REG - AT & T Inc. - 2Q14 10-Q <Origin Href="QuoteRef">T.N</Origin> - Part 2
29/10/2014 10:51
- Part 2: For the preceding part double click ID:nRSF4581Oa
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 Six months ended
June 30, June 30,
2014 2013 2014 2013
Pension cost:
Service cost - benefits earned during the period $ 282 $ 330 $ 564 $ 660
Interest cost on projected benefit obligation 662 607 1,323 1,214
Expected return on assets (851) (828) (1,700) (1,656)
Amortization of prior service credit (23) (23) (47) (46)
Net pension cost $ 70 $ 86 $ 140 $ 172
Postretirement cost:
Service cost - benefits earned during the period $ 58 $ 96 $ 116 $ 191
Interest cost on accumulated postretirement benefit obligation 364 389 729 779
Expected return on assets (162) (178) (326) (356)
Amortization of prior service credit (362) (262) (724) (525)
Net postretirement (credit) cost $ (102) $ 45 $ (205) $ 89
Combined net pension and postretirement (credit) cost $ (32) $ 131 $ (65) $ 261
Our combined net pension and postretirement cost decreased $163 in the second quarter and $326 for the first six months of
2014. The decrease reflects higher amortization of prior service credits due to plan changes, including changes to future
costs for continued retiree healthcare coverage. The decrease also reflects increasing corporate bond rates, which
contributed to lower service cost and higher interest costs.
Due in part to our 2013 enhanced retirement offer and projected distribution levels, we expect that lump sum distributions
from the plan during 2014 could exceed service and interest costs, resulting in settlement accounting for a portion of our
pension plan. This would result in remeasurement of the plans assets and obligations, with remeasurement for each interim
period thereafter.
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 $29 in the second
quarter of 2014, of which $28 was interest cost, and $58 for the first six months, of which $55 was interest cost. In 2013,
net supplemental retirement pension benefits cost was $28 in the second quarter, of which $26 was interest cost, and $55
for the first six months, of which $51 was interest cost.
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, 2013.
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:
June 30, 2014 December 31, 2013
Carrying Fair Carrying Fair
Amount Value Amount Value
Notes and debentures $ 83,548 $ 91,833 $ 74,484 $ 79,309
Commercial paper 150 150 20 20
Bank borrowings 5 5 1 1
Investment securities 2,708 2,708 2,450 2,450
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.
Following is the fair value leveling for available-for-sale securities and derivatives as of June 30, 2014 and December 31,
2013:
June 30, 2014
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 1,113 $ - $ - $ 1,113
International equities 566 - - 566
Fixed income bonds - 949 - 949
Asset Derivatives1
Interest rate swaps - 203 - 203
Cross-currency swaps - 2,011 - 2,011
Liability Derivatives1
Cross-currency swaps - (503) - (503)
December 31, 2013
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 1,049 $ - $ - $ 1,049
International equities 563 - - 563
Fixed income bonds - 759 - 759
Asset Derivatives1
Interest rate swaps - 191 - 191
Cross-currency swaps - 1,951 - 1,951
Liability Derivatives1
Interest rate swaps - (7) - (7)
Cross-currency swaps - (519) - (519)
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.
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 $90 have maturities of less than one year, $285 within one to three years, $300
within three to five years, and $274 for five or more years.
Our short-term investments (including money market securities) and customer deposits are recorded at amortized cost, and
the respective carrying amounts approximate fair values. 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 six months ended June 30, 2014 and June 30,
2013, 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 and Canadian dollar 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 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 six months ended June
30, 2014 and June 30, 2013, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.
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 $43 from accumulated OCI to interest expense due to the
amortization of net losses on historical interest rate locks.
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 six months ended June 30, 2014 and June 30, 2013, 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 June 30, 2014, we had posted collateral
of $3 (a deposit asset) and held collateral of $1,755 (a receipt liability). Under the agreements, if our credit rating had
been downgraded one rating level by Moody's Investors Service and Standard & Poor's Rating Services and two rating levels
by Fitch Ratings, before the final collateral exchange in June, we would have been required to post additional collateral
of $50. At December 31, 2013, we had posted collateral of $8 (a deposit asset) and held collateral of $1,600 (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:
June 30, December 31,
2014 2013
Interest rate swaps $ 6,350 $ 4,750
Cross-currency swaps 20,650 17,787
Total $ 27,000 $ 22,537
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 Six months ended
June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ 22 $ (63) $ 11 $ (87)
Gain (Loss) on long-term debt (22) 63 (11) 87
In addition, the net swap settlements that accrued and settled in the quarter ended June 30 were offset against interest
expense.
Cash Flow Hedging Relationships Three months ended Six months ended
June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI $ (160) $ 184 $ (149) $ 325
Interest rate locks:
Interest income (expense) reclassified from accumulated OCI into income (11) (12) (22) (23)
Foreign exchange contracts:
Gain (Loss) recognized in accumulated OCI - 2 (2) -
NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
Leap On March 13, 2014, we acquired Leap, a provider of prepaid wireless service, for fifteen dollars per outstanding
share of Leap's common stock, or $1,248 (excluding Leap's cash on hand), plus one nontransferable contingent value right
(CVR) per share. The CVR will entitle each Leap stockholder to a pro rata share of the net proceeds of the future sale of
the Chicago 700 MHz A-band Federal Communications Commission (FCC) license held by Leap.
The preliminary values of assets acquired under the terms of the agreement were: $3,000 in licenses, $510 in property,
plant and equipment, $520 of customer lists, $340 for trade names and $716 of goodwill. The estimated fair value of debt
associated with the acquisition of Leap was $3,889, all of which was redeemed or matured by July 31, 2014.
Pending Acquisition
DIRECTV On May 18, 2014, we announced an agreement to acquire DIRECTV in a stock-and-cash transaction for ninety-five
dollars per share of DIRECTV's common stock, or approximately $48,500 at the date of announcement. As of June 30, 2014,
DIRECTV had approximately $17,691 in net debt. Each DIRECTV shareholder will receive cash of $28.50 per share and $66.50
per share in our stock. The stock portion will be subject to a collar such that DIRECTV shareholders will receive 1.905
AT&T shares if our stock price is below $34.90 per share at closing and 1.724 AT&T shares if our stock price is above
$38.58 at closing. If our stock price is between $34.90 and $38.58 at closing, then DIRECTV shareholders will receive a
number of 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 must be adopted by DIRECTV's stockholders and is 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 state public utility
commissions and foreign governmental entities have been obtained and are in full force and effect. We have obtained all
required state regulatory consents. The transaction is expected to close within 12 months of the announcement. The
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 the DIRECTV stockholders' approval has not been
obtained at a duly convened meeting of DIRECTV stockholders or an order permanently restraining, enjoining, or otherwise
prohibiting consummation of the merger becomes final and non-appealable. In addition, we may terminate the agreement if the
DIRECTV board of directors changes its recommendation of the merger in a manner adverse to AT&T prior to the DIRECTV
stockholders' approval having been obtained. The parties also have agreed that in the event that DIRECTV's agreement for
the "NFL Sunday Ticket" service is not renewed substantially on the terms discussed between the parties, the Company may
elect not to consummate the Merger, but the Company will not have a damages claim arising out of such failure so long as
DIRECTV used its reasonable best efforts to obtain such renewal. Under certain circumstances 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.
Disposition
América Móvil In May 2014, in conjunction with the announcement of our intention to dispose of our investment in América
Móvil and the resignation of our board members from the board of América Móvil, we discontinued accounting for this
investment under the equity method due to our lack of significant influence. On June 30, 2014, we sold our remaining stake
in América Móvil for approximately $5,566 and recorded a pre-tax gain of $1,243. At closing, we received $4,565 cash and
have agreed to receive a final cash payment of approximately $1,001 within 60 days. To date we have received partial
payments totaling $650.
Pending Disposition
Connecticut Wireline In December 2013, we entered into an agreement to sell our incumbent local exchange operations in
Connecticut for $2,000 in cash. The transaction was approved by the FCC on July 25, 2014 and is pending before the
Connecticut Public Utilities Regulatory Authority and other state regulatory authorities. We expect the deal to close in
the fourth quarter of 2014, subject to customary closing conditions.
We applied held-for-sale treatment to the assets and liabilities of the Connecticut operations, and, accordingly, included
the assets in "Other current assets," and the related liabilities in "Accounts payable and accrued liabilities," on our
consolidated balance sheets. However, the business does not qualify as discontinued operations as we expect significant
continuing direct cash flows related to the disposed operations. Assets and liabilities of the Connecticut operations
included the following:
June 30, December 31,
2014 2013
Assets held for sale:
Current assets $ 122 $ 155
Property, plant and equipment - net 1,388 1,289
Goodwill 799 799
Other assets 18 17
Total assets $ 2,327 $ 2,260
Liabilities related to assets held for sale:
Current liabilities $ 125 $ 128
Noncurrent liabilities 478 480
Total liabilities $ 603 $ 608
NOTE 8. SALE OF EQUIPMENT INSTALLMENT RECEIVABLES
We offer our customers the option to purchase certain wireless devices in installments over a period of up to 24 months,
with the right to trade in the original equipment for a new device and have the remaining unpaid balance satisfied. As of
June 30, 2014, gross equipment installment receivables of $2,427 were included on our consolidated balance sheets.
On June 27, 2014, we entered into 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) with
a funding amount not expected to exceed $2,000 at any given time. Under the agreement, we may transfer the receivables to
the Purchasers for cash and additional consideration upon settlement of the receivables. Under the terms of the
arrangement, we continue to bill and collect on behalf of our customers for the receivables sold.
On June 27, 2014, we sold to the Purchasers equipment installment receivables totaling $1,637 (or $1,391 net of allowance,
imputed interest and trade-in right guarantees) and received cash proceeds of $819 and will collect the remaining balance
over the remaining term of the equipment installment contracts. We have recorded a deferred purchase price of $565 that
assumes customers elect to trade-in their device and agree to a new contract with AT&T; however, if customers choose not to
trade-in, we expect to receive the remaining installments. The deferred purchase price was recorded at estimated fair
value, which was based on remaining installment payments expected to be collected, adjusted by the expected timing and
value of the device trade-ins. The value of the device trade-ins considers estimated prices offered to us by independent,
third parties that contemplate changes in value after the launch of a device. Our maximum exposure to loss as a result of
selling these is limited to the amount of our deferred purchase price at any point in time.
This transaction did not have a material impact in our consolidated statements of income or to "Total Assets" reported on
our consolidated balance sheet. We will 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.
RESULTS OF OPERATIONS
For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of
the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company
whose subsidiaries and affiliates operate in the communications services industry both in the United States and
internationally, providing wireless and wireline telecommunication services and equipment. You should read this discussion
in conjunction with the consolidated financial statements, accompanying notes and management's discussion and analysis of
financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31,
2013. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements. In the
tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a
dash. Certain amounts have been reclassified to conform to the current period's presentation.
Consolidated Results Our financial results in the second quarter and for the first six months of 2014 and 2013 are
summarized as follows:
Second Quarter Six-Month Period
2014 2013 Percent Change 2014 2013 Percent Change
Operating Revenues $ 32,575 $ 32,075 1.6 % $ 65,051 $ 63,431 2.6 %
Operating expenses
Cost of services and sales 14,212 13,270 7.1 27,533 25,824 6.6
Selling, general and administrative 8,197 8,121 0.9 16,457 16,454 -
Depreciation and amortization 4,550 4,571 (0.5) 9,167 9,100 0.7
Total Operating Expenses 26,959 25,962 3.8 53,157 51,378 3.5
Operating Income 5,616 6,113 (8.1) 11,894 12,053 (1.3)
Income Before Income Taxes 6,106 5,794 5.4 11,757 11,124 5.7
Net Income 3,621 3,880 (6.7) 7,355 7,653 (3.9)
Net Income Attributable to AT&T $ 3,547 $ 3,822 (7.2) % $ 7,199 $ 7,522 (4.3) %
Overview
Operating incomedecreased $497, or 8.1%, in the second quarter and $159, or 1.3%, for the first six months of 2014.
Operating income in the second quarter reflects lower wireless service revenues resulting from the popularity of Mobile
Share plans, continued decline in legacy voice and data product revenues as well as higher AT&T U-verse (U-verse) content
costs. This decline is partially offset by higher wireless equipment revenue for device sales under our AT&T NextSM (AT&T
Next) program as well as continued growth in our U-verse and strategic business services. Our operating results include the
operations of Leap Wireless International, Inc. (Leap) from March 13, 2014, the date of acquisition.
Operating revenues increased $500, or 1.6%, in the second quarter and $1,620, or 2.6%, for the first six months of 2014.
Growth in wireless revenues reflected the continuing trend by our postpaid subscribers to choose devices on installment
purchase rather than the device subsidy model, which resulted in increased equipment revenue recognized for device sales,
partially offset by lower wireless service revenues. Wireline revenues were slightly lower and continue to be driven by
service revenues from our U-verse services and strategic business services, which almost offset decreases from our legacy
voice and data products.
The telecommunications industry is rapidly evolving from fixed location, voice-oriented services into an industry driven by
customer demand for instantly available, data-based services (including video). Our products, services and plans are
changing as we transition to sophisticated, high-speed, IP-based alternatives. In addition to re-designing our networks to
accommodate these new demands and to take advantage of related technological efficiencies, we are also repositioning our
wireless model by moving to simple pricing and no-device-subsidy plans. We expect continued growth in our wireless and
wireline IP-based services as we bundle and price plans with greater focus on data and video offerings. We expect continued
declines in voice services and our basic wireline data services as customers choose these next-generation services.
Cost of services and sales expenses increased $942, or 7.1%, in the second quarter and $1,709, or 6.6%, for the first six
months of 2014. The increases were primarily due to customers choosing higher-priced devices, which contributed to
increased wireless equipment costs and handset insurance costs. The increases also reflect higher wireless network costs
and wireline costs attributable to U-verse subscriber growth and employee-related charges.
Selling, general and administrative expenses increased $76, or 0.9%, in the second quarter and $3 for the first six months
of 2014. The increases were primarily due to increased nonemployee related expenses related to information technology
enhancements, and higher selling (other than commissions) and administrative expenses in our Wireless segment. Partially
offsetting the increases were lower commissions expenses and lower employee-related costs in our Wireline segment.
Depreciation and amortization expense decreased $21, or 0.5%, in the second quarter and increased $67, or 0.7%, for the
first six months of 2014. The second-quarter decrease was primarily due to an increase in the useful life of non-network
software, an increase in fully depreciated assets and lower amortization of intangibles for customer lists related to
acquisitions, which were partially offset by ongoing capital spending for network upgrades and expansion and additional
expense for assets acquired from Leap. The increase for the first six months was primarily due to increased capital
spending for network upgrades and expansion.
Interest expense increased $56, or 6.8%, in the second quarter and $89, or 5.4%, for the first six months of 2014. The
increases were primarily due to higher interest related to our December 2013 tower transaction, partially offset by lower
interest incurred as a result of 2013 refinancing activity.
Equity in net income of affiliates decreased $116, or 53.2%, in the second quarter and $213, or 52.9%, for the first six
months of 2014. Decreased equity in net income of affiliates in the second quarter, and for the first six months, was
primarily due to decreased earnings at América Móvil, S.A. de C.V. (América Móvil) and YP Holdings LLC (YP Holdings). The
second-quarter 2014 results also reflect our change in accounting for América Móvil (see Note 7).
Second Quarter Six-Month Period
2014 2013 2014 2013
América Móvil $ 99 $ 174 $ 153 $ 325
YP Holdings 31 63 85 115
Mobile Wallet Joint Venture (29) (19) (49) (37)
Other 1 - 1 -
Equity in Net Income of Affiliates $ 102 $ 218 $ 190 $ 403
Other income (expense) - net We had other income of $1,269 in the second quarter and $1,414 for the first six months of
2014, compared to other income of $288 in the second quarter and $320 for the first six months of 2013. Results in the
second quarter and for the first six months of 2014 included a net gain on the sale of América Móvil shares and
otherinvestments of $1,245 and $1,367, interest and dividend income of $23 and $36 and leveraged lease income of $7 and
$13, respectively.
Other income in the second quarter and for the first six months of 2013 included a net gain on the sale of América Móvil
shares and other investments of $249 and $260, interest and dividend income of $23 and $40 and leveraged lease income of
$10 and $15, respectively.
Income taxes increased $571, or 29.8%, in the second quarter and $931, or 26.8%, for the first six months of 2014. Our
effective tax rate was 40.7% for the second quarter and 37.4% for the first six months of 2014, as compared to 33.0% for
the second quarter and 31.2% for the first six months of 2013. The increase in effective tax rate for both the second
quarter and the first six months was primarily due to the sale of América Móvil shares in 2014. We had previously assumed
that undistributed earnings for our investment in América Móvil would be returned through dividends that, when received,
would qualify for foreign tax credits. As a result of our strategic decision to sell this equity position in connection
with our pending acquisition of DIRECTV, these foreign tax credits were not available to be realized.
Selected Financial and Operating Data
June 30,
Subscribers and connections in (000s) 2014 2013
Wireless subscribers 116,634 107,884
Network access lines in service 22,547 26,849
U-Verse VoIP connections 4,411 3,379
Total wireline broadband connections 16,448 16,453
Debt ratio1 47.6% 46.6%
Ratio of earnings to fixed charges2 5.53 5.51
Number of AT&T employees 248,170 245,350
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 See exhibit 12
Segment Results
Our segments are strategic business units that offer different products and services over various technology platforms and
are managed accordingly. Our operating segment results presented in Note 4 and discussed below for each segment follow our
internal management reporting. We analyze our operating segments based on segment income before income taxes. We make our
capital allocation decisions based on our strategic direction of the business, needs of the network (wireless or wireline)
providing services and demands 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 two reportable segments: (1) Wireless and (2) Wireline.
The Wireless segment uses our nationwide network to provide consumer and business customers with wireless data and voice
communications services. This segment includes our portion of the results from our mobile wallet joint venture which is
accounted for as an equity investment.
The Wireline segment uses our regional, national and global network to provide consumer and business customers with data
and voice communications services, U-verse high speed Internet, video and VoIP services and managed networking to business
customers.
We discuss capital expenditures for each segment in "Liquidity and Capital Resources."
Wireless
Segment Results
Second Quarter Six-Month Period
2014 2013 Percent Change 2014 2013 Percent Change
Segment operating revenues
Service $ 15,148 $ 15,370 (1.4) % $ 30,535 $ 30,432 0.3 %
Equipment 2,782 1,921 44.8 5,261 3,550 48.2
Total Segment Operating Revenues 17,930 17,291 3.7 35,796 33,982 5.3
Segment operating expenses
Operations and support 11,568 10,770 7.4 22,450 20,950 7.2
Depreciation and amortization 2,035 1,843 10.4 3,966 3,678 7.8
Total Segment Operating Expenses 13,603 12,613 7.8 26,416 24,628 7.3
Segment Operating Income 4,327 4,678 (7.5) 9,380 9,354 0.3
Equity in Net Income (Loss) of
Affiliates (29) (19) (52.6) (49) (37) (32.4)
Segment Income $ 4,298 $ 4,659 (7.7) % $ 9,331 $ 9,317 0.2 %
The following table highlights other key measures of performance for the Wireless segment:
Second Quarter Six-Month Period
2014 2013 Percent Change 2014 2013 Percent Change
(in 000s)
Wireless Subscribers 1 116,634 107,884 8.1 %
Postpaid smartphones 54,629 49,462 10.4
Postpaid feature phones and data-centric
devices 19,703 21,816 (9.7)
Postpaid 74,332 71,278 4.3
Prepaid 11,343 7,084 60.1
Reseller 13,756 14,330 (4.0)
Connected devices 2 17,203 15,192 13.2
Total Wireless Subscribers 116,634 107,884 8.1
Net Additions 3
Postpaid 1,026 551 86.2 % 1,651 847 94.9
Prepaid (405) 11 - (455) (173) -
Reseller (162) (414) 60.9 (368) (666) 44.7
Connected devices2 175 484 (63.8) 868 915 (5.1)
Net Subscriber Additions 634 632 0.3 1,696 923 83.7
Mobile Share connections 41,291 13,077 -
Smartphones sold under our installment
program during period 3,142 - - 6,010 - -
Total Churn4 1.47% 1.36% 11 BP 1.43% 1.37% 6 BP
Postpaid Churn4 0.86% 1.02% (16) BP 0.96% 1.03% (7) BP
1 Represents 100% of AT&T Mobility wireless subscribers.
2 Includes data-centric devices (eReaders and automobile monitoring systems). Excludes tablets, which are primarily
included in postpaid.
3 Excludes merger and acquisition-related additions during the period.
4 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided
by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to
the average of the churn rate for each month of that period.
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 AT&T NextSM (AT&T Next). While we have
historically focused on attracting and retaining postpaid subscribers, we have recently increased our focus on prepaid
subscribers with our acquisition of Leap.
At June 30, 2014, we served 116.6 million subscribers (including approximately 4.5 million Cricket subscribers from our
March 13, 2014 acquisition of Leap), an increase of 8.1% from the prior year. Our subscriber base consists primarily of
postpaid accounts. Our prepaid services, which include results from services sold under the Cricket brand, are monthly,
pay-as-you-go services.
ARPU
Total ARPU (average service revenue per average wireless subscribers) was down 8.9 % in the second quarter and 5.5% for the
first six months of 2014. Postpaid ARPU was down 9.6% and 5.5% when compared to the second quarter and first six months of
2013, primarily due to the attractive Mobile Share Value pricing. As we adjust our service offerings and pricing
structures, management believes that postpaid phone-only ARPU plus Next subscriber installment billings (postpaid
phone-only ARPU plus AT&T Next) is a better representation of the monthly economic value per postpaid subscriber. For the
quarter and six months, postpaid phone-only ARPU decreased 7.7% and 3.7% versus the year-ago periods and postpaid
phone-only ARPU plus AT&T Next decreased 4.7% and 1.4% compared to the same periods last year.
Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and
improve margins. Total churn was higher in the second quarter and for the first six months of 2014 due to the expected
pressure in prepaid with the transition of Cricket subscribers to our network. Postpaid churn was lower for both the second
quarter and the first six months.
Postpaid
Postpaid subscribers increased 1.4% during the second quarter and 4.3% when compared to June 30, 2013. At June 30, 2014,
80% of our postpaid phone subscriber base used smartphones, compared to 73% at June 30, 2013. About 95% 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. A growing percentage of our postpaid smartphone subscribers are on
usage-based data plans, with approximately 80% on these plans as compared to 71% in the prior year, and about 49% of our
Mobile Share accounts have chosen the 10 gigabyte or higher plans. Device connections on our Mobile Share plans now
represent about 56% of our postpaid customer base. Such offerings are intended to encourage existing subscribers to upgrade
their current services and/or add connected devices, attract subscribers from other providers and minimize subscriber
churn.
As of June 30, 2014, approximately 84% of our postpaid smartphone subscribers use a 4G-capable device (i.e., a device that
would operate on our HSPA+ or LTE network), and about 63% of our postpaid smartphone subscribers use an LTE device.
Historically, our postpaid customers have signed two-year service contracts for subsidized handsets. However, through our
Mobile Share plans, we have recently begun offering postpaid services at lower prices for those customers who either bring
their own devices or participate in our AT&T Next program. Our AT&T Next program allows for postpaid subscribers to
purchase certain devices in installments over a period of up to 24 months. Additionally, after a specified period of time
they also have the right to trade in the original device for a new device and have the remaining unpaid balance satisfied.
For customers that elect these trade-in programs, at the time of the sale, we recognize equipment revenue for the amount of
the customer receivable, net of the fair value of the trade-in right guarantee and
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