among AT&T Inc., Leap Wireless International, Inc., Laser, Inc. and the Rights Agent. (Exhibit 10.3 to Form 8-K dated July 12, 2013.) |
12 | Computation of Ratios of Earnings to Fixed Charges |
31 | Rule 13a-14(a)/15d-14(a) Certifications 31.1 Certification of Principal Executive Officer 31.2 Certification of Principal Financial Officer |
32 | Section 1350 Certifications |
101 | XBRL Instance Document |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AT&T Inc.
NovemberAugust 1, 20132014 /s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer