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AT&T (T)

Filed: 19 Feb 20, 9:42pm
0000732717 srt:MinimumMember us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember us-gaap:DefinedBenefitPlanEquitySecuritiesUsMember 2019-12-31

 

 

FORM 10-K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

 

OR

 

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the transition period from              to

 

Commission File Number: 001-8610

 

AT&T INC.

 

Incorporated under the laws of the State of Delaware

I.R.S. Employer Identification Number 43-1301883

 

208 S. Akard St., Dallas, Texas, 75202

Telephone Number 210-821-4105

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Name of each exchange

Title of each class

Trading Symbol(s)

on which registered

Common Shares (Par Value $1.00 Per Share)

T

New York Stock Exchange

Depositary Shares, each representing a 1/1000th interest in a share of 5.000% Perpetual Preferred Stock, Series A

TPRA

New York Stock Exchange

Depositary Shares, each representing a 1/1000th interest in a share of 4.750% Perpetual Preferred Stock, Series C

TPRC

New York Stock Exchange

AT&T Inc. Floating Rate Global Notes due August 3, 2020

T 20C

New York Stock Exchange

AT&T Inc. 1.875% Global Notes due December 4, 2020

T 20

New York Stock Exchange

AT&T Inc. 2.650% Global Notes due December 17, 2021

T 21B

New York Stock Exchange

AT&T Inc. 1.450% Global Notes due June 1, 2022

T 22B

New York Stock Exchange

AT&T Inc. 2.500% Global Notes due March 15, 2023

T 23

New York Stock Exchange

AT&T Inc. 2.750% Global Notes due May 19, 2023

T 23C

New York Stock Exchange

AT&T Inc. Floating Rate Global Notes due September 5, 2023

T 23D

New York Stock Exchange

AT&T Inc. 1.050% Global Notes due September 5, 2023

T 23E

New York Stock Exchange

AT&T Inc. 1.300% Global Notes due September 5, 2023

T 23A

New York Stock Exchange

AT&T Inc. 1.950% Global Notes due September 15, 2023

T 23F

New York Stock Exchange

 

 

 


 

 

 

Name of each exchange

Title of each class

Trading Symbol(s)

on which registered

AT&T Inc. 2.400% Global Notes due March 15, 2024

T 24A

New York Stock Exchange

AT&T Inc. 3.500% Global Notes due December 17, 2025

T 25

New York Stock Exchange

AT&T Inc. 0.250% Global Notes due March 4, 2026

T 26E

New York Stock Exchange

AT&T Inc. 1.800% Global Notes due September 5, 2026

T 26D

New York Stock Exchange

AT&T Inc. 2.900% Global Notes due December 4, 2026

T 26A

New York Stock Exchange

AT&T Inc. 2.350% Global Notes due September 5, 2029

T 29D

New York Stock Exchange

AT&T Inc. 4.375% Global Notes due September 14, 2029

T 29B

New York Stock Exchange

AT&T Inc. 2.600% Global Notes due December 17, 2029

T 29A

New York Stock Exchange

AT&T Inc. 0.800% Global Notes due March 4, 2030

T 30B

New York Stock Exchange

AT&T Inc. 3.550% Global Notes due December 17, 2032

T 32

New York Stock Exchange

AT&T Inc. 5.200% Global Notes due November 18, 2033

T 33

New York Stock Exchange

AT&T Inc. 3.375% Global Notes due March 15, 2034

T 34

New York Stock Exchange

AT&T Inc. 2.450% Global Notes due March 15, 2035

T 35

New York Stock Exchange

AT&T Inc. 3.150% Global Notes due September 4, 2036

T 36A

New York Stock Exchange

AT&T Inc. 1.800% Global Notes due September 14, 2039

T 39B

New York Stock Exchange

AT&T Inc. 7.000% Global Notes due April 30, 2040

T 40

New York Stock Exchange

AT&T Inc. 4.250% Global Notes due June 1, 2043

T 43

New York Stock Exchange

AT&T Inc. 4.875% Global Notes due June 1, 2044

T 44

New York Stock Exchange

AT&T Inc. 4.250% Global Notes due March 1, 2050

T 50

New York Stock Exchange

AT&T Inc. 5.350% Global Notes due November 1, 2066

TBB

New York Stock Exchange

AT&T Inc. 5.625% Global Notes due August 1, 2067

TBC

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [X] No [ ]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]

 

 

 

 


 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

[X]

 

Accelerated Filer

[ ]

Non-accelerated filer

[ ]

 

Smaller reporting company

[ ]

 

 

 

Emerging growth company

[ ]

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

 

Based on the closing price of $33.51 per share on June 30, 2019, the aggregate market value of our voting and non-voting common stock held by non-affiliates was $245 billion.

 

At February 12, 2020, common shares outstanding were 7,172,884,070.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

(1)Portions of AT&T Inc.’s Notice of 2020 Annual Meeting and Proxy Statement dated on or about March 11, 2020 to be filed within the period permitted under General Instruction G(3) (Parts III and IV).

 

 

 

 

 

 


 

 

TABLE OF CONTENTS

 

 

Item

 

Page

 

PART I

 

 

1.

Business

1

1A.

Risk Factors

15

2.

Properties

22

3.

Legal Proceedings

22

4.

Mine Safety Disclosures

22

 

 

 

 

Information about our Executive Officers

23

 

 

 

 

 

 

 

PART II

 

 

5.

Market for Registrant’s Common Equity, Related Stockholder Matters

and Issuer Purchases of Equity Securities

24

6.

Selected Financial Data

26

7.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

27

7A.

Quantitative and Qualitative Disclosures about Market Risk

55

8.

Financial Statements and Supplementary Data

57

9.

Changes in and Disagreements with Accountants on Accounting

and Financial Disclosure

125

9A.

Controls and Procedures

125

9B.

Other Information

126

 

 

 

 

 

 

 

PART III

 

 

10.

Directors, Executive Officers and Corporate Governance

126

11.

Executive Compensation

126

12.

Security Ownership of Certain Beneficial Owners and

Management and Related Stockholder Matters

127

13.

Certain Relationships and Related Transactions, and Director Independence

128

14.

Principal Accountant Fees and Services

128

 

 

 

 

 

 

 

PART IV

 

 

15.

Exhibits and Financial Statement Schedules

128

16.

Form 10-K Summary

132

 

 

 

 

 

 


AT&T Inc.

Dollars in millions except per share amounts

 

PART I

 

ITEM 1. BUSINESS

 

GENERAL

 

AT&T Inc. (“AT&T,” “we” or the “Company”) is a holding company incorporated under the laws of the State of Delaware in 1983 and has its principal executive offices at 208 S. Akard St., Dallas, Texas, 75202 (telephone number 210-821-4105). We maintain an internet website at www.att.com. (This website address is for information only and is not intended to be an active link or to incorporate any website information into this document.) We file electronically with the Securities and Exchange Commission (SEC) required reports on Form 8-K, Form 10-Q and Form 10-K; proxy materials; registration statements on Forms S-3 and S-8, as necessary; and other forms or reports as required. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. We make available, free of charge, on our website our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. We also make available on that website, and in print, if any stockholder or other person so requests, our “Code of Ethics” applicable to all employees and Directors, our “Corporate Governance Guidelines,” and the charters for all committees of our Board of Directors, including Audit, Human Resources and Corporate Governance and Nominating. Any changes to our Code of Ethics or waiver of our Code of Ethics for senior financial officers, executive officers or Directors will be posted on that website.

 

A reference to a “Note” refers to the Notes to Consolidated Financial Statements in Item 8.

 

History

AT&T, formerly known as SBC Communications Inc. (SBC), was formed as one of several regional holding companies created to hold AT&T Corp.’s (ATTC) local telephone companies. On January 1, 1984, we were spun-off from ATTC pursuant to an anti-trust consent decree, becoming an independent publicly-traded telecommunications services provider. At formation, we primarily operated in five southwestern states.

 

Following our formation, we have expanded our footprint and operations by acquiring various businesses, most significantly:

Our subsidiaries merged with Pacific Telesis Group in 1997, Southern New England Telecommunications Corporation in 1998 and Ameritech Corporation in 1999, thereby expanding our wireline operations as the incumbent local exchange carrier (ILEC) into a total of 13 states.

In 2005, we merged one of our subsidiaries with ATTC, creating one of the world’s leading telecommunications providers. In connection with the merger, we changed the name of our company from “SBC Communications Inc.” to “AT&T Inc.”

In 2006, we merged one of our subsidiaries with BellSouth Corporation (BellSouth) making us the ILEC in an additional nine states. With the BellSouth acquisition, we also acquired BellSouth’s 40 percent economic interest in AT&T Mobility LLC (AT&T Mobility), formerly Cingular Wireless LLC, resulting in 100 percent ownership of AT&T Mobility.

In 2014, we completed the acquisition of wireless provider Leap Wireless International, Inc. and sold our ILEC operations in Connecticut, which we had previously acquired in 1998.

In January and April 2015, we acquired wireless properties in Mexico, and acquired DIRECTV, a leading provider of digital television entertainment services in both the United States and Latin America.

In June 2018, we acquired Time Warner Inc. (Time Warner), a leader in media and entertainment that operates the Turner, Home Box Office (HBO) and Warner Bros. business units. We also acquired Otter Media Holdings August 2018 and advertising platform AppNexus in August 2018.

 

In late 2019, we announced the sale of wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands; the sale is expected to close in mid-2020.

 

General

We are a leading provider of telecommunications, media and technology services globally. The services and products that we offer vary by market and utilize various technology platforms in a range of geographies. Our reportable segments are organized as follows:

 

1

 


AT&T Inc.

Dollars in millions except per share amounts

 

The Communications segment provides services to businesses and consumers located in the U.S. and businesses globally. Our business strategies reflect bundled product offerings that cut across product lines and utilize shared assets. This segment contains the following business units:

Mobility provides nationwide wireless service and equipment.

Entertainment Group provides video, including over-the-top (OTT) services, internet and voice communications services to residential customers. This segment also sells advertising on DIRECTV and U-verse distribution platforms.

Business Wireline provides advanced IP-based services, as well as traditional voice and data services to business customers.

 

The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content over various physical and digital formats. This segment contains the following business units:

Turner primarily operates multichannel basic television networks and digital properties. Turner also sells advertising on its networks and digital properties.

Home Box Office consists of premium pay television and OTT and streaming services domestically and premium pay, basic tier television and OTT and streaming services internationally, as well as content licensing and home entertainment.

Warner Bros. consists of the production, distribution and licensing of television programming and feature films, the distribution of home entertainment products and the production and distribution of games.

 

The Latin America segment provides entertainment and wireless services outside of the U.S. This segment contains the following business units:

Mexico provides wireless service and equipment to customers in Mexico.

Vrio provides video services primarily to residential customers using satellite technology in Latin America and the Caribbean.

 

The Xandr segment provides advertising services. These services utilize data insights to develop and deliver targeted advertising across video and digital platforms.

 

Corporate and Other reconciles our segment results to consolidated operating income and income before income taxes, and includes:

Corporate, which consists of: (1) businesses no longer integral to our operations or which we no longer actively market, (2) corporate support functions, (3) impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, (4) the reclassification of the amortization of prior service credits, which we continue to report with segment operating expenses, to consolidated other income (expense) – net and (5) the recharacterization of programming intangible asset amortization, for programming acquired in the Time Warner acquisition, which we continue to report with WarnerMedia segment operating expense, to consolidated amortization expense.

Acquisition-related items, which consists of items associated with the merger and integration of acquired businesses, including amortization of intangible assets.

Certain significant items, which includes (1) employee separation charges associated with voluntary and/or strategic offers, (2) losses resulting from abandonment or impairment of assets and (3) other items for which the individual segments are not being evaluated.

Eliminations and consolidations, which (1) removes transactions involving dealings between our segments, including content licensing between WarnerMedia and Communications and (2) includes adjustments for our reporting of the advertising business.

 

Areas of Focus

We are in a period of rapid growth in wireless video usage and believe that there are substantial opportunities available for next-generation converged services that combine technologies and services. Our First Responder Network Authority (FirstNet) contract and our strong spectrum position allows us to execute a different 5G deployment strategy. With our upcoming launch of HBO Max, we will capitalize on our premier network, technology and distribution capabilities to provide our premier content in this unique offering. Our recent fiber expansion allows us to respond to continuing advances in technology and changing demands from our customers. We expect our transition to software-based products with low acquisition costs will provide better economics and improve our product portfolio, including expansion into streaming TV. Our acquisitions over the past few years and our continued investment in a premier network experience make our customers’

2

 


AT&T Inc.

Dollars in millions except per share amounts

 

lives more convenient and productive and foster competition and further innovation in the communications and entertainment industry. In 2020, we plan to focus on the areas discussed below.

 

Communications

Our integrated telecommunications network utilizes different technological platforms, including wireless, satellite and wireline, to provide instant connectivity and at the higher speeds made possible by our fiber network expansion and wireless network enhancements. Video streaming will also drive greater demand for broadband and capitalize on our fiber deployment. These investments prepare us to meet increased customer demand for enhanced wireless and broadband services, including video streaming, augmented reality and “smart” technologies. During 2020, we will continue to develop and provide high-value integrated video, mobile and broadband solutions. We believe offering integrated services facilitates our customers’ desire to view video anywhere on demand and encourages customer retention.

 

Wireless Service We are experiencing rapid growth in data usage as consumers are demanding seamless access across their wireless and wired devices, and businesses and municipalities are connecting more and more equipment and facilities to the internet. We were awarded the FirstNet contract, which provides us with access to 20 MHz of nationwide low band spectrum and invested in 5G and millimeter-wave technologies with our acquisition of FiberTower Corporation, which currently holds significant amounts of spectrum in the millimeter wave bands (39 GHz) that the U.S. Federal Communications Commission (FCC) reallocated for mobile broadband services. These bands will help to accelerate our entry into 5G services. At December 31, 2019, our FirstNet coverage is approximately 75 percent complete with more than 1.0 million FirstNet connections. We expect to have mobile 5G service nationwide to more than 200 million people by the second quarter 2020, and with that availability, we anticipate the introduction of 5G handsets and devices will contribute to a renewed interest in equipment upgrades. We will continue to invest in our wireless network as we look to provide future service offerings and participate in technologies, such as 5G and millimeter-wave bands. The increased speeds and network operating efficiency expected with this technology should enable massive deployment of devices connected to the internet as well as faster delivery of data services. We expect that 5G will enhance our customers’ entire connected experience and not just provide faster speeds.

 

Our network covers over 430 million people in North America with 4G LTE technology, and, in the United States, our network covers all major metropolitan areas and more than 330 million people with our LTE technology. Our 3G network provides services to customers using older handsets and connected devices. We expect to redeploy spectrum currently used for our 3G services as we transition to 5G service and project that we will discontinue service on our 3G network in early 2022; we will manage this process consistent with previous network upgrades. As of December 31, 2019, about 7 percent of our postpaid subscribers were using 3G handsets, and we expect them to transition to newer technologies. We do not expect this transition to have a material impact on our consolidated operating results.

 

As the wireless industry has matured, future wireless growth will increasingly depend on our ability to offer innovative data services on a wireless network that has sufficient spectrum and capacity to support these innovations. We continue to invest significant capital in expanding our network capacity, as well as obtaining additional spectrum that meets our long-term needs. We have participated in recent FCC spectrum auctions, including the 24 GHz auction in 2019, and have been redeploying spectrum previously used for more basic services to support more advanced mobile internet services.

 

Broadband Technology We are rapidly converting to a software-based network and managing the migration of wireline customers to services using our fiber infrastructure to provide broadband technology. Software-based technologies align with our global leadership in software defined network (SDN) and network function virtualization (NFV). This network approach, of which we are a global leader in our commitment to virtualize 75 percent of our network by the end of 2020, delivers a demonstrable cost advantage in the deployment of next-generation technology over the traditional, hardware-intensive network approach. Our virtualized network will be able to support next-generation applications like 5G and broadband-based services quickly and efficiently.

 

3

 


AT&T Inc.

Dollars in millions except per share amounts

 

Media

We produce and distribute high-quality video content to take advantage of growing global demand. Our media businesses use their strong brands, distinctive intellectual property and global scale to produce and distribute quality content. As the television industry continues to evolve from a distribution system using satellite and cable offerings to internet streaming video services, we are well-positioned to address and capitalize on these changes, but we face financial risks and new sources of competition associated with these developments. We plan in 2020 to continue launching more personalized services offered directly to consumers through our own distribution and distribution partner channels, including our streaming platform HBO Max, scheduled for launch in May 2020. AT&T customers on premium video, mobile and broadband services will be offered bundles with HBO Max included at no additional charge. We also plan to add an advertising-supported HBO Max offering to take advantage of our advertising capabilities. In the future, we also plan to provide HBO Max subscribers with unique live, interactive and special event programming.

 

Advertising

Our Xandr segment relies on using data from our 170 million customer relationships, to deliver digital and video advertising that is more relevant to consumers. Advertisers are interested in capitalizing on our broad video distribution and ability to offer more precise marketing to customers through a digital platform. We also are expanding relationships with other video providers and digital publishers to use our platforms to reach their audiences. We believe this segment will benefit from the nationwide election cycle in 2020.

 

Latin America

We believe that the wireless model in the U.S., with accelerating demand for mobile internet service and the associated economic benefits, will be repeated around the world as companies invest in high-speed mobile networks. Due in part to changes in the legal and regulatory framework in Mexico in 2015, we acquired Mexican wireless operations to establish a seamless, cross-border North American wireless network covering an area with over 430 million people and businesses in the United States and Mexico. Our 4G LTE network in Mexico now covers approximately 100 million people and businesses. Our Vrio business unit provides video services to primarily residential customers using satellite technology in Latin America and the Caribbean. We have approximately 13 million video subscribers in Latin America.

 

BUSINESS OPERATIONS

 

OPERATING SEGMENTS

Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. We analyze our operating segments based on segment contribution, which consists of operating income, excluding acquisition-related costs and other significant items, and equity in net income (loss) of affiliates for investments managed within each operating segment. We have four reportable segments: (1) Communications, (2) WarnerMedia, (3) Latin America and (4) Xandr.

 

Additional information about our segments, including financial information, is included under the heading “Segment Results” in Item 7. and in Note 4 of Item 8.

 

COMMUNICATIONS

Our Communications segment provides wireless and wireline telecom, video and broadband services to consumers located in the U.S. and businesses globally. Our Communications services and products are marketed under the AT&T, Cricket, AT&T PREPAID and DIRECTV brand names. The Communications segment provided approximately 77% of 2019 segment operating revenues and 76% of our 2019 total segment contribution. This segment contains the Mobility, Entertainment Group and Business Wireline business units.

 

Mobility – Our Mobility business unit provides nationwide wireless services to consumers and wholesale and resale wireless subscribers located in the United States by utilizing our network to provide voice and data services, including high-speed internet over wireless devices. We classify our subscribers as either postpaid, prepaid, connected device or reseller. At December 31,

4

 


AT&T Inc.

Dollars in millions except per share amounts

 

2019, we served 166 million Mobility subscribers, including 75 million postpaid, 18 million prepaid, 7 million reseller and 66 million connected devices. Our Mobility business unit revenue includes the following categories: service and equipment.

 

Wireless Services

We offer a comprehensive range of high-quality nationwide wireless voice and data communications services in a variety of pricing plans to meet the communications needs of targeted customer categories. Through our FirstNet services, we also provide a nationwide wireless broadband network dedicated to public safety.

 

Consumers continue to require increasing availability of data-centric services and a network to connect and control those devices. An increasing number of our subscribers are using more advanced integrated and data-centric devices, including embedded computing systems and/or software, commonly called the Internet of Things (IoT). We offer plans that include unlimited features allowing for the sharing of voice, text and data across multiple devices, which attracts subscribers from other providers and helps minimize subscriber churn. Customers in our “connected device” category (e.g., users of monitoring devices and automobile systems) generally purchase those devices from third-party suppliers that buy data access supported by our network. We continue to upgrade our network and coordinate with equipment manufacturers and application developers to further capitalize on the continued growing demand for wireless data services.

 

We also offer nationwide wireless voice and data communications to certain customers who prefer to pay in advance. These services are offered under the Cricket and AT&T PREPAIDSM brands and are typically monthly prepaid services.

 

Equipment

We sell a wide variety of handsets, wirelessly enabled computers and wireless data cards manufactured by various suppliers for use with our voice and data services. We also sell accessories, such as carrying cases and hands-free devices. We sell through our own company-owned stores, agents and third-party retail stores. We provide our customers the ability to purchase handsets on an installment basis and the opportunity to bring their own device. In recent years, subscribers have been bringing their own devices or retaining their handsets for longer periods, which could continue to impact upgrade activity. Like other wireless service providers, we also provide a limited number of postpaid contract subscribers substantial equipment subsidies to initiate, renew or upgrade service.

 

Entertainment Group – Our Entertainment Group business unit provides video, internet/broadband, voice communication and interactive and targeted advertising services to customers in the United States by utilizing our IP-based and copper wired network and/or our satellite technology. Our Entertainment Group business unit revenue includes the following categories: video entertainment, high-speed internet, legacy voice and data services and other service and equipment.

 

Video Entertainment

Video entertainment revenues are comprised of subscription and advertising revenues. We offer video entertainment services using satellite and IP-based technologies (referred to as “premium” or “linear”) as well as streaming options that do not require either satellite or wired IP services (referred to as “over-the-top” or “OTT”). Our offerings are structured to provide customers with the best video experience both inside and outside of the home by offering subscribers attractive programming and state-of-the-art technology. Due to the rising cost of programming as well as higher costs to acquire new subscribers in an increasingly competitive industry, we have discontinued long-term (e.g., two-year) price locks for subscribers, and have instead adopted a strategy of focusing on higher-value subscribers with offerings that distinguish and elevate our video entertainment experience for our new and existing customers. In trial markets, we have started bundling our fiber broadband offer with AT&T TV, which is delivered over our software-based video architecture and has a lower subscriber acquisition cost.

 

We provide approximately 20 million subscribers with access to hundreds of channels of digital-quality video entertainment and audio programming. In addition, our video entertainment subscribers have the ability to use the internet and/or our mobile applications from smartphones and tablets to view authorized content, search program listings and schedule DVR recordings. Our customers continue to shift, consistent with the rest of the industry, from a premium linear service to our more economically priced OTT video service, or to competitors, which has pressured our video revenues.

 

We believe it is critical that we extend our brand leadership as a premium pay-TV provider in the marketplace by providing a direct to consumer video experience both at home and on mobile devices. Our traditional linear business historically has generated at least $4,000, including synergies resulting from our DIRECTV acquisition. We believe that our flexible platform with a broadband and wireless connection is the most efficient way to transport that content. Through this integrated approach, we can optimize the use of storage in the home as well as in the cloud, while also providing a seamless service for

5

 


AT&T Inc.

Dollars in millions except per share amounts

 

consumers across screens and locations. We expect our upcoming streaming platform HBO Max to provide an attractive offering of video options as well as bundling opportunities for our wireless customers and will drive our direct to consumer strategy.

 

High-Speed Internet

We offer broadband and internet services to 13.6 million residential subscribers, with 3.9 million fiber broadband connections at December 31, 2019. Our IP-based technology provides high-speed internet services.

 

Legacy Voice and Data Services

Revenues from our traditional voice services continue to decline as customers switch to wireless or VoIP services provided by us, cable companies or other internet-based providers. We have responded by offering packages of combined voice and data services, including broadband and video, and intend to continue this strategy during 2020.

 

Business Wireline – Our Business Wireline business unit provides services to business customers, including multinational corporations, small and mid-sized businesses, governmental and wholesale customers. Our Business Wireline business unit revenue includes the following categories: strategic and managed services, legacy voice and data services, and other services and equipment.

 

Strategic and Managed Services

Strategic and managed services are our most advanced business solutions and allow our customers to create and manage their own internal networks and to access external data networks. Additionally, we provide collaboration services that utilize our IP infrastructure and allow our customers to utilize the most advanced technology to improve their productivity. Our strategic and managed services are made up of Strategic Data, Strategic Voice, Security, Cloud Solutions, Outsourcing, Managed Services and Professional Services. Strategic Data services include our Virtual Private Networks (VPN), AT&T Dedicated Internet (ADI), and Ethernet and Broadband Services. We continue to reconfigure our wireline network to take advantage of the latest technologies and services. We have developed services that rely on our SDN and NFV to enhance business customers’ digital agility in a rapidly evolving environment. We also provide state-of-the-art security solutions like Threat Management, Intrusion Detection and other business security applications. Due to developing technology, our most advanced business solutions are subject to change periodically. We review and evaluate our strategic and managed service offerings annually, which may result in an updated definition and the recast of our historical financial information to conform to the current period presentation. Any modifications will be reflected in the first quarter.

 

Legacy Voice and Data Services

Voice services include services provided to business and governmental customers, either directly or through wholesale arrangements with other service providers. Our circuit-based, traditional data products include switched and dedicated transport services that allow customers to transmit data at high speeds, as well as access to the internet using a DSL connection.

 

Other Services and Equipment

Other service revenues include licensing of intellectual property and customer premises equipment.

 

Additional information on our Communications segment is the “Overview” section of Item 7.

 

WARNERMEDIA

Our WarnerMedia segment is comprised of leading media and entertainment businesses that principally develop, produce and distribute feature films, television content, and other content globally; operate cable networks, premium pay television and OTT services domestically and internationally; and operate digital media properties. The WarnerMedia segment provided approximately 18% of 2019 segment operating revenues and 22% of our 2019 total segment contribution. This segment consists primarily of the Turner, Home Box Office and Warner Bros. business units and will include our new HBO Max steaming platform.

 

Turner – The Turner business unit operates television networks and related properties that offer branded news, entertainment, sports and kids multi-platform content for consumers around the world.

 

Turner licenses programming to distributors that have contracted to receive and deliver the programming to subscribers, sells advertising on its networks and its digital properties owned or managed for other companies, and licenses its original

6

 


AT&T Inc.

Dollars in millions except per share amounts

 

programming and brands and characters for consumer products and other business ventures. Turner revenue includes the following categories: subscription, advertising and content and other.

 

Subscription

Turner’s programming is primarily delivered by distributors and is available to subscribers of the distributors for viewing live and on demand on television and on various internet-connected devices through the distributors’ services and Turner’s network apps. Turner’s license agreements with its distributors are typically multi-year arrangements that provide for annual service fee increases and have fee arrangements that are generally related to the number of subscribers served by the distributor and the networks provided to the distributor.

 

Advertising

Advertising arrangements for its networks generally have terms of one year or less. In the U.S., the advertising revenues generally depend on the size and demographics of a network’s audience delivered to an advertiser, the number of units of time sold and the price per unit. The price per unit of advertising is determined considering factors such as the type of program or network and/or the time of day the advertising is to be run. Certain advertising inventory is sold in the “upfront” market in advance each year and other inventory in the “scatter” market closer to the time a program airs. Outside the U.S., advertising is generally sold at a fixed rate for the unit of time sold, determined by the time of day and network.

 

Turner’s digital properties consist of owned assets and those managed and/or operated for sports leagues where Turner holds the related programming rights. Digital properties managed or operated for sports leagues include NBA.com, NBA Mobile and NCAA.com.

 

Content and Other

Turner licenses certain owned original programming to international territories and to subscription VOD (referred to as “SVOD”) services. Turner also licenses its brands and characters for consumer products and other business ventures.

 

Home Box Office – Our Home Box Office business unit owns and operates leading multichannel premium pay television services, HBO and Cinemax. Our Home Box Office business unit revenue includes the following categories: subscription and content and other.

 

We also hold an 88 percent interest in HBO Latin America Group (HBO LAG), which owns and operates various television channels in Latin America. We account for this investment under the equity method of accounting. In October 2019, we entered into an agreement to acquire the remaining interest in HBO LAG, which we expect to close in the second half of 2020, pending regulatory approval.

 

Subscription

In the U.S., HBO and Cinemax programming is available to subscribers of traditional distributors for viewing live and on demand on television and on various internet-connected devices. Home Box Office contracts with a number of digital distributors to provide their subscribers programming on digital platforms and devices. HBO NOW, a domestic stand-alone OTT service, is provided through digital distributors, such as Apple, Google, Amazon and Roku, as well as by some affiliates. At December 31, 2019, Home Box Office had approximately 43 million domestic subscribers, including HBO NOW. We expect to launch our streaming platform HBO Max in May 2020 to provide comprehensive video options for all audience demographics.

 

Home Box Office’s domestic license agreements with distributors are typically multi-year arrangements that provide for annual service fee increases and marketing support. Revenues depend on the specific terms of the applicable agreement, which may include subscriber thresholds, volume discounts and other performance-based discounts.

 

Internationally, one or more of the following distribution models are used: premium pay and basic tier television services delivered by traditional distributors, licensing of programming to third-party providers, OTT services distributed by third parties and direct-to-consumer OTT services. HBO and Cinemax-branded premium pay, basic tier television and/or OTT services are distributed in over 70 countries in Latin America, Europe and Asia. Home Box Office had approximately 97 million international premium pay, basic tier television service and OTT service subscribers at December 31, 2019, including subscribers through Home Box Office’s unconsolidated joint ventures. The amount of its international subscription revenues depends on factors such as basic and/or pay television subscribers, performance-based or volume discounts, negotiated minimum guarantees or flat-fee arrangements.

 

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Content and Other

Original programming is licensed to television networks and OTT services in over 150 countries, Original programming also is available to customers in both physical and digital formats in the U.S. and various international regions through a wide variety of digital storefronts and traditional retailers.

 

Warner Bros. – Our Warner Bros. business unit is one of the largest television and film studios in the world. Warner Bros. produces, distributes and licenses television programming and feature films and distributes home entertainment products in both physical and digital formats, as well as producing and distributing games and licensing consumer products and brands. Warner Bros. will allow us to offer an expanded library of programming available under HBO Max, our streaming platform that will launch in May 2020.

 

At December 31, 2019, Warner Bros.’ vast content library consists of more than 100,000 hours of programming, including over 8,600 feature films and 5,000 television programs comprised of tens of thousands of individual episodes.

 

The home entertainment industry is rapidly moving toward digital formats. While consumer spending on the higher-margin digital formats has increased in recent years, it has not offset decline in spending on product in physical formats, like DVDs. As such, Warner Bros. has been focusing on increasing the more profitable electronic sell-through and transactional digital VOD rentals of its film and television content while executing on opportunities to improve the operational efficiency of the physical distribution business.

 

Our Warner Bros. business unit revenue includes the following categories: theatrical product, television product, and games and other.

 

Theatrical Product

Theatrical product consists of (1) rental fees paid by movie theaters for the initial exhibition of feature films produced (or co-produced) and/or distributed by Warner Bros., (2) licensing fees paid by television networks, premium pay television services and OTT services for the exhibition of feature films produced or co-produced by Warner Bros. and (3) revenues from the distribution of Warner Bros.’ and other companies’ feature films in physical and digital formats. Our feature films also support Warner Bros.’ key brands and franchises, which helps generate consumer product and brand licensing revenues based on Warner Bros.’ films and characters.

 

Television Product

Television product consists of (1) fees for the initial broadcast of television programming on U.S. broadcast and cable television networks and premium pay television and OTT services, (2) fees for the airing or other distribution of television programming after the initial broadcast in secondary U.S. distribution channels (such as basic cable networks, local television stations and OTT services), (3) fees for the international distribution of television programming for free-to-air television, basic tier television services, premium pay television services and OTT services, and (4) revenues from the sale of the television programming in physical and digital formats. Our television programming also supports Warner Bros.’ key brands and franchises, which helps generate consumer product and brand licensing revenues based on the programming for years beyond the initial airing of the programming on television. Warner Bros. licenses its U.S. programming globally.

 

Games and Other

We develop, publishes and distribute games, including mobile and console games. The games are based on intellectual property owned or licensed by Warner Bros. (including DC Entertainment properties, Harry Potter and Mortal Kombat).

 

Additional information on our WarnerMedia segment is contained in the “Overview” section of Item 7.

 

LATIN AMERICA

Our Latin America segment provides entertainment services in Latin America and wireless services in Mexico. The Latin America segment provided approximately 4% of 2019 segment operating revenues. Our Latin America services and products are marketed under the AT&T, DIRECTV, SKY and Unefon brand names. This segment contains the Mexico and Vrio business units.

 

Mexico – We utilize our regional and national wireless networks in Mexico to provide consumer and business customers with wireless data and voice communication services. We divide our revenue into the following categories: wireless service and wireless equipment.

 

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We provide postpaid and prepaid wireless services in Mexico to approximately 19 million subscribers under the AT&T and Unefon brands. Postpaid services allow for (1) no annual service contract for subscribers who bring their own device or purchase a device on installment (the device must be paid in full if the customer chooses to drop their service from AT&T) and (2) service contracts for periods up to 24 months for subscribers who purchase their equipment under the traditional device subsidy model. Plans offer no roaming charges in the United States or Canada, unlimited minutes and messages to the extended AT&T community and unlimited data access to social networking. We also offer prepaid services to customers who prefer to pay in advance. With the increased capacity from our completed LTE network, we also expect additional reseller revenue in 2020.

 

We sell a wide variety of handsets, including smartphones manufactured by various suppliers for use with our voice and data services. We sell through our own company-owned stores, agents and third-party retail stores.

 

Vrio – Video entertainment services are provided to primarily residential customers using satellite technology. We are a leading provider of digital television services throughout Latin America, providing a wide selection of local and international digital-quality video entertainment and audio programming under the DIRECTV and SKY brands. We provide one of the most extensive collections of programming available in the Latin America pay-TV market, including HD sports video content and the most innovative interactive technology across the region. In addition, we have the unique ability to sell superior offerings of our differentiated products and services on a continent-wide basis with an operational cost structure that we believe to be lower than that of our competition.

 

We have approximately 13 million video subscribers in Latin America. Our business encompasses pay television services with satellite operations serving Argentina, Brazil, Chile, Colombia, Ecuador, Peru, Uruguay, Venezuela and parts of the Caribbean. Our operations also include our 41% equity method investment in Innova, S. de R.L. de C.V., or SKY Mexico. Sky Mexico financial results are accounted for as an equity-method investment.

 

Additional information on our Latin America segment is contained in the “Overview” section of Item 7.

 

XANDR

Our Xandr segment relies on using data from our 170 million customer relationships, to develop digital and video advertising that is more relevant to consumers. The Xandr segment provided approximately 1% of 2019 segment operating revenues and 3% of our 2019 total segment contribution. Advertisers are interested in capitalizing on our broad video distribution and ability to offer more precise marketing to customers through a digital platform. We also are expanding relationships with other video providers and digital publishers to use our platforms to reach their audiences.

 

Additional information on our Xandr segment is contained in the “Overview” section of Item 7.

 

MAJOR CLASSES OF SERVICE

 

The following table sets forth the percentage of total consolidated reported operating revenues by any class of service that accounted for 10% or more of our consolidated total operating revenues in any of the last three fiscal years:

 

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Percentage of Total

Consolidated Operating Revenues

 

2019

2018

2017

Communications Segment

 

 

 

 

 

 

Wireless service 1

30

%

32

%

36

%

Subscription 2, 3

17

 

19

 

23

 

Advanced data 4

12

 

12

 

12

 

Equipment

9

 

10

 

9

 

WarnerMedia Segment

 

 

 

 

 

 

Subscription

8

 

4

 

-

 

Latin America Segment

 

 

 

 

 

 

Subscription 2

2

 

3

 

3

 

Wireless service

1

 

1

 

1

 

Equipment

1

 

1

 

-

 

1 2019 and 2018 exclude $291 and $232, respectively, of advertising revenues included as Wireless service in our Mobility business unit.

2 Subscription is reported as Video in our Entertainment Group and Vrio business units.

3 2019 and 2018 exclude $1,672 and $1,595, respectively, of advertising revenues included as Video in our Entertainment Group business unit.

4 Advanced data is reported as High-speed internet and Strategic services in our Entertainment Group and Business Wireline business units, respectively.

 

Additional information on our geographical distribution of revenues is contained in the Annual Report in Note 4 of Item 8.

 

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GOVERNMENT REGULATION

Wireless communications providers in the United States must be licensed by the FCC to provide communications services at specified spectrum frequencies within defined geographic areas and must comply with the rules and policies governing the use of the spectrum as adopted by the FCC. The FCC’s rules have a direct impact on whether the wireless industry has sufficient spectrum available to support the high-quality, innovative services our customers demand. Wireless licenses are issued for a fixed time period, typically ten years, and we must seek renewal of these licenses. While the FCC has generally renewed licenses given to operating companies such as us, the FCC has authority to both revoke a license for cause and to deny a license renewal if a renewal is not in the public interest. Additionally, while wireless communications providers’ prices and service offerings are generally not subject to regulation, the federal government and various states periodically consider new regulations and legislation relating to various aspects of wireless services.

 

The Communications Act of 1934 and other related acts give the FCC broad authority to regulate the U.S. operations of our satellite services, which are licensed by the FCC, and some of WarnerMedia’s businesses are also subject to obligations under the Communications Act and related FCC regulations.

 

Our ILEC subsidiaries are subject to regulation by state governments, which have the power to regulate intrastate rates and services, including local, long-distance and network access services, provided such state regulation is consistent with federal law. Some states have eliminated or reduced regulations on our retail offerings. In addition, many states have adopted legislation that enables us to provide IP-based video service through a single statewide or state-approved franchise to offer a competitive video product. These subsidiaries are also subject to the jurisdiction of the FCC with respect to intercarrier compensation, interconnection, and interstate and international rates and services, including interstate access charges. Access charges are a form of intercarrier compensation designed to reimburse our wireline subsidiaries for the use of their networks by other carriers.

 

Our subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the market where service is provided.

 

The following discussion highlights significant regulatory issues directly affecting our operations:

 

Communications Segment

 

Wireless

The industry-wide deployment of 5G technology, which is needed to satisfy extensive demand for video and internet access, will involve significant deployment of “small cell” equipment and therefore increase the need for local permitting processes that allow for the placement of small cell equipment on reasonable timelines and terms. Federal regulations also can delay and impede broadband services, including small cell equipment. In March, August and September 2018, the FCC adopted orders to streamline the wireless infrastructure review process in order to facilitate deployment of next-generation wireless facilities. Those orders have been appealed and the various appeals remain pending in the DC Circuit and 9th Circuit Court of Appeals. In addition, to date, 28 states and Puerto Rico have adopted legislation to facilitate small cell deployment.

 

Internet

In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to Title II of the Communications Act. This order, which represented a departure from longstanding bipartisan precedent, significantly expanded the FCC’s authority to regulate broadband internet access services, as well as internet interconnection arrangements. In December 2017, the FCC reversed its 2015 decision by reclassifying fixed and mobile consumer broadband services as information services and repealing most of the rules that were adopted in 2015. In lieu of broad conduct prohibitions, the order requires internet service providers to disclose information about their network practices and terms of service, including whether they block or throttle internet traffic or offer paid prioritization. Several parties appealed the FCC’s December 2017 decision. On October 1, 2019, the D.C. Circuit issued a unanimous opinion upholding the FCC’s reclassification of broadband as an information service, and its reliance on transparency requirements and competitive marketplace dynamics to safeguard net neutrality. While the court vacated the FCC’s express preemption of any state regulation of net neutrality, it nevertheless stressed that its ruling does not prevent the FCC or ISPs from relying on conflict preemption to invalidate particular state laws that are inconsistent with the FCC’s regulatory objectives and framework. The court also concluded that the FCC failed to satisfy its obligation under the Administrative Procedure Act (APA) to consider the impact of its 2017 order in three discrete areas—public safety, the Lifeline program, and pole attachment regulation—and thus remanded it to the FCC for further proceedings on those issues,

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but without disturbing the operative effect of that order. A number of states have adopted legislation that would reimpose the very rules the FCC repealed, and in some cases, establish additional requirements that go beyond the FCC’s February 2015 order. Additionally, some state governors have issued executive orders that effectively re-impose the repealed requirements. Suits have recently been filed concerning laws in California and Vermont, and other lawsuits are possible. The California and Vermont suits have been stayed pursuant to agreements by those states not to enforce their laws pending resolution of appeals of the FCC’s December 2017 order. If no one seeks rehearing or Supreme Court review of the D.C. Circuit’s decision, the foregoing litigation will recommence. We expect that additional states may seek to regulate net neutrality based on the D.C. Circuit’s decision. We will continue to support congressional action to codify a set of standard consumer rules for the internet.

 

Privacy-related legislation has been adopted or considered in a number of states. Legislative and regulatory action could result in increased costs of compliance, claims against broadband internet access service providers and others, and increased uncertainty in the value and availability of data. Effective as of January 1, 2020, a California state law gives California consumers the right to know what personal information is being collected about them, and whether and to whom it is sold or disclosed, and to access and request deletion of this information. Subject to certain exceptions, it also gives consumers the right to opt-out of the sale of personal information.

 

WarnerMedia Segment

 

WarnerMedia creates, owns and distributes intellectual property, including copyrights, trademarks and licenses of intellectual property. To protect its intellectual property, WarnerMedia relies on a combination of laws and license agreements. Outside the U.S., laws and regulations relating to intellectual property protection and the effective enforcement of these laws and regulations vary greatly from country to country. The European Union Commission is pursuing legislative and regulatory initiatives that could impair Warner Bros.’ current country-by-country licensing approach in the European Union. Piracy, particularly of digital content, continues to threaten revenues from WarnerMedia’s products and services, as well as revenues from our pay TV business, and we work to limit that threat through a combination of approaches, including technological and legislative solutions. Outside the U.S., various laws and regulations, as well as trade agreements with the U.S., also apply to the distribution or licensing of feature films for exhibition in theaters and on broadcast and cable networks. For example, in certain countries, including China, laws and regulations limit the number of foreign films exhibited in such countries in a calendar year.

 

Additional information relating to regulation of our subsidiaries is contained under the headings “Operating Environment Overview” and “Regulatory Developments” of Item 7.

 

IMPORTANCE, DURATION AND EFFECT OF LICENSES

 

Certain of our subsidiaries own or have licenses to various patents, copyrights, trademarks and other intellectual property necessary to conduct business. Many of our subsidiaries also hold government-issued licenses or franchises to provide wireline, satellite or wireless services. Additional information relating to regulation affecting those rights is contained under the heading “Operating Environment Overview,” of Item 7. We actively pursue patents, trademarks and service marks to protect our intellectual property within the United States and abroad. We maintain a significant global portfolio of patents, trademarks and service mark registrations. We have also entered into agreements that permit other companies, in exchange for fees and rights, and subject to appropriate safeguards and restrictions, to utilize certain of our patents, trademarks and service marks. As we transition our network from a switch-based network to an IP, software-based network, we have increasingly entered into licensing agreements with software developers.

 

We periodically receive offers from third parties to obtain licenses for patents and other intellectual rights in exchange for royalties or other payments. We also receive notices asserting that our products or services sold to customers or software-based network functions infringe on their patents and other intellectual property rights. These claims, whether against us directly, such as network functions or against third-party suppliers of products or services that we, in turn, sell to our customers, such as wireless handsets, could require us to pay damages, royalties, stop offering the relevant products or services and/or cease network functions or other activities. While the outcome of any litigation is uncertain, we do not

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Dollars in millions except per share amounts

 

believe that the resolution of any of these infringement claims or the expiration or non-renewal of any of our intellectual property rights would have a material adverse effect on our results of operations.

 

MAJOR CUSTOMERS

 

No customer accounted for 10% or more of our consolidated revenues in 2019, 2018 or 2017.

 

 

COMPETITION

 

Competition continues to increase for communications, media entertainment and digital services from traditional and nontraditional competitors. Technological advances have expanded the types and uses of services and products available. In addition, lack of or a reduced level of regulation of comparable legacy services has lowered costs for alternative communications service providers. As a result, we face continuing competition as well as some new opportunities in significant portions of our business.

 

Wireless We face substantial competition in our wireless businesses. Under current FCC rules, multiple licensees, who provide wireless services on the cellular, PCS, Advanced Wireless Services, 700 MHz and other spectrum bands, may operate in each of our U.S. service areas. Our competitors include three national wireless providers; a larger number of regional providers and resellers of those services; and specifically certain cable companies. In addition, we face competition from providers who offer voice, text messaging and other services as applications on data networks. Substantially all of the U.S. population lives in areas with at least three mobile telephone operators, with most of the population living in areas with at least four competing carriers. We are one of three facilities-based providers in Mexico, with the most significant market share controlled by América Móvil. We may experience significant competition from companies that provide similar services using other communications technologies and services. While some of these technologies and services are now operational, others are being developed or may be developed. We compete for customers based principally on service/device offerings, price, network quality, coverage area and customer service.

 

Video/Broadband Our subsidiaries providing communications and digital entertainment services will face continued competitive pressure in 2020 from multiple providers, including wireless, satellite, cable, online video providers, and resellers. In addition, the desire for high-speed data on demand, including video, is continuing to lead customers to terminate their traditional wired or linear services and use our or competitors’ wireless, satellite and internet-based services. We have launched our own video OTT and/or streaming options to attract or retain customers that do not want a full-scale traditional video package. In most U.S. markets, we compete for customers with large cable companies for high-speed internet, video and voice services and other smaller telecommunications companies for both long-distance and local services. In addition, in Latin American countries served by our DIRECTV subsidiary, we also face competition from other video providers, including América Móvil and Telefónica.

 

Legacy Voice and Data We continue to lose legacy voice and data subscribers due to competitors (e.g., wireless, cable and VoIP providers) who can provide comparable services at lower prices because they are not subject to traditional telephone industry regulation (or the extent of regulation they are subject to is in dispute), utilize different technologies or promote a different business model (such as advertising based). In response to these competitive pressures, for a number of years we have used a bundling strategy that rewards customers who consolidate their services with us. We continue to focus on bundling services, including combined packages of wireless and video service through our satellite and IP-based services. We will continue to develop innovative and integrated services that capitalize on our wireless and IP-based network and satellites.

 

Additionally, we provide local and interstate telephone and switched services to other service providers, primarily large internet service providers using the largest class of nationwide internet networks (internet backbone), wireless carriers, other telephone companies, cable companies and systems integrators. These services are subject to additional competitive pressures from the development of new technologies, the introduction of innovative offerings and increasing satellite, wireless, fiber-optic and cable transmission capacity for services. We face a number of international competitors, including Orange Business Services, BT, Singapore Telecommunications Limited and Verizon Communications Inc., as well as competition from a number of large systems integrators.

 

Media Our WarnerMedia businesses face similar shifts in consumer viewing patterns, increased competition from streaming services and the expansion by other companies, in particular, technology companies. In May 2020, we plan to launch HBO

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AT&T Inc.

Dollars in millions except per share amounts

 

Max, our new platform for premium content and video offered directly to consumers, as well as through our traditional distributors.

 

WarnerMedia competes with other studios and television production groups and independents to produce and sell programming. Many television networks and online platforms have affiliated production companies from which they are increasingly obtaining their programming, which has reduced their demand for programming from non-affiliated production companies. WarnerMedia also faces competition from other television networks, online platforms, and premium pay television services for distribution and marketing of its television networks and premium pay and basic tier television services by affiliates.

 

Our WarnerMedia businesses compete with other production companies and studios for the services of producers, directors, writers, actors and others and for the acquisition of literary properties. In recent years, technology companies also have begun to produce programming and compete with WarnerMedia for talent and property rights.

 

Advertising The increased amount of consumer time spent online and on mobile activities has resulted in the shift of advertising budgets away from traditional television to digital advertising. WarnerMedia’s advertising-supported television networks and digital properties compete with streaming services, other networks and digital properties, print, radio and other media. Our programmatic advertising business faces competition from a variety of technology companies. Similar to all participants in the advertising technology sector, we contend with the dominance of Google, as well as the influence of Facebook, whose practices may result in the decreased ability and willingness of advertisers and programmers to adopt programmatic solutions offered by alternative suppliers.

 

RESEARCH AND DEVELOPMENT

 

AT&T scientists and engineers conduct research in a variety of areas, including IP networking, advanced network design and architecture, network and cyber security, network operations support systems, satellite technology, video platform development and data analytics. The majority of the development activities are performed to create new services and to invent tools and systems to manage secure and reliable networks for us and our customers. Research and development expenses were $1,276 in 2019, $1,194 in 2018, and $1,503 in 2017.

 

EMPLOYEES

 

As of January 31, 2020, we employed approximately 246,000 persons. Approximately 40% of our employees are represented by the Communications Workers of America (CWA), the International Brotherhood of Electrical Workers (IBEW) or other unions. After expiration of the agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached. A contract covering approximately 7,000 traditional wireline employees in our Midwest region expired in April 2018. In August 2019, a new four-year contract was ratified by employees and will expire in April 2022. A contract covering approximately 3,000 traditional wireline employees in our legacy AT&T Corp. business expired in April 2018. In August 2019, a new four-year contract was ratified by employees and will expire in April 2022. A contract covering approximately 18,000 traditional wireline employees in our Southeast region expired in August 2019. In October 2019, a new five-year contract was ratified by employees and will expire in August 2024. Other contracts covering approximately 20,000 employees are scheduled to expire during 2020, including a contract expiring in February covering approximately 7,000 Mobility employees and a contract expiring in April covering approximately 13,000 traditional wireline employees in our West region.

 

At December 31, 2019, we had approximately 540,000 retirees and dependents that were eligible to receive retiree benefits.

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AT&T Inc.

Dollars in millions except per share amounts

 

ITEM 1A. RISK FACTORS

 

In addition to the other information set forth in this document, including the matters contained under the caption “Cautionary Language Concerning Forward-Looking Statements,” you should carefully read the matters described below. We believe that each of these matters could materially affect our business. We recognize that most of these factors are beyond our ability to control and therefore we cannot predict an outcome.

 

Macro-economic Factors:

 

Adverse changes in medical costs, the U.S. securities markets and interest rates could materially increase our benefit plan costs.

 

Our costs to provide current benefits and funding for future benefits are subject to increases, primarily due to continuing increases in medical and prescription drug costs, and can be affected by lower returns on funds held by our pension and other benefit plans, which are reflected in our financial statements for that year. Favorable market returns in 2019 have led to higher than assumed investment returns on our plan assets, with a lower end-of-period yield curve contributing to higher benefit obligations resulting in an insignificant change to our overall funding obligations. Should favorable market returns continue, we may need to adjust our assumed rate of return on plan assets. In calculating the costs included on our financial statements of providing benefits under our plans, we have made certain assumptions regarding future investment returns, medical costs and interest rates. While we have made some changes to the benefit plans to limit our risk from increasing medical costs, if actual investment returns, medical costs and interest rates are worse than those previously assumed, our expenses will increase.

 

The Financial Accounting Standards Board requires companies to recognize the funded status of defined benefit pension and postretirement plans as an asset or liability in our statement of financial position and to recognize changes in that funded status in the year in which the changes occur. We have elected to reflect the annual adjustments to the funded status in our consolidated statement of income. Therefore, an increase in our costs or adverse market conditions will have a negative effect on our operating results.

 

Adverse changes in global financial markets could limit our ability and our larger customers’ ability to access capital or increase the cost of capital needed to fund business operations.

 

During 2019, volatility in the credit, currency, equity and fixed income markets persisted due to continued uncertainty surrounding global growth rates. Uncertainty regarding ongoing U.S. tariffs on Chinese goods and vice versa, the withdrawal of the United Kingdom from the European Union and other political developments in Europe and Asia could significantly affect global financial markets in 2020. Volatility in other areas, such as in emerging markets, may affect companies’ access to the credit markets, leading to higher borrowing costs, or, in some cases, the inability to fund ongoing operations. In addition, we contract with large financial institutions to support our own treasury operations, including contracts to hedge our exposure on interest rates and foreign exchange and the funding of credit lines and other short-term debt obligations, including commercial paper. These financial institutions face stricter capital-related and other regulations in the United States and Europe, as well as ongoing legal and financial issues concerning their loan portfolios, which may hamper their ability to provide credit or raise the cost of providing such credit.

 

The interest rate used to calculate the rate of variable rate indebtedness, the LIBOR benchmark, will not be reported after 2021. Although our securities may provide for alternative methods of calculating the interest rate payable on such indebtedness, uncertainty as to the extent and manner of future changes may adversely affect the current trading market for LIBOR-based securities, and the value of variable rate indebtedness in general. A company’s cost of borrowing is also affected by evaluations given by various credit rating agencies and these agencies have been applying tighter credit standards when evaluating debt levels and future growth prospects. While we have been successful in continuing to access the credit and fixed income markets when needed, adverse changes in the financial markets could render us either unable to access these markets or able to access these markets only at higher interest costs and with restrictive financial or other conditions, severely affecting our business operations.

 

Our international operations have increased our exposure to political instability, to changes in the international economy and to the level of regulation on our business and these risks could offset our expected growth opportunities.

 

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AT&T Inc.

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We have international operations, particularly Latin America, including Mexico, and worldwide through WarnerMedia’s content distribution as well as services to our large U.S.-based businesses. We need to comply with a wide variety of complex local laws, regulations and treaties. We are exposed to restrictions on cash repatriation, foreign exchange controls, fluctuations in currency values, changes in relationships between U.S. and foreign governments, trade restrictions including potential tariffs, differences in intellectual property protection laws, and other regulations that may affect materially our earnings. Our Mexico operations in particular rely on a continuation of a regulatory regime that fosters competition. While our foreign operations represent significant opportunities to sell our services, a number of foreign countries where we operate have experienced unstable growth patterns, high inflation, currency devaluation, foreign exchange controls, instability in the banking sector and high unemployment. In addition, several Latin America countries have experienced significant political turmoil during 2019. Should these conditions persist, our ability to offer service in one or more countries could be adversely affected and customers in these countries may be unable to purchase the services we offer or pay for services already provided.

 

In addition, operating in foreign countries also typically involves participating with local businesses, either to comply with local laws or, for example, to enhance product marketing, deploy networks or execute on other capital projects. Involvement with foreign firms exposes us to the risk of being unable to control the actions of those firms and therefore exposes us to risks associated with our obligation to comply with the Foreign Corrupt Practices Act (FCPA). Violations of the FCPA could have a material adverse effect on our operating results.

 

Industry-wide Factors:

 

Changes to federal, state and foreign government regulations and decisions in regulatory proceedings could further increase our operating costs and/or alter customer perceptions of our operations, which could materially adversely affect us.

 

Our subsidiaries providing wired services are subject to significant federal and state regulation while many of our competitors are not. In addition, our subsidiaries and affiliates operating outside the United States are also subject to the jurisdiction of national and supranational regulatory authorities in the market where service is provided. Our wireless and various video subsidiaries are regulated to varying degrees by the FCC and in some instances, by state and local agencies. Adverse regulations and rulings by the FCC relating to broadband, wireless deployment and satellite video issues could impede our ability to manage our networks and recover costs and lessen incentives to invest in our networks. The continuing growth of IP-based services, especially when accessed by wireless devices, has created or potentially could create conflicting regulation between the FCC and various state and local authorities, which may involve lengthy litigation to resolve and may result in outcomes unfavorable to us. In addition, increased public focus on a variety of issues related to our operations, such as privacy issues, government requests or orders for customer data, and concerns about global climate changes, have led to proposals or new legislation at state, federal and foreign government levels to change or increase regulation on our operations. Enactment of new privacy laws and regulations could, among other things, adversely affect our ability to collect and offer targeted advertisements, an expected growth area for the company, or result in additional costs of compliance or litigation. Should customers decide that our competitors offer a more customer-friendly environment, our competitive position, results of operations or financial condition could be materially adversely affected.

 

Continuing growth in and the converging nature of wireless, video and broadband services will require us to deploy significant amounts of capital and require ongoing access to spectrum in order to provide attractive services to customers.

 

Wireless, video and broadband services are undergoing rapid and significant technological changes and a dramatic increase in usage, in particular, the demand for faster and seamless usage of video and data across mobile and fixed devices. We must continually invest in our networks in order to improve our wireless, video and broadband services to meet this increasing demand and remain competitive. Improvements in these services depend on many factors, including continued access to and deployment of adequate spectrum and the capital needed to expand our wireline network to support transport of these services. In order to stem broadband subscriber losses to cable competitors in our non-fiber wireline areas, we have been expanding our all-fiber wireline network. We must maintain and expand our network capacity and coverage for transport of video, data and voice between cell and fixed landline sites. To this end, we have participated in spectrum auctions and continue to deploy software and other technology advancements in order to efficiently invest in our network.

 

Network service enhancements and product launches may not occur as scheduled or at the cost expected due to many factors, including delays in determining equipment and wireless handset operating standards, supplier delays, software issues,

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AT&T Inc.

Dollars in millions except per share amounts

 

increases in network and handset component costs, regulatory permitting delays for tower sites or enhancements, or labor-related delays. Deployment of new technology also may adversely affect the performance of the network for existing services. If we cannot acquire needed spectrum or deploy the services customers desire on a timely basis with acceptable quality and at adequate cost, then our ability to attract and retain customers, and, therefore, maintain and improve our operating margins, could be materially adversely affected.

 

Increasing competition for wireless customers could materially adversely affect our operating results.

 

We have multiple wireless competitors in each of our service areas and compete for customers based principally on service/device offerings, price, network quality, coverage area and customer service. In addition, we are facing growing competition from providers offering services using advanced wireless technologies and IP-based networks. We expect market saturation to continue to cause the wireless industry’s customer growth rate to moderate in comparison with historical growth rates, leading to increased competition for customers. We also expect that our customers’ growing demand for high-speed video and data services will place constraints on our network capacity. These competition and capacity constraints will continue to put pressure on pricing and margins as companies compete for potential customers. Our ability to respond will depend, among other things, on continued improvement in network quality and customer service as well as effective marketing of attractive products and services. These efforts will involve significant expenses and require strategic management decisions on, and timely implementation of, equipment choices, network deployment and service offerings.

 

Ongoing changes in the television industry and consumer viewing patterns could materially adversely affect our operating results.

 

Our video subsidiaries derive substantial revenues and profits from cable networks and premium pay television services and the production and licensing of television programming to broadcast and cable networks and premium pay television services. The U.S. television industry is continuing to evolve rapidly, with developments in technology leading to new methods for the distribution of video content and changes in when, where and how audiences consume video content. These changes have led to (1) new, internet-based OTT competitors, which are increasing in number and some of which have significant and growing subscriber/user bases, and (2) reduced viewers of traditional advertising-supported television resulting from increased video consumption through SVOD services, time-shifted viewing of television programming and the use of DVRs to skip advertisements. The number of subscribers to traditional linear programming in the U.S. has been declining in recent years and the U.S. television industry has generally experienced declines in ratings for programming, which have negatively affected subscription and advertising revenues, and these trends are expected to continue. The popularity of content, whether on television, on the internet, or through movies, is difficult to predict and can change rapidly, and low public acceptance of our television, OTT and movie content, including WarnerMedia’s content, could adversely affect our results of operations. We are taking steps to mitigate the risks from these changes, such as our 2020 launch of our HBO Max direct-to-consumer streaming platform and new, enhanced advertising opportunities, but there can be no assurance that these and other efforts will be successful in responding to these changes.

 

Intellectual property rights may be adversely affected by piracy or be inadequate to take advantage of business opportunities, such as new distribution platforms, which may materially adversely affect our operations.

 

Increased piracy of video content, products and other intellectual property, particularly in our foreign WarnerMedia and Latin American operations, will decrease revenues. Mobile and broadband technological developments have made it easier to reproduce and distribute high-quality unauthorized copies of content. Piracy is particularly prevalent in countries that lack effective copyright and other legal protections or enforcement measures and thieves can attract users throughout the world. Effective intellectual property protection may not be available in every country where we operate. We may need to spend significant amounts of money to protect our rights. We are also increasingly negotiating broader licensing agreements to expand our ability to use new methods to distribute content to customers. Any impairment of our intellectual property rights, including due to changes in U.S. or foreign intellectual property laws or the absence of effective legal protections or enforcement measures, or our inability to negotiate broader distribution rights, could materially adversely impact our operations.

 

Company-Specific Financial Factors:

 

Adoption of new software-based technologies may involve quality and supply chain issues and could increase capital costs.

 

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AT&T Inc.

Dollars in millions except per share amounts

 

The communications and digital entertainment industry has experienced rapid changes in the past several years. An increasing number of our customers are using mobile devices as the primary means of viewing video and an increasing number of nontraditional video providers are developing content and technologies to satisfy the desire for video entertainment demand. In addition, businesses and government bodies are broadly shifting to wireless-based services for homes and infrastructure to improve services to their respective customers and constituencies. In order to meet this demand and remain competitive, we now offer a mobile TV service and continue to upgrade our sophisticated wired and wireless networks, including satellites, as well as research other technologies. We are spending significant capital to shift our wired network to software-based technology to manage this demand and are launching 5G wireless technology to address these consumer demands. We are entering into a significant number of software licensing agreements and working with software developers to provide network functions in lieu of installing switches or other physical network equipment in order to respond to rapid developments in video and wireless demand. While software-based functionality can be changed much more quickly than, for example, physical switches, the rapid pace of development means that we may increasingly need to rely on single-source and software solutions that have not previously been deployed in production environments. Should this software not function as intended or our license agreements provide inadequate protection from intellectual property infringement claims, we could be forced to either substitute (if available), or else spend time to develop alternative technologies at a much higher cost and incur harm to our reputation for reliability, and, as a result, our ability to remain competitive could be materially adversely affected.

 

Increasing costs to provide video and other services could adversely affect operating margins.

 

Our operating costs, including customer acquisition and retention costs, could continue to put pressure on margins and customer retention levels. In addition, most of our video programming that we distribute via our linear services is provided by other companies and historically the rates they charge us for programming have often increased more than the rate of inflation. In addition, as customer viewing habits shift to mobile and on-demand from linear programming, negotiating licensing rights is increasingly complicated. We are attempting to use our increased scale and access to wireless customers to change this trend but such negotiations are difficult and also may result in programming disruption. Our new HBO Max streaming platform is another component of our strategy to reach nontraditional video customers and we are investing heavily to launch a competitive and attractive offering. If we are unable to restrain these costs or provide programming desired by our customers, it could impact margins and our ability to attract and retain customers. Our WarnerMedia operations, which create and license content to other providers, also may experience increasing difficulties to secure favorable terms, including those related to pricing, positioning and packaging, during contract negotiations, which may lead to blackouts of WarnerMedia programming, and WarnerMedia may face greater difficulty in achieving placement of its networks and premium pay television services in smaller bundles or mobile offerings by third parties.

 

A number of our competitors offering comparable legacy services that rely on alternative technologies and business models are typically subject to less (or no) regulation, and therefore are able to operate with lower costs. These competitors generally can focus on discrete customer segments since they do not have regulatory obligations to provide universal service. Also, these competitors have cost advantages compared to us, due in part to operating on newer, more technically advanced and lower-cost networks and a nonunionized workforce, lower employee benefits and fewer retirees. We have begun initiatives at both the state and federal levels to obtain regulatory approvals, where needed, to transition services from our older copper-based network to an advanced IP-based network. If we do not obtain regulatory approvals for our network transition or obtain approvals with onerous conditions, we could experience significant cost and competitive disadvantages.

 

If our efforts to attract and retain subscribers to our new HBO Max platform are not successful, our business will be adversely affected.

 

As with any new product launch, HBO Max’s future success is subject to inherent uncertainty. Our ability to attract subscribers to the HBO Max platform will depend in part on our ability to consistently provide subscribers with compelling content choices, as well as a quality experience for selecting and viewing those content choices. Furthermore, the relative service levels, content offerings, promotions, and pricing and related features of competitors to HBO Max may adversely impact our ability to attract and retain subscribers. Competitors include other entertainment video providers, such as multichannel video programming distributors and internet-based movie and TV content providers. If consumers do not perceive our offerings to be of value, including if we introduce new or adjust existing features, adjust pricing or offerings, terminate or modify promotional or trial period offerings, experience technical issues, or change the mix of content in a manner that is not favorably received by them, we may not be able to attract and retain subscribers. In addition, many subscribers to these types of offerings originate from word-of-mouth advertising from then existing subscribers. If our efforts to satisfy subscribers are not successful, including because we terminate or modify promotional or trial-period offerings or

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AT&T Inc.

Dollars in millions except per share amounts

 

because of technical issues with the platform, we may not be able to attract subscribers, and as a result, our ability to maintain and/or grow our business will be adversely affected.

 

If subscribers cancel or decide to not continue subscriptions for many reasons, including a perception that they do not use it sufficiently, the need to cut household expenses, unsatisfactory availability of content, promotions or trial-period offers expire or are modified, competitive services or promotions provide a better value or experience, and customer service or technical issues are not satisfactorily resolved, our business will be adversely affected. We must continually add new subscribers both to replace canceled subscribers and to grow our business. If we do not grow as expected, given, in particular, that a significant portion of our content costs are committed and contracted over several years based on minimum subscriber delivery levels, we may not be able to adjust our expenditures or increase our (per subscriber) revenues commensurate with the lowered growth rate such that our margins, liquidity and results of operations may be adversely impacted. If we are unable to successfully compete with competitors in retaining and attracting new subscribers, our business will be adversely affected. Further, if excessive numbers of subscribers do cancel, we may be required to incur significantly higher marketing expenditures or offer significantly more generous promotions to replace these subscribers with new subscribers.

 

Unfavorable litigation or governmental investigation results could require us to pay significant amounts or lead to onerous operating procedures.

 

We are subject to a number of lawsuits both in the United States and in foreign countries, including, at any particular time, claims relating to antitrust; patent infringement; wage and hour; personal injury; customer privacy violations; regulatory proceedings; and selling and collection practices. We also spend substantial resources complying with various government standards, which may entail related investigations and litigation. In the wireless area, we also face current and potential litigation relating to alleged adverse health effects on customers or employees who use such technologies including, for example, wireless devices. We may incur significant expenses defending such suits or government charges and may be required to pay amounts or otherwise change our operations in ways that could materially adversely affect our operations or financial results.

 

Cyberattacks, equipment failures, natural disasters and terrorist acts may materially adversely affect our operations.

 

Cyberattacks, major equipment failures or natural disasters, such as flooding, hurricanes and forest fires, whether caused by discrete severe weather events and/or precipitated by long-term climate change and earthquakes, software problems, terrorist acts or other breaches of network or IT security that affect our networks, including software and switches, microwave links, third-party-owned local and long-distance networks on which we rely, our cell sites or other equipment, our satellites, our customer account support and information systems, or employee and business records could have a material adverse effect on our operations. Our wired network in particular is becoming increasingly reliant on software as it evolves to handle increasing demands for video transmission. While we have been subject to security incidents or cyberattacks, these did not result in a material adverse effect on our operations. However, as such attacks continue to increase in scope and frequency, we may be unable to prevent a significant attack in the future. Our ability to maintain and upgrade our video programming also depends on our ability to successfully deploy and operate video satellites. Our inability to deploy or operate our networks or customer support systems or protect sensitive personal information of customers or valuable technical and marketing information could result in significant expenses, potential legal liability, a loss of current or future customers and reputation damage, any of which could have a material adverse effect on our operations and financial condition.

 

Increases in our debt levels to fund acquisitions, additional spectrum purchases, or other strategic decisions could adversely affect our ability to finance future debt at attractive rates and reduce our ability to respond to competition and adverse economic trends.

 

We have incurred debt to fund significant acquisitions, as well as spectrum purchases needed to compete in our industry. While we believe such decisions were prudent and necessary to take advantage of both growth opportunities and respond to industry developments, we did experience credit-rating downgrades from historical levels. Banks and potential purchasers of our publicly traded debt may decide that these strategic decisions and similar actions we may take in the future, as well as expected trends in the industry, will continue to increase the risk of investing in our debt and may demand a higher rate of interest, impose restrictive covenants or otherwise limit the amount of potential borrowing. Additionally, our capital allocation plan is focused on, among other things, further reducing our debt going forward. Any failure to successfully execute this plan could adversely affect our cost of funds, liquidity, competitive position and access to capital markets.

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AT&T Inc.

Dollars in millions except per share amounts

 

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

Information set forth in this report contains forward-looking statements that are subject to 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, political and/or capital access changes in the markets served by us or in countries in which we have significant investments and/or operations, including the impact on customer demand and our ability and our suppliers’ ability to access financial markets at favorable rates and terms.

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; adverse changes in mortality assumptions; adverse medical cost trends; and unfavorable or delayed implementation or repeal of healthcare legislation, regulations or related court decisions.

The final outcome of FCC and other federal, state or foreign government agency proceedings (including judicial review, if any, of such proceedings) and legislative efforts involving issues that are important to our business, including, without limitation, pending Notices of Apparent Liability; the transition from legacy technologies to IP-based infrastructure, including the withdrawal of legacy TDM-based services; universal service; broadband deployment; wireless equipment siting regulations and, in particular, siting for 5G service; E911 services; competition policy; privacy; net neutrality; multichannel video programming distributor services and equipment; content licensing and copyright protection; availability of new spectrum on fair and balanced terms; and wireless and satellite license awards and renewals.

Enactment of additional state, local, federal and/or foreign regulatory and tax laws and regulations, or changes to existing standards and actions by tax agencies and judicial authorities including the resolution of disputes with any taxing jurisdictions, 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.

Potential changes to the electromagnetic spectrum currently used for broadcast television and satellite distribution being considered by the FCC could negatively impact WarnerMedia’s ability to deliver linear network feeds of its domestic cable networks to its affiliates, and in some cases, WarnerMedia’s ability to produce high-value news and entertainment programming on location.

U.S. and foreign laws and regulations regarding intellectual property rights protection and privacy, personal data protection and user consent are complex and rapidly evolving and could result in adverse impacts to our business plans, increased costs, or claims against us that may harm our reputation.

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 non-regulation of comparable alternative technologies and/or government-owned or subsidized networks.

The continued development and delivery of attractive and profitable wireless, video and broadband offerings and devices, and, in particular, the success of our new HBO Max platform; the extent to which regulatory and build-out requirements apply to our offerings; our ability to match speeds offered by our competitors and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.

Our ability to generate advertising revenue from attractive video content, especially from WarnerMedia, in the face of unpredictable and rapidly evolving public viewing habits and legal restrictions on the use of personal data.

The availability and cost and our ability to adequately fund additional wireless spectrum and network upgrades; 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 (which includes arbitrations), including, without limitation, patent and product safety claims by or against third parties.

The impact from major equipment or software failures on our networks, including satellites operated by DIRECTV; the effect of 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; and in the case of satellites launched, timely provisioning of services from vendors; or severe weather conditions including flooding and hurricanes, natural disasters including earthquakes and forest fires, pandemics, energy shortages, wars or terrorist attacks.

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AT&T Inc.

Dollars in millions except per share amounts

 

The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.

Our ability to successfully integrate our WarnerMedia operations, including the ability to manage various businesses in widely dispersed business locations and with decentralized management.

Changes in our corporate strategies, such as changing network-related 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 decrease in government spending and reluctance of businesses and consumers to spend in general.

 

Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.

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AT&T Inc.

Dollars in millions except per share amounts

 

ITEM 2. PROPERTIES

 

Our properties do not lend themselves to description by character and location of principal units. At December 31, 2019, of our total property, plant and equipment, central office equipment represented 29%; outside plant (including cable, wiring and other non-central office network equipment) represented approximately 22%; satellites represented 1%; other equipment, comprised principally of wireless network equipment attached to towers, furniture and office equipment and vehicles and other work equipment, represented 28%; land, building and wireless communications towers represented 12%; and other miscellaneous property represented 8%.

 

For our Communications segment, substantially all of the installations of central office equipment are located in buildings and on land we own. Many garages, administrative and business offices, wireless towers, telephone centers and retail stores are leased. Property on which communication towers are located may be either owned or leased.

 

For our WarnerMedia segment, we own or leases offices; studios; technical, production and warehouse spaces; communications facilities and other properties in numerous locations globally.

 

ITEM 3. LEGAL PROCEEDINGS

 

We are a party to numerous lawsuits, regulatory proceedings and other matters arising in the ordinary course of business. As of the date of this report, we do not believe any pending legal proceedings to which we or our subsidiaries are subject are required to be disclosed as material legal proceedings pursuant to this item.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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AT&T Inc.

Dollars in millions except per share amounts

 

 

Information about our Executive Officers

(As of February 1, 2020)

 

 

Name

Age

Position

Held Since

 

 

 

 

Randall L. Stephenson

59

Chairman of the Board and Chief Executive Officer

6/2007

David S. Huntley

61

Senior Executive Vice President and Chief Compliance Officer

12/2014

Lori M. Lee

54

Chief Executive Officer-AT&T Latin America and Global Marketing Officer

8/2017

David R. McAtee II

51

Senior Executive Vice President and General Counsel

10/2015

Jeffery S. McElfresh

49

Chief Executive Officer, AT&T Communications LLC

10/2019

Angela R. Santone

48

Senior Executive Vice President - Human Resources

12/2019

John T. Stankey

57

President and Chief Operating Officer

10/2019

John J. Stephens

60

Senior Executive Vice President and Chief Financial Officer

 

6/2011

 

All of the above executive officers have held high-level managerial positions with AT&T or its subsidiaries for more than the past five years, except for Ms. Santone. Ms. Santone was previously Chief Administrative Officer of AT&T from May 2019 to December 2019, Executive Vice President and Global Chief Human Resources Officer of Turner from February 2016 to April 2019, and Senior Vice President and Chief Human Resources Officer of Turner from June 2013 to January 2016. Executive officers are not appointed to a fixed term of office.

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AT&T Inc.

Dollars in millions except per share amounts

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED

STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is listed on the New York Stock Exchange under the ticker symbol “T”. The number of stockholders of record as of December 31, 2019 and 2018 was 891,449 and 937,230. The number of stockholders of record as of February 12, 2020, was 887,276. We declared dividends, on a quarterly basis, totaling $2.05 per share in 2019 and $2.01 per share in 2018.

 

STOCK PERFORMANCE GRAPH

 

Picture 1

 

The comparison above assumes $100 invested on December 31, 2014, in AT&T common stock and the following Standard & Poor’s (S&P) Indices: S&P 500 Index, S&P 500 Integrated Telecom Index and S&P 500 Communications Services Index. We have adopted the S&P 500 Communications Services Index, which permits us to use a more diversified set of companies in the communications and media sectors that are relevant to our businesses. Total return equals stock price appreciation plus reinvestment of dividends.

 

Our Board of Directors has approved the following authorizations to repurchase common stock: (1) March 2013 authorization program of 300 million shares, with 19 million outstanding at December 31, 2019 and (2) March 2014 authorization program for an additional 300 million shares, with all 300 million outstanding at December 31, 2019. Excluding the impact of acquisitions, our 2020 financing activities will focus on managing our debt level, repurchasing common stock and paying dividends, subject to approval by our Board of Directors. We plan to fund our financing uses of cash through a combination of cash from operations, issuance of debt, issuance of additional preferred stock and asset sales. The timing and mix of any debt issuance and/or refinancing will be guided by credit market conditions and interest rate trends.

 

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AT&T Inc.

Dollars in millions except per share amounts

 

To implement these authorizations, we used open market repurchase programs, relying on Rule 10b5-1 of the Securities Exchange Act of 1934, where feasible. We entered into an Accelerated Share Repurchase program and repurchased $4,000 million of common stock during the first quarter of 2020.

 

We will continue to fund any share repurchases through a combination of cash from operations, borrowings dependent on market conditions, or cash from the disposition of certain non-strategic investments.

 

A summary of our repurchases of common stock during the fourth quarter of 2019 is as follows:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

 

 

(b)

 

(c)

 

(d)

Period

 

 

Total Number of Shares (or Units) Purchased1,2,3

 

 

Average Price Paid Per Share (or Unit)

 

 

Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs1

 

 

Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

October 1, 2019 -

October 31, 2019

 

671,252

 

$

37.21

 

-

 

370,897,657

November 1, 2019 -

November 30, 2019

 

24,049,128

 

 

38.40

 

24,000,000

 

346,897,657

December 1, 2019 -

December 31, 2019

 

28,064,877

 

 

38.42

 

27,398,212

 

319,499,445

Total

 

52,785,257

 

$

38.40

 

51,398,212

 

 

1

In December 2019, the Company entered into a $4,000 accelerated share repurchase agreement (ASR). Through

 

purchases under the ASR, the Company plans to repurchase shares of our common stock during the first quarter of 2020.

 

In March 2014, our Board of Directors approved an authorization to repurchase up to 300 million shares of our common

 

stock. In March 2013, our Board of Directors approved an authorization to repurchase up to 300 million shares of our

 

common stock. The authorizations have no expiration date.

2

Of the shares purchased, 886,515 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.

3

Of the shares repurchased or transferred, 500,530 shares were transferred from AT&T maintained VEBA trusts.

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AT&T Inc.

Dollars in millions except per share amounts

 

ITEM 6. SELECTED FINANCIAL DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31 and for the year ended:

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

181,193

 

$

170,756

 

$

160,546

 

$

163,786

 

$

146,801

Operating expenses

$

153,238

 

$

144,660

 

$

140,576

 

$

140,243

 

$

126,439

Operating income

$

27,955

 

$

26,096

 

$

19,970

 

$

23,543

 

$

20,362

Interest expense

$

8,422

 

$

7,957

 

$

6,300

 

$

4,910

 

$

4,120

Equity in net income (loss) of affiliates

$

6

 

$

(48)

 

$

(128)

 

$

98

 

$

79

Other income (expense) - net

$

(1,071)

 

$

6,782

 

$

1,597

 

$

1,081

 

$

4,371

Income tax (benefit) expense

$

3,493

 

$

4,920

 

$

(14,708)

 

$

6,479

 

$

7,005

Net Income

$

14,975

 

$

19,953

 

$

29,847

 

$

13,333

 

$

13,687

Less: Net Income Attributable to Noncontrolling Interest

$

(1,072)

 

$

(583)

 

$

(397)

 

$

(357)

 

$

(342)

Net Income Attributable to AT&T

$

13,903

 

$

19,370

 

$

29,450

 

$

12,976

 

$

13,345

Net Income Attributable to Common Stock

$

13,900

 

$

19,370

 

$

29,450

 

$

12,976

 

$

13,345

Basic Earnings Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Attributable to Common Stock

$

1.90

 

$

2.85

 

$

4.77

 

$

2.10

 

$

2.37

Diluted Earnings Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Attributable to Common Stock

$

1.89

 

$

2.85

 

$

4.76

 

$

2.10

 

$

2.37

Weighted-average common shares outstanding (000,000)

 

7,319

 

 

6,778

 

 

6,164

 

 

6,168

 

 

5,628

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

with dilution (000,000)

 

7,348

 

 

6,806

 

 

6,183

 

 

6,189

 

 

5,646

End of period common shares outstanding (000,000)

 

7,255

 

 

7,282

 

 

6,139

 

 

6,139

 

 

6,145

Dividends declared per common share

$

2.05

 

$

2.01

 

$

1.97

 

$

1.93

 

$

1.89

Cash and cash equivalents

$

12,130

 

$

5,204

 

$

50,498

 

$

5,788

 

$

5,121

Total assets

$

551,669

 

$

531,864

 

$

444,097

 

$

403,821

 

$

402,672

Long-term debt

$

151,309

 

$

166,250

 

$

125,972

 

$

113,681

 

$

118,515

Total debt

$

163,147

 

$

176,505

 

$

164,346

 

$

123,513

 

$

126,151

Debt ratio

 

44.7%

 

 

47.7%

 

 

53.6%

 

 

49.9%

 

 

50.5%

Net debt ratio

 

41.4%

 

 

46.2%

 

 

37.2%

 

 

47.5%

 

 

48.5%

Book value per common share

$

27.84

 

$

26.63

 

$

23.13

 

$

20.22

 

$

20.12

Capital expenditures

$

19,635

 

$

21,251

 

$

21,550

 

$

22,408

 

$

20,015

Vendor financing payments

$

3,050

 

$

560

 

$

572

 

$

-

 

$

-

Gross capital investment1

$

23,690

 

$

23,240

 

$

22,401

 

$

22,408

 

$

20,015

Spectrum acquisitions2

$

1,316

 

$

447

 

$

(1,380)

 

$

2,477

 

$

17,740

Number of employees

 

247,800

 

 

268,220

 

 

254,000

 

 

268,540

 

 

281,450

1

Includes capital expenditures and vendor financing payments and excludes FirstNet reimbursements of $1,005 in 2019, $1,429 in 2018,

 

$279 in 2017 and $0 in 2016-2015 (see Note 20).

2

Cash paid for FCC license and domestic spectrum acquired in business acquisitions and swaps, net of auction deposit returns.

26


AT&T Inc.

Dollars in millions except per share amounts

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

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 worldwide in the telecommunications, media and technology industries. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes (Notes). We completed the acquisition of Time Warner Inc. (Time Warner) on June 14, 2018, and have included its results after that date. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from Time Warner prior to the acquisition are excluded.

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this document generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this document can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

 

We have four reportable segments: (1) Communications, (2) WarnerMedia, (3) Latin America and (4) Xandr. Our segment results presented in Note 4 and discussed below follow our internal management reporting. We analyze our segments based on segment operating contribution, which consists of operating income, excluding acquisition-related costs and other significant items and equity in net income (loss) of affiliates for investments managed within each segment. Each segment’s percentage calculation of total segment operating revenue and contribution is derived from our segment results table in Note 4 and may total more than 100% due to losses in one or more segments. Percentage increases and decreases that are not considered meaningful are denoted with a dash. We have recast our segment results for all prior periods presented to exclude wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands from our Mobility and Business Wireline business units of the Communications segment, instead reporting them with Corporate and Other (see Note 6).

 

 

 

 

 

 

 

 

 

Percent Change

 

 

2019

 

2018

 

2017

2019 vs. 2018

 

2018 vs. 2017

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

Communications

$

142,359

 

$

143,721

$

149,457

(0.9)

%

(3.8)

%

WarnerMedia

 

33,499

 

 

18,941

 

430

76.9

 

-

 

Latin America

 

6,963

 

 

7,652

 

8,269

(9.0)

 

(7.5)

 

Xandr

 

2,022

 

 

1,740

 

1,373

16.2

 

26.7

 

Corporate and other

 

1,603

 

 

2,101

 

2,200

(23.7)

 

(4.5)

 

Eliminations and consolidation

 

(5,253)

 

 

(3,399)

 

(1,183)

(54.5)

 

-

 

AT&T Operating Revenues

 

181,193

 

 

170,756

 

160,546

6.1

 

6.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Contribution

 

 

 

 

 

 

 

 

 

 

 

Communications

 

32,230

 

 

32,108

 

31,488

0.4

 

2.0

 

WarnerMedia

 

9,326

 

 

5,695

 

62

63.8

 

-

 

Latin America

 

(635)

 

 

(710)

 

(266)

10.6

 

-

 

Xandr

 

1,318

 

 

1,333

 

1,202

(1.1)

 

10.9

 

Segment Operating Contribution

$

42,239

 

$

38,426

$

32,486

9.9

%

18.3

%

 

The Communications segment accounted for approximately 77% of our 2019 total segment operating revenues compared to 84% in 2018 and 76% of our 2019 total segment operating contribution as compared to 84% in 2018. This segment provides services to businesses and consumers located in the U.S. and businesses globally. Our business strategies reflect bundled product offerings that cut across product lines and utilize shared assets. This segment contains the following business units:

Mobility provides nationwide wireless service and equipment.

Entertainment Group provides video, including over-the-top (OTT) services, broadband and voice communications services to residential customers. This segment also sells advertising on DIRECTV and U-verse distribution platforms.

27


AT&T Inc.

Dollars in millions except per share amounts

 

Business Wireline provides advanced IP-based services, as well as traditional voice and data services to business customers.

 

The WarnerMedia segment accounted for approximately 18% of our 2019 total segment operating revenues compared to 11% in 2018 and 22% of our 2019 total segment operating contribution compared to 15% in 2018. This segment develops, produces and distributes feature films, television, gaming and other content over various physical and digital formats. This segment contains the following business units:

Turner primarily operates multichannel basic television networks and digital properties. Turner also sells advertising on its networks and digital properties.

Home Box Office consists of premium pay television and OTT and streaming services domestically and premium pay, basic tier television and OTT and streaming services internationally, as well as content licensing and home entertainment.

Warner Bros. consists of the production, distribution and licensing of television programming and feature films, the distribution of home entertainment products and the production and distribution of games.

 

The Latin America segment accounted for approximately 4% of our 2019 and 2018 total segment operating revenues. This segment provides entertainment and wireless services outside of the U.S. This segment contains the following business units:

Mexico provides wireless service and equipment to customers in Mexico.

Vrio provides video services primarily to residential customers using satellite technology in Latin America and the Caribbean.

 

The Xandr segment accounted for approximately 1% of our total segment operating revenues in 2019 and 2018 and 3% of our total segment operating contribution in 2019 and 2018. This segment provides advertising services. These services utilize data insights to develop and deliver targeted advertising across video and digital platforms.

 

RESULTS OF OPERATIONS

 

Consolidated Results Our financial results are summarized in the following table. We then discuss factors affecting our overall results for the past three years. Additional analysis is discussed in our “Segment Results” section. We also discuss our expected revenue and expense trends for 2020 in the “Operating Environment and Trends of the Business” section. Certain prior period amounts have been reclassified to conform to the current period’s presentation.

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

 

2019 vs.

 

 

2018 vs.

 

 

 

2019

 

 

2018

 

 

2017

 

2018

 

 

2017

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service

$

163,499

 

$

152,345

 

$

145,597

 

7.3

%

 

4.6

%

Equipment

 

17,694

 

 

18,411

 

 

14,949

 

(3.9)

 

 

23.2

 

Total Operating Revenues

 

181,193

 

 

170,756

 

 

160,546

 

6.1

 

 

6.4

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations and support

 

125,021

 

 

116,230

 

 

116,189

 

7.6

 

 

-

 

Depreciation and amortization

 

28,217

 

 

28,430

 

 

24,387

 

(0.7)

 

 

16.6

 

Total Operating Expenses

 

153,238

 

 

144,660

 

 

140,576

 

5.9

 

 

2.9

 

Operating Income

 

27,955

 

 

26,096

 

 

19,970

 

7.1

 

 

30.7

 

Interest expense

 

8,422

 

 

7,957

 

 

6,300

 

5.8

 

 

26.3

 

Equity in net income (loss) of affiliates

 

6

 

 

(48)

 

 

(128)

 

-

 

 

62.5

 

Other income (expense) – net

 

(1,071)

 

 

6,782

 

 

1,597

 

-

 

 

-

 

Income Before Income Taxes

 

18,468

 

 

24,873

 

 

15,139

 

(25.8)

 

 

64.3

 

Net Income

 

14,975

 

 

19,953

 

 

29,847

 

(24.9)

 

 

(33.1)

 

Net Income Attributable to AT&T

 

13,903

 

 

19,370

 

 

29,450

 

(28.2)

 

 

(34.2)

 

Net Income Attributable to Common Stock

$

13,900

 

$

19,370

 

$

29,450

 

(28.2)

%

 

(34.2)

%

 

OVERVIEW

 

28


AT&T Inc.

Dollars in millions except per share amounts

 

Operating revenues increased in 2019, primarily due to including a full year’s worth of Time Warner results, which was acquired in June 2018. Partially offsetting the increase were declines in the Communications segment driven by continued pressure in legacy and video services and lower wireless equipment upgrades that were offset by growth in advanced data and wireless services.

 

Operations and support expenses increased in 2019, primarily due to our 2018 acquisition of Time Warner and the abandonment of certain copper assets that will not be necessary to support future network activity (see Note 7). The increase was partially offset by lower costs in our Communications segment, specifically fewer subscribers contributing to lower content costs, lower upgrades driving a decline in wireless equipment costs and our continued focus on cost management.

 

Depreciation and amortization expense decreased in 2019.

Amortization expense decreased $415, or 5.0%, in 2019 primarily due to the amortization of intangibles associated with WarnerMedia. We expect continued declines in amortization expense, reflecting the accelerated method of amortization applied to certain of the WarnerMedia intangibles.

 

Depreciation expense increased $202, or 1.0%, in 2019 primarily due to the Time Warner acquisition.

 

Operating income increased in 2019 and 2018. Our operating margin was 15.4% in 2019, compared to 15.3% in 2018 and 12.4% in 2017.

 

Interest expense increased in 2019, primarily due to lower capitalized interest associated with putting spectrum into network service.

 

Equity in net income (loss) of affiliates increased in 2019, primarily due to the sale of Hulu, which had losses of $44 in 2019 and $105 in 2018. (See Note 6)

 

Other income (expense) – net decreased in 2019 primarily due to the recognition of $5,171 in actuarial losses, compared to gains of $3,412 in 2018. Also contributing to the decline were higher debt redemption costs, partially offset by increased income from Rabbi trusts and other investments and gains from the sales of nonstrategic assets.

 

Income tax expense decreased in 2019, primarily driven by a decrease in income before income taxes. Our effective tax rate was 18.9% in 2019, 19.8% in 2018, and (97.2)% in 2017. All years were impacted by The Tax Cuts and Jobs Act, which was enacted in 2017.

 

Segment Results Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our segment results presented below follow our internal management reporting. In addition to segment operating contribution, we also evaluate segment performance based on EBITDA and/or EBITDA margin. EBITDA is defined as segment operating contribution, excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.

 

29


AT&T Inc.

Dollars in millions except per share amounts

 

COMMUNICATIONS SEGMENT

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

 

2019

 

2018

 

2017

2018

 

2017

Segment Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

$

71,056

 

$

70,521

 

$

70,259

0.8

%

 

0.4

%

Entertainment Group

 

45,126

 

 

46,460

 

 

49,995

(2.9)

 

 

(7.1)

 

Business Wireline

 

26,177

 

 

26,740

 

 

29,203

(2.1)

 

 

(8.4)

 

Total Segment Operating Revenues

 

142,359

 

 

143,721

 

 

149,457

(0.9)

 

 

(3.8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Contribution

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

 

22,321

 

 

21,568

 

 

20,011

3.5

 

 

7.8

 

Entertainment Group

 

4,822

 

 

4,715

 

 

5,471

2.3

 

 

(13.8)

 

Business Wireline

 

5,087

 

 

5,825

 

 

6,006

(12.7)

 

 

(3.0)

 

Total Segment Operating Contribution

$

32,230

 

$

32,108

 

$

31,488

0.4

%

 

2.0

%

 

Selected Subscribers and Connections

 

 

 

 

 

December 31,

(000s)

2019

2018

 

2017

Mobility subscribers

165,889

151,921

 

139,986

Total domestic broadband connections

14,659

14,751

 

14,487

Network access lines in service

8,487

10,002

 

11,754

U-verse VoIP connections

4,370

5,114

 

5,682

 

Operating revenues decreased in 2019, driven by declines in our Entertainment Group and Business Wireline business units, partially offset by increases in our Mobility business unit. The decrease reflects the continued shift away from legacy voice and data products and linear video, largely offset by higher wireless service revenues from growth in postpaid phone subscribers and average revenue per subscriber (ARPU), and growth in our prepaid subscriber base.

 

Operating contribution increased in 2019 and 2018. The 2019 contribution includes improvements in our Mobility and Entertainment Group business units, partially offset by declines in our Business Wireline business unit. Our Communications segment operating income margin was 22.6% in 2019, 22.3% in 2018 and 21.1% in 2017.

 

Communications Business Unit Discussion

 

 

 

Mobility Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

 

2019

 

2018

 

2017

2018

 

2017

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Service

$

55,331

 

$

54,294

 

$

57,023

1.9

%

 

(4.8)

%

Equipment

 

15,725

 

 

16,227

 

 

13,236

(3.1)

 

 

22.6

 

Total Operating Revenues

 

71,056

 

 

70,521

 

 

70,259

0.8

 

 

0.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations and support

 

40,681

 

 

40,690

 

 

42,317

-

 

 

(3.8)

 

Depreciation and amortization

 

8,054

 

 

8,263

 

 

7,931

(2.5)

 

 

4.2

 

Total Operating Expenses

 

48,735

 

 

48,953

 

 

50,248

(0.4)

 

 

(2.6)

 

Operating Income

 

22,321

 

 

21,568

 

 

20,011

3.5

 

 

7.8

 

Equity in Net Income (Loss) of Affiliates

 

-

 

 

-

 

 

-

-

 

 

-

 

Operating Contribution

$

22,321

 

$

21,568

 

$

20,011

3.5

%

 

7.8

%

 

30


AT&T Inc.

Dollars in millions except per share amounts

 

The following tables highlight other key measures of performance for Mobility:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility Subscribers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

(in 000s)

2019

 

 

2018

 

 

2017

2018

 

2017

Postpaid Phone Subscribers

63,018

 

 

62,882

 

 

63,197

0.2

%

 

(0.5)

%

Total Phone Subscribers

79,700

 

 

78,767

 

 

77,657

1.2

 

 

1.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Postpaid smartphones

60,664

 

 

60,131

 

 

59,298

0.9

 

 

1.4

 

Postpaid feature phones and other devices

14,543

 

 

15,937

 

 

17,376

(8.7)

 

 

(8.3)

 

Postpaid

75,207

 

 

76,068

 

 

76,674

(1.1)

 

 

(0.8)

 

Prepaid

17,803

 

 

16,828

 

 

15,154

5.8

 

 

11.0

 

Reseller

6,893

 

 

7,693

 

 

9,171

(10.4)

 

 

(16.1)

 

Connected devices1

65,986

 

 

51,332

 

 

38,987

28.5

 

 

31.7

 

Total Mobility Subscribers

165,889

 

 

151,921

 

 

139,986

9.2

%

 

8.5

%

1

Includes data-centric devices such as wholesale automobile systems, monitoring devices, fleet management and session-based tablets.

 

Mobility Net Additions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

2019 vs.

2018 vs.

(in 000s)

2019

 

2018

 

2017

 

2018

2017

Postpaid Phone Net Additions

483

 

194

 

(186)

 

149.0

%

204.3

%

Total Phone Net Additions

989

 

1,248

 

659

 

(20.8)

 

89.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Postpaid2

(435)

 

(90)

 

853

 

-

 

-

 

Prepaid

677

 

1,301

 

996

 

(48.0)

 

30.6

 

Reseller

(928)

 

(1,599)

 

(1,765)

 

42.0

 

9.4

 

Connected devices3

14,645

 

12,324

 

9,694

 

18.8

 

27.1

 

Mobility Net Subscriber Additions1

13,959

 

11,936

 

9,778

 

16.9

%

22.1

%

 

 

 

 

 

 

 

 

 

 

 

Postpaid Churn4

1.18

%

1.12

%

1.07

%

6

BP

5

BP

Postpaid Phone-Only Churn4

0.95

%

0.90

%

0.85

%

5

BP

5

BP

1

Excludes acquisition-related additions during the period.

2

In addition to postpaid phones, includes tablets and wearables and other. Tablet net adds (losses) were (1,487), (1,200) and 59 for the years ended

 

December 31, 2019, 2018 and 2017, respectively. Wearables and other net adds were 569, 916 and 980 for the years ended December 31, 2019, 2018

 

and 2017, respectively.

3

Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes

 

postpaid tablets.

4

Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number

 

of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for

 

each month of that period.

 

Service revenue increased during 2019 largely due to prepaid subscriber gains and higher postpaid phone ARPU driven by the adoption of unlimited plans.

 

ARPU

ARPU increased primarily due to pricing actions that were not in effect in the prior year and a continued shift by subscribers to our unlimited plans.

 

Churn

31


AT&T Inc.

Dollars in millions except per share amounts

 

The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Competitive pricing in the industry contributed to higher postpaid churn rates in 2019, and our move to unlimited plans combined with an improved customer experience in 2018 contributed to lower churn rates in that year.

 

Equipment revenue decreased in 2019. The 2019 decrease was driven by lower postpaid sales, resulting from the continuing trend of customers choosing to upgrade devices less frequently or bring their own, which is generally offset by lower equipment expense.

 

Operations and support expenses decreased in 2019, primarily due to lower equipment expense driven by low upgrade rates and increased operational efficiencies, partially offset by higher bad debt expense and handset insurance costs.

 

Depreciation expenses decreased in 2019, primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion.

 

Operating income increased in 2019 and 2018. Our Mobility operating income margin was 31.4% in 2019, 30.6% in 2018 and 28.5% in 2017. Our Mobility EBITDA margin was 42.7% in 2019, 42.3% in 2018 and 39.8% in 2017.

 

Subscriber Relationships

As the wireless industry has matured, we believe future wireless growth will depend on our ability to offer innovative services, plans and devices that take advantage of our premier 5G wireless network, and to provide these services in bundled product offerings. Subscribers that purchase two or more services from us have significantly lower churn than subscribers that purchase only one service. To support higher mobile data usage, our priority is to best utilize a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible.

 

To attract and retain subscribers in a mature and highly competitive market, we have launched a wide variety of plans, including our FirstNet and prepaid products, and arrangements that bundle our video services. Virtually all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add devices, attract subscribers from other providers and/or minimize subscriber churn. We also offer unlimited data plans and such subscribers also tend to have higher retention and lower churn rates.

 

Connected Devices

Connected devices include data-centric devices such as wholesale automobile systems, monitoring devices, fleet management and session-based tablets. Connected device subscribers increased in 2019, and we added approximately 8.4 million wholesale connected cars through agreements with various carmakers, and experienced strong growth in other Internet of Things (IoT) connections as well. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.

 

32


AT&T Inc.

Dollars in millions except per share amounts

 

Entertainment Group Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

 

2019

 

2018

 

2017

2018

 

2017

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Video entertainment

$

32,110

 

$

33,357

 

$

36,167

(3.7)

%

 

(7.8)

%

High-speed internet

 

8,403

 

 

7,956

 

 

7,674

5.6

 

 

3.7

 

Legacy voice and data services

 

2,573

 

 

3,041

 

 

3,767

(15.4)

 

 

(19.3)

 

Other service and equipment

 

2,040

 

 

2,106

 

 

2,387

(3.1)

 

 

(11.8)

 

Total Operating Revenues

 

45,126

 

 

46,460

 

 

49,995

(2.9)

 

 

(7.1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations and support

 

35,028

 

 

36,430

 

 

38,903

(3.8)

 

 

(6.4)

 

Depreciation and amortization

 

5,276

 

 

5,315

 

 

5,621

(0.7)

 

 

(5.4)

 

Total Operating Expenses

 

40,304

 

 

41,745

 

 

44,524

(3.5)

 

 

(6.2)

 

Operating Income

 

4,822

 

 

4,715

 

 

5,471

2.3

 

 

(13.8)

 

Equity in Net Income (Loss) of Affiliates

 

-

 

 

-

 

 

-

-

 

 

-

 

Operating Contribution

$

4,822

 

$

4,715

 

$

5,471

2.3

%

 

(13.8)

%

 

The following tables highlight other key measures of performance for Entertainment Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Connections

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

(in 000s)

2019

 

 

2018

 

 

2017

2018

 

2017

Video Connections

 

 

 

 

 

 

 

 

 

 

 

 

Premium TV

19,473

 

 

22,903

 

 

24,089

(15.0)

%

 

(4.9)

%

AT&T TV NOW

926

 

 

1,591

 

 

1,155

(41.8)

 

 

37.7

 

Total Video Connections

20,399

 

 

24,494

 

 

25,244

(16.7)

 

 

(3.0)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Broadband Connections

 

 

 

 

 

 

 

 

 

 

 

 

IP

13,598

 

 

13,729

 

 

13,462

(1.0)

 

 

2.0

 

DSL

521

 

 

680

 

 

888

(23.4)

 

 

(23.4)

 

Total Broadband Connections

14,119

 

 

14,409

 

 

14,350

(2.0)

 

 

0.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Consumer Switched Access Lines

3,329

 

 

3,967

 

 

4,774

(16.1)

 

 

(16.9)

 

U-verse Consumer VoIP Connections

3,794

 

 

4,582

 

 

5,222

(17.2)

 

 

(12.3)

 

Total Retail Consumer Voice Connections

7,123

 

 

8,549

 

 

9,996

(16.7)

 

 

(14.5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiber Broadband Connections (included in IP)

3,887

 

 

2,763

 

 

1,767

40.7

%

 

56.4

%

 

33


AT&T Inc.

Dollars in millions except per share amounts

 

Net Additions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

(in 000s)

2019

 

 

2018

 

 

2017

2018

 

2017

Video Net Additions

��

 

 

 

 

 

 

 

 

 

 

 

Premium TV

(3,430)

 

 

(1,186)

 

 

(1,176)

-

%

 

(0.9)

%

AT&T TV NOW

(665)

 

 

436

 

 

888

-

 

 

(50.9)

 

Net Video Additions

(4,095)

 

 

(750)

 

 

(288)

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Broadband Net Additions

 

 

 

 

 

 

 

 

 

 

 

 

IP

(131)

 

 

267

 

 

574

-

 

 

(53.5)

 

DSL

(159)

 

 

(208)

 

 

(403)

23.6

 

 

48.4

 

Net Broadband Additions

(290)

 

 

59

 

 

171

-

 

 

(65.5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiber Broadband Net Additions

1,124

 

 

1,034

 

 

1,525

8.7

%

 

(32.2)

%

 

Video entertainment revenues are comprised of subscription and advertising revenues. Revenues decreased in 2019, largely driven by a 15.0% decline in premium TV subscribers, as we continue to focus on high-value customers, partially offset by subscription-based advertising growth of 4.8%. Our customers continue to shift, consistent with the rest of the industry, from a premium linear service to our more economically priced OTT video service, or to competitors, which has pressured our video revenues.

 

Revenue declines in our premium TV products were partially offset by growth in revenues from our OTT service, AT&T TV NOW, which were primarily attributable to pricing actions. AT&T TV NOW subscriber net additions declined in 2019 due to price increases and fewer promotions.

 

High-speed internet revenues increased in 2019, reflecting higher ARPU resulting from the continued shift of subscribers to our higher-speed fiber services. Our bundling strategy is helping to lower churn with subscribers who bundle broadband with another AT&T service.

 

Legacy voice and data service revenues decreased in 2019, reflecting the continued migration of customers to our more advanced IP-based offerings or to competitors. The trend at which we are experiencing these revenue declines has slowed, with a decrease of $468 in 2019 compared to $726 in 2018.

 

Operations and support expenses decreased in 2019, largely driven by lower content costs from fewer subscribers and our ongoing focus on cost initiatives. Partially offsetting the decreases were higher amortization of fulfillment cost deferrals, including the impact of second-quarter updates to decrease the estimated economic life for our Entertainment Group customers, and costs associated with NFL SUNDAY TICKET. We expect the second-quarter 2019 update to estimated economic customer lives, and our launch of AT&T TV, our new streaming premium TV product, to contribute to expense pressure in the first half of 2020.

 

Depreciation expenses decreased in 2019, due to network assets becoming fully depreciated. Partially offsetting the decreases was ongoing capital spending for network upgrades and expansion, including the completion of the fiber commitment under the DIRECTV acquisition.

 

Operating income increased in 2019 and decreased in 2018. Our Entertainment Group operating income margin was 10.7% in 2019, 10.1% in 2018 and 10.9% in 2017. Our Entertainment Group EBITDA margin was 22.4% in 2019, 21.6% in 2018 and 22.2% in 2017.

 

34


AT&T Inc.

Dollars in millions except per share amounts

 

Business Wireline Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

 

2019

 

2018

 

2017

2018

 

2017

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Strategic and managed services

$

15,440

 

$

14,660

 

$

13,880

5.3

%

 

5.6

%

Legacy voice and data services

 

9,180

 

 

10,674

 

 

13,791

(14.0)

 

 

(22.6)

 

Other service and equipment

 

1,557

 

 

1,406

 

 

1,532

10.7

 

 

(8.2)

 

Total Operating Revenues

 

26,177

 

 

26,740

 

 

29,203

(2.1)

 

 

(8.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations and support

 

16,091

 

 

16,201

 

 

18,441

(0.7)

 

 

(12.1)

 

Depreciation and amortization

 

4,999

 

 

4,714

 

 

4,756

6.0

 

 

(0.9)

 

Total Operating Expenses

 

21,090

 

 

20,915

 

 

23,197

0.8

 

 

(9.8)

 

Operating Income

 

5,087

 

 

5,825

 

 

6,006

(12.7)

 

 

(3.0)

 

Equity in Net Income (Loss) of Affiliates

 

-

 

 

-

 

 

-

-

 

 

-

 

Operating Contribution

$

5,087

 

$

5,825

 

$

6,006

(12.7)

%

 

(3.0)

%

 

Strategic and managed services revenues increased in 2019. Our strategic services are made up of (1) data services, including our VPN, dedicated internet ethernet and broadband, (2) voice service, including VoIP and cloud-based voice solutions, (3) security and cloud solutions, and (4) managed, professional and outsourcing services. Revenue increases were primarily attributable to our data services and security and cloud solutions.

 

Legacy voice and data service revenues decreased in 2019, primarily due to lower demand as customers continue to shift to our more advanced IP-based offerings or our competitors. The trend at which we are experiencing these revenue declines has slowed, with a decrease of $1,494 in 2019 compared to $3,117 in 2018.

 

Other service and equipment revenues increased in 2019, driven by higher intellectual property licensing activity. Revenues from the licensing of intellectual property assets vary from period-to-period and can impact revenue trends. Other service revenues include project-based revenue, which is nonrecurring in nature, as well as revenues from customer premises equipment.

 

Operations and support expenses decreased in 2019. The 2019 decrease was primarily due to our continued efforts to shift to a software-based network and automate and digitize our customer support activities, partially offset by higher fulfillment deferral amortization.

 

Depreciation expense increased in 2019, primarily due to increases in capital spending for network upgrades and expansion.

 

Operating income decreased in 2019 and 2018. Our Business Wireline operating income margin was 19.4% in 2019, 21.8% in 2018 and 20.6% in 2017. Our Business Wireline EBITDA margin was 38.5% in 2019, 39.4% in 2018 and 36.9% in 2017.

 

35


AT&T Inc.

Dollars in millions except per share amounts

 

WARNERMEDIA SEGMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

2018

 

2017

Segment Operating Revenues

 

 

 

 

 

 

 

 

Turner

$

13,122

 

$

6,979

 

$

430

Home Box Office

 

6,749

 

 

3,598

 

 

-

Warner Bros.

 

14,358

 

 

8,703

 

 

-

Eliminations & Other

 

(730)

 

 

(339)

 

 

-

Total Segment Operating Revenues

 

33,499

 

 

18,941

 

 

430

 

 

 

 

 

 

 

 

 

Segment Operating Contribution

 

 

 

 

 

 

 

 

Turner

 

5,199

 

 

3,108

 

 

140

Home Box Office

 

2,365

 

 

1,384

 

 

-

Warner Bros.

 

2,350

 

 

1,449

 

 

-

Eliminations & Other

 

(588)

 

 

(246)

 

 

(78)

Total Segment Operating Contribution

$

9,326

 

$

5,695

 

$

62

 

Our WarnerMedia segment consists of our Turner, Home Box Office and Warner Bros. business units. The order of presentation reflects the consistency of revenue streams, rather than overall magnitude as that is subject to timing and frequency of studio releases. WarnerMedia also includes our financial results for regional sports networks (RSNs).

 

The WarnerMedia segment does not include results from Time Warner operations for the periods prior to our June 14, 2018 acquisition. Otter Media is included as an equity method investment for periods prior to our August 7, 2018 acquisition of the remaining interest and is in the segment operating results following the acquisition. Consistent with our past practice, many of the impacts of the fair value adjustments from the application of purchase accounting required under GAAP have not been allocated to the segment, instead they are reported as acquisition-related items in the reconciliation to consolidated results.

 

Due to the June 2018 acquisition of Time Warner, segment and business unit results for 2019 are not comparable to prior periods, and, therefore, comparative results are not discussed.

 

WarnerMedia Business Unit Discussion

Turner Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

2018

 

2017

Operating revenues

 

 

 

 

 

 

 

 

Subscription

$

7,736

 

$

4,207

 

$

365

Advertising

 

4,566

 

 

2,330

 

 

65

Content and other

 

820

 

 

442

 

 

-

Total Operating Revenues

 

13,122

 

 

6,979

 

 

430

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Operations and support

 

7,740

 

 

3,794

 

 

331

Depreciation and amortization

 

235

 

 

131

 

 

4

Total Operating Expenses

 

7,975

 

 

3,925

 

 

335

Operating Income

 

5,147

 

 

3,054

 

 

95

Equity in Net Income of Affiliates

 

52

 

 

54

 

 

45

Operating Contribution

$

5,199

 

$

3,108

 

$

140

 

Turner includes the WarnerMedia businesses managed by Turner as well as our financial results for RSNs.

 

36


AT&T Inc.

Dollars in millions except per share amounts

 

Operating revenues are generated primarily from licensing programming to distribution affiliates and from selling advertising on its networks and digital properties. We expect strong advertising revenue growth in 2020 as Turner advertising revenues are expected to benefit from presidential election political spend and from airing the NCAA Final Four and Championship games.

 

Operating income increased in 2019. Our Turner operating income margin was 39.2% for 2019 and 43.8% for 2018. Our Turner EBITDA margin was 41.0% for 2019 and 45.6% for 2018.

 

Home Box Office Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

2018

 

2017

Operating revenues

 

 

 

 

 

 

 

 

Subscription

$

5,814

 

$

3,201

 

$

-

Content and other

 

935

 

 

397

 

 

-

Total Operating Revenues

 

6,749

 

 

3,598

 

 

-

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Operations and support

 

4,312

 

 

2,187

 

 

-

Depreciation and amortization

 

102

 

 

56

 

 

-

Total Operating Expenses

 

4,414

 

 

2,243

 

 

-

Operating Income

 

2,335

 

 

1,355

 

 

-

Equity in Net Income of Affiliates

 

30

 

 

29

 

 

-

Operating Contribution

$

2,365

 

$

1,384

 

$

-

 

Operating revenues are generated from the exploitation of original and licensed programming through distribution outlets.

 

Operating income increased in 2019. Our Home Box Office operating income margin was 34.6% for 2019 and 37.7% for 2018. Our Home Box Office EBITDA margin was 36.1% for 2019 and 39.2% for 2018.

 

Warner Bros. Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

2018

 

2017

Operating revenues

 

 

 

 

 

 

 

 

Theatrical product

$

5,978

 

$

4,002

 

$

-

Television product

 

6,367

 

 

3,621

 

 

-

Games and other

 

2,013

 

 

1,080

 

 

-

Total Operating Revenues

 

14,358

 

 

8,703

 

 

-

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Operations and support

 

11,816

 

 

7,130

 

 

-

Depreciation and amortization

 

162

 

 

96

 

 

-

Total Operating Expenses

 

11,978

 

 

7,226

 

 

-

Operating Income

 

2,380

 

 

1,477

 

 

-

Equity in Net Income (Loss) of Affiliates

 

(30)

 

 

(28)

 

 

-

Operating Contribution

$

2,350

 

$

1,449

 

$

-

 

Operating revenues primarily relate to theatrical product (which is content made available for initial exhibition in theaters) and television product (which is content made available for initial airing on television or OTT services). During 2019, fourth-quarter revenues were pressured from foregone content licensing revenues as we prepare for our launch of HBO Max in 2020 and lower theatrical product resulting from a more favorable mix of box office and home entertainment releases in the prior year. The timing of theatrical releases varies from year to year and is based on several factors. The variability of the release

37


AT&T Inc.

Dollars in millions except per share amounts

 

schedule and the difficulty in predicting the popularity of content can result in meaningful/material changes in quarterly revenue results as well as difficult year-over-year comparisons.

 

Operating income increased in 2019. Our Warner Bros. operating income margin was 16.6% for 2019 and 17.0% for 2018. Our Warner Bros. EBITDA margin was 17.7% for 2019 and 18.1% for 2018.

 

LATIN AMERICA SEGMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

 

2019

 

2018

 

2017

2018

 

2017

Segment Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Vrio

$

4,094

 

$

4,784

 

$

5,456

(14.4)

%

 

(12.3)

%

Mexico

 

2,869

 

 

2,868

 

 

2,813

-

 

 

2.0

 

Total Segment Operating Revenues

 

6,963

 

 

7,652

 

 

8,269

(9.0)

 

 

(7.5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Contribution

 

 

 

 

 

 

 

 

 

 

 

 

 

Vrio

 

83

 

 

347

 

 

522

(76.1)

 

 

(33.5)

 

Mexico

 

(718)

 

 

(1,057)

 

 

(788)

32.1

 

 

(34.1)

 

Total Segment Operating Contribution

$

(635)

 

$

(710)

 

$

(266)

10.6

%

 

-

%

 

Operating Results

Our Latin America operations conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates, subjecting results to foreign currency fluctuations.

 

Operating revenues decreased in 2019, driven by lower revenues for Vrio, primarily resulting from foreign exchange pressure related to Argentina’s hyperinflationary economy. Mexico revenues were stable, with service revenue growth offset by lower equipment sales.

 

Operating contribution increased in 2019 and decreased in 2018, reflecting foreign exchange pressure, offset by improvement in Mexico. Our Latin America segment operating income margin was (9.5)% in 2019, (9.7)% in 2018 and (4.3)% in 2017.

 

Latin America Business Unit Discussion

 

 

 

 

 

 

 

 

 

 

 

 

 

Mexico Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

 

2019

 

2018

 

2017

2018

 

2017

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Service

$

1,863

 

$

1,701

 

$

2,047

9.5

%

 

(16.9)

%

Equipment

 

1,006

 

 

1,167

 

 

766

(13.8)

 

 

52.3

 

Total Operating Revenues

 

2,869

 

 

2,868

 

 

2,813

-

 

 

2.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations and support

 

3,085

 

 

3,415

 

 

3,232

(9.7)

 

 

5.7

 

Depreciation and amortization

 

502

 

 

510

 

 

369

(1.6)

 

 

38.2

 

Total Operating Expenses

 

3,587

 

 

3,925

 

 

3,601

(8.6)

 

 

9.0

 

Operating Income (Loss)

 

(718)

 

 

(1,057)

 

 

(788)

32.1

 

 

(34.1)

 

Equity in Net Income of Affiliates

 

-

 

 

-

 

 

-

-

 

 

-

 

Operating Contribution

$

(718)

 

$

(1,057)

 

$

(788)

32.1

%

 

(34.1)

%

 

38


AT&T Inc.

Dollars in millions except per share amounts

 

The following tables highlight other key measures of performance for Mexico:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

(in 000s)

 

2019

 

 

2018

 

 

2017

2018

 

2017

Mexico Wireless Subscribers1

 

 

 

 

 

 

 

 

 

 

 

 

 

Postpaid

 

5,103

 

 

5,805

 

 

5,498

(12.1)

%

 

5.6

%

Prepaid

 

13,584

 

 

12,264

 

 

9,397

10.8

 

 

30.5

 

Reseller

 

472

 

 

252

 

 

204

87.3

 

 

23.5

 

Total Mexico Wireless Subscribers

 

19,159

 

 

18,321

 

 

15,099

4.6

%

 

21.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

(in 000s)

 

2019

 

 

2018

 

 

2017

2018

 

2017

Mexico Wireless Net Additions

 

 

 

 

 

 

 

 

 

 

 

 

 

Postpaid

 

(608)

 

 

307

 

 

533

-

%

 

(42.4)

%

Prepaid

 

1,919

 

 

2,867

 

 

2,670

(33.1)

 

 

7.4

 

Reseller

 

219

 

 

48

 

 

(77)

-

 

 

-

 

Mexico Wireless Net Subscriber Additions

 

1,530

 

 

3,222

 

 

3,126

(52.5)

%

 

3.1

%

1

2019 excludes the impact of 692 subscriber disconnections resulting from the churn of customers related to sales by certain third-party

 

distributors and the sunset of 2G services in Mexico, which are reflected in beginning of period subscribers.

 

Service revenues increased in 2019, primarily due to growth in our subscriber base.

 

Equipment revenues decreased in 2019, reflecting higher demand in the prior year for our initial offering of equipment installment programs.

 

Operations and support expenses decreased in 2019, driven by lower equipment costs. Approximately 6% of Mexico expenses are U.S. dollar-based, with the remainder in the local currency.

 

Depreciation expense decreased in 2019, primarily due to changes in the useful lives of certain assets, partially offset by the amortization of spectrum licenses and higher in-service assets.

 

Operating income increased in 2019 and decreased in 2018. Our Mexico operating income margin was (25.0)% in 2019, (36.9)% in 2018 and (28.0)% in 2017. Our Mexico EBITDA margin was (7.5)% in 2019, (19.1)% in 2018 and (14.9)% in 2017.

 

Vrio Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

 

2019

 

2018

 

2017

2018

 

2017

Operating revenues

$

4,094

 

$

4,784

 

$

5,456

(14.4)

%

 

(12.3)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations and support

 

3,378

 

 

3,743

 

 

4,172

(9.8)

 

 

(10.3)

 

Depreciation and amortization

 

660

 

 

728

 

 

849

(9.3)

 

 

(14.3)

 

Total Operating Expenses

 

4,038

 

 

4,471

 

 

5,021

(9.7)

 

 

(11.0)

 

Operating Income

 

56

 

 

313

 

 

435

(82.1)

 

 

(28.0)

 

Equity in Net Income of Affiliates

 

27

 

 

34

 

 

87

(20.6)

 

 

(60.9)

 

Operating Contribution

$

83

 

$

347

 

$

522

(76.1)

%

 

(33.5)

%

 

39


AT&T Inc.

Dollars in millions except per share amounts

 

The following tables highlight other key measures of performance for Vrio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

(in 000s)

 

2019

 

 

2018

 

 

2017

2018

 

2017

Vrio Video Subscribers1,2

 

13,331

 

 

13,838

 

 

13,629

(3.7)

%

 

1.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

(in 000s)

 

2019

 

 

2018

 

 

2017

2018

 

2017

Vrio Video Net Subscriber Additions3

 

(285)

 

 

250

 

 

42

-

%

 

-

%

1

Excludes subscribers of our equity investment in SKY Mexico, in which we own a 41.3% stake. SKY Mexico had 7.4 million

 

subscribers at September 30, 2019 and 7.6 million and 8.0 million at December 31, 2018 and 2017, respectively.

2

2019 excludes the impact of 222 subscriber disconnections resulting from conforming our video credit policy across the region, which is

 

reflected in beginning of period subscribers.

3

Excludes SKY Mexico net subscriber losses of 225 in the nine months ended September 30, 2019 and losses of 366 and 23 for

 

years ended December 31, 2018 and 2017, respectively.

 

Operating revenues decreased in 2019, due to foreign exchange pressures.

 

Operations and support expenses decreased in 2019, reflecting changes in foreign currency exchange rates. Approximately 19% of Vrio expenses are U.S. dollar-based, with the remainder in the local currency.

 

Depreciation expense decreased in 2019, primarily due to changes in foreign currency exchange rates.

 

Operating income decreased in 2019 and 2018. Our Vrio operating income margin was 1.4% in 2019, 6.5% in 2018 and 8.0% in 2017. Our Vrio EBITDA margin was 17.5% in 2019, 21.8% in 2018 and 23.5% in 2017.

 

XANDR SEGMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

 

2019

 

2018

 

2017

2018

 

2017

Segment Operating Revenues

$

2,022

 

$

1,740

 

$

1,373

16.2

%

 

26.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations and support

 

646

 

 

398

 

 

169

62.3

 

 

-

 

Depreciation and amortization

 

58

 

 

9

 

 

2

-

 

 

-

 

Total Segment Operating Expenses

 

704

 

 

407

 

 

171

73.0

 

 

-

 

Segment Operating Income

 

1,318

 

 

1,333

 

 

1,202

(1.1)

 

 

10.9

 

Equity in Net Income of Affiliates

 

-

 

 

-

 

 

-

-

 

 

-

 

Segment Operating Contribution

$

1,318

 

$

1,333

 

$

1,202

(1.1)

%

 

10.9

%

 

Operating revenues increased in 2019 due to growth in subscription-based advertising revenue and our acquisition of AppNexus in August 2018 (see Note 6).

 

Operations and support expenses increased in 2019 reflecting our acquisition of AppNexus and our ongoing development of the platform supporting Xandr’s business.

 

Operating income decreased in 2019 and increased 2018. Our Xandr segment operating income margin was 65.2% in 2019, 76.6% in 2018 and 87.5% in 2017.

40


AT&T Inc.

Dollars in millions except per share amounts

 

SUPPLEMENTAL TOTAL ADVERTISING REVENUE INFORMATION

As a supplemental presentation to our Xandr segment operating results, we are providing a view of total advertising revenues generated by AT&T. This combined view presents the entire portfolio of advertising revenues reported across all operating segments and represents a significant strategic initiative and growth opportunity for AT&T. See the revenue categories table in Note 5 for a reconciliation.

 

Total Advertising Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

 

2019

 

2018

 

2017

2018

 

2017

Advertising Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

WarnerMedia

$

4,676

 

$

2,461

 

$

65

90.0

%

 

-

%

Communications

 

1,963

 

 

1,827

 

 

1,513

7.4

 

 

20.8

 

Xandr

 

2,022

 

 

1,740

 

 

1,373

16.2

 

 

26.7

 

Eliminations

 

(1,672)

 

 

(1,595)

 

 

(1,357)

(4.8)

 

 

(17.5)

 

Total Advertising Revenues

$

6,989

 

$

4,433

 

$

1,594

57.7

%

 

-

%

 

SUPPLEMENTAL COMMUNICATIONS OPERATING INFORMATION

As a supplemental presentation to our Communications segment operating results, we are providing a view of our AT&T Business Solutions results which includes both wireless and wireline operations. This combined view presents a complete profile of the entire business customer relationship, including mobile solutions for our business customers. Wireless business relationships include FirstNet customers, IoT connections and other company paid-for devices. See “Discussion and Reconciliation of Non-GAAP Measure” for a reconciliation of these supplemental measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.

 

Business Solutions Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

2019 vs.

 

2018 vs.

 

2019

2018

2017

2018

 

2017

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Wireless service

$

7,925

 

$

7,323

 

$

7,928

8.2

%

 

(7.6)

%

Strategic and managed services

 

15,440

 

 

14,660

 

 

13,880

5.3

 

 

5.6

 

Legacy voice and data services

 

9,180

 

 

10,674

 

 

13,791

(14.0)

 

 

(22.6)

 

Other service and equipment

 

1,557

 

 

1,406

 

 

1,532

10.7

 

 

(8.2)

 

Wireless equipment

 

2,757

 

 

2,510

 

 

1,532

9.8

 

 

63.8

 

Total Operating Revenues

 

36,859

 

 

36,573

 

 

38,663

0.8

 

 

(5.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations and support

 

22,735

 

 

22,608

 

 

24,376

0.6

 

 

(7.3)

 

Depreciation and amortization

 

6,213

 

 

5,900

 

 

5,859

5.3

 

 

0.7

 

Total Operating Expenses

 

28,948

 

 

28,508

 

 

30,235

1.5

 

 

(5.7)

 

Operating Income

 

7,911

 

 

8,065

 

 

8,428

(1.9)

 

 

(4.3)

 

Equity in Net Income (Loss) of Affiliates

 

-

 

 

-

 

 

-

-

 

 

-

 

Operating Contribution

$

7,911

 

$

8,065

 

$

8,428

(1.9)

%

 

(4.3)

%

 

OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS

2020 Revenue Trends We expect revenue growth in our wireless and broadband businesses as customers demand premium content, instant connectivity and higher speeds made possible by our fiber network expansion and wireless network enhancements through 5G deployment. In our Communications segment, we expect that our network quality and First Responder Network Authority (FirstNet) deployment will contribute to wireless subscriber and service revenue growth, and that 5G handset introductions during 2020 will drive wireless equipment revenue growth. We anticipate that applications like video streaming will also drive greater demand for broadband. In our WarnerMedia segment, we expect our premium content

41


AT&T Inc.

Dollars in millions except per share amounts

 

to drive revenue growth from both the current wholesale distribution through traditional pay-TV providers and our new video streaming platform, HBO Max, to be launched in May 2020. Across AT&T, we expect to provide consumers with a broad variety of video entertainment services, from mobile-centric and OTT live-TV streaming packages, to traditional full-size linear video. We expect growth in our advertising businesses from combining the data insights from our 170 million direct-to-consumer relationships with our premium video and digital advertising inventory. Revenue from business customers will continue to grow for mobile and IP-based services, but decline for legacy wireline services. Overall, we believe growth in wireless, broadband and WarnerMedia’s premium content should offset pressure from our linear video and legacy voice and data services.

 

2020 Expense Trends We expect the spending required to support growth initiatives, primarily our 5G deployment and FirstNet build, as well as the launch of the HBO Max platform, to pressure expense trends in 2020. To the extent 5G handset introductions in 2020 are as expected, the expenses associated with those device sales will also contribute to higher costs. In addition, we expect the second-quarter 2019 update to estimated economic customer lives, and our launch of AT&T TV, our new streaming premium TV product, to contribute to expense pressure in the first half of the year. During 2020, we will also continue to transition our hardware-based network technology to more efficient and less expensive software-based technology. These investments will prepare us to meet increased customer demand for enhanced wireless and broadband services, including video streaming, augmented reality and “smart” technologies. The software benefits of our 5G wireless technology and new video delivery platforms should result in a more efficient use of capital and lower network-related expenses in the coming years.

 

To offset the costs of these initiatives, we anticipate savings from corporate initiatives to lower labor-related costs and corporate overhead, digital transformation of customer service and ordering functions, vendor discounts and WarnerMedia merger synergies. Cost savings and non-strategic asset sales should help to further reduce our debt level.

 

Market Conditions The U.S. stock market experienced a positive year although general business investment remained modest, which affected our business services. Most of our products and services are not directly affected by the imposition of tariffs on Chinese goods. To date, we have not experienced any disruptions from our wireless handset supply chain due to the coronavirus epidemic in China but we continue to monitor the situation. While unemployment remains historically low, our residential customers continue to be price sensitive in selecting offerings, especially in the video area, and continue to focus on products that give them efficient access to video and broadcast services. We expect ongoing pressure on pricing during 2020 as we respond to the competitive marketplace, especially in wireless and video services.

 

Included on our consolidated balance sheets are assets held by benefit plans for the payment of future benefits. Our pension plans are subject to funding requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). We expect only minimal ERISA contribution requirements to our pension plans for 2020. Investment returns on these assets depend largely on trends in the economy, and a weakness in the equity, fixed income and real asset markets could require us to make future contributions to the pension plans. In addition, our policy of recognizing actuarial gains and losses related to our pension and other postretirement plans in the period in which they arise subjects us to earnings volatility caused by changes in market conditions; however, these actuarial gains and losses do not impact segment performance as they are required to be recorded in other income (expense) – net. Changes in our discount rate, which are tied to changes in the bond market, and changes in the performance of equity markets, may have significant impacts on the valuation of our pension and other postretirement obligations at the end of 2020 (see “Critical Accounting Policies and Estimates”).

 

OPERATING 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.

 

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 consumer welfare. Nonetheless, over the ensuing two decades, the Federal Communications Commission (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. More recently, the FCC has pursued a more deregulatory agenda, eliminating a variety of antiquated and unnecessary regulations and streamlining its processes in a number of areas. In addition, we are pursuing, at both the state and federal levels, additional legislative and regulatory

42


AT&T Inc.

Dollars in millions except per share amounts

 

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 further extended to broadband or wireless services, which are subject to vigorous competition.

 

We have organized the following discussion by reportable segment.

 

Communications Segment

Internet The FCC currently classifies fixed and mobile consumer broadband services as information services, subject to light-touch regulation. Although the D.C. Circuit upheld the FCC’s current classification, challenges to that decision remain pending. A more detailed discussion can be found under “Regulatory Developments”.

 

A number of states have adopted legislation or issued executive orders that would reimpose net neutrality rules repealed by the FCC, and in some cases, established additional requirements. Suits have been filed concerning laws in certain states, but have been stayed pursuant to agreements by those states not to enforce their laws pending final resolution of all appeals. We will continue to support congressional action to codify a set of standard consumer rules for the internet. A more detailed discussion can be found under “Regulatory Developments”.

 

In October 2016, the FCC adopted new rules governing the use of customer information by providers of broadband internet access service. Those rules were more restrictive in certain respects than those governing other participants in the internet economy, including so-called “edge” providers such as Google and Facebook. In April 2017, the president signed a resolution passed by Congress repealing the new rules under the Congressional Review Act.

 

Privacy-related legislation has been considered or adopted in a number of states. Legislative and regulatory action could result in increased costs of compliance, claims against broadband internet access service providers and others, and increased uncertainty in the value and availability of data. Effective as of January 1, 2020, a California state law gives consumers the right to know what personal information is being collected about them, and whether and to whom it is sold or disclosed, and to access and request deletion of this information. Subject to certain exceptions, it also gives California consumers the right to opt out of the sale of personal information.

 

Wireless The industry-wide deployment of 5G technology, which is needed to satisfy extensive demand for video and internet access, will involve significant deployment of “small cell” equipment and therefore increase the need for local permitting processes that allow for the placement of small cell equipment on reasonable timelines and terms. Federal regulations also can delay and impede the deployment of infrastructure used to provide telecommunications and broadband services, including small cell equipment. In March, August and September 2018, the FCC adopted orders to streamline federal and local wireless infrastructure review processes in order to facilitate deployment of next-generation wireless facilities. Specifically, the FCC’s March 2018 Order streamlined historical, tribal, and environmental review requirements for wireless infrastructure, including by excluding most small cell facilities from such review. The Order was appealed and in August 2019, the D.C. Circuit Court of Appeals vacated the FCC’s finding that most small cell facilities are excluded from review, but otherwise upheld the FCC’s Order. The FCC’s August and September 2018 Orders simplified the regulations for attaching telecommunications equipment to utility poles and clarified when local government right-of-way access and use restrictions can be preempted because they unlawfully prohibit the provision of telecommunications services. Those orders were appealed to the 9th Circuit Court of Appeals, where they remain pending. In addition to the FCC’s actions, to date, 28 states and Puerto Rico have adopted legislation to facilitate small cell deployment.

 

In December 2018, we introduced the nation’s first commercial mobile 5G service. We expect to have mobile 5G service available nationwide to more than 200 million people by the second quarter of 2020; we anticipate the introduction of 5G handsets and devices will contribute to a renewed interest in equipment upgrades.

 

As the U.S. wireless industry has matured, we believe future wireless growth will depend on our ability to offer innovative services, plans and devices and to provide these services in bundled product offerings to best utilize a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. We continue to invest significant capital in expanding our network capacity, as well as to secure and utilize spectrum that meets our long-term needs. We secured the FirstNet contract, which provides us with access to 20 MHz of nationwide low band spectrum, and invested in 5G and millimeter-wave technologies with our acquisition of Fiber-Tower Corporation, which holds significant amounts of spectrum in the millimeter wave bands (39 GHz) that the FCC reallocated for mobile broadband

43


AT&T Inc.

Dollars in millions except per share amounts

 

services. We were also awarded 24 GHz licenses covering a nationwide footprint in a recent FCC auction. These bands will help to accelerate our entry into 5G services.

 

Video We provide domestic satellite video service through our subsidiary DIRECTV, whose satellites are licensed by the FCC. The Communications Act of 1934 and other related acts give the FCC broad authority to regulate the U.S. operations of DIRECTV, and some of WarnerMedia’s businesses are also subject to obligations under the Communications Act and related FCC regulations.

 

WarnerMedia Segment

We create, own and distribute intellectual property, including copyrights, trademarks and licenses of intellectual property. To protect our intellectual property, we rely on a combination of laws and license agreements. Outside of the U.S., laws and regulations relating to intellectual property protection and the effective enforcement of these laws and regulations vary greatly from country to country. The European Union Commission is pursuing legislative and regulatory initiatives that could impair Warner Bros.’ current country-by-country licensing approach in the European Union. Piracy, particularly of digital content, continues to threaten WarnerMedia’s revenues from products and services, and we work to limit that threat through a combination of approaches, including technological and legislative solutions. Outside the U.S., various laws and regulations, as well as trade agreements with the U.S., also apply to the distribution or licensing of feature films for exhibition in movie theaters and on broadcast and cable networks. For example, in certain countries, including China, laws and regulations limit the number of foreign films exhibited in such countries in a calendar year.

 

EXPECTED GROWTH AREAS

 

Over the next few years, we expect our growth to come from wireless, software-based video offerings like HBO Max, IP-based broadband services and advertising and data insights (especially with WarnerMedia). We now provide integrated services to diverse groups of customers in the U.S. on an integrated telecommunications network utilizing different technological platforms, including wireless, satellite and wireline. In 2020, our key initiatives include:

Launching 5G service nationwide on our premier wireless network.

Generating mobile subscriber growth from FirstNet and our premier network quality.

Launching HBO Max, our new platform for premium content and video offered directly to consumers, as well as through our traditional distributors.

Increasing fiber penetration and growing broadband revenues.

Continuing to develop a competitive advantage through our industry-leading network cost structure.

Growing profitability in our Mexico business unit.

 

Wireless We expect to continue to deliver revenue growth in the coming years. We are in a period of rapid growth in wireless video usage and believe that there are substantial opportunities available for next-generation converged services that combine technologies and services. We secured the FirstNet contract, which provides us with access to 20 MHz of nationwide low band spectrum and the opportunity to grow subscribers through the first responder agencies served, and invested in 5G and millimeter-wave technologies with our acquisition of FiberTower Corporation, which holds significant amounts of spectrum in the millimeter wave bands (39 GHz) that the FCC reallocated for mobile broadband services. These bands will help to accelerate our entry into 5G services.

 

As of December 31, 2019, we served 185 million wireless subscribers in North America, with 166 million in the United States. Our LTE technology covers over 430 million people in North America, and in the United States, we cover all major metropolitan areas and more than 330 million people. We also provide 4G coverage using another technology (HSPA+), and when combined with our upgraded backhaul network, we provide enhanced network capabilities and superior mobile broadband speeds for data and video services. In December 2018, we introduced the nation’s first commercial mobile 5G service and plan to expand that deployment nationwide by the second quarter of 2020 to cover approximately 200 million people.

 

Our networks covering both the U.S. and Mexico have enabled our customers to use wireless services without roaming on other companies’ networks. We believe this seamless access will prove attractive to customers and provide a significant growth opportunity. As of the end of 2019, we provided LTE coverage to approximately 100 million people in Mexico.

 

Integration of Data/Broadband and Entertainment Services As the communications industry has evolved into internet-based technologies capable of blending wireline, satellite and wireless services, we plan to focus on expanding our wireless network capabilities and provide high-speed internet and video offerings that allow customers to integrate their home or

44


AT&T Inc.

Dollars in millions except per share amounts

 

business fixed services with their mobile service. During 2020, we will continue to develop and provide unique integrated video, mobile and broadband solutions. The launch of the HBO Max platform will facilitate our customers’ desire to view video anywhere on demand and encourage customer retention.

 

REGULATORY DEVELOPMENTS

 

Set forth below is a summary of the most significant regulatory proceedings that directly affected our operations during 2019. Industry-wide regulatory developments are discussed above in Operating Environment Overview. While these issues may apply only to certain subsidiaries, the words “we,” “AT&T” and “our” are used to simplify the discussion. The following discussions are intended as a condensed summary of the issues rather than as a comprehensive legal analysis and description of all of these specific issues.

 

International Regulation Our subsidiaries operating outside the United States are subject to the jurisdiction of regulatory authorities in the territories in which the subsidiaries operate. Our licensing, compliance and advocacy initiatives in foreign countries primarily enable the provision of enterprise (i.e., large business), wireless and satellite television services. AT&T is engaged in multiple efforts with foreign regulators to open markets to competition, foster conditions favorable to investment and increase our scope of services and products.

 

The General Data Protection Regulation went into effect in Europe in May of 2018. AT&T processes and handles personal data of its customers and subscribers, employees of its enterprise customers and its employees. This regulation created a range of new compliance obligations and significantly increased financial penalties for noncompliance.

 

Federal Regulation We have organized our following discussion by service impacted.

 

Internet In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to Title II of the Communications Act. The Order, which represented a departure from longstanding bipartisan precedent, significantly expanded the FCC’s authority to regulate broadband internet access services, as well as internet interconnection arrangements. In December 2017, the FCC reversed its 2015 decision by reclassifying fixed and mobile consumer broadband services as information services and repealing most of the rules that were adopted in 2015. In lieu of broad conduct prohibitions, the order requires internet service providers to disclose information about their network practices and terms of service, including whether they block or throttle internet traffic or offer paid prioritization. Several parties appealed the FCC’s December 2017 decision and the D.C. Circuit heard oral argument on the appeals on February 1, 2019. On October 1, 2019, the court issued a unanimous opinion upholding the FCC’s reclassification of broadband as an information service, and its reliance on transparency requirements and competitive marketplace dynamics to safeguard net neutrality. While the court vacated the FCC’s express preemption of any state regulation of net neutrality, it nevertheless stressed that its ruling does not prevent the FCC or ISPs from relying on conflict preemption to invalidate particular state laws that are inconsistent with the FCC’s regulatory objectives and framework. The court also concluded that the FCC failed to satisfy its obligation under the Administrative Procedure Act (APA) to consider the impact of its 2017 order in three discrete areas: public safety, the Lifeline program, and pole attachment regulation, and thus remanded it to the FCC for further proceedings on those issues, but without disturbing the operative effect of that order. Several petitions for rehearing of the D.C. Circuit’s October 1 decision have been filed. Those petitions remain pending. A number of states have adopted legislation to reimpose the very rules the FCC repealed. In some cases, state legislation imposes requirements that go beyond the FCC’s February 2015 order. Additionally, some state governors have issued executive orders that effectively reimpose the repealed requirements. Suits have been filed concerning laws in California and Vermont. Both lawsuits have been stayed pursuant to agreements by those states not to enforce their laws pending final resolution of all appeals of the FCC’s December 2017 order. We expect that going forward additional states may seek to impose net neutrality requirements. We will continue to support congressional action to codify a set of standard consumer rules for the internet.

 

Wireless and Broadband Since November 2017, the FCC has adopted four significant rulings designed to accelerate broadband infrastructure deployment. In November 2017, the FCC updated and streamlined certain rules governing pole attachments, copper retirement, and service discontinuances. In March 2018, the FCC eliminated lengthy environmental, historical and tribal reviews for most small cell deployments and streamlined processes that must be followed when those reviews are required. The D.C. Circuit Court of Appeals vacated the FCC’s finding in this Order that small cell facilities do not require environmental, historical and tribal reviews, but left intact all other processes adopted to streamline review when required. In August 2018, the FCC adopted more comprehensive pole attachment reform, including by simplifying the attaching process (i.e., one-touch make-ready) and clarified that the Communications Act precludes local governments from imposing moratoria on the deployment of communications facilities. And, in September 2018, the FCC restricted the ability

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AT&T Inc.

Dollars in millions except per share amounts

 

of state and local governments to impede small cell deployments in rights-of-way and on government-owned structures, through exorbitant fees, unreasonable aesthetic requirements and other actions. These decisions will remove regulatory barriers and reduce the costs of the infrastructure needed for 5G deployment, which will enhance our ability to place small cell facilities on utility poles and to replace legacy facilities and services with advanced broadband infrastructure and services. Appeals of the August and September 2018 Orders remain pending in the 9th Circuit Court of Appeals.

 

In 2018, the FCC took several actions to make spectrum available for 5G services. In late 2018, the FCC adopted auction rules for the 39 GHz band that will allow the FCC to auction remaining unlicensed 39 GHz spectrum and realign the band to allow large, contiguous blocks of spectrum that will support 5G. This auction, which also includes spectrum in the 37 GHz and 47 GHz bands, is currently underway. The FCC has granted AT&T special temporary authority to launch its 5G service in 400 MHz of contiguous spectrum in the 37/39 GHz band in a total of 32 markets. In addition, the FCC completed auctions in 2019 of 24 and 28 GHz spectrum, two other bands that will support 5G. AT&T was awarded 24 GHz licenses covering a nationwide footprint.

 

ACCOUNTING POLICIES AND STANDARDS

Critical Accounting Policies and Estimates Because of the size of the financial statement line items they relate to or the extent of judgment required by our management, some of our accounting policies and estimates have a more significant impact on our consolidated financial statements than others. The following policies are presented in the order in which the topics appear in our consolidated statements of income.

 

Pension and Postretirement Benefits Our actuarial estimates of retiree benefit expense and the associated significant weighted-average assumptions are discussed in Note 15. Our assumed weighted-average discount rates for pension and postretirement benefits of 3.40% and 3.20%, respectively, at December 31, 2019, reflect the hypothetical rate at which the projected benefit obligations could be effectively settled or paid out to participants. We determined our discount rate based on a range of factors, including a yield curve composed of the rates of return on several hundred high-quality, fixed income corporate bonds available at the measurement date and corresponding to the related expected durations of future cash outflows for the obligations. These bonds were all rated at least Aa3 or AA- by one of the nationally recognized statistical rating organizations, denominated in U.S. dollars, and neither callable, convertible nor index linked. For the year ended December 31, 2019, when compared to the year ended December 31, 2018, we decreased our pension discount rate by 1.10%, resulting in an increase in our pension plan benefit obligation of $8,018 and decreased our postretirement discount rate by 1.20%, resulting in an increase in our postretirement benefit obligation of $2,399.

 

Our expected long-term rate of return on pension plan assets is 7.00% for 2020 and 2019. Our expected long-term rate of return on postretirement plan assets is 4.75% for 2020 and 5.75% for 2019. Our expected return on plan assets is calculated using the actual fair value of plan assets. If all other factors were to remain unchanged, we expect that a 0.50% decrease in the expected long-term rate of return would cause 2020 combined pension and postretirement cost to increase $273, which under our accounting policy would be adjusted to actual returns in the current year as part of our fourth-quarter remeasurement of our retiree benefit plans.

 

We recognize gains and losses on pension and postretirement plan assets and obligations immediately in “Other income (expense) – net” in our consolidated statements of income. These gains and losses are generally measured annually as of December 31, and accordingly, will normally be recorded during the fourth quarter, unless an earlier remeasurement is required. Should actual experience differ from actuarial assumptions, the projected pension benefit obligation and net pension cost and accumulated postretirement benefit obligation and postretirement benefit cost would be affected in future years. See Note 15 for additional discussions regarding our assumptions.

 

Depreciation Our depreciation of assets, including use of composite group depreciation for certain subsidiaries and estimates of useful lives, is described in Notes 1 and 7.

 

If all other factors were to remain unchanged, we expect that a one-year increase in the useful lives of our plant in service would have resulted in a decrease of approximately $3,027 in our 2019 depreciation expense and that a one-year decrease would have resulted in an increase of approximately $4,196 in our 2019 depreciation expense. See Notes 7 and 8 for depreciation and amortization expense applicable to property, plant and equipment, including our finance lease right-of-use assets.

 

Asset Valuations and Impairments Goodwill and other indefinite-lived intangible assets are not amortized but tested at least annually for impairment. For impairment testing, we estimate fair values using models that predominantly rely on the

46


AT&T Inc.

Dollars in millions except per share amounts

 

expected cash flows to be derived from the use of the asset. We recorded an impairment in 2019 for our SKY Brasil trade name (see Note 9).

 

We test goodwill on a reporting unit basis by comparing the estimated fair value of each reporting unit to its book value. If the fair value exceeds the book value, then no impairment is measured. We estimate fair values using an income approach (also known as a discounted cash flow) and a market multiple approach. The income approach utilizes our 10-year cash flow projections with a perpetuity value discounted at an appropriate weighted average cost of capital. The market multiple approach uses the multiples of publicly traded companies whose services are comparable to those offered by the reporting units. In 2019, the calculated fair values of the reporting units exceeded their book values in all circumstances. If either the projected rate of long-term growth of cash flows or revenues declined by 0.5%, or if the discount rate increased by 0.5%, the fair values would still be higher than the book value of the goodwill. In the event of a 10% drop in the fair values of the reporting units, the fair values still would have exceeded the book values of the reporting units.

 

We assess fair value for U.S. wireless licenses using a discounted cash flow model (the Greenfield Approach) and a corroborative market approach based on auction prices, depending upon auction activity. The Greenfield Approach assumes a company initially owns only the wireless licenses and makes investments required to build an operation comparable to current use. Inputs to the model include subscriber growth, churn, revenue per user, capital investment and acquisition costs per subscriber, ongoing operating costs and resulting EBITDA margins. We based our assumptions on a combination of average marketplace participant data and our historical results, trends and business plans. These licenses are tested annually for impairment on an aggregated basis, consistent with their use on a national scope for the United States. For impairment testing, we assume subscriber and revenue growth will trend up to projected levels, with a long-term growth rate reflecting expected long-term inflation trends. We assume churn rates will initially exceed our current experience, but decline to rates that are in line with industry-leading churn. We used a discount rate of 8.75%, based on the optimal long-term capital structure of a market participant and its associated cost of debt and equity for the licenses, to calculate the present value of the projected cash flows. If either the projected rate of long-term growth of cash flows or revenues declined by 0.5%, or if the discount rate increased by 0.5%, the fair values of these wireless licenses would still be higher than the book value of the licenses. The fair value of these wireless licenses exceeded their book values by more than 10%.

 

Orbital slots are also valued using the Greenfield Approach. The projected cash flows are based on various factors, including satellite cost, other capital investment per subscriber, acquisition costs per subscriber and usage per subscriber, as well as revenue growth, subscriber growth and churn rates. For impairment testing purposes, we assumed sustainable long-term growth assumptions consistent with the business plan and industry counterparts in the United States. We used a discount rate of 8.5% to calculate the present value of the projected cash flows. In 2019, the fair value of orbital slots was slightly lower than the prior year, which exceeded the book value by approximately 10% in 2018. The decrease in fair value was driven by the transition of the video business to OTT and streaming technology.

 

We review customer relationships, licenses in Mexico and other finite-lived intangible assets for impairment whenever events or circumstances indicate that the book value may not be recoverable over their remaining life. For this analysis, we compare the expected undiscounted future cash flows attributable to the asset to its book value.

 

We review operating lease right-of-use assets for impairment whenever events or circumstances indicated that the book value may not be recoverable over the remaining life.

 

We periodically assess our network assets for impairment (see Note 1).

 

Income Taxes Our estimates of income taxes and the significant items giving rise to the deferred assets and liabilities are shown in Note 14 and reflect our assessment of actual future taxes to be paid on items reflected in the financial statements, giving consideration to both timing and probability of these estimates. Actual income taxes could vary from these estimates due to future changes in income tax law or the final review of our tax returns by federal, state or foreign tax authorities.

We use our judgment to determine whether it is more likely than not that we will sustain positions that we have taken on tax returns and, if so, the amount of benefit to initially recognize within our financial statements. We regularly review our uncertain tax positions and adjust our unrecognized tax benefits (UTBs) in light of changes in facts and circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law. These adjustments to our UTBs may affect our income tax expense. Settlement of uncertain tax positions may require use of our cash.

 

New Accounting Standards

47


AT&T Inc.

Dollars in millions except per share amounts

 

 

Beginning with 2019 interim and annual reporting periods, we adopted the FASB’s new accounting guidance related to leasing. The most significant impact of the new guidance was to our balance sheet, as we recorded a right-of-use asset and corresponding liability for our operating leases existing at January 1, 2019. We adopted the new leasing standard using a modified retrospective transition method as of the beginning of the period of adoption, which did not require us to adjust the balance sheet for prior periods, therefore affecting the comparability of our financial statements. See Note 1 for discussion of the impact of the standard.

 

See Note 1 for discussion of the expected impact of other new standards.

 

OTHER BUSINESS MATTERS

Unlimited Data Plan Claims In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The FTC’s allegations concern the application of AT&T’s Maximum Bit Rate (MBR) program to customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces in certain instances the download speeds of a small portion of our legacy Unlimited Data Plan customers each month after the customer exceeds a designated amount of data during the customer’s billing cycle. MBR is an industry-standard practice that is designed to affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media posts, internet browsing and many other applications are typically unaffected. Contrary to the FTC’s allegations, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers. We reached a tentative agreement (Stipulated Order) with the FTC staff in August 2019, pending FTC approval. The FTC approved the Stipulated Order on November 4, 2019, and the Court approved and entered the Order on December 3, 2019. In the resolution of this matter, we did not admit the FTC’s allegations, and the settlement amount is not material to our financial results. In addition to the FTC case, several class actions were filed challenging our MBR program. We have secured dismissals in each of these cases except Roberts v. AT&T Mobility LLC, which is ongoing.

 

Labor Contracts As of January 31, 2020, we employed approximately 246,000 persons. Approximately 40% of our employees are represented by the Communications Workers of America (CWA), the International Brotherhood of Electrical Workers (IBEW) or other unions. After expiration of the collective bargaining agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.

A contract covering approximately 7,000 traditional wireline employees in our Midwest region expired in April 2018. In August 2019, a new four-year contract was ratified by employees and will expire in April 2022.

A contract covering approximately 3,000 traditional wireline employees in our legacy AT&T Corp. business expired in April 2018. In August 2019, a new four-year contract was ratified by employees and will expire in April 2022.

A contract covering approximately 18,000 traditional wireline employees in our Southeast region expired in August 2019. In October 2019, a new five-year contract was ratified by employees and will expire in August 2024.

Contracts covering approximately 20,000 employees are scheduled to expire during 2020, including a contract expiring in February covering approximately 7,000 Mobility employees and a contract expiring in April covering approximately 13,000 traditional wireline employees in our West region.

 

Environmental We are subject from time to time to judicial and administrative proceedings brought by various governmental authorities under federal, state or local environmental laws. We reference in our Forms 10-Q and 10-K certain environmental proceedings that could result in monetary sanctions (exclusive of interest and costs) of one hundred thousand dollars or more. However, we do not believe that any of those currently pending will have a material adverse effect on our results of operations.

 

LIQUIDITY AND CAPITAL RESOURCES

We had $12,130 in cash and cash equivalents available at December 31, 2019. Cash and cash equivalents included cash of $2,654 and money market funds and other cash equivalents of $9,476. Approximately $2,681 of our cash and cash equivalents were held by our foreign entities in accounts predominantly outside of the U.S. and may be subject to restrictions on repatriation.

 

Cash and cash equivalents increased $6,926 since December 31, 2018. In 2019, cash inflows were primarily provided by cash receipts from operations, including cash from an increased amount of sales and transfers of our receivables to third parties, sale of investments, issuance of long-term debt, collateral received from banks and other participants in our derivative arrangements and issuances of nonconvertible perpetual preferred interests in subsidiaries and cumulative preferred stock.

48


AT&T Inc.

Dollars in millions except per share amounts

 

These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, debt repayments, funding capital expenditures and vendor financing payments, spectrum purchases and dividends to stockholders.

 

Cash Provided by or Used in Operating Activities

During 2019, cash provided by operating activities was $48,668 compared to $43,602 in 2018. Higher operating cash flows in 2019 were primarily due to contributions from full year of WarnerMedia and higher cash flows from working capital initiatives, including sales of receivables (see Note 18), partly offset by higher spend on film and television production and net tax payments in 2019 compared to net tax refunds in 2018.

 

We actively manage the timing of our supplier payments for non-capital items to optimize the use of our cash. Among other things, we seek to make payments on 90-day or greater terms, while providing the suppliers with access to bank facilities that permit earlier payments at their cost. In addition, for payments to a key supplier, we have arrangements that allow us to extend payment terms up to 90 days at an additional cost to us (referred to as supplier financing). The net impact of supplier financing on cash from operating activities was to improve working capital $909 in 2019, and $1,869 in 2018. All supplier financing payments are due within one year.

 

Cash Used in or Provided by Investing Activities

During 2019, cash used in investing activities totaled $16,690, and consisted primarily of $19,635 (including interest during construction) for capital expenditures ($1,616 lower than the prior-year), and $982 of wireless spectrum offset by proceeds from the sales of our ownership interests in Hulu and WarnerMedia’s headquarters (Hudson Yards) under a sale-leaseback arrangement (see Note 6).

 

For capital improvements, we have negotiated favorable vendor payment terms of 120 days or more (referred to as vendor financing) with some of our vendors, which are excluded from capital expenditures and reported as financing activities. Vendor financing payments were $3,050 in 2019, compared to $560 in 2018. Capital expenditures in 2019 were $19,635, and when including $3,050 cash paid for vendor financing and excluding $1,005 of FirstNet reimbursements, gross capital investment was $23,690 ($450 higher than the prior-year). The vast majority of our capital expenditures are spent on our networks, including product development and related support systems. In 2019, we placed $2,632 of equipment in service under vendor financing arrangements (compared to $2,162 in 2018) and $1,116 of assets related to the FirstNet build (compared to $1,500 in 2018). Total reimbursements from the government for FirstNet were $1,374 for 2019 and $1,670 for 2018, predominately for capital expenditures.

 

The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. In 2020, we expect that our gross capital investment, which includes capital expenditures and cash paid for vendor financing and excludes expected FirstNet reimbursement of approximately $1,000, will be in the $20,000 range.

 

Cash Used in or Provided by Financing Activities

For the full year, cash used in financing activities totaled $25,083 and included net proceeds from debt issuances of $17,039, which consisted primarily of the following issuances:

 

Issued and redeemed in 2019

January draw of $2,850 on an 11-month syndicated term loan agreement (repaid in the third quarter).

January draw of $750 on a private financing agreement (repaid in the first quarter).

August borrowings of $400 under a private financing agreement (repaid in the third quarter).

 

Issued and outstanding in 2019

February issuance of $3,000 of 4.350% global notes due 2029.

February issuance of $2,000 of 4.850% global notes due 2039.

Borrowings of $725 in January and $525 in June that are supported by government agencies to support network equipment purchases.

June draw of $300 on a private financing agreement.

September issuance of €1,000 of 0.25% global notes due 2026, €1,250 of 0.80% global notes due 2030 and €750 of 1.80% global notes due 2039 (when combined, $3,308 at issuance).

September draw of $1,300 on a Bank of America term loan credit agreement.

November draw of $750 on a private financing agreement.

December issuance of $1,265 of 4.250% global notes due 2050.

49


AT&T Inc.

Dollars in millions except per share amounts

 

 

During 2019, repayment of long-term debt totaled $27,592. Repayments primarily consisted of the following:

 

Notes redeemed at maturity:

$1,850 of 2.300% AT&T global notes in the first quarter.

$400 of AT&T floating-rate notes in the first quarter.

€1,500 of AT&T floating-rate notes in the second quarter ($1,882 at maturity).

$650 of 2.100% Warner Media, LLC notes in the second quarter.

CHF 450 0.500% senior fixed-rate notes in the fourth quarter ($467 at maturity).

 

Notes redeemed or repurchased prior to maturity:

$2,010 of AT&T global notes with interest rates ranging from 5.000% to 5.200% and original maturities in 2020 and 2021, in the first quarter.

$2,000 of Warner Media, LLC notes with interest rates ranging from 4.700% to 4.750% and original maturities in 2021, in the first quarter.

$1,295 of 4.700% AT&T global notes with an original maturity in 2044, in the fourth quarter.

$590 of Warner Media, LLC and/or Historic TW Inc. notes that were tendered for cash in our second quarter obligor debt exchange. The notes had interest rates ranging between 6.500% and 9.150% and original maturities ranging from 2023 to 2036.

$1,409 of subsidiary notes that were tendered for cash in December 2019. The notes had interest rates ranging between 2.950% and 9.150% and original maturities ranging from 2022 to 2097.

$243 of open market repurchases of AT&T Corp, AT&T Mobility LLC, and New Cingular Wireless Services, Inc. notes, with interest rates ranging from 7.125% to 8.750% and original maturities in 2031, in the second quarter.

$154 of open market repurchases of Warner Media, LLC, Historic TW Inc., BellSouth LLC and AT&T Mobility LLC notes, with interest rates ranging from 2.95% to 7.625% and original maturities ranging from 2022 to 2097, in the third quarter.

 

Credit facilities repaid and other redemptions:

$2,625 of final amounts outstanding under our Acquisition Term Loan (defined below) in the first quarter.

$750 of January borrowings under a private financing agreement, in the first quarter.

$1,500 of four-year and five-year borrowings under the Nova Scotia Credit Agreement (defined below) in the second quarter and $750 of three-year borrowings in the third quarter.

$600 of borrowings under our credit agreement with Canadian Imperial Bank of Commerce in the second quarter.

$500 of advances under our November 2018 Term Loan (defined below) in the second quarter, with payment of the remaining $3,050 of advances in the third quarter.

$250 of borrowings under a U.S. Bank credit agreement in the second quarter.

$750 of borrowings under a private credit agreement in the third quarter.

$400 of borrowings under a private financing agreement in the third quarter.

$2,850 of borrowings under an 11-month syndicated term loan agreement from January 2019 in the third quarter.

 

Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.4% as of December 31, 2019 and 4.4% as of December 31, 2018. We had $161,109 of total notes and debentures outstanding at December 31, 2019, which included Euro, British pound sterling, Canadian dollar, Mexican peso, Australian dollar, Brazilian real and Swiss franc denominated debt that totaled approximately $42,485.

 

At December 31, 2019, we had $11,838 of debt maturing within one year, consisting of $4 of other short-term borrowings and $11,834 of 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 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 remainder of the zero-coupon note (issued for principal of $500 in 2007 and partially exchanged in the 2017 debt exchange offers) is held to maturity, the redemption amount will be $592.

 

During 2019, we paid $3,050 of cash under our vendor financing program. Total vendor financing payables included in our December 31, 2019 consolidated balance sheet were approximately $2,067, with $1,625 due within one year (in “Accounts

50


AT&T Inc.

Dollars in millions except per share amounts

 

payable and accrued liabilities”) and the remainder predominantly due within two to three years (in “Other noncurrent liabilities”).

 

Financing activities in 2019 also included $7,876 of capital from the issuance of nonconvertible preferred interests issued by subsidiaries and $1,164 for the December issuance of cumulative 5.00% preferred stock. In February 2020, we issued Series B and Series C preferred stock for approximately $3,900. (See Note 17)

 

At December 31, 2019, we had approximately 319 million shares remaining from share repurchase authorizations approved by the Board of Directors in 2013 and 2014 (see Note 17). For the year ended December 31, 2019, we repurchased approximately 56 million shares under these authorizations. In January 2020, we repurchased $4,000 of AT&T common stock under an accelerated share repurchase agreement (see Note 2).

 

We paid dividends on common shares of $14,888 in 2019 and $13,410 in 2018, primarily reflecting the increase in the number of shares outstanding related to our acquisition of Time Warner as well as an increase in our quarterly dividend approved by our Board of Directors in December 2018. Dividends declared by our Board of Directors totaled $2.05 per share in 2019 and $2.01 per share in 2018. Our dividend policy considers the expectations and requirements of stockholders, capital funding 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.

 

Our 2020 financing activities will focus on managing our debt level, repurchasing common stock and paying dividends, subject to approval by our Board of Directors. We plan to fund our financing uses of cash through a combination of cash from operations, issuance of debt, issuance of additional preferred stock and asset sales. The timing and mix of any debt issuance and/or refinancing will be guided by credit market conditions and interest rate trends.

 

Credit Facilities

The following summary of our various credit and loan agreements does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form 10-K.

 

We use credit facilities as a tool in managing our liquidity status. In December 2018, we amended our five-year revolving credit agreement (the “Amended and Restated Credit Agreement”) and concurrently entered into a new five-year agreement (the “Five Year Credit Agreement”) such that we now have two $7,500 revolving credit agreements totaling $15,000. The Amended and Restated Credit Agreement terminates on December 11, 2021 and the Five Year Credit Agreement terminates on December 11, 2023. No amounts were outstanding under either agreement as of December 31, 2019.

 

In September 2019, we entered into and drew on a $1,300 term loan credit agreement containing (i) a 1.25 year $400 facility due in 2020 (BAML Tranche A Facility), (ii) a 2.25 year $400 facility due in 2021 (BAML Tranche B Facility), and (iii) a 3.25 year $500 facility due in 2022 (BAML Tranche C Facility), with Bank of America, N.A., as agent. No repayment had been made under these facilities as of December 31, 2019.

 

We also utilize other external financing sources, which include various credit arrangements supported by government agencies to support network equipment purchases, as well as a commercial paper program.

 

Each of our credit and loan agreements contains covenants that are customary for an issuer with an investment grade senior debt credit rating as well as a net debt-to-EBITDA financial ratio covenant requiring AT&T to maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.5-to-1. As of December 31, 2019, we were in compliance with the covenants for our credit facilities.

 

Collateral Arrangements

During the year, we amended collateral arrangements with certain counterparties to require cash collateral posting by AT&T only when derivative market values exceed certain thresholds. Under these arrangements, counterparties are still required to post collateral. During 2019, we received $1,413 of cash collateral, on a net basis, primarily driven by the amended arrangements. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 13)

 

Other

51


AT&T Inc.

Dollars in millions except per share amounts

 

Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders’ equity. Our capital structure does not include debt issued by our equity method investees. At December 31, 2019, our debt ratio was 44.7%, compared to 47.7% at December 31, 2018 and 53.6% at December 31, 2017. Our net debt ratio was 41.4% at December 31, 2019, compared to 46.2% at December 31, 2018 and 37.2% at December 31, 2017. The debt ratio is affected by the same factors that affect total capital, and reflects debt issuances, repayments and debt acquired in business combinations.

 

A significant amount of our cash outflows is related to tax items and benefits paid for current and former employees. Total taxes incurred, collected and remitted by AT&T during 2019 and 2018, were $24,170 and $22,172. These taxes include income, franchise, property, sales, excise, payroll, gross receipts and various other taxes and fees. Total health and welfare benefits provided to certain active and retired employees and their dependents totaled $4,059 in 2019, with $941 paid from plan assets. Of those benefits, $3,707 related to medical and prescription drug benefits. In addition, in 2019 we prefunded $500 for future benefit payments. During 2019, we paid $6,356 of pension benefits out of plan assets.

 

During 2019, we received $4,684 from the disposition of assets, and when combined with capital received from issuing preferred interests to external investors, an amendment of collateral arrangements, and working capital monetization initiatives, which include the sale of receivables, total cash received from monetization efforts, net of spectrum acquisitions, was approximately $18,000. We plan to continue to explore similar opportunities.

 

52


AT&T Inc.

Dollars in millions except per share amounts

 

CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES

Our contractual obligations as of December 31, 2019 are in the following table:

 

 

 

Payments Due By Period

 

 

Total

 

Less than

1 Year

 

1-3

Years

 

3-5

Years

 

More than

5 Years

Contractual Obligations

 

 

 

 

Long-term debt obligations1

$

168,065

 

$

12,149

 

$

22,225

 

$

21,262

 

$

112,429

Interest payments on long-term debt

 

108,976

 

 

7,204

 

 

13,259

 

 

11,847

 

 

76,666

Purchase obligations2

 

67,807

 

 

16,590

 

 

21,121

 

 

11,153

 

 

18,943

Operating lease obligations3

 

31,155

 

 

4,723

 

 

8,377

 

 

6,689

 

 

11,366

FirstNet sustainability payments4

 

17,640

 

 

120

 

 

315

 

 

390

 

 

16,815

Unrecognized tax benefits5

 

10,236

 

 

569

 

 

-

 

 

-

 

 

9,667

Other finance obligations6

 

11,028

 

 

2,459

 

 

2,034

 

 

1,429

 

 

5,106

Authorized share repurchases7

 

4,000

 

 

4,000

 

 

-

 

 

-

 

 

-

Total Contractual Obligations

$

418,907

 

$

47,814

 

$

67,331

 

$

52,770

 

$

250,992

1

Represents principal or payoff amounts of notes and debentures at maturity or, for putable debt, the next put opportunity (see Note 12).

2

The purchase obligations will be funded with cash provided by operations or through incremental borrowings. The minimum

 

commitment for certain obligations is based on termination penalties that could be paid to exit the contracts. If we elect to exit these

 

contracts, termination fees for all such contracts in the year of termination could be approximately $257 in 2020, $344 in the

 

aggregate for 2021 and 2022, $129 in the aggregate for 2023 and 2024, and $22 in the aggregate thereafter. Certain termination fees

 

are excluded from the above table, as the fees would not be paid every year and the timing of such payments, if any, is uncertain. (See Note 21)

3

Represents operating lease payments (see Note 8).

4

Represents contractual commitment to make sustainability payments over the 25-year contract. These sustainability payments represent

 

our commitment to fund FirstNet’s operating expenses and future reinvestment in the network, which we will own and operate.

 

FirstNet has a statutory requirement to reinvest funds that exceed the agency’s operating expenses, which we anticipate

 

to be $15,000. (See Note 20)

5

The noncurrent portion of the UTBs is included in the “More than 5 Years” column, as we cannot reasonably estimate the timing or

 

amounts of additional cash payments, if any, at this time (see Note 14).

6

Represents future minimum payments under the Crown Castle and other arrangements (see Note 19), payables subject to extended

 

payment terms (see Note 22) and finance lease payments (see Note 8).

7

Represents commitments to repurchase shares of common stock under an accelerated share repurchase program (see Note 2).

 

Certain items were excluded from this table, as the year of payment is unknown and could not be reliably estimated since past trends were not deemed to be an indicator of future payment, the obligations are immaterial or because the settlement of the obligation will not require the use of cash. These items include: deferred income tax liability of $59,502 (see Note 14); net postemployment benefit obligations of $20,316; expected pension and postretirement payments (see Note 15); other noncurrent liabilities of $13,412; third-party debt guarantees; and fair value of our interest rate swaps.

53


AT&T Inc.

Dollars in millions except per share amounts

 

DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURE

We believe the following measure is relevant and useful information to investors as it is used by management as a method of comparing performance with that of many of our competitors. This supplemental measure should be considered in addition to, but not as a substitute of, our consolidated and segment financial information.

 

Business Solutions Reconciliation

We provide a supplemental discussion of our Business Solutions operations that is calculated by combining our Mobility and Business Wireline business units, and then adjusting to remove non-business operations. The following table presents a reconciliation of our supplemental Business Solutions results.

 

 

Year Ended December 31, 2019

 

 

Mobility

 

Business Wireline

 

Adjustments1

 

Business Solutions

Operating revenues

 

 

 

 

 

 

 

 

Wireless service

$

55,331

$

-

$

(47,406)

$

7,925

Strategic and managed services

 

-

 

15,440

 

-

 

15,440

Legacy voice and data services

 

-

 

9,180

 

-

 

9,180

Other service and equipment

 

-

 

1,557

 

-

 

1,557

Wireless equipment

 

15,725

 

-

 

(12,968)

 

2,757

Total Operating Revenues

 

71,056

 

26,177

 

(60,374)

 

36,859

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Operations and support

 

40,681

 

16,091

 

(34,037)

 

22,735

EBITDA

 

30,375

 

10,086

 

(26,337)

 

14,124

Depreciation and amortization

 

8,054

 

4,999

 

(6,840)

 

6,213

Total Operating Expenses

 

48,735

 

21,090

 

(40,877)

 

28,948

Operating Income

$

22,321

$

5,087

$

(19,497)

$

7,911

1Non-business wireless reported in the Communications segment under the Mobility business unit.

 

 

Year Ended December 31, 2018

 

 

Mobility

 

Business Wireline

 

Adjustments1

 

Business Solutions

Operating revenues

 

 

 

 

 

 

 

 

Wireless service

$

54,294

$

-

$

(46,971)

$

7,323

Strategic managed services

 

-

 

14,660

 

-

 

14,660

Legacy voice and data services

 

-

 

10,674

 

-

 

10,674

Other service and equipment

 

-

 

1,406

 

-

 

1,406

Wireless equipment

 

16,227

 

-

 

(13,717)

 

2,510

Total Operating Revenues

 

70,521

 

26,740

 

(60,688)

 

36,573

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Operations and support

 

40,690

 

16,201

 

(34,283)

 

22,608

EBITDA

 

29,831

 

10,539

 

(26,405)

 

13,965

Depreciation and amortization

 

8,263

 

4,714

 

(7,077)

 

5,900

Total Operating Expenses

 

48,953

 

20,915

 

(41,360)

 

28,508

Operating Income

$

21,568

$

5,825

$

(19,328)

$

8,065

1Non-business wireless reported in the Communications segment under the Mobility business unit.

 

54


AT&T Inc.

Dollars in millions except per share amounts

 

 

Year Ended December 31, 2017

 

 

Mobility

 

Business Wireline

 

Adjustments1

 

Business Solutions

Operating revenues

 

 

 

 

 

 

 

 

Wireless service

$

57,023

$

-

$

(49,095)

$

7,928

Strategic and managed services

 

-

 

13,880

 

-

 

13,880

Legacy voice and data services

 

-

 

13,791

 

-

 

13,791

Other service and equipment

 

-

 

1,532

 

-

 

1,532

Wireless equipment

 

13,236

 

-

 

(11,704)

 

1,532

Total Operating Revenues

 

70,259

 

29,203

 

(60,799)

 

38,663

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Operations and support

 

42,317

 

18,441

 

(36,382)

 

24,376

EBITDA

 

27,942

 

10,762

 

(24,417)

 

14,287

Depreciation and amortization

 

7,931

 

4,756

 

(6,828)

 

5,859

Total Operating Expenses

 

50,248

 

23,197

 

(43,210)

 

30,235

Operating Income

$

20,011

$

6,006

$

(17,589)

$

8,428

1Non-business wireless reported in the Communications segment under the Mobility business unit.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risks primarily from changes in interest rates and foreign currency exchange rates. These risks, along with other business risks, impact our cost of capital. It is our policy to manage our debt structure and foreign exchange exposure in order to manage capital costs, control financial risks and maintain financial flexibility over the long term. In managing market risks, we employ derivatives according to documented policies and procedures, including interest rate swaps, interest rate locks, foreign currency exchange contracts and combined interest rate foreign currency contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We do not foresee significant changes in the strategies we use to manage market risk in the near future.

 

One of the most significant assumptions used in estimating our postretirement benefit obligations is the assumed weighted-average discount rate, which is the hypothetical rate at which the projected benefit obligations could be effectively settled or paid out to participants. We determined our discount rate based on a range of factors, including a yield curve composed of the rates of return on several hundred high-quality, fixed income corporate bonds available at the measurement date and corresponding to the related expected durations of future cash outflows for the obligations. In recent years, the discount rates have been increasingly volatile, and on average have been lower than in historical periods. Lower discount rates used to measure our pension and postretirement plans result in higher obligations. Future increases in these rates could result in lower obligations, improved funded status and actuarial gains.

 

Interest Rate Risk

 

The majority of our financial instruments are medium- and long-term fixed-rate notes and debentures. Changes in interest rates can lead to significant fluctuations in the fair value of these instruments. The principal amounts by expected maturity, average interest rate and fair value of our liabilities that are exposed to interest rate risk are described in Notes 12 and 13. In managing interest expense, we control our mix of fixed and floating rate debt through term loans, floating rate notes, and interest rate swaps. We have established interest rate risk limits that we closely monitor by measuring interest rate sensitivities in our debt and interest rate derivatives portfolios.

 

Most of our foreign-denominated long-term debt has been swapped from fixed-rate or floating-rate foreign currencies to fixed-rate U.S. dollars at issuance through cross-currency swaps, removing interest rate risk and foreign currency exchange risk associated with the underlying interest and principal payments. Likewise, periodically we enter into interest rate locks to partially hedge the risk of increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We expect gains or losses in our cross-currency swaps and interest rate locks to offset the losses and gains in the financial instruments they hedge.

55


AT&T Inc.

Dollars in millions except per share amounts

 

 

Following are our interest rate derivatives subject to material interest rate risk as of December 31, 2019. The interest rates illustrated below refer to the average rates we expect to pay based on current and implied forward rates and the average rates we expect to receive based on derivative contracts. The notional amount is the principal amount of the debt subject to the interest rate swap contracts. The fair value asset (liability) represents the amount we would receive (pay) if we terminated the contracts as of December 31, 2019.

 

 

 

Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

 

2020

 

2021

 

2022

 

2023

 

2024

 

Thereafter

 

Total

 

12/31/19

Interest Rate Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receive Fixed/Pay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Notional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Maturing

$

-

 

$

853

 

$

-

 

$

-

 

$

-

 

$

-

 

$

853

 

$

2

Weighted-Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Rate Payable1

 

4.2%

 

 

4.1%

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Rate Receivable

 

4.5%

 

 

4.5%

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

 

 

 

 

1

Interest payable based on current and implied forward rates for One Month LIBOR plus a spread ranging between

 

approximately 254 and 274 basis points.

 

Foreign Exchange Risk

 

We principally use foreign exchange contracts to hedge certain film production costs denominated in foreign currencies. We are also exposed to foreign currency exchange risk through our foreign affiliates and equity investments in foreign companies. We have designated €1,450 million aggregate principal amount of debt as a hedge of the variability of certain Euro-denominated net investments of our subsidiaries. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within accumulated other comprehensive income, net on the consolidated balance sheet.

 

Through cross-currency swaps, most of our foreign-denominated debt has been swapped from fixed-rate or floating-rate foreign currencies to fixed-rate U.S. dollars at issuance, removing interest rate and foreign currency exchange risk associated with the underlying interest and principal payments. We expect gains or losses in our cross-currency swaps to offset the gains and losses in the financial instruments they hedge.

 

For the purpose of assessing specific risks, we use a sensitivity analysis to determine the effects that market risk exposures may have on the fair value of our financial instruments and results of operations. We had foreign exchange forward contracts with a notional value of $269 and a fair value of $89 outstanding at December 31, 2019.

56


AT&T Inc.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Management

 

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. The integrity and objectivity of the data in these financial statements, including estimates and judgments relating to matters not concluded by year end, are the responsibility of management, as is all other information included in the Annual Report, unless otherwise indicated.

 

The financial statements of AT&T Inc. (AT&T) have been audited by Ernst & Young LLP, Independent Registered Public Accounting Firm. Management has made available to Ernst & Young LLP all of AT&T’s financial records and related data, as well as the minutes of stockholders’ and directors’ meetings. Furthermore, management believes that all representations made to Ernst & Young LLP during its audit were valid and appropriate.

 

Management maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by AT&T 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 by the Securities and Exchange Commission’s rules and forms.

 

Management also seeks to ensure the objectivity and integrity of its financial data by the careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communication programs aimed at ensuring that its policies, standards and managerial authorities are understood throughout the organization.

 

The Audit Committee of the Board of Directors meets periodically with management, the internal auditors and the independent auditors to review the manner in which they are performing their respective responsibilities and to discuss auditing, internal accounting controls and financial reporting matters. Both the internal auditors and the independent auditors periodically meet alone with the Audit Committee and have access to the Audit Committee at any time.

 

Assessment of Internal Control

The management of AT&T is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934. AT&T’s internal control system was designed to provide reasonable assurance to the company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

 

AT&T management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2019. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013 framework). Based on its assessment, AT&T management believes that, as of December 31, 2019, the company’s internal control over financial reporting is effective based on those criteria.

 

Ernst & Young LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report, has issued an attestation report on the company’s internal control over financial reporting.

 

 

/s/Randall Stephenson ./s/John J. Stephens .

Randall Stephenson John J. Stephens

Chairman of the BoardSenior Executive Vice President and

and Chief Executive OfficerChief Financial Officer

 

 

57


AT&T Inc.

 

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and the Board of Directors of AT&T Inc.

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of AT&T Inc. (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, cash flows and changes in stockholders’ equity for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 19, 2020 expressed an unqualified opinion thereon.

 

Adoption of Accounting Standards Updates

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2019, the Company changed its method for accounting for leases as a result of the modified retrospective adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), as amended. Effective January 1, 2018, the Company changed its method for recognizing revenue as a result of the modified retrospective adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended, which is also discussed in Note 1.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

58


AT&T Inc.

 

 

 

 

Description of the Matter

 

Discount rates used in determining pension and postretirement benefit obligations

 

At December 31, 2019, the Company’s pension benefit obligation was $59,873 million and exceeded the fair value of defined benefit pension plan assets of $53,530 million, resulting in an unfunded benefit obligation of $6,343 million. Additionally, at December 31, 2019, the Company’s postretirement benefit obligation was $16,041 million and exceeded the fair value of postretirement plan assets of $4,145 million, resulting in an unfunded benefit obligation of $11,896 million. As explained in Note 15 to the consolidated financial statements, the Company updates the assumptions used to measure the defined benefit pension and postretirement benefit obligations, including discount rates, at December 31 or upon a remeasurement event. The Company determines the discount rates used to measure the obligations based on the development of a yield curve using high-quality corporate bonds selected to yield cash flows that correspond to the expected timing and amount of the expected future benefit payments. The selected discount rate has a significant effect on the measurement of the defined benefit pension and postretirement benefit obligations.

 

Auditing the defined benefit pension and postretirement benefit obligations was complex due to the need to evaluate the highly judgmental nature of the actuarial assumptions made by management, primarily the discount rate, used in the Company’s measurement process. Auditing the discount rates associated with the measurement of the defined benefit pension and postretirement benefit obligations was complex because it required an evaluation of the credit quality of the corporate bonds used to develop the discount rate and the correlation of those bonds’ cash inflows to the timing and amount of future expected benefit payments.

 

How We

Addressed the Matter in Our

Audit

 

 

We obtained an understanding, evaluated the design and tested the operating effectiveness of certain controls over management’s review of the determination of the discount rates used in defined benefit pension obligation and postretirement benefit obligation calculations.

 

To test the determination of the discount rate used in the calculation of the defined benefit pension and postretirement benefit obligations, we performed audit procedures that focused on evaluating, with the assistance of our actuarial specialists, the determination of the discount rates, among other procedures. For example, we evaluated the selected yield curve used to determine the discount rates applied in measuring the defined benefit pension and postretirement benefit obligations. As part of this assessment, we considered the credit quality of the corporate bonds that comprise the yield curve and compared the timing and amount of cash flows at maturity with the expected amounts and duration of the related benefit payments. As part of this assessment, we compared the Company’s current projections to historical projected defined benefit pension obligation cash flows, and compared the current-year benefits paid to the prior-year projected cash flows.

 

 

 

Description of the Matter

 

Uncertain tax positions

 

As discussed in Note 14 to the consolidated financial statements, at December 31, 2019 the Company had recorded unrecognized tax benefits of $13,687 million for uncertain tax positions. Uncertainty in a tax position may arise as tax laws are subject to interpretation. The Company uses judgment to (1) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (2) measure the amount of tax benefit that qualifies for recognition within the financial statements. Changes in facts and circumstances, such as changes in tax laws, new regulations issued by taxing authorities and communications with taxing authorities may affect the amount of uncertain tax positions and, in turn, income tax expense. Estimated tax benefits related to uncertain tax positions that are not more likely than not to be sustained are reported as unrecognized income tax benefits.

 

Auditing the measurement of uncertain tax positions was challenging because the measurement is based on interpretations of tax laws and legal rulings. Each tax position involves unique facts and circumstances that must be evaluated, and there may be many uncertainties around initial recognition and de-recognition of tax positions, including regulatory changes, litigation and examination activity.

 

How We

Addressed the Matter in Our Audit

 

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting process for uncertain tax positions. This included controls over identification and measurement of the benefits of the uncertain tax positions, including management’s review of the inputs and calculations of unrecognized income tax benefits, both initially and on an ongoing basis.

 

We involved our tax professionals to assist us in assessing significant uncertain tax positions, including an evaluation of the technical merits of individual positions, the determination of whether a tax position was more-likely-than-not to be sustained, and the Company’s measurement of its uncertain tax positions, including the computation of interest and penalties, among other procedures. For significant new positions, we assessed the Company’s filing position, correspondence with the relevant tax authorities and third-party advice obtained by the Company, as appropriate. For existing positions, we assessed changes in facts and law, as well as settlements of similar positions for any impact to the recognized liability for the positions. We analyzed the Company’s assumptions and data used to determine the amount of tax benefit to recognize and tested the accuracy of the calculations. We also evaluated the adequacy of the Company’s financial statement disclosures related to uncertain tax positions included in Note 14.

59


AT&T Inc.

 

 

 

 

 

Description of the Matter

 

 

Evaluation of goodwill and indefinite-lived intangible assets for impairment

 

At December 31, 2019, the Company’s goodwill balance was $146,241 million and its total indefinite-lived intangible assets were $101,392 million. The Company’s indefinite-lived intangible assets consist of wireless licenses, orbital slots and trade names. As discussed in Note 9 to the consolidated financial statements, reporting unit goodwill and indefinite-lived intangible assets are tested for impairment at least annually. This involves estimating the fair value of the reporting units and indefinite-lived intangible assets, which are determined using discounted cash flow models and a market multiples valuations approach. These fair value estimates are sensitive to significant assumptions, such as cash flow projections, operating margin, discount rates, terminal values, subscriber growth and churn, royalty rates and capital investment. The Company also considers market multiples for peer companies which offer comparable services to its reporting units. These assumptions are affected by expectations about future market and economic conditions.

 

Auditing management’s annual impairment tests for goodwill and indefinite-lived intangible assets was complex because of the significant judgment required to evaluate the management assumptions described above used to determine the fair value of the reporting units and other assets.

 

How We

Addressed the Matter in Our Audit

 

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill and indefinite-lived intangible assets impairment review processes. This included controls over management’s review of the valuation models and the significant assumptions noted above, utilized in both the discounted cash flow and market valuation approaches.

 

To test the estimated fair value of the Company’s reporting units and indefinite-lived intangible assets, we involved our valuation specialists to assist us in performing our audit procedures. Our procedures included, among others, testing the valuation methodology used and the significant assumptions within the valuation methodology. For example, we compared the significant assumptions to current industry, market and economic trends, and other guideline companies in the same industry and to other factors. Where appropriate, we evaluated whether changes to the company’s business model, customer base and other factors would affect the significant assumptions. We also assessed the historical accuracy of management’s estimates, tested the clerical accuracy of the valuation calculations, and performed independent sensitivity analyses. In addition, we tested management’s reconciliation of the fair value of the reporting units to the market capitalization of the Company.

 

/s/ Ernst & Young LLP

 

We have served as the Company’s auditor since 1999.

 

Dallas, Texas

February 19, 2020

 

 

60


AT&T Inc.

 

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and the Board of Directors of AT&T Inc.

 

Opinion on Internal Control Over Financial Reporting

We have audited AT&T Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, AT&T Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2019 consolidated financial statements of the Company and our report dated February 19, 2020 expressed an unqualified opinion thereon.

 

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.