REG - AT & T Inc. - 2Q14 10-Q <Origin Href="QuoteRef">T.N</Origin> - Part 3
29/10/2014 10:51
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imputed interest. A significant
percentage of our customers on the AT&T Next program pay a lower monthly service charge, which results in lower service
revenue recorded for these subscribers. In the second quarter of 2014, we began offering the AT&T Next program through
other distributors and we plan to expand the offering to additional distributors, which is expected to further accelerate
the impacts on service revenues.
Prepaid
In March 2014, we completed our acquisition of Leap, which included approximately 4.5 million prepaid subscribers at
closing. Prepaid subscribers decreased 4.0% during the second quarter due to expected transition of Cricket subscribers.
Excluding merger and acquisition related additions, prepaid subscribers decreased 3.9% when compared to June 30, 2013. As
of July 31, we have approximately 1 million Leap and former Aio subscribers on our GSM network.
Operating Results
Our Wireless segment operating income margin in the second quarter decreased from 27.1% in 2013 to 24.1% in 2014 and for
the first six months decreased from 27.5% in 2013 to 26.2% in 2014. Our Wireless segment operating income decreased $351,
or 7.5%, in the second quarter and increased $26, or 0.3%, for the first six months of 2014. The decreases in operating
margin and income in the second quarter reflected the increasing popularity of Mobile Share plans, promotional activities
and new business initiatives. The increase in segment operating income for the first six months was primarily driven by
overall growth in the number of subscribers using smartphones with larger data plans, which was mostly offset by lower
service revenues from Mobile Share plans and new business initiatives.
Service revenues decreased $222, or 1.4%, in the second quarter and increased $103, or 0.3%, for the first six months of
2014. The decrease in the second quarter is due to customers shifting to no-device subsidy plans, which allow for
discounted monthly service charges under our Mobile Share plans. This decrease was largely offset by revenues from Cricket
subscribers that were not included in our 2013 results. The increase in the first six months was primarily due to the
increased number of subscribers using smartphones with larger data plans and revenues from Cricket subscribers, which were
partially offset by the expanding Mobile Share plans. While we expect monthly service revenues to continue to be pressured
as customers move to Mobile Share plans, we expect equipment revenues to increase for those subscribers who elect the AT&T
Next program.
Equipmentrevenues increased $861, or 44.8%, in the second quarter and $1,711, or 48.2%, for the first six months of 2014.
The increases were primarily related to devices sold under our AT&T Next program. During the second quarter, with the
launch of the AT&T Next program through other distributors we began deferring the recognition of equipment revenue and
costs until the device is sold to the end subscriber and the trade-in right is conveyed. This lag in timing of the
recognition of the sale resulted in lower revenue through these distributors during the second quarter of 2014.
Operations and support expenses increased $798, or 7.4%, in the second quarter and $1,500, or 7.2%, in the first six months
of 2014. The increases in the second quarter and for the first six months were primarily due to the following:
· Selling (other than commissions) and administrative expenses increased $416 and $699 due primarily to increases of:
$177 and $165 primarily due to legal costs and accruals including fees and costs related to acquisitions; $65 and $110 in
sales expense; $41 and $56 in bad debt expense; $36 and $96 in customer service expense; $32 and $68 in information
technology costs in conjunction with ongoing support systems development; and $22 and $48 in marketing expense. Each of
these increases included additional costs related to the acquisition of Leap.
· Network system costs increased $242 and $353 due to higher network traffic and personnel-related network support
costs and cell site related costs in conjunction with our network enhancement efforts.
· Equipment costs increased $175 and $544 reflecting the sales of more expensive smartphones.
· Handset insurance cost increased $84 and $163 due to an increase in the cost of replacement phones.
Partially offsetting these increases were lower commission expenses of $240 and $340 primarily due to the decline in
upgrade transactions and lower average commission rates.
Depreciation and amortization expenses increased $192, or 10.4%, in the second quarter and $288, or 7.8%, for the first six
months of 2014. Depreciation expense increased $193, or 10.8%, in the second quarter and $339, or 9.6%, for the first six
months primarily due to ongoing capital spending for network upgrades and expansion. Amortization expense decreased $1, or
1.6%, in the second quarter and $51, or 36.4%, for the first six months primarily due to the fact we have fully amortized
customer lists acquired in our acquisition of BellSouth Corporation. The change in the second quarter includes higher
amortization of intangibles for customer lists related to our acquisition of Leap.
Wireline
Segment Results
Second Quarter Six-Month Period
2014 2013 Percent Change 2014 2013 Percent Change
Segment operating revenues
Service $ 14,408 $ 14,482 (0.5) % $ 28,797 $ 28,863 (0.2) %
Equipment 229 291 (21.3) 441 565 (21.9)
Total Segment Operating Revenues 14,637 14,773 (0.9) 29,238 29,428 (0.6)
Segment operating expenses
Operations and support 10,700 10,417 2.7 21,157 20,752 2.0
Depreciation and amortization 2,514 2,722 (7.6) 5,198 5,410 (3.9)
Total Segment Operating Expenses 13,214 13,139 0.6 26,355 26,162 0.7
Segment Operating Income 1,423 1,634 (12.9) 2,883 3,266 (11.7)
Equity in Net Income of Affiliates - - - 1 1 -
Segment Income $ 1,423 $ 1,634 (12.9) % $ 2,884 $ 3,267 (11.7) %
Supplemental Information
Wireline Broadband, Telephone and Video Connections Summary
Our broadband, switched access lines and other services provided at June 30, 2014 and 2013 are shown below and trends are
addressed throughout this segment discussion.
June 30, June 30, Percent
(in 000s) 2014 2013 Change
U-verse high speed Internet 11,497 9,090 26.5 %
DSL and Other Broadband Connections 4,951 7,363 (32.8)
Total Wireline Broadband Connections1 16,448 16,453 -
Total U-verse Video Connections 5,851 5,001 17.0
Retail Consumer Switched Access Lines 10,935 13,983 (21.8)
U-verse Consumer VoIP Connections 4,379 3,379 29.6
Total Retail Consumer Voice Connections 15,314 17,362 (11.8)
Switched Access Lines
Retail Consumer 10,935 13,983 (21.8)
Retail Business 9,808 10,904 (10.1)
Retail Subtotal 20,743 24,887 (16.7)
Wholesale Subtotal 1,581 1,687 (6.3)
Total Switched Access Lines2 22,547 26,849 (16.0) %
1 Total wireline broadband connections include DSL, U-verse high speed Internet and satellite broadband.
2 Total switched access lines includes access lines provided to national mass markets and private payphone service
providers of 223 at June 30, 2014 and 276 at June 30, 2013.
Operating Results
Our Wireline segment operating income margin in the second quarter decreased from 11.1% in 2013 to 9.7% in 2014, and for
the first six months decreased from 11.1% in 2013 to 9.9% in 2014. Our Wireline segment operating income decreased $211, or
12.9%, in the second quarter and $383, or 11.7%, for the first six months of 2014. The decrease in operating margins and
income was driven primarily by continued decrease in our legacy voice and data products and increased U-verse content
costs, largely offset by increased revenues from our U-verse and strategic business services.
Service revenues decreased $74, or 0.5%, in the second quarter and $66, or 0.2%, for the first six months of 2014. Lower
service revenues from business customers, which include integration, government-related and outsourcing services, were
largely offset by higher service revenues from our residential customers.
Business
Service revenues from business customers decreased $197, or 2.3%, in the second quarter and $379, or 2.2%, for the first
six months of 2014. The revenue decreases were due to a $115 and $264 decrease in long-distance and local voice revenues
and a $329 and $644 decrease in traditional data revenues, which include circuit-based and packet-switched data services.
The decreases were primarily due to lower demand as customers continue to shift to our most advanced IP-based offerings
such as Ethernet, VPN, U-verse high speed Internet access and managed Internet services. The lower traditional service
revenues were largely offset by higher demand for our next generation services. Strategic business service revenues, which
include VPNs, Ethernet, hosting, IP conferencing, VoIP, Ethernet-access to Managed Internet Service (EaMIS), security
services, and U-verse services provided to business customers increased $283, or 13.5%, in the second quarter and $601, or
14.7%, for the first six months of 2014. In the second quarter and for the first six months, revenue from VPN increased $88
and $188, Ethernet increased $85 and $165, U-verse services increased $34 and $78 and EaMIS increased $37 and $73.
Consumer
Service revenues from residential customers increased $175, or 3.1%, in the second quarter and $415, or 3.8%, for the first
six months of 2014. The increases were driven by higher IP data revenue reflecting increased U-verse penetration, customer
additions, and migration from our legacy voice and DSL services. In the second quarter and for the first six months,
U-verse revenue from consumers increased $341 and $702 for high-speed Internet access, $265 and $541 for video and $94 and
$205 for voice. These increases were partially offset by a decrease of $187 and $352 in DSL revenue as customers continue
to shift to our strategic high-speed Internet access offerings, and a $347 and $700 decrease in traditional voice
revenues.
Equipment revenues decreased $62, or 21.3%, in the second quarter of 2014, and $124, or 21.9%, for the first six months of
2014. Our equipment revenues are mainly attributable to our business customers.
Operations and support expenses increased $283, or 2.7%, in the second quarter and $405, or 2.0%, for the first six months
of 2014. Operations and support expenses consist of costs incurred to provide our products and services, including costs of
operating and maintaining our networks and personnel costs, such as compensation and benefits.
The increases in expenses were primarily due to increased cost of sales of $111 and $253, related to U-verse related
content fees; higher nonemployee expenses of $155 and $242 in conjunction with Project Velocity IP (VIP) investments,
information technology enhancements and U-verse business growth; higher Universal Service Fund (USF) fees of $44 and $103,
which are offset by higher USF revenues; higher materials and energy costs of $34 and $74; and higher traffic compensation
costs of $28 and $67. These increases were partially offset by lower employee related expense of $69 and $278, reflecting
ongoing workforce reduction initiatives.
Depreciation and amortization expenses decreased $208, or 7.6%, in the secondquarter and $212, or 3.9%, for the first six
months of 2014. Depreciation expense decreased $172, or 6.6%, in the secondquarter and $140, or 2.7%, for the first six
months of 2014 primarily due to the increase in the useful life of non-network software, partially offset by ongoing
capital spending for network upgrades and expansion. Amortization expense decreased $36, or 32.1%, and $72, or 30.9%, for
the first six months of 2014 primarily due to lower amortization of intangibles for the customer lists associated with
acquisitions.
OTHER BUSINESS MATTERS
U-verse Services As part of Project VIP, we plan to expand our IP-broadband service to approximately 57 million customer
locations. As of June 30, 2014, we had 11.8 million total U-verse subscribers (high-speed Internet and video), including
11.5 million Internet and 5.9 million video subscribers (subscribers to both services are only counted once in the total).
We believe that our U-verse TV service is a "video service" under the Federal Communications Act. However, some cable
providers and municipalities have claimed that certain IP services should be treated as a traditional cable service and
therefore subject to the applicable state and local cable regulation. Petitions have been filed at the Federal
Communications Commission (FCC) alleging that the manner in which we provision "public, educational and governmental" (PEG)
programming over our U-verse TV service conflicts with federal law. If courts having jurisdiction where we have significant
deployments of our U-verse services were to decide that federal, state and/or local cable regulation were applicable to our
U-verse services, or if the FCC, state agencies or the courts were to rule that we must deliver PEG programming in a manner
substantially different from the way we do today or in ways that are inconsistent with our current network architecture, it
could have a material adverse effect on the cost and extent of our U-verse offerings.
DIRECTV Acquisition 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.
Based on synergies we expect to realize with the acquisition, we have also committed to the following upon closing of the
transaction: (1) expanding and enhancing our deployment of both wireline and fixed wireless broadband to at least 15
million customer locations across 48 states, with most of the locations in underserved rural areas, (2) adhering to the
FCC's Open Internet protections established in 2010 for three years after closing, regardless of whether the FCC
re-establishes such protections for other industry participants following the D.C. Circuit's vacating of those rules, (3)
for three years after closing, offering standalone retail broadband Internet access service at reasonable market-based
prices, including a service of at least 6 Mbps down (where feasible) at guaranteed prices, in areas where we offer wireline
broadband service today, and (4) offering, for three years after closing, standalone DIRECTV satellite video service at
nationwide package prices that do not differ between customers in AT&T's wireline footprint and customers outside our
current 22-state wireline footprint.
Connecticut Wireline Disposition In December 2013, we agreed to sell our incumbent local exchange operations in
Connecticut to Frontier Communications Corporation for $2,000 in cash. These Connecticut operations represent approximately
$1,200 in annual revenues as of 2013. The transaction was approved by the FCC on July 25, 2014 and is pending before the
Connecticut Public Utilities Regulatory Authority and other state regulatory authorities. We expect the transaction to
close in the fourth quarter of 2014, subject to customary closing conditions. We anticipate the cash tax impact of the
transaction would be partially offset by the availability of capital loss carryforwards.
Environmental On March 29, 2012, attorneys in an investigation led by the California Attorney General's Office informed us
of claimed violations of California state hazardous waste statutes arising from the disposal of batteries, aerosol cans,
and electronic waste at various California facilities. We are analyzing the claims while cooperating with investigators and
implementing remedial measures where appropriate. At this time, we anticipate we will face civil penalties in excess of one
hundred thousand dollars, but we do not anticipate such fines would be in an amount that would be material.
COMPETITIVE AND REGULATORY ENVIRONMENT
Overview AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities.
AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational
regulatory authorities in the markets where service is provided, and regulation is generally limited to operational
licensing authority for the provision of services to enterprise customers.
In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the
benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening
all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare.
However, since the Telecom Act was passed, the FCC and some state regulatory commissions have maintained or expanded
certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated
as legal monopolies. We are pursuing, at both the state and federal levels, additional legislative and regulatory measures
to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our
ability to compete more effectively and offer services wanted and needed by our customers, including initiatives to
transition services from traditional networks to all IP-based networks. At the same time, we also seek to ensure that
legacy regulations are not extended to broadband or wireless services, which are subject to vigorous competition.
In addition, states representing a majority of our local service access lines have adopted legislation that enables new
video entrants to acquire a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or
even thousands of municipal-approved franchises) to offer competitive video services. We also are supporting efforts to
update and improve regulatory treatment for retail services. Regulatory reform and passage of legislation is uncertain and
depends on many factors.
We provide wireless services in robustly competitive markets, but those services are subject to substantial and increasing
governmental regulation. Wireless communications providers must obtain licenses from the FCC to provide communications
services at specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and
policies governing the use of the spectrum. While wireless communications providers' prices and service offerings are
generally not subject to state regulation, states sometimes attempt to regulate or legislate various aspects of wireless
services, such as in the area of consumer protection.
The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. Government
to make more spectrum available. In February 2012, Congress set forth specific spectrum blocks to be auctioned and licensed
by February 2015 (the "AWS-3 Auction"), and also authorized the FCC to conduct an "incentive auction," to make available
for wireless broadband use certain spectrum that is currently used by broadcast television licensees (the "600 MHz
Auction"). The FCC has initiated proceedings to establish rules that would govern these auctions. The AWS-3 Auction is
expected to begin in the second half of 2014. We intend to bid at least $9,000 in connection with the 600 MHz auction,
provided there is sufficient spectrum available in the auction to give us a viable path to at least a 2x10 MHz nationwide
spectrum footprint.
In May 2014, in a separate proceeding, the FCC issued an order revising its policies governing mobile spectrum holdings.
The FCC rejected the imposition of caps on the amount of spectrum any carrier could acquire, retaining its case by case
review policy. Moreover, it increased the amount of spectrum that could be acquired before exceeding an aggregation
"screen" that would automatically trigger closer scrutiny of a proposed transaction. On the other hand, it indicated that
it will separately consider an acquisition of "low band" spectrum that exceeds one third of the available low band spectrum
as presumptively harmful to competition. In addition, the FCC imposed limits on certain bidders in the 600 MHz Auction,
including AT&T, restricting them from bidding on up to 40 percent of the available spectrum in the incentive auction in
markets that cover as much as 70-80 percent of the U.S. population. On balance, the order and the new spectrum screen
should allow AT&T to obtain additional spectrum to meet our customers' needs, but because AT&T uses more "low band"
spectrum in its network than some other national carriers, the separate consideration of low band spectrum acquisitions
might affect AT&T's ability to expand capacity in these bands ("low band" spectrum has better propagation characteristics
than "high band" spectrum). We seek to ensure that we have the opportunity, through the auction process and otherwise, to
obtain the spectrum we need to provide our customers with high-quality service in the future.
Due to substantial increases in the demand for wireless service in the United States, AT&T is facing significant spectrum
and capacity constraints on its wireless network in certain markets. We expect such constraints to increase and expand to
additional markets in the coming years. While we are continuing to invest significant capital in expanding our network
capacity, our capacity constraints could affect the quality of existing data and voice services and our ability to launch
new, advanced wireless broadband services, unless we are able to obtain more spectrum. Any long-term spectrum solution will
require that the FCC make new or existing spectrum available to the wireless industry to meet the expanding needs of our
subscribers. We will continue to attempt to address spectrum and capacity constraints on a market-by-market basis.
Net Neutrality In January 2014, the D.C. Circuit released its decision on Verizon's appeal of the FCC's Net Neutrality
rules. Those rules prohibited providers of fixed, mass market Internet access service from blocking access to lawful
content, applications, services or non-harmful devices. The rules prohibited providers of mobile broadband Internet access
service from blocking consumers from accessing lawful websites or applications that compete with the provider's own voice
or video telephony services. The rules also imposed transparency requirements on providers of both fixed and mobile
broadband Internet access services, requiring public disclosure of information regarding network management practices,
performance and commercial terms of their service offerings. In addition, the rules prohibited providers of fixed (but not
mobile) broadband Internet access service from unreasonably discriminating in their transmission of lawful network
traffic.
In its decision, the court found the FCC had authority under section 706 of the Act (which directs the FCC and state
commissions to promote broadband deployment) to adopt rules designed to preserve the open Internet, but vacated and
remanded the antidiscrimination and no-blocking rules on the ground that they impermissibly imposed common carrier
regulation on broadband Internet access service. The court held that, having declared broadband Internet access services to
be information services, the FCC could not regulate them as telecommunications services. The court did not vacate the
transparency rules.
The invalidation of the no-blocking and antidiscrimination rules means that broadband Internet access providers have
greater flexibility in their provision of mass market services. However, the court's finding that section 706 provides the
FCC independent authority to adopt rules to promote broadband deployment appears to give the FCC broad authority to
regulate the Internet and, more generally, IP-based services, provided the FCC finds such regulation promotes deployment of
broadband infrastructure. In addition, because section 706(a) grants authority to both the FCC and the states to adopt
rules to promote broadband deployment, states could attempt to rely on that provision to regulate broadband services,
although the states' authority to do so appears to be narrower than the FCC's. On May 15, 2014, the FCC released a notice
of proposed rulemaking in response to the D.C. Circuit's January decision that also asks wide-ranging questions that appear
to re-open settled issues. Most significantly, the Commission asks whether it has sufficient authority under section 706 to
reestablish protections against discrimination and blocking on broadband Internet access services or whether it needs to
reclassify broadband Internet access service as a telecommunications service to achieve its regulatory goals. If the FCC
were to reclassify broadband as a telecommunications service, or the FCC and/or the states were to impose additional
regulation of the Internet or broadband services, it could have a material adverse impact on our broadband services and
operating results.
Intercarrier Compensation/Universal Service In October 2011, the FCC adopted an order fundamentally overhauling its
high-cost universal service program, through which it disburses approximately $4,500 per year to carriers providing
telephone service in high-cost areas, and its existing intercarrier compensation (ICC) rules, which govern payments between
carriers for the exchange of traffic. The order adopts rules to address immediately certain practices that artificially
increase ICC payments, as well as other practices to avoid such payments. The order also establishes a new ICC regime that
will result in the elimination of virtually all terminating switched access charges and reciprocal compensation payments
over a six-year transition. In the order, the FCC also repurposed its high-cost universal service program to encourage
providers to deploy broadband facilities in unserved areas. To accomplish this goal, the FCC is transitioning support
amounts disbursed through its existing high-cost program to its new Connect America Fund (CAF). In 2013, the FCC awarded us
approximately $100 in new CAF funding to deploy broadband in unserved areas. On May 23, 2014, the United States Court of
Appeals for the Tenth Circuit denied all challenges to the universal service and intercarrier compensation rules adopted in
the 2011 order. Two petitions for rehearing on discrete issues affirmed in the court's decision are pending. We do not
expect the FCC's rules to have a material impact on our operating results.
Transition to IP-Based Network In conjunction with Project VIP, we filed a petition with the FCC asking it to open a
proceeding to facilitate our transition to all IP-based networks and services to promote consumer interests and incentivize
private investment in broadband infrastructure. In January 2014, the FCC adopted an order authorizing a broad set of
voluntary experiments to measure the impact on consumers of the IP transition. Among other things, the order invites
providers to submit proposals for all-IP trials in discrete geographic areas. In February 2014, AT&T filed a detailed plan
for two such trials. In June 2014, the FCC staff presented a status report on the AT&T trial to the commissioners. We do
not expect any formal FCC action on the AT&T proposal at this time. We expect this transition to take several years.
LIQUIDITY AND CAPITAL RESOURCES
We had $11,305 in cash and cash equivalents available at June 30, 2014. Cash and cash equivalents included cash of $1,756
and money market funds and other cash equivalents of $9,549. In the first six months of 2014, cash inflows were primarily
provided by cash receipts from operations and long-term debt issuances, with additional cash from the monetization of our
investment in América Móvil and other assets. These inflows were largely offset by cash used to meet the needs of the
business, including, but not limited to, payment of operating expenses, funding capital expenditures, dividends to
stockholders, debt redemptions, stock repurchases and the acquisition of operations and wireless spectrum. We discuss many
of these factors in detail below.
Cash Provided by or Used in Operating Activities
During the first six months of 2014, cash provided by operating activities was $16,869, compared to $17,711 for the first
six months of 2013. Lower operating cash flows in 2014 were primarily due to increased inventory levels, retirement benefit
funding and wireless device financing related to our AT&T Next program, which results in cash collection over the
installment period instead of at the time of sale. In June 2014, we entered into uncommitted agreements to periodically
sell certain equipment installment receivables for cash and future consideration (see Note 8). Proceeds from the sale of
equipment installment receivables and the timing of working capital payments partially offset the decline in operating cash
flows. We expect lower cash from operations in 2014 as our AT&T Next program continues to gain popularity with customers,
we incur Leap integration costs, and for increased tax payments resulting from prior-year deductions for our contribution
to the pension plan and for changes in tax rules that allowed for us to more rapidly deduct the cost of equipment.
Cash Used in or Provided by Investing Activities
For the first six months of 2014, cash used in investing activities totaled $7,701 and consisted primarily of $11,649 for
capital expenditures, excluding interest during construction, and $857 for the acquisitions of Leap, other operations and
spectrum. These expenditures were partially offset by cash receipts of approximately $4,885 from the sale of our shares in
América Móvil.
Virtually all of our capital expenditures are spent on our wireless and wireline networks, our U-verse services and support
systems for our communications services. Capital expenditures, excluding interest during construction, increased $1,984 in
the first six months. Our Wireless segment represented 56% of our total spending and increased 24% in the first six months.
The Wireline segment, which includes U-verse services, represented 44% of the total capital expenditures and increased 17%
in the first six months, primarily reflecting our ongoing implementation of Project VIP.
We continue to expect our capital expenditures during 2014 to be in the $21,000 range. We expect 2014 to be our peak
investment year for Project VIP and anticipate our Wireless and Wireline segments' spend to be proportionally consistent to
2013.
Cash Used in or Provided by Financing Activities
For the first six months of 2014, cash used in financing activities totaled $1,202 and included net proceeds of $8,564 from
the following long-term debt issuances:
· March 2014 issuance of $1,100 of 2.300% global notes due 2019, $1,000 of 3.900% global notes due 2024 and $400 of
floating rate global notes due 2019. The floating rate for the notes is based upon the three-month London Interbank Offered
Rate (LIBOR), reset quarterly, plus 67 basis points.
· March 2014 issuance of $500 of floating rate global notes due 2017. The floating rate for the notes is based upon
the three-month LIBOR, reset quarterly, plus 42 basis points.
· May 2014 draw of $750 on a private financing agreement with Export Development Canada due 2017. The agreement is
designed to encourage the purchase of Canadian-sourced equipment. The agreement contains terms similar to that provided
under our revolving credit arrangements, discussed below; the interest rate was privately negotiated at market rates. The
rate for this agreement is based upon the three-month LIBOR, reset quarterly, plus 50 basis points.
· June 2014 issuance of $2,000 of 4.800% global notes due 2044.
· June 2014 issuance of E1,600 (equivalent to $2,181 when issued) of 2.400% global notes due 2024 and E500 (equivalent
to $681 when issued) of 3.375% global notes due 2034.
For the first six months of 2014, we redeemed $3,508 of debt, primarily consisting of the following:
· March 2014 redemption of $1,814 of Cricket Communications, Inc. term loans and $38 of 4.500% Leap convertible senior
notes in connection with the Leap acquisition.
· April 2014 redemption of Cricket Communications, Inc. 7.750% senior notes with a face value of $1,600 in connection
with the Leap acquisition.
In July 2014, we redeemed $4,393 of debt consisting of all of the outstanding BellSouth 5.200% notes due 2014, AT&T 0.875%
global notes due 2015, AT&T 5.625% global notes due 2016, and BellSouth 5.200% notes due 2016 as well as $750 in principal
amount of the outstanding AT&T 2.500% global notes due 2015.
Our weighted average interest rate of our long-term debt portfolio was approximately 4.4% as of June 30, 2014, and 4.5% as
of December 31, 2013. We had $83,548 of total notes and debentures outstanding at June 30, 2014, which included Euro,
British pound sterling and Canadian dollar denominated debt of approximately $21,240.
Since the first quarter of 2012, we have been buying back shares of AT&T common stock under three previous 300 million
share repurchase authorizations approved by our Board of Directors. During the first six months of 2014, we repurchased
approximately 42 million shares for $1,396. In March 2014, our Board of Directors approved a fourth authorization to
repurchase 300 million shares of our common stock, which has no expiration date. As of June 30, 2014, we had approximately
421 million shares remaining from the authorizations. We expect to make future repurchases opportunistically.
We paid dividends of $4,784 during the first six months of 2014, compared with $4,930 for the first six months of 2013,
primarily reflecting the decline in shares outstanding due to our repurchase activity, partially offset by the increase in
the quarterly dividend approved by our Board of Directors in December 2013. Dividends declared by our Board of Directors
totaled $0.46 per share in the second quarter and $0.92 per share for the first six months of 2014 and $0.45 in the second
quarter and $0.90 per share for the first six months of 2013. Our dividend policy considers the expectations and
requirements of stockholders, internal requirements of AT&T and long-term growth opportunities. It is our intent to provide
the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in
dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.
At June 30, 2014, we had $10,482 of debt maturing within one year, $10,291 of which were related to long-term debt
issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:
· $1,000 of annual put reset securities issued by BellSouth that may be put back to us each April until maturity in
2021.
· An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the zero-coupon note (issued
for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,030.
We have two revolving credit agreements with a syndicate of banks: a $5,000 agreement expiring in December 2018 and a
$3,000 agreement expiring in December 2017. Advances under either agreement may be used for general corporate purposes.
Advances are not conditioned on the absence of a material adverse change. All advances must be repaid no later than the
date on which lenders are no longer obligated to make any advances under each agreement. Under each agreement, we can
terminate, in whole or in part, amounts committed by the lenders in excess of any outstanding advances; however, we cannot
reinstate any such terminated commitments. Under each agreement, we must maintain a debt-to-EBITDA, including modifications
described in the agreement, ratio of not more than three-to-one as of the last day of each fiscal quarter for the four
quarters then ended. Both agreements also contain a negative pledge covenant, which generally provides that if we pledge
assets or permit liens on our property, then any advances must also be secured. At June 30, 2014, we had no advances
outstanding under either agreement and were in compliance with all covenants under each agreement.
Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders' equity. Our capital
structure does not include any debt issued by YP Holdings and other investees. At June 30, 2014, our debt ratio was 47.6%,
compared to 46.6% at June 30, 2013, and 45.0% at December 31, 2013. The debt ratio is affected by the same factors that
affect total capital, and reflects our recent debt issuances, debt in connection with acquisitions and stock repurchases.
During 2014, we also received approximately $4,994 from the monetization of various nonstrategic assets. A majority of that
cash was attributable to sales of our investment in América Móvil and real estate holdings. We plan to continue to explore
similar opportunities in the remainder of 2014.
In September 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility), the
holding company for our wireless business, to the trust used to pay pension benefits under our qualified pension plans. In
July 2014, the U.S. Department of Labor (DOL) published in the Federal Register their final retroactive approval of our
voluntary contribution.
The preferred equity interest had a value of $9,104 on the contribution date, does not have any voting rights and has a
liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of $560 per annum, which will
be distributed quarterly in equal amounts. We distributed $280 to the trust during the six months ended June 30, 2014. So
long as we make the distributions, the terms of the preferred equity interest will not impose any limitations on our
ability to declare a dividend, or repurchase shares.
At June 30, 2014, we had interest rate swaps with a notional value of $6,350 and a fair value of $203.
We have fixed-to-fixed cross-currency swaps on foreign-currency-denominated debt instruments with a U.S. dollar notional
value of $20,650 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been
designated at inception and qualify as cash flow hedges with a net fair value of $1,508 at June 30, 2014.
Item 4. Controls and Procedures
The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be
disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including
its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and
reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The chief executive
officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the
registrant's disclosure controls and procedures as of June 30, 2014. Based on that evaluation, the chief executive officer
and chief financial officer concluded that the registrant's disclosure controls and procedures were effective as of June
30, 2014.
Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and
actual results could differ materially. Many of these factors are discussed in more detail in the "Risk Factors" section.
We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation
Reform Act of 1995.
The following factors could cause our future results to differ materially from those expressed in the forward-looking
statements:
· Adverse economic and/or capital access changes in the markets served by us or in countries in which we have
significant investments, including the impact on customer demand and our ability and our suppliers' ability to access
financial markets at favorable rates and terms.
· Changes in available technology and the effects of such changes, including product substitutions and deployment
costs.
· Increases in our benefit plans' costs, including increases due to adverse changes in the United States and foreign
securities markets, resulting in worse-than-assumed investment returns and discount rates; adverse medical cost trends, and
unfavorable or delayed implementation of healthcare legislation, regulations or related court decisions.
· The final outcome of FCC and other federal or state agency proceedings (including judicial review, if any, of such
proceedings) involving issues that are important to our business, including, without limit, intercarrier compensation,
interconnection obligations, the transition from legacy technologies to IP-based infrastructure, universal service,
broadband deployment, E911 services, competition policy, net neutrality, unbundled network elements and other wholesale
obligations, availability of new spectrum from the FCC on fair and balanced terms, and wireless license awards and
renewals.
· The final outcome of state and federal legislative efforts involving issues that are important to our business,
including deregulation of IP-based services, relief from Carrier of Last Resort obligations, and elimination of state
commission review of the withdrawal of services.
· Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our
subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks,
resulting in lower revenue growth and/or higher operating costs.
· Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative
technologies (e.g., cable, wireless and VoIP) and our ability to maintain capital expenditures.
· The extent of competition and the resulting pressure on customer and access line totals and wireline and wireless
operating margins.
· Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our
wireless and wireline markets.
· The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and
regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network
elements and nonregulation of comparable alternative technologies (e.g., VoIP).
· The continued development of attractive and profitable U-verse service offerings; the extent to which regulatory,
franchise fees and build-out requirements apply to this initiative; and the availability, cost and/or reliability of the
various technologies and/or content required to provide such offerings.
· Our continued ability to attract and offer a diverse portfolio of wireless devices, some on an exclusive basis.
· The availability and cost of additional wireless spectrum and regulations and conditions relating to spectrum use,
licensing, obtaining additional spectrum, technical standards and deployment and usage, including network management
rules.
· Our ability to manage growth in wireless data services, including network quality and acquisition of adequate
spectrum at reasonable costs and terms.
· The outcome of pending, threatened or potential litigation, including patent and product safety claims by or against
third parties.
· The impact on our networks and business from major equipment failures; security breaches related to the network or
customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in
a timely and cost-effective manner from suppliers; or severe weather conditions, natural disasters, pandemics, energy
shortages, wars or terrorist attacks.
· The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting
standards or changes to existing standards.
· The issuance by the Internal Revenue Service and/or state tax authorities of new tax regulations or changes to
existing standards and actions by federal, state or local tax agencies and judicial authorities with respect to applying
applicable tax laws and regulations and the resolution of disputes with any taxing jurisdictions.
· Our pending acquisition of DIRECTV.
· Our ability to adequately fund our wireless operations, including payment for additional spectrum, network upgrades
and technological advancements.
· Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, which
may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological
developments.
· The uncertainty surrounding further congressional action to address spending reductions, which may result in a
significant reduction in government spending and reluctance of businesses and consumers to spend in general and on our
products and services specifically, due to this fiscal uncertainty.
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially
affect our future earnings.
Item 1A. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to
update this discussion to reflect material developments since our Form 10-K was filed. The additional Risk Factor below
reflects our pending acquisition of DIRECTV (See "Other Business Matters").
The impact of our pending acquisition of DIRECTV, including our ability to obtain governmental approvals on favorable terms
including any required divestitures; the risk that the businesses will not be integrated successfully; the risk that the
cost savings and any other synergies from the acquisition may not be fully realized or may take longer to realize than
expected; our costs in financing the acquisition and potential adverse effects on our share price and dividend amount due
to the issuance of additional shares; the addition of DIRECTV's existing debt to our balance sheet; disruption from the
acquisition making it more difficult to maintain relationships with customers, employees or suppliers; and competition and
its effect on pricing, spending, third party relationships and revenues.
As discussed in Other Business Matters, on May 18, 2014, we agreed to acquire DIRECTV for approximately $48,500. We believe
that the acquisition will give us the scale, resources and ability to deploy video technology to more customers than
otherwise possible and to provide an integrated bundle of broadband, video and wireless services enabling us to compete
more effectively against cable operators as well as other technology, media and communications companies. In addition, we
believe the acquisition will result in cost savings, especially in the area of video content costs, and other potential
synergies, enabling us to expand and enhance our broadband deployment and provide more video options across multiple fixed
and mobile devices.
Achieving these results will depend upon obtaining governmental approvals on favorable terms within the time limits
contemplated by the parties. Delays in closing, including as a result of delays in obtaining regulatory approval could
divert attention from ongoing operations on the part of management and employees, adversely affecting customers and
suppliers and therefore revenues. If such approvals are obtained and the transaction is consummated, then we must integrate
a large number of video network and other operational systems and administrative systems, which may involve significant
management time and create uncertainty for employees, customers and suppliers. The integration process may also result in
significant expenses and charges against earnings, both cash and noncash. While we have successfully merged large companies
into our operations in the past, delays in the process could have a material adverse effect on our revenues, expenses,
operating results and financial condition. This acquisition also will increase the amount of debt on our balance sheet
(both from DIRECTV's debt and the indebtedness needed to pay a portion of the purchase price) leading to additional
interest expense and, due to additional shares being issued, will result in additional cash being required for any
dividends declared. Both of these factors could put pressure on our financial flexibility to continue capital investments,
develop new services and declare future dividends. In addition, events outside of our control, including changes in
regulation and laws as well as economic trends, could adversely affect our ability to realize the expected benefits from
this acquisition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) A summary of our repurchases of common stock during the second quarter of 2014 is as follows:
Period (a) Total Number of Shares (or Units) Purchased 1,2 (b) Average Price Paid Per Share (or Unit) (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs 1 (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs
April 1, 2014 -April 30, 2014 4,500,637 $ 35.43 4,500,000 420,750,000
May 1, 2014 -May 31, 2014 7,793 - - 420,750,000
June 1, 2014 -June 30, 2014 12,851 - - 420,750,000
Total 4,521,281 $ 35.43 4,500,000
1 In March 2014, our Board of Directors approved
a fourth authorization to repurchase up to 300
million shares of our common stock.
In March 2013, our Board of Directors approved
a
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