Attached files
file | filename |
---|---|
EX-12 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES - AT&T INC. | ex12.htm |
EX-32 - SECTION 1350 CERTIFICATIONS - AT&T INC. | ex32.htm |
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - AT&T INC. | ex31_2.htm |
EXCEL - IDEA: XBRL DOCUMENT - AT&T INC. | Financial_Report.xls |
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - AT&T INC. | ex31_1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
or
|
|
||
|
o
|
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 1-8610
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
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
|
[X]
|
Accelerated filer
|
[ ]
|
|
Non-accelerated filer
|
[ ]
|
(Do not check if a smaller reporting company)
|
Smaller reporting company
|
[ ]
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
At April 30, 2015 there were 5,193 million common shares outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AT&T INC.
|
||||||||
CONSOLIDATED STATEMENTS OF INCOME
|
||||||||
Dollars in millions except per share amounts
|
||||||||
(Unaudited)
|
||||||||
Three months ended
|
||||||||
March 31,
|
||||||||
2015
|
2014
|
|||||||
Operating Revenues
|
||||||||
Service
|
$
|
28,962
|
$
|
29,776
|
||||
Equipment
|
3,614
|
2,700
|
||||||
Total operating revenues
|
32,576
|
32,476
|
||||||
Operating Expenses
|
||||||||
Cost of services and sales (exclusive of depreciation
|
||||||||
and amortization shown separately below)
|
14,581
|
13,321
|
||||||
Selling, general and administrative
|
7,961
|
8,260
|
||||||
Depreciation and amortization
|
4,578
|
4,617
|
||||||
Total operating expenses
|
27,120
|
26,198
|
||||||
Operating Income
|
5,456
|
6,278
|
||||||
Other Income (Expense)
|
||||||||
Interest expense
|
(899
|
)
|
(860
|
)
|
||||
Equity in net income of affiliates
|
-
|
88
|
||||||
Other income (expense) – net
|
70
|
145
|
||||||
Total other income (expense)
|
(829
|
)
|
(627
|
)
|
||||
Income Before Income Taxes
|
4,627
|
5,651
|
||||||
Income tax expense
|
1,351
|
1,917
|
||||||
Net Income
|
3,276
|
3,734
|
||||||
Less: Net Income Attributable to Noncontrolling Interest
|
(76
|
)
|
(82
|
)
|
||||
Net Income Attributable to AT&T
|
$
|
3,200
|
$
|
3,652
|
||||
Basic Earnings Per Share Attributable to AT&T
|
$
|
0.61
|
$
|
0.70
|
||||
Diluted Earnings Per Share Attributable to AT&T
|
$
|
0.61
|
$
|
0.70
|
||||
Weighted Average Number of Common Shares Outstanding – Basic (in millions)
|
5,203
|
5,222
|
||||||
Weighted Average Number of Common Shares Outstanding – with Dilution (in millions)
|
5,219
|
5,238
|
||||||
Dividends Declared Per Common Share
|
$
|
0.47
|
$
|
0.46
|
||||
See Notes to Consolidated Financial Statements.
|
2
AT&T INC.
|
||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
||||||||
Dollars in millions
|
||||||||
(Unaudited)
|
||||||||
Three months ended
|
||||||||
March 31,
|
||||||||
2015
|
2014
|
|||||||
Net income
|
$
|
3,276
|
$
|
3,734
|
||||
Other comprehensive income, net of tax:
|
||||||||
Foreign currency:
|
||||||||
Foreign currency translation adjustment (includes $0 and $0 attributable to
noncontrolling interest), net of taxes of $(104) and $(9)
|
(186
|
)
|
(20
|
)
|
||||
Reclassification adjustment included in net income, net of taxes of $0 and $14
|
-
|
25
|
||||||
Available-for-sale securities:
|
||||||||
Net unrealized gains, net of taxes of $19 and $10
|
34
|
16
|
||||||
Reclassification adjustment included in net income, net of taxes of $(3) and $(7)
|
(5
|
)
|
(11
|
)
|
||||
Cash flow hedges:
|
||||||||
Net unrealized (losses) gains, net of taxes of $(190) and $3
|
(354
|
)
|
6
|
|||||
Reclassification adjustment included in net income, net of taxes of $4 and $4
|
7
|
7
|
||||||
Defined benefit postretirement plans:
|
||||||||
Amortization of net prior service credit included in net income, net of taxes of $(131)
and $(147)
|
(215
|
)
|
(240
|
)
|
||||
Reclassification adjustment included in net income, net of taxes of $0 and $2
|
-
|
3
|
||||||
Other comprehensive income (loss)
|
(719
|
)
|
(214
|
)
|
||||
Total comprehensive income
|
2,557
|
3,520
|
||||||
Less: Total comprehensive income attributable to noncontrolling interest
|
(76
|
)
|
(82
|
)
|
||||
Total Comprehensive Income Attributable to AT&T
|
$
|
2,481
|
$
|
3,438
|
||||
See Notes to Consolidated Financial Statements.
|
3
AT&T INC.
|
||||||||
CONSOLIDATED BALANCE SHEETS
|
||||||||
Dollars in millions except per share amounts
|
||||||||
March 31,
|
December 31,
|
|||||||
2015
|
2014
|
|||||||
Assets
|
(Unaudited)
|
|||||||
Current Assets
|
||||||||
Cash and cash equivalents
|
$
|
4,444
|
$
|
8,603
|
||||
Accounts receivable - net of allowances for doubtful accounts of $488 and $454
|
13,592
|
14,527
|
||||||
Prepaid expenses
|
930
|
831
|
||||||
Deferred income taxes
|
1,538
|
1,142
|
||||||
Other current assets
|
6,906
|
6,925
|
||||||
Total current assets
|
27,410
|
32,028
|
||||||
Property, plant and equipment
|
285,133
|
282,295
|
||||||
Less: accumulated depreciation and amortization
|
(171,935
|
)
|
(169,397
|
)
|
||||
Property, Plant and Equipment – Net
|
113,198
|
112,898
|
||||||
Goodwill
|
70,341
|
69,692
|
||||||
Licenses
|
80,560
|
60,824
|
||||||
Other Intangible Assets – Net
|
6,423
|
6,139
|
||||||
Investments in Equity Affiliates
|
266
|
250
|
||||||
Other Assets
|
9,830
|
10,998
|
||||||
Total Assets
|
$
|
308,028
|
$
|
292,829
|
||||
Liabilities and Stockholders' Equity
|
||||||||
Current Liabilities
|
||||||||
Debt maturing within one year
|
$
|
8,181
|
$
|
6,056
|
||||
Accounts payable and accrued liabilities
|
20,418
|
23,592
|
||||||
Advanced billing and customer deposits
|
4,221
|
4,105
|
||||||
Accrued taxes
|
2,390
|
1,091
|
||||||
Dividends payable
|
2,441
|
2,438
|
||||||
Total current liabilities
|
37,651
|
37,282
|
||||||
Long-Term Debt
|
88,272
|
76,011
|
||||||
Deferred Credits and Other Noncurrent Liabilities
|
||||||||
Deferred income taxes
|
38,019
|
37,544
|
||||||
Postemployment benefit obligation
|
37,074
|
37,079
|
||||||
Other noncurrent liabilities
|
19,908
|
17,989
|
||||||
Total deferred credits and other noncurrent liabilities
|
95,001
|
92,612
|
||||||
Stockholders' Equity
|
||||||||
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2015 and
|
||||||||
December 31, 2014: issued 6,495,231,088 at March 31, 2015 and December 31, 2014)
|
6,495
|
6,495
|
||||||
Additional paid-in capital
|
90,977
|
91,108
|
||||||
Retained earnings
|
28,490
|
27,736
|
||||||
Treasury stock (1,302,176,826 at March 31, 2015 and 1,308,318,131
|
||||||||
at December 31, 2014, at cost)
|
(46,804
|
)
|
(47,029
|
)
|
||||
Accumulated other comprehensive income
|
7,341
|
8,060
|
||||||
Noncontrolling interest
|
605
|
554
|
||||||
Total stockholders' equity
|
87,104
|
86,924
|
||||||
Total Liabilities and Stockholders' Equity
|
$
|
308,028
|
$
|
292,829
|
||||
See Notes to Consolidated Financial Statements.
|
4
AT&T INC.
|
||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
Dollars in millions
|
||||||||
(Unaudited)
|
||||||||
Three months ended
|
||||||||
March 31,
|
||||||||
2015
|
2014
|
|||||||
Operating Activities
|
||||||||
Net income
|
$
|
3,276
|
$
|
3,734
|
||||
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
Depreciation and amortization
|
4,578
|
4,617
|
||||||
Undistributed earnings from investments in equity affiliates
|
-
|
17
|
||||||
Provision for uncollectible accounts
|
285
|
241
|
||||||
Deferred income tax expense
|
214
|
578
|
||||||
Net (gain) loss from sale of investments, net of impairments
|
(33
|
)
|
(122
|
)
|
||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable
|
739
|
(498
|
)
|
|||||
Other current assets
|
13
|
(340
|
)
|
|||||
Accounts payable and accrued liabilities
|
(1,817
|
)
|
1,025
|
|||||
Retirement benefit funding
|
(140
|
)
|
(140
|
)
|
||||
Other - net
|
(377
|
)
|
(313
|
)
|
||||
Total adjustments
|
3,462
|
5,065
|
||||||
Net Cash Provided by Operating Activities
|
6,738
|
8,799
|
||||||
Investing Activities
|
||||||||
Construction and capital expenditures:
|
||||||||
Capital expenditures
|
(3,848
|
)
|
(5,716
|
)
|
||||
Interest during construction
|
(123
|
)
|
(55
|
)
|
||||
Acquisitions, net of cash acquired
|
(19,514
|
)
|
(662
|
)
|
||||
Dispositions
|
8
|
351
|
||||||
Sale of securities
|
1,890
|
-
|
||||||
Net Cash Used in Investing Activities
|
(21,587
|
)
|
(6,082
|
)
|
||||
Financing Activities
|
||||||||
Net change in short-term borrowings with original maturities of three months or less
|
-
|
(17
|
)
|
|||||
Issuance of long-term debt
|
16,572
|
2,987
|
||||||
Repayment of long-term debt
|
(596
|
)
|
(1,867
|
)
|
||||
Purchase of treasury stock
|
-
|
(1,237
|
)
|
|||||
Issuance of treasury stock
|
8
|
13
|
||||||
Dividends paid
|
(2,434
|
)
|
(2,398
|
)
|
||||
Other
|
(2,860
|
)
|
74
|
|||||
Net Cash Provided by (Used in) Financing Activities
|
10,690
|
(2,445
|
)
|
|||||
Net (decrease) increase in cash and cash equivalents
|
(4,159
|
)
|
272
|
|||||
Cash and cash equivalents beginning of year
|
8,603
|
3,339
|
||||||
Cash and Cash Equivalents End of Period
|
$
|
4,444
|
$
|
3,611
|
||||
Cash paid (received) during the three months ended March 31 for:
|
||||||||
Interest
|
$
|
1,021
|
$
|
976
|
||||
Income taxes, net of refunds
|
$
|
(247
|
)
|
$
|
(40
|
)
|
||
See Notes to Consolidated Financial Statements.
|
5
AT&T INC.
|
||||||||
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
|
||||||||
Dollars and shares in millions except per share amounts
|
||||||||
(Unaudited)
|
||||||||
March 31, 2015
|
||||||||
Shares
|
Amount
|
|||||||
Common Stock
|
||||||||
Balance at beginning of year
|
6,495
|
$
|
6,495
|
|||||
Issuance of stock
|
-
|
-
|
||||||
Balance at end of period
|
6,495
|
$
|
6,495
|
|||||
Additional Paid-In Capital
|
||||||||
Balance at beginning of year
|
$
|
91,108
|
||||||
Issuance of treasury stock
|
3
|
|||||||
Share-based payments
|
(123
|
)
|
||||||
Change related to acquisition of interests held by noncontrolling owners
|
(11
|
)
|
||||||
Balance at end of period
|
$
|
90,977
|
||||||
Retained Earnings
|
||||||||
Balance at beginning of year
|
$
|
27,736
|
||||||
Net income attributable to AT&T ($0.61 per diluted share)
|
3,200
|
|||||||
Dividends to stockholders ($0.47 per share)
|
(2,446
|
)
|
||||||
Balance at end of period
|
$
|
28,490
|
||||||
Treasury Stock
|
||||||||
Balance at beginning of year
|
(1,308
|
)
|
$
|
(47,029
|
)
|
|||
Issuance of treasury stock
|
6
|
225
|
||||||
Balance at end of period
|
(1,302
|
)
|
$
|
(46,804
|
)
|
|||
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
|
||||||||
Balance at beginning of year
|
$
|
8,060
|
||||||
Other comprehensive loss attributable to AT&T
|
(719
|
)
|
||||||
Balance at end of period
|
$
|
7,341
|
||||||
Noncontrolling Interest
|
||||||||
Balance at beginning of year
|
$
|
554
|
||||||
Net income attributable to noncontrolling interest
|
76
|
|||||||
Distributions
|
(54
|
)
|
||||||
Acquisition of noncontrolling interests
|
29
|
|||||||
Balance at end of period
|
$
|
605
|
||||||
Total Stockholders' Equity at beginning of year
|
$
|
86,924
|
||||||
Total Stockholders' Equity at end of period
|
$
|
87,104
|
||||||
See Notes to Consolidated Financial Statements.
|
6
AT&T INC.
MARCH 31, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS
Basis of Presentation Throughout this document, AT&T Inc. is referred to as "AT&T," "we" or the "Company." We believe that these consolidated financial statements include all adjustments, consisting only of normal recurring accruals, that are necessary to present fairly the results for the presented interim periods. The results for the interim periods are not necessarily indicative of those for the full year. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2014.
The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates. Our subsidiaries and affiliates operate in the communications services industry both domestically and internationally, providing wireless communications services, traditional wireline voice services, data/broadband and Internet services, video services, telecommunications equipment, managed networking and wholesale services.
All significant intercompany transactions are eliminated in the consolidation process. Investments in less than majority-owned subsidiaries and partnerships where we have significant influence are accounted for under the equity method. Earnings from certain investments accounted for using the equity method are included for periods ended within up to one month of our period end. We also recorded our proportionate share of our equity method investees' other comprehensive income (OCI) items, including actuarial gains and losses on pension and other postretirement benefit obligations.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates.
New Accounting Standards
Revenue Recognition In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09), which replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASU 2014-09 becomes effective for annual reporting periods beginning after December 15, 2016. In April 2015, the FASB issued an exposure draft to delay the effective date of ASU 2014-09 by one year. We continue to evaluate the impact of the new standard and available adoption methods.
Long-Term Debt and Debt Issuance Costs In April 2015, the FASB issued ASU No. 2015-03, "Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03), which will result in the reclassification of debt issuance costs from "Other Assets" to inclusion as a reduction of our reportable "Long-term Debt" balance on our consolidated balance sheets. ASU 2015-03 becomes effective January 1, 2016, subject to early adoption, and will require full retrospective application. We do not expect this new standard to have a material impact on our consolidated balance sheets.
7
AT&T INC.
MARCH 31, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for the three months ended March 31, 2015 and 2014, is shown in the table below:
Three months ended
|
||||||||
March 31,
|
||||||||
2015
|
2014
|
|||||||
Numerators
|
||||||||
Numerator for basic earnings per share:
|
||||||||
Net income
|
$
|
3,276
|
$
|
3,734
|
||||
Less: Net income attributable to noncontrolling interest
|
(76
|
)
|
(82
|
)
|
||||
Net income attributable to AT&T
|
3,200
|
3,652
|
||||||
Dilutive potential common shares:
|
||||||||
Share-based payment
|
4
|
4
|
||||||
Numerator for diluted earnings per share
|
$
|
3,204
|
$
|
3,656
|
||||
Denominators (000,000)
|
||||||||
Denominator for basic earnings per share:
|
||||||||
Weighted-average number of common shares outstanding
|
5,203
|
5,222
|
||||||
Dilutive potential common shares:
|
||||||||
Share-based payment (in shares)
|
16
|
16
|
||||||
Denominator for diluted earnings per share
|
5,219
|
5,238
|
||||||
Basic earnings per share attributable to AT&T
|
$
|
0.61
|
$
|
0.70
|
||||
Diluted earnings per share attributable to AT&T
|
$
|
0.61
|
$
|
0.70
|
8
AT&T INC.
MARCH 31, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 3. OTHER COMPREHENSIVE INCOME
Changes in the balances of each component included in accumulated other comprehensive income (accumulated OCI) are presented below. All amounts are net of tax and exclude noncontrolling interest.
|
|||||||||||||||
At March 31, 2015 and for the period ended:
|
|
||||||||||||||
Foreign
Currency
Translation
Adjustment
|
|
Net Unrealized
Gains (Losses)
on Available-
for-Sale
Securities
|
|
Net Unrealized
Gains (Losses)
on Cash Flow
Hedges
|
|
Defined Benefit
Postretirement
Plans
|
|
Accumulated
Other
Comprehensive
Income
|
|||||||
Balance as of December 31, 2014
|
$
|
(26)
|
|
$
|
498
|
|
$
|
741
|
|
$
|
6,847
|
|
$
|
8,060
|
|
Other comprehensive income
(loss) before reclassifications
|
(186)
|
|
34
|
|
(354)
|
|
-
|
|
(506)
|
||||||
Amounts reclassified
from accumulated OCI
|
-
|
1
|
(5)
|
2
|
7
|
3
|
(215)
|
4
|
(213)
|
||||||
Net other comprehensive
income (loss)
|
(186)
|
|
29
|
|
(347)
|
|
(215)
|
|
(719)
|
||||||
Balance as of March 31, 2015
|
$
|
(212)
|
|
$
|
527
|
|
$
|
394
|
|
$
|
6,632
|
|
$
|
7,341
|
|
|
|||||||||||||||
At March 31, 2014 and for the period ended:
|
|
||||||||||||||
Foreign
Currency
Translation
Adjustment
|
|
Net Unrealized
Gains (Losses)
on Available-
for-Sale
Securities
|
|
Net Unrealized
Gains (Losses)
on Cash Flow
Hedges
|
|
Defined Benefit
Postretirement
Plans
|
|
Accumulated
Other
Comprehensive
Income
|
|||||||
Balance as of December 31, 2013
|
$
|
(367)
|
|
$
|
450
|
|
$
|
445
|
|
$
|
7,352
|
|
$
|
7,880
|
|
Other comprehensive income
(loss) before reclassifications
|
(20)
|
|
16
|
|
6
|
|
-
|
|
2
|
||||||
Amounts reclassified
from accumulated OCI
|
25
|
1
|
(11)
|
2
|
7
|
3
|
(237)
|
4
|
(216)
|
||||||
Net other comprehensive
income (loss)
|
5
|
|
5
|
|
13
|
|
(237)
|
|
(214)
|
||||||
Balance as of March 31, 2014
|
$
|
(362)
|
|
$
|
455
|
|
$
|
458
|
|
$
|
7,115
|
|
$
|
7,666
|
|
1 Translation (gain) loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
|
|||||||||||||||
2 (Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
|
|||||||||||||||
3 (Gains) losses are included in interest expense in the consolidated statements of income. See Note 6 for additional information.
|
|||||||||||||||
4 The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income (see Note 5).
|
|||||||||||||||
Actuarial loss reclassifications related to our equity method investees are included in Other income (expense) - net in the consolidated statements of income.
|
9
AT&T INC.
MARCH 31, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 4. SEGMENT INFORMATION
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 income before income taxes. We make our capital allocation decisions based on our strategic direction of the business, needs of the network (wireless or wireline) providing services and to provide emerging services to our customers. Actuarial gains and losses from pension and other postretirement benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are not included in each segment's reportable results. The customers and long-lived assets of our reportable segments are predominantly in the United States. We have three reportable segments: (1) Wireless, (2) Wireline and (3) International.
The Wireless segment uses our nationwide network to provide consumer and business customers with wireless data and voice communications services. This segment included our portion of the results from our equity investment in the SoftcardTM mobile wallet joint venture.
The Wireline segment uses our regional, national and global network to provide consumer and business customers with data and voice communications services, AT&T U-verse® high speed Internet, video and VoIP services and managed networking to business customers.
The International segment uses the Iusacell and Unefon regional and national networks to provide consumer and business customers with wireless data and voice communication services in Mexico. Beginning April 30, 2015, the International segment also utilizes the regional and national networks of Nextel Mexico to provide similar services.
The Corporate and Other column includes unallocated corporate expenses, which includes costs to support corporate-driven activities and operations, and impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans as well as our actuarial gains and losses on our pension and postretirement plan valuations. Results from equity method investments in América Móvil S.A. de C.V. (prior to the June 2014 disposal of our investment), YP Holdings LLC, and Otter Media (our joint venture with The Chernin Group), are also excluded from our segment results as those results are not considered in our assessment of segment performance. We have revised our prior-period presentation to conform to our current reporting.
10
AT&T INC.
MARCH 31, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
For the three months ended March 31, 2015:
|
||||||||||||||||||||
Wireless
|
Wireline
|
International
|
Corporate
and Other
|
Consolidated
Results
|
||||||||||||||||
Service
|
$
|
14,812
|
$
|
13,935
|
$
|
215
|
$
|
-
|
$
|
28,962
|
||||||||||
Equipment
|
3,374
|
213
|
21
|
6
|
3,614
|
|||||||||||||||
Total segment operating revenues
|
18,186
|
14,148
|
236
|
6
|
32,576
|
|||||||||||||||
Operations and support expenses
|
11,681
|
10,263
|
219
|
379
|
22,542
|
|||||||||||||||
Depreciation and amortization expenses
|
2,058
|
2,476
|
44
|
-
|
4,578
|
|||||||||||||||
Total segment operating expenses
|
13,739
|
12,739
|
263
|
379
|
27,120
|
|||||||||||||||
Segment operating income (loss)
|
4,447
|
1,409
|
(27
|
)
|
(373
|
)
|
5,456
|
|||||||||||||
Interest expense
|
-
|
-
|
-
|
899
|
899
|
|||||||||||||||
Equity in net income (loss) of affiliates
|
(4
|
)
|
(7
|
)
|
-
|
11
|
-
|
|||||||||||||
Other income (expense) – net
|
-
|
-
|
-
|
70
|
70
|
|||||||||||||||
Segment income (loss) before income taxes
|
$
|
4,443
|
$
|
1,402
|
$
|
(27
|
)
|
$
|
(1,191
|
)
|
$
|
4,627
|
||||||||
For the three months ended March 31, 2014:
|
||||||||||||||||||||
Wireless
|
Wireline
|
International
|
Corporate
and Other
|
Consolidated
Results
|
||||||||||||||||
Service
|
$
|
15,387
|
$
|
14,389
|
$
|
-
|
$
|
-
|
$
|
29,776
|
||||||||||
Equipment
|
2,479
|
212
|
-
|
9
|
2,700
|
|||||||||||||||
Total segment operating revenues
|
17,866
|
14,601
|
-
|
9
|
32,476
|
|||||||||||||||
Operations and support expenses
|
10,882
|
10,457
|
-
|
242
|
21,581
|
|||||||||||||||
Depreciation and amortization expenses
|
1,931
|
2,684
|
-
|
2
|
4,617
|
|||||||||||||||
Total segment operating expenses
|
12,813
|
13,141
|
-
|
244
|
26,198
|
|||||||||||||||
Segment operating income (loss)
|
5,053
|
1,460
|
-
|
(235
|
)
|
6,278
|
||||||||||||||
Interest expense
|
-
|
-
|
-
|
860
|
860
|
|||||||||||||||
Equity in net income (loss) of affiliates
|
(20
|
)
|
1
|
-
|
107
|
88
|
||||||||||||||
Other income (expense) – net
|
-
|
-
|
-
|
145
|
145
|
|||||||||||||||
Segment income (loss) before income taxes
|
$
|
5,033
|
$
|
1,461
|
$
|
-
|
$
|
(843
|
)
|
$
|
5,651
|
NOTE 5. PENSION AND POSTRETIREMENT BENEFITS
Substantially all of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental, life insurance, and death benefits to certain retired employees under various plans and accrue actuarially determined postretirement benefit costs. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits described in the plans to employees upon their retirement.
In December 2014, we offered an opportunity for certain management employees who were retirement eligible as of March 31, 2015 to elect an enhanced, full lump sum payment option of their accrued pension if they retired on or before March 31, 2015. The lump sum value totaled approximately $1,200 which will be distributed in 2015. We recorded special termination benefits of approximately $150 as a result of this offer.
In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $8,970 at March 31, 2015. The trust is entitled to receive cumulative cash distributions of $560 per annum, which will be distributed quarterly in equal amounts and will be accounted for as contributions. We distributed $140 to the trust during the three months ended March 31, 2015. So long as we make the distributions, we will have no limitations on our ability to declare a dividend, or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan's separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation. We have also agreed to make a cash contribution to the trust of $175 no later than the due date of our federal income tax return for 2014.
11
AT&T INC.
MARCH 31, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
We recognize actuarial gains and losses on pension and postretirement plan assets in our operating results at our annual measurement date of December 31, unless earlier remeasurements are required. The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income, expense credits are denoted with parentheses. A portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded.
Three months ended
|
||||||||
March 31,
|
||||||||
2015
|
2014
|
|||||||
Pension cost:
|
||||||||
Service cost – benefits earned during the period
|
$
|
299
|
$
|
282
|
||||
Interest cost on projected benefit obligation
|
474
|
661
|
||||||
Expected return on assets
|
(826
|
)
|
(849
|
)
|
||||
Amortization of prior service credit
|
(26
|
)
|
(24
|
)
|
||||
Net pension (credit) cost
|
$
|
(79
|
)
|
$
|
70
|
|||
Postretirement cost:
|
||||||||
Service cost – benefits earned during the period
|
$
|
55
|
$
|
58
|
||||
Interest cost on accumulated postretirement benefit obligation
|
242
|
365
|
||||||
Expected return on assets
|
(105
|
)
|
(164
|
)
|
||||
Amortization of prior service credit
|
(320
|
)
|
(362
|
)
|
||||
Net postretirement (credit) cost
|
$
|
(128
|
)
|
$
|
(103
|
)
|
||
Combined net pension and postretirement (credit) cost
|
$
|
(207
|
)
|
$
|
(33
|
)
|
Our combined net pension and postretirement cost decreased $174 in the first quarter of 2015. The decrease is primarily due to the change in the method used to estimate the service and interest components of net periodic benefit cost for pension and other postretirement benefits. While this change in estimate provides a more precise measurement of interim service and interest costs, it will not affect the measurement of our total benefit obligations or our annual net periodic benefit cost as the change in the service and interest costs is completely offset in the actuarial gain or loss reported. The decrease from this change was partially offset by lower amortization of prior service credits as previous postretirement plan changes have become fully amortized, our lower expected long-term rate of return on our postretirement plan assets and updated assumed mortality rates.
We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. Net supplemental retirement pension benefits cost, which is not included in the table above, was $20 in the first quarter of 2015, of which $19 was interest cost, and $29 for the first quarter of 2014, of which $27 was interest cost.
12
AT&T INC.
MARCH 31, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 | Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access. |
Level 2 | Inputs to the valuation methodology include: |
·
|
Quoted prices for similar assets and liabilities in active markets.
|
·
|
Quoted prices for identical or similar assets or liabilities in inactive markets.
|
·
|
Inputs other than quoted market prices that are observable for the asset or liability.
|
·
|
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
Level 3 | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
·
|
Fair value is often based on developed models in which there are few, if any, external observations.
|
The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used should maximize the use of observable inputs and minimize the use of unobservable inputs.
The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2014.
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities and other financial instruments, are summarized as follows:
March 31, 2015
|
December 31, 2014
|
||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
||||||||||||
Amount
|
Value
|
Amount
|
Value
|
||||||||||||
Notes and debentures
|
$
|
96,026
|
$
|
105,084
|
$
|
81,632
|
$
|
90,367
|
|||||||
Bank borrowings
|
5
|
5
|
5
|
5
|
|||||||||||
Investment securities
|
2,740
|
2,740
|
2,735
|
2,735
|
The carrying value of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.
13
AT&T INC.
MARCH 31, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Following is the fair value leveling for available-for-sale securities and derivatives as of March 31, 2015 and December 31, 2014:
|
March 31, 2015
|
||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||
Available-for-Sale Securities
|
|||||||||||||||
Domestic equities
|
$
|
1,176
|
$
|
-
|
$
|
-
|
$
|
1,176
|
|||||||
International equities
|
592
|
-
|
-
|
592
|
|||||||||||
Fixed income bonds
|
-
|
793
|
-
|
793
|
|||||||||||
Asset Derivatives1
|
|||||||||||||||
Interest rate swaps
|
-
|
194
|
-
|
194
|
|||||||||||
Cross-currency swaps
|
-
|
706
|
-
|
706
|
|||||||||||
Liability Derivatives1
|
|||||||||||||||
Cross-currency swaps
|
-
|
(3,528
|
)
|
-
|
(3,528
|
)
|
|||||||||
Interest rate locks
|
-
|
(444
|
)
|
-
|
(444
|
)
|
|||||||||
|
|||||||||||||||
December 31, 2014
|
|||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||
Available-for-Sale Securities
|
|||||||||||||||
Domestic equities
|
$
|
1,160
|
$
|
-
|
$
|
-
|
$
|
1,160
|
|||||||
International equities
|
553
|
-
|
-
|
553
|
|||||||||||
Fixed income bonds
|
-
|
836
|
-
|
836
|
|||||||||||
Asset Derivatives1
|
|||||||||||||||
Interest rate swaps
|
-
|
157
|
-
|
157
|
|||||||||||
Cross-currency swaps
|
-
|
1,243
|
-
|
1,243
|
|||||||||||
Interest rate locks
|
-
|
5
|
-
|
5
|
|||||||||||
Liability Derivatives1
|
|||||||||||||||
Cross-currency swaps
|
-
|
(1,506
|
)
|
-
|
(1,506
|
)
|
|||||||||
Interest rate locks
|
-
|
(133
|
)
|
-
|
(133
|
)
|
|||||||||
1 Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.
|
14
AT&T INC.
MARCH 31, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Investment Securities
Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in "Other income (expense) – net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in "Other income (expense) – net" with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $91 have maturities of less than one year, $409 within one to three years, $66 within three to five years, and $227 for five or more years.
Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments are recorded in "Other current assets" and our investment securities are recorded in "Other Assets" on the consolidated balance sheets.
Derivative Financial Instruments
We employ derivatives to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.
The majority of our derivatives are designated either as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), or as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge).
Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the three months ended March 31, 2015 and March 31, 2014, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.
Cash Flow Hedging We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro, British pound sterling, Canadian dollar and Swiss Franc denominated debt. These agreements include initial and final exchanges of principal from fixed foreign denominations to fixed U.S. denominated amounts, to be exchanged at a specified rate, which was determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign-denominated rate to a fixed U.S. denominated interest rate.
Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities, both for the period they are outstanding. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as "Other income (expense) – net" in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the three months ended March 31, 2015 and March 31, 2014, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.
15
AT&T INC.
MARCH 31, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) – net" in the consolidated statements of income. Over the next 12 months, we expect to reclassify $35 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks. Our unutilized interest rate locks carry mandatory early terminations, the latest occurring in the first half of 2015.
We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Some of these instruments are designated as cash flow hedges while others remain nondesignated, largely based on size and duration. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) –net" in the consolidated statements of income. In the three months ended March 31, 2015 and March 31, 2014, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.
Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At March 31, 2015, we had posted collateral of $2,566 (a deposit asset) and held collateral of $62 (a receipt liability). Under the agreements, if our credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in March, we would have been required to post additional collateral of $147. At December 31, 2014, we had posted collateral of $530 (a deposit asset) and held collateral of $599 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable), against the fair value of the derivative instruments.
Following is the notional amount of our outstanding derivative positions:
March 31,
|
December 31,
|
|||||||
2015
|
2014
|
|||||||
Interest rate swaps
|
$
|
6,550
|
$
|
6,550
|
||||
Cross-currency swaps
|
29,350
|
26,505
|
||||||
Interest rate locks
|
7,000
|
6,750
|
||||||
Total
|
$
|
42,900
|
$
|
39,805
|
Following is the related hedged items affecting our financial position and performance:
|
|||||||
Effect of Derivatives on the Consolidated Statements of Income
|
|||||||
Fair Value Hedging Relationships
|
Three months ended
|
||||||
March 31,
|
March 31,
|
||||||
2015
|
2014
|
||||||
Interest rate swaps (Interest expense):
|
|||||||
Gain (Loss) on interest rate swaps
|
$
|
41
|
$
|
(11
|
)
|
||
Gain (Loss) on long-term debt
|
(41
|
)
|
11
|
16
AT&T INC.
MARCH 31, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Three months ended
|
|||||||
March 31,
|
March 31,
|
||||||
Cash Flow Hedging Relationships
|
2015
|
2014
|
|||||
Cross-currency swaps:
|
|||||||
Gain (Loss) recognized in accumulated OCI
|
$
|
(228
|
)
|
$
|
11
|
||
Interest rate locks:
|
|||||||
Gain (Loss) recognized in accumulated OCI
|
(316
|
)
|
-
|
||||
Interest income (expense) reclassified from accumulated OCI into income
|
(11
|
)
|
(11
|
)
|
|||
Foreign exchange contracts:
|
|||||||
Gain (Loss) recognized in accumulated OCI
|
-
|
(2
|
)
|
NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
In January 2015, we submitted winning bids for 251 Advanced Wireless Service (AWS) spectrum licenses in the AWS-3 Auction (FCC Auction 97) for $18,189. We provided the Federal Communications Commission (FCC) an initial down payment of $921 in October 2014 and paid the remaining $17,268 in the first quarter of 2015. The interest associated with this acquisition will be excluded from interest expense and capitalized until this spectrum is ready for its intended use.
GSF Telecom On January 16, 2015, we acquired Mexican wireless company GSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom) for $2,500, less net debt of approximately $700. GSF Telecom offers service under both the Iusacell and Unefon brand names in Mexico.
The preliminary values of assets acquired were: $1,078 in licenses, $943 in property, plant and equipment, $365 in customer lists, $51 in trade names and $690 of goodwill.
Subsequent and Pending Acquisitions
Nextel Mexico On April 30, 2015, we completed our acquisition of the subsidiaries of NII Holdings Inc., operating its wireless business in Mexico, for $1,875, less approximately $427 of net debt and other adjustments. The subsidiaries offer service under the name Nextel Mexico.
DIRECTV In May 2014, we announced a merger agreement to acquire DIRECTV in a stock-and-cash transaction for $95.00 per share of DIRECTV's common stock, or approximately $48,500 at the date of announcement. As of March 31, 2015, DIRECTV had approximately $15,129 in net debt. Each DIRECTV shareholder will receive cash of $28.50 per share and $66.50 per share in our stock subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if our average stock price is below $34.90 per share at closing and 1.724 AT&T shares if our average stock price is above $38.58 at closing. If our average stock price (calculated in accordance with the merger agreement with DIRECTV) is between $34.90 and $38.58 at closing, then DIRECTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value. DIRECTV is a premier pay TV provider in the United States and Latin America, with a high-quality customer base, the best selection of programming, the best technology for delivering and viewing high-quality video on any device and the best customer satisfaction among major U.S. cable and satellite TV providers.
The merger agreement was adopted by DIRECTV's stockholders on September 25, 2014 and the transaction remains subject to review by the FCC and the Department of Justice and to other closing conditions. It is also a condition that all necessary consents by certain foreign governmental entities have been obtained and are in full force and effect. The transaction is still expected to close in the second quarter of 2015. The merger agreement provides certain mutual termination rights for us and DIRECTV, including the right of either party to terminate the agreement if the merger is not consummated by May 18, 2015, subject to extension in certain cases to a date no later than November 13, 2015. Either party may also terminate the agreement if an order permanently restraining, enjoining, or otherwise prohibiting consummation of the merger becomes final and nonappealable. In October 2014, DIRECTV and the National Football League renewed their agreement for the "NFL Sunday Ticket" service substantially on the terms discussed between AT&T and DIRECTV, satisfying one of the conditions to closing the merger. Under certain circumstances relating to a competing transaction, DIRECTV may be required to pay a termination fee to us in connection with or following a termination of the agreement.
17
AT&T INC.
MARCH 31, 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Subsequent Debt Issuance
In May 2015, we issued $17,500 in debt to be used for general corporate purposes, including funding previously announced acquisitions.
NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES
We offer our customers the option to purchase certain wireless devices in installments over a period of up to 30 months, with the right to trade in the original equipment for a new device within a set period and have the remaining unpaid balance satisfied. As of March 31, 2015 and December 31, 2014, gross equipment installment receivables of $3,786 and $4,265 were included on our consolidated balance sheets, of which $2,240 and $2,514 are notes receivable that are included in "Accounts receivable, net."
On June 27, 2014, we entered into the first of a series of uncommitted agreements pertaining to the sale of equipment installment receivables and related security with Citibank, N.A. and various other relationship banks as purchasers (collectively, the Purchasers). Under these agreements, we transferred the receivables to the Purchasers for cash and additional consideration upon settlement of the receivables. Under the terms of the arrangements, we continue to bill and collect on behalf of our customers for the receivables sold. To date, we have collected and remitted approximately $1,298 (net of fees), of which $130 was returned as deferred purchase price.
The following table sets forth a summary of equipment installment receivables sold during the three months ended March 31, 2015:
|
Three months ended
|
||
|
March 31,
|
||
|
2015
|
||
Net receivables sold1
|
$
|
2,381
|
|
Cash proceeds received
|
1,524
|
||
Deferred purchase price recorded
|
858
|
||
1 Gross receivables sold were $2,635, before deducting the allowance, imputed interest and trade-in right guarantees.
|
The deferred purchase price was initially recorded at estimated fair value, which was based on remaining installment payments expected to be collected, adjusted by the expected timing and value of device trade-ins, and is subsequently carried at the lower of cost or net realizable value. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).
At March 31, 2015, our deferred purchase price receivable was $2,410, of which $1,148 is included in "Other current assets" on our consolidated balance sheets, with the remainder in "Other Assets." At December 31, 2014, our deferred purchase price receivable was $1,606, which is included in "Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the amount of our deferred purchase price at any point in time.
The sales of equipment installment receivables did not have a material impact in our consolidated statements of income or to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate risk.
18
AT&T INC.
MARCH 31, 2015
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS
For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications services industry both in the United States and internationally, providing wireless and wireline telecommunications services and equipment. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2014. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period's presentation.
Consolidated Results Our financial results in the first quarter of 2015 and 2014 are summarized as follows:
First Quarter
|
||||||||||||
2015
|
2014
|
Percent
Change
|
||||||||||
Operating Revenues
|
||||||||||||
Service
|
$
|
28,962
|
$
|
29,776
|
(2.7
|
) %
|
||||||
Equipment
|
3,614
|
2,700
|
33.9
|
|||||||||
Total Operating Revenues
|
32,576
|
32,476
|
0.3
|
|||||||||
Operating expenses
|
||||||||||||
Cost of services and sales
|
14,581
|
13,321
|
9.5
|
|||||||||
Selling, general and administrative
|
7,961
|
8,260
|
(3.6
|
)
|
||||||||
Depreciation and amortization
|
4,578
|
4,617
|
(0.8
|
)
|
||||||||
Total Operating Expenses
|
27,120
|
26,198
|
3.5
|
|||||||||
Operating Income
|
5,456
|
6,278
|
(13.1
|
)
|
||||||||
Income Before Income Taxes
|
4,627
|
5,651
|
(18.1
|
)
|
||||||||
Net Income
|
3,276
|
3,734
|
(12.3
|
)
|
||||||||
Net Income Attributable to AT&T
|
$
|
3,200
|
$
|
3,652
|
(12.4
|
) %
|
Overview
Operating revenues increased $100, or 0.3%, in the first quarter of 2015.
Service revenues decreased $814, or 2.7%, in the first quarter of 2015. The decrease was primarily due to increased adoption of our wireless Mobile Share Value plans, continued declines in our legacy wireline voice and data products and the October 2014 sale of our Connecticut wireline operations, partially offset by strong revenues from AT&T U-verse® (U-verse), strategic business services and revenues from our prepaid wireless offering, Cricket®.
Equipment revenues increased $914, or 33.9%, in the first quarter of 2015. Growth in equipment revenues reflected the continuing trend by our postpaid wireless subscribers to choose devices on installment purchase rather than the device subsidy model. Revenues also increased as subscribers are purchasing higher-priced smartphones.
Operating expenses increased $922, or 3.5%, in the first quarter of 2015.
Cost of services and sales expenses increased $1,260, or 9.5%, in the first quarter of 2015. The increase was primarily due to higher wireless equipment costs resulting from customers choosing higher-priced devices, increased wireless network costs, higher expenses attributable to U-verse subscriber growth, voluntary employee separation charges and an increase in noncash benefit expenses in our Wireline segment. These increases were slightly offset by lower noncash financing-related costs associated with our pension and postretirement benefits and lower traffic compensation costs.
19
AT&T INC.
MARCH 31, 2015
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Selling, general and administrative expenses decreased $299, or 3.6%, in the first quarter of 2015. The decrease was due to lower advertising, employee related and wireless commissions costs, which were partially offset by increases in our sales expenses resulting from increased competition.
Depreciation and amortization expense decreased $39, or 0.8%, in the first quarter of 2015. The decrease is primarily due to extending the estimated useful life of software and abandonment of certain network assets, both in 2014. These decreases were partially offset by increases due to ongoing capital spending for network upgrades and additional expenses associated with the assets acquired from Leap Wireless International, Inc. (Leap) and GSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom).
Operating income decreased $822, or 13.1%, in the first quarter of 2015. Our operating income margin in the first quarter decreased from 19.3% in 2014 to 16.7% in 2015.
Interest expense increased $39, or 4.5%, in the first quarter of 2015. The increase was primarily due to higher average debt balances. The increase was partially offset by lower average interest rates and an increase in capitalized interest resulting from spectrum acquired in the AWS-3 Auction (see Note 7).
Equity in net income of affiliates decreased $88 in the first quarter of 2015. This decrease primarily resulted from the sale of América Móvil, S.A. de C.V. (América Móvil) in June 2014 and lower earnings from YP Holdings LLC.
Other income (expense) – net We had other income of $70 in the first quarter of 2015, compared to other income of $145 in the first quarter of 2014. Results for first quarter 2015 included a net gain on the sale of investments of $33 and interest and dividend income of $19. Results for first quarter 2014 included a net gain on the sale of América Móvil shares and other investments of $122 and interest and dividend income of $13.
Income taxes decreased $566, or 29.5%, in the first quarter of 2015. Our effective tax rate was 29.2% for the first quarter 2015, compared to 33.9% for first quarter 2014. The decrease in effective tax rate for the first quarter of 2015 was primarily due to recognition of tax benefits related to the restructuring of a portion of our enterprise business.
Selected Financial and Operating Data
|
||||||||
|
March 31,
|
|||||||
Subscribers and connections in (000s)
|
2015
|
2014
|
||||||
Domestic wireless subscribers
|
121,772
|
116,014
|
||||||
Network access lines in service
|
18,949
|
23,582
|
||||||
U-verse VoIP connections
|
5,200
|
4,134
|
||||||
Total wireline broadband connections
|
16,097
|
16,503
|
||||||
Debt ratio1
|
52.5
|
%
|
46.6
|
%
|
||||
Net debt ratio2
|
50.1
|
%
|
44.5
|
%
|
||||
Ratio of earnings to fixed charges3
|
4.22
|
5.50
|
||||||
Number of AT&T employees4
|
250,790
|
246,730
|
1 Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders' equity) and do not consider cash available to pay down debt. See our "Liquidity and Capital Resources" section for discussion.
2 Net debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) less cash available by total capital (total debt plus total stockholders' equity).
3 See Exhibit 12.
4 Reflects recent acquisition activity.
20
AT&T INC.
MARCH 31, 2015
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
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 operating segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our operating segments based on segment income before income taxes. We make our capital allocation decisions based on our strategic direction of the business, needs of the network (wireless or wireline) providing services and to provide emerging services to our customers. Actuarial gains and losses from pension and other postretirement benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are not included in each segment's reportable results. The customers and long-lived assets of our reportable segments are predominantly in the United States. We have three reportable segments: (1) Wireless, (2) Wireline and (3) International.
The Wireless segment uses our nationwide network to provide consumer and business customers with wireless data and voice communications services. This segment included our portion of the results from our equity investment in Softcard.
The Wireline segment uses our regional, national and global network to provide consumer and business customers with data and voice communications services, U-verse high speed Internet, video and VoIP services and managed networking to business customers.
The International segment uses the Iusacell and Unefon regional and national networks to provide consumer and business customers with wireless data and voice communication services in Mexico. Beginning April 30, 2015, the International segment also utilizes the regional and national networks of Nextel Mexico to provide similar services.
We discuss capital expenditures for each segment in "Liquidity and Capital Resources."
Wireless
|
||||||||||||
Segment Results
|
||||||||||||
First Quarter
|
||||||||||||
2015
|
2014
|
Percent
Change
|
||||||||||
Segment operating revenues
|
||||||||||||
Service
|
$
|
14,812
|
$
|
15,387
|
(3.7
|
) %
|
||||||
Equipment
|
3,374
|
2,479
|
36.1
|
|||||||||
Total Segment Operating Revenues
|
18,186
|
17,866
|
1.8
|
|||||||||
Segment operating expenses
|
||||||||||||
Operations and support
|
11,681
|
10,882
|
7.3
|
|||||||||
Depreciation and amortization
|
2,058
|
1,931
|
6.6
|
|||||||||
Total Segment Operating Expenses
|
13,739
|
12,813
|
7.2
|
|||||||||
Segment Operating Income
|
4,447
|
5,053
|
(12.0
|
)
|
||||||||
Equity in Net Income (Loss) of Affiliates
|
(4
|
)
|
(20
|
)
|
80.0
|
|||||||
Segment Income
|
$
|
4,443
|
$
|
5,033
|
(11.7
|
) %
|
21
AT&T INC.
MARCH 31, 2015
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
The following table highlights other key measures of performance for the Wireless segment:
|
||||||||||||
|
||||||||||||
First Quarter
|
||||||||||||
|
2015
|
2014
|
Percent
Change
|
|||||||||
(in 000s)
|
||||||||||||
Wireless Subscribers 1
|
121,772
|
116,014
|
5.0
|
%
|
||||||||
Postpaid smartphones
|
57,157
|
53,020
|
7.8
|
|||||||||
Postpaid feature phones and data-centric devices
|
19,018
|
20,271
|
(6.2
|
)
|
||||||||
Postpaid
|
76,175
|
73,291
|
3.9
|
|||||||||
Prepaid
|
10,037
|
10,411
|
(3.6
|
)
|
||||||||
Reseller
|
13,595
|
13,886
|
(2.1
|
)
|
||||||||
Connected devices 2
|
21,965
|
18,426
|
19.2
|
|||||||||
Total Wireless Subscribers
|
121,772
|
116,014
|
5.0
|
|||||||||
|
||||||||||||
Net Additions 3
|
||||||||||||
Postpaid
|
441
|
625
|
(29.4
|
)
|
||||||||
Prepaid
|
98
|
88
|
11.4
|
|||||||||
Reseller
|
(266
|
)
|
(206
|
)
|
(29.1
|
)
|
||||||
Connected devices2
|
945
|
555
|
70.3
|
|||||||||
Net Subscriber Additions
|
1,218
|
1,062
|
14.7
|
|||||||||
|
||||||||||||
Mobile Share connections
|
55,581
|
32,585
|
70.6
|
|||||||||
Smartphones under our installment program at end of period
|
18,540
|
4,132
|
-
|
|||||||||
Smartphones sold under our installment program during period
|
4,065
|
2,868
|
41.7
|
%
|
||||||||
|
||||||||||||
Total Churn4
|
1.40
|
%
|
1.39
|
%
|
1 BP
|
|||||||
Postpaid Churn4
|
1.02
|
%
|
1.07
|
%
|
(5) BP
|
|||||||
1 Represents 100% of AT&T Mobility wireless subscribers.
|
||||||||||||
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
|
||||||||||||
3 Excludes merger and acquisition-related additions during the period.
|
||||||||||||
4 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period.
|
Subscriber Relationships
As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative services, plans and devices and a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. To attract and retain subscribers in a maturing market, we have launched a wide variety of plans, including Mobile Share and Mobile Share Value (collectively referred to as Mobile Share) and AT&T Next SM (AT&T Next).
At March 31, 2015, we served 121.8 million subscribers, an increase of 5.0% from the prior year. Our subscriber base consists primarily of postpaid accounts and connected devices. Our prepaid services, which include results from services sold under the Cricket brand, are monthly prepaid services.
ARPU
Postpaid phone-only ARPU (average revenue per average wireless subscriber) decreased 9.6% compared to the first quarter of 2014 reflecting subscribers' continued adoption of AT&T Next and Mobile Share Value plans. Postpaid phone-only ARPU plus Next subscriber installment billings (postpaid phone-only ARPU plus AT&T Next) decreased 1.9% compared to the first quarter of 2014 and increased 0.4% sequentially. As AT&T Next continues to grow, postpaid phone-only ARPU plus AT&T Next is expected to increase.
22
AT&T INC.
MARCH 31, 2015
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total churn was slightly higher in the first quarter of 2015, compared to the first quarter of 2014. Postpaid churn, however, was lower for the first quarter of 2015. A significant portion of our postpaid subscribers are on plans that historically have experienced lower churn.
Postpaid
Postpaid subscribers increased 3.9% compared to March 31, 2014. At March 31, 2015, 84% of our postpaid phone subscriber base used smartphones, compared to 78% at March 31, 2014. About 97% of our postpaid smartphone subscribers are on plans that provide for service on multip