REG - AT & T Inc. - AT&T Inc. 2019 10-K
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RNS Number : 6779D AT & T Inc. 20 February 2020
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-8610
AT&T INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
208 S. Akard St., Dallas, Texas, 75202
Telephone Number 210-821-4105
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class Trading Symbol(s) on which registered
Common Shares (Par Value $1.00 Per Share) T New York Stock Exchange
Depositary Shares, each representing a 1/1000th interest in a share of 5.000% TPRA New York Stock Exchange
Perpetual Preferred Stock, Series A
Depositary Shares, each representing a 1/1000th interest in a share of 4.750% TPRC New York Stock Exchange
Perpetual Preferred Stock, Series C
AT&T Inc. Floating Rate Global Notes due August 3, 2020 T 20C New York Stock Exchange
AT&T Inc. 1.875% Global Notes due December 4, 2020 T 20 New York Stock Exchange
AT&T Inc. 2.650% Global Notes due December 17, 2021 T 21B New York Stock Exchange
AT&T Inc. 1.450% Global Notes due June 1, 2022 T 22B New York Stock Exchange
AT&T Inc. 2.500% Global Notes due March 15, 2023 T 23 New York Stock Exchange
AT&T Inc. 2.750% Global Notes due May 19, 2023 T 23C New York Stock Exchange
AT&T Inc. Floating Rate Global Notes due September 5, 2023 T 23D New York Stock Exchange
AT&T Inc. 1.050% Global Notes due September 5, 2023 T 23E New York Stock Exchange
AT&T Inc. 1.300% Global Notes due September 5, 2023 T 23A New York Stock Exchange
AT&T Inc. 1.950% Global Notes due September 15, 2023 T 23F New York Stock Exchange
Name of each exchange
Title of each class Trading Symbol(s) on which registered
AT&T Inc. 2.400% Global Notes due March 15, 2024 T 24A New York Stock Exchange
AT&T Inc. 3.500% Global Notes due December 17, 2025 T 25 New York Stock Exchange
AT&T Inc. 0.250% Global Notes due March 4, 2026 T 26E New York Stock Exchange
AT&T Inc. 1.800% Global Notes due September 5, 2026 T 26D New York Stock Exchange
AT&T Inc. 2.900% Global Notes due December 4, 2026 T 26A New York Stock Exchange
AT&T Inc. 2.350% Global Notes due September 5, 2029 T 29D New York Stock Exchange
AT&T Inc. 4.375% Global Notes due September 14, 2029 T 29B New York Stock Exchange
AT&T Inc. 2.600% Global Notes due December 17, 2029 T 29A New York Stock Exchange
AT&T Inc. 0.800% Global Notes due March 4, 2030 T 30B New York Stock Exchange
AT&T Inc. 3.550% Global Notes due December 17, 2032 T 32 New York Stock Exchange
AT&T Inc. 5.200% Global Notes due November 18, 2033 T 33 New York Stock Exchange
AT&T Inc. 3.375% Global Notes due March 15, 2034 T 34 New York Stock Exchange
AT&T Inc. 2.450% Global Notes due March 15, 2035 T 35 New York Stock Exchange
AT&T Inc. 3.150% Global Notes due September 4, 2036 T 36A New York Stock Exchange
AT&T Inc. 1.800% Global Notes due September 14, 2039 T 39B New York Stock Exchange
AT&T Inc. 7.000% Global Notes due April 30, 2040 T 40 New York Stock Exchange
AT&T Inc. 4.250% Global Notes due June 1, 2043 T 43 New York Stock Exchange
AT&T Inc. 4.875% Global Notes due June 1, 2044 T 44 New York Stock Exchange
AT&T Inc. 4.250% Global Notes due March 1, 2050 T 50 New York Stock Exchange
AT&T Inc. 5.350% Global Notes due November 1, 2066 TBB New York Stock Exchange
AT&T Inc. 5.625% Global Notes due August 1, 2067 TBC New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes X No [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No X
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No [ ]
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yes X No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See definition of "large accelerated filer,"
"accelerated filer," "smaller reporting company," and "emerging growth
company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer X Accelerated Filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has
elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes [ ] No X
Based on the closing price of $33.51 per share on June 30, 2019, the aggregate
market value of our voting and non-voting common stock held by non-affiliates
was $245 billion.
At February 12, 2020, common shares outstanding were 7,172,884,070.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of AT&T Inc.'s Notice of 2020 Annual Meeting and
Proxy Statement dated on or about March 11, 2020 to be filed within the
period permitted under General Instruction G(3) (Parts III and IV).
TABLE OF CONTENTS
Item Page
PART I
1. Business 1
1A. Risk Factors 13
2. Properties 15
3. Legal Proceedings 15
4. Mine Safety Disclosures 15
Information about our Executive Officers 16
PART II
5. Market for Registrant's Common Equity, Related Stockholder Matters 17
and Issuer Purchases of Equity Securities
6. Selected Financial Data 18
7. Management's Discussion and Analysis of Financial Condition 18
and Results of Operations
7A. Quantitative and Qualitative Disclosures about Market Risk 18
8. Financial Statements and Supplementary Data 18
9. Changes in and Disagreements with Accountants on Accounting 18
and Financial Disclosure
9A. Controls and Procedures 19
9B. Other Information 20
PART III
10. Directors, Executive Officers and Corporate Governance 20
11. Executive Compensation 20
12. Security Ownership of Certain Beneficial Owners and 21
Management and Related Stockholder Matters
13. Certain Relationships and Related Transactions, and Director Independence 22
14. Principal Accountant Fees and Services 22
PART IV
15. Exhibits and Financial Statement Schedules 22
16. Form 10-K Summary 26
PART I
ITEM 1. BUSINESS
GENERAL
AT&T Inc. ("AT&T," "we" or the "Company") is a holding company
incorporated under the laws of the State of Delaware in 1983 and has its
principal executive offices at 208 S. Akard St., Dallas, Texas, 75202
(telephone number 210-821-4105). We maintain an internet website at
www.att.com. (This website address is for information only and is not intended
to be an active link or to incorporate any website information into this
document.) We file electronically with the Securities and Exchange Commission
(SEC) required reports on Form 8-K, Form 10-Q and Form 10-K; proxy materials;
registration statements on Forms S-3 and S-8, as necessary; and other forms or
reports as required. The SEC maintains a website (www.sec.gov) that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC. We make available, free of
charge, on our website our annual report on Form 10-K, our quarterly reports
on Form 10-Q, current reports on Form 8-K and all amendments to those reports
as soon as reasonably practicable after such reports are electronically filed
with, or furnished to, the SEC. We also make available on that website, and in
print, if any stockholder or other person so requests, our "Code of Ethics"
applicable to all employees and Directors, our "Corporate Governance
Guidelines," and the charters for all committees of our Board of Directors,
including Audit, Human Resources and Corporate Governance and Nominating. Any
changes to our Code of Ethics or waiver of our Code of Ethics for senior
financial officers, executive officers or Directors will be posted on that
website.
A reference to a "Note" refers to the Notes to Consolidated Financial
Statements in Item 8.
History
AT&T, formerly known as SBC Communications Inc. (SBC), was formed as one
of several regional holding companies created to hold AT&T Corp.'s (ATTC)
local telephone companies. On January 1, 1984, we were spun-off from ATTC
pursuant to an anti-trust consent decree, becoming an independent
publicly-traded telecommunications services provider. At formation, we
primarily operated in five southwestern states.
Following our formation, we have expanded our footprint and operations by
acquiring various businesses, most significantly:
· Our subsidiaries merged with Pacific Telesis Group in 1997,
Southern New England Telecommunications Corporation in 1998 and Ameritech
Corporation in 1999, thereby expanding our wireline operations as the
incumbent local exchange carrier (ILEC) into a total of 13 states.
· In 2005, we merged one of our subsidiaries with ATTC, creating
one of the world's leading telecommunications providers. In connection with
the merger, we changed the name of our company from "SBC Communications Inc."
to "AT&T Inc."
· In 2006, we merged one of our subsidiaries with BellSouth
Corporation (BellSouth) making us the ILEC in an additional nine states. With
the BellSouth acquisition, we also acquired BellSouth's 40 percent economic
interest in AT&T Mobility LLC (AT&T Mobility), formerly Cingular
Wireless LLC, resulting in 100 percent ownership of AT&T Mobility.
· In 2014, we completed the acquisition of wireless provider Leap
Wireless International, Inc. and sold our ILEC operations in Connecticut,
which we had previously acquired in 1998.
· In January and April 2015, we acquired wireless properties in
Mexico, and acquired DIRECTV, a leading provider of digital television
entertainment services in both the United States and Latin America.
· In June 2018, we acquired Time Warner Inc. (Time Warner), a
leader in media and entertainment that operates the Turner, Home Box Office
(HBO) and Warner Bros. business units. We also acquired Otter Media Holdings
August 2018 and advertising platform AppNexus in August 2018.
In late 2019, we announced the sale of wireless and wireline operations in
Puerto Rico and the U.S. Virgin Islands; the sale is expected to close in
mid-2020.
General
We are a leading provider of telecommunications, media and technology services
globally. The services and products that we offer vary by market and utilize
various technology platforms in a range of geographies. Our reportable
segments are organized as follows:
The Communications segment provides services to businesses and consumers
located in the U.S. and businesses globally. Our business strategies reflect
bundled product offerings that cut across product lines and utilize shared
assets. This segment contains the following business units:
· Mobility provides nationwide wireless service and equipment.
· Entertainment Group provides video, including over-the-top (OTT)
services, internet and voice communications services to residential customers.
This segment also sells advertising on DIRECTV and U-verse distribution
platforms.
· Business Wireline provides advanced IP-based services, as well as
traditional voice and data services to business customers.
The WarnerMedia segment develops, produces and distributes feature films,
television, gaming and other content over various physical and digital
formats. This segment contains the following business units:
· Turner primarily operates multichannel basic television networks
and digital properties. Turner also sells advertising on its networks and
digital properties.
· Home Box Office consists of premium pay television and OTT and
streaming services domestically and premium pay, basic tier television and OTT
and streaming services internationally, as well as content licensing and home
entertainment.
· Warner Bros. consists of the production, distribution and
licensing of television programming and feature films, the distribution of
home entertainment products and the production and distribution of games.
The Latin America segment provides entertainment and wireless services outside
of the U.S. This segment contains the following business units:
· Mexico provides wireless service and equipment to customers in
Mexico.
· Vrio provides video services primarily to residential customers
using satellite technology in Latin America and the Caribbean.
The Xandr segment provides advertising services. These services utilize data
insights to develop and deliver targeted advertising across video and digital
platforms.
Corporate and Other reconciles our segment results to consolidated operating
income and income before income taxes, and includes:
· Corporate, which consists of: (1) businesses no longer integral
to our operations or which we no longer actively market, (2) corporate support
functions, (3) impacts of corporate-wide decisions for which the individual
operating segments are not being evaluated, (4) the reclassification of the
amortization of prior service credits, which we continue to report with
segment operating expenses, to consolidated other income (expense) - net and
(5) the recharacterization of programming intangible asset amortization, for
programming acquired in the Time Warner acquisition, which we continue to
report with WarnerMedia segment operating expense, to consolidated
amortization expense.
· Acquisition-related items, which consists of items associated
with the merger and integration of acquired businesses, including amortization
of intangible assets.
· Certain significant items, which includes (1) employee separation
charges associated with voluntary and/or strategic offers, (2) losses
resulting from abandonment or impairment of assets and (3) other items for
which the individual segments are not being evaluated.
· Eliminations and consolidations, which (1) removes transactions
involving dealings between our segments, including content licensing between
WarnerMedia and Communications and (2) includes adjustments for our reporting
of the advertising business.
Areas of Focus
We are in a period of rapid growth in wireless video usage and believe that
there are substantial opportunities available for next-generation converged
services that combine technologies and services. Our First Responder Network
Authority (FirstNet) contract and our strong spectrum position allows us to
execute a different 5G deployment strategy. With our upcoming launch of HBO
Max, we will capitalize on our premier network, technology and distribution
capabilities to provide our premier content in this unique offering. Our
recent fiber expansion allows us to respond to continuing advances in
technology and changing demands from our customers. We expect our transition
to software-based products with low acquisition costs will provide better
economics and improve our product portfolio, including expansion into
streaming TV. Our acquisitions over the past few years and our continued
investment in a premier network experience make our customers' lives more
convenient and productive and foster competition and further innovation in the
communications and entertainment industry. In 2020, we plan to focus on the
areas discussed below.
Communications
Our integrated telecommunications network utilizes different technological
platforms, including wireless, satellite and wireline, to provide instant
connectivity and at the higher speeds made possible by our fiber network
expansion and wireless network enhancements. Video streaming will also drive
greater demand for broadband and capitalize on our fiber deployment. These
investments prepare us to meet increased customer demand for enhanced wireless
and broadband services, including video streaming, augmented reality and
"smart" technologies. During 2020, we will continue to develop and provide
high-value integrated video, mobile and broadband solutions. We believe
offering integrated services facilitates our customers' desire to view video
anywhere on demand and encourages customer retention.
Wireless Service We are experiencing rapid growth in data usage as consumers
are demanding seamless access across their wireless and wired devices, and
businesses and municipalities are connecting more and more equipment and
facilities to the internet. We were awarded the FirstNet contract, which
provides us with access to 20 MHz of nationwide low band spectrum and invested
in 5G and millimeter-wave technologies with our acquisition of FiberTower
Corporation, which currently holds significant amounts of spectrum in the
millimeter wave bands (39 GHz) that the U.S. Federal Communications Commission
(FCC) reallocated for mobile broadband services. These bands will help to
accelerate our entry into 5G services. At December 31, 2019, our FirstNet
coverage is approximately 75 percent complete with more than 1.0 million
FirstNet connections. We expect to have mobile 5G service nationwide to more
than 200 million people by the second quarter 2020, and with that
availability, we anticipate the introduction of 5G handsets and devices will
contribute to a renewed interest in equipment upgrades. We will continue to
invest in our wireless network as we look to provide future service offerings
and participate in technologies, such as 5G and millimeter-wave bands. The
increased speeds and network operating efficiency expected with this
technology should enable massive deployment of devices connected to the
internet as well as faster delivery of data services. We expect that 5G will
enhance our customers' entire connected experience and not just provide faster
speeds.
Our network covers over 430 million people in North America with 4G LTE
technology, and, in the United States, our network covers all major
metropolitan areas and more than 330 million people with our LTE technology.
Our 3G network provides services to customers using older handsets and
connected devices. We expect to redeploy spectrum currently used for our 3G
services as we transition to 5G service and project that we will discontinue
service on our 3G network in early 2022; we will manage this process
consistent with previous network upgrades. As of December 31, 2019, about 7
percent of our postpaid subscribers were using 3G handsets, and we expect them
to transition to newer technologies. We do not expect this transition to have
a material impact on our consolidated operating results.
As the wireless industry has matured, future wireless growth will increasingly
depend on our ability to offer innovative data services on a wireless network
that has sufficient spectrum and capacity to support these innovations. We
continue to invest significant capital in expanding our network capacity, as
well as obtaining additional spectrum that meets our long-term needs. We have
participated in recent FCC spectrum auctions, including the 24 GHz auction in
2019, and have been redeploying spectrum previously used for more basic
services to support more advanced mobile internet services.
Broadband Technology We are rapidly converting to a software-based network
and managing the migration of wireline customers to services using our fiber
infrastructure to provide broadband technology. Software-based technologies
align with our global leadership in software defined network (SDN) and network
function virtualization (NFV). This network approach, of which we are a global
leader in our commitment to virtualize 75 percent of our network by the end of
2020, delivers a demonstrable cost advantage in the deployment of
next-generation technology over the traditional, hardware-intensive network
approach. Our virtualized network will be able to support next-generation
applications like 5G and broadband-based services quickly and efficiently.
Media
We produce and distribute high-quality video content to take advantage of
growing global demand. Our media businesses use their strong brands,
distinctive intellectual property and global scale to produce and distribute
quality content. As the television industry continues to evolve from a
distribution system using satellite and cable offerings to internet streaming
video services, we are well-positioned to address and capitalize on these
changes, but we face financial risks and new sources of competition associated
with these developments. We plan in 2020 to continue launching more
personalized services offered directly to consumers through our own
distribution and distribution partner channels, including our streaming
platform HBO Max, scheduled for launch in May 2020. AT&T customers on
premium video, mobile and broadband services will be offered bundles with HBO
Max included at no additional charge. We also plan to add an
advertising-supported HBO Max offering to take advantage of our advertising
capabilities. In the future, we also plan to provide HBO Max subscribers with
unique live, interactive and special event programming.
Advertising
Our Xandr segment relies on using data from our 170 million customer
relationships, to deliver digital and video advertising that is more relevant
to consumers. Advertisers are interested in capitalizing on our broad video
distribution and ability to offer more precise marketing to customers through
a digital platform. We also are expanding relationships with other video
providers and digital publishers to use our platforms to reach their
audiences. We believe this segment will benefit from the nationwide election
cycle in 2020.
Latin America
We believe that the wireless model in the U.S., with accelerating demand for
mobile internet service and the associated economic benefits, will be repeated
around the world as companies invest in high-speed mobile networks. Due in
part to changes in the legal and regulatory framework in Mexico in 2015, we
acquired Mexican wireless operations to establish a seamless, cross-border
North American wireless network covering an area with over 430 million people
and businesses in the United States and Mexico. Our 4G LTE network in Mexico
now covers approximately 100 million people and businesses. Our Vrio business
unit provides video services to primarily residential customers using
satellite technology in Latin America and the Caribbean. We have approximately
13 million video subscribers in Latin America.
BUSINESS OPERATIONS
OPERATING SEGMENTS
Our segments are strategic business units that offer different products and
services over various technology platforms and/or in different geographies
that are managed accordingly. We analyze our operating segments based on
segment contribution, which consists of operating income, excluding
acquisition-related costs and other significant items, and equity in net
income (loss) of affiliates for investments managed within each operating
segment. We have four reportable segments: (1) Communications,
(2) WarnerMedia, (3) Latin America and (4) Xandr.
Additional information about our segments, including financial information, is
included under the heading "Segment Results" in Item 7. and in Note 4 of Item
8.
COMMUNICATIONS
Our Communications segment provides wireless and wireline telecom, video and
broadband services to consumers located in the U.S. and businesses globally.
Our Communications services and products are marketed under the AT&T,
Cricket, AT&T PREPAID and DIRECTV brand names. The Communications segment
provided approximately 77% of 2019 segment operating revenues and 76% of our
2019 total segment contribution. This segment contains the Mobility,
Entertainment Group and Business Wireline business units.
Mobility - Our Mobility business unit provides nationwide wireless services to
consumers and wholesale and resale wireless subscribers located in the United
States by utilizing our network to provide voice and data services, including
high-speed internet over wireless devices. We classify our subscribers as
either postpaid, prepaid, connected device or reseller. At December 31, 2019,
we served 166 million Mobility subscribers, including 75 million postpaid, 18
million prepaid, 7 million reseller and 66 million connected devices. Our
Mobility business unit revenue includes the following categories: service and
equipment.
Wireless Services
We offer a comprehensive range of high-quality nationwide wireless voice and
data communications services in a variety of pricing plans to meet the
communications needs of targeted customer categories. Through our FirstNet
services, we also provide a nationwide wireless broadband network dedicated to
public safety.
Consumers continue to require increasing availability of data-centric services
and a network to connect and control those devices. An increasing number of
our subscribers are using more advanced integrated and data-centric devices,
including embedded computing systems and/or software, commonly called the
Internet of Things (IoT). We offer plans that include unlimited features
allowing for the sharing of voice, text and data across multiple devices,
which attracts subscribers from other providers and helps minimize subscriber
churn. Customers in our "connected device" category (e.g., users of monitoring
devices and automobile systems) generally purchase those devices from
third-party suppliers that buy data access supported by our network. We
continue to upgrade our network and coordinate with equipment manufacturers
and application developers to further capitalize on the continued growing
demand for wireless data services.
We also offer nationwide wireless voice and data communications to certain
customers who prefer to pay in advance. These services are offered under the
Cricket and AT&T PREPAID(SM) brands and are typically monthly prepaid
services.
Equipment
We sell a wide variety of handsets, wirelessly enabled computers and wireless
data cards manufactured by various suppliers for use with our voice and data
services. We also sell accessories, such as carrying cases and hands-free
devices. We sell through our own company-owned stores, agents and third-party
retail stores. We provide our customers the ability to purchase handsets on an
installment basis and the opportunity to bring their own device. In recent
years, subscribers have been bringing their own devices or retaining their
handsets for longer periods, which could continue to impact upgrade activity.
Like other wireless service providers, we also provide a limited number of
postpaid contract subscribers substantial equipment subsidies to initiate,
renew or upgrade service.
Entertainment Group - Our Entertainment Group business unit provides video,
internet/broadband, voice communication and interactive and targeted
advertising services to customers in the United States by utilizing our
IP-based and copper wired network and/or our satellite technology. Our
Entertainment Group business unit revenue includes the following categories:
video entertainment, high-speed internet, legacy voice and data services and
other service and equipment.
Video Entertainment
Video entertainment revenues are comprised of subscription and advertising
revenues. We offer video entertainment services using satellite and IP-based
technologies (referred to as "premium" or "linear") as well as streaming
options that do not require either satellite or wired IP services (referred to
as "over-the-top" or "OTT"). Our offerings are structured to provide customers
with the best video experience both inside and outside of the home by offering
subscribers attractive programming and state-of-the-art technology. Due to the
rising cost of programming as well as higher costs to acquire new subscribers
in an increasingly competitive industry, we have discontinued long-term (e.g.,
two-year) price locks for subscribers, and have instead adopted a strategy of
focusing on higher-value subscribers with offerings that distinguish and
elevate our video entertainment experience for our new and existing customers.
In trial markets, we have started bundling our fiber broadband offer with
AT&T TV, which is delivered over our software-based video architecture and
has a lower subscriber acquisition cost.
We provide approximately 20 million subscribers with access to hundreds of
channels of digital-quality video entertainment and audio programming. In
addition, our video entertainment subscribers have the ability to use the
internet and/or our mobile applications from smartphones and tablets to view
authorized content, search program listings and schedule DVR recordings. Our
customers continue to shift, consistent with the rest of the industry, from a
premium linear service to our more economically priced OTT video service, or
to competitors, which has pressured our video revenues.
We believe it is critical that we extend our brand leadership as a premium
pay-TV provider in the marketplace by providing a direct to consumer video
experience both at home and on mobile devices. Our traditional linear business
historically has generated at least $4,000, including synergies resulting from
our DIRECTV acquisition. We believe that our flexible platform with a
broadband and wireless connection is the most efficient way to transport that
content. Through this integrated approach, we can optimize the use of storage
in the home as well as in the cloud, while also providing a seamless service
for consumers across screens and locations. We expect our upcoming streaming
platform HBO Max to provide an attractive offering of video options as well as
bundling opportunities for our wireless customers and will drive our direct to
consumer strategy.
High-Speed Internet
We offer broadband and internet services to 13.6 million residential
subscribers, with 3.9 million fiber broadband connections at December 31,
2019. Our IP-based technology provides high-speed internet services.
Legacy Voice and Data Services
Revenues from our traditional voice services continue to decline as customers
switch to wireless or VoIP services provided by us, cable companies or other
internet-based providers. We have responded by offering packages of combined
voice and data services, including broadband and video, and intend to continue
this strategy during 2020.
Business Wireline - Our Business Wireline business unit provides services to
business customers, including multinational corporations, small and mid-sized
businesses, governmental and wholesale customers. Our Business Wireline
business unit revenue includes the following categories: strategic and managed
services, legacy voice and data services, and other services and equipment.
Strategic and Managed Services
Strategic and managed services are our most advanced business solutions and
allow our customers to create and manage their own internal networks and to
access external data networks. Additionally, we provide collaboration services
that utilize our IP infrastructure and allow our customers to utilize the most
advanced technology to improve their productivity. Our strategic and managed
services are made up of Strategic Data, Strategic Voice, Security, Cloud
Solutions, Outsourcing, Managed Services and Professional Services. Strategic
Data services include our Virtual Private Networks (VPN), AT&T Dedicated
Internet (ADI), and Ethernet and Broadband Services. We continue to
reconfigure our wireline network to take advantage of the latest technologies
and services. We have developed services that rely on our SDN and NFV to
enhance business customers' digital agility in a rapidly evolving environment.
We also provide state-of-the-art security solutions like Threat Management,
Intrusion Detection and other business security applications. Due to
developing technology, our most advanced business solutions are subject to
change periodically. We review and evaluate our strategic and managed service
offerings annually, which may result in an updated definition and the recast
of our historical financial information to conform to the current period
presentation. Any modifications will be reflected in the first quarter.
Legacy Voice and Data Services
Voice services include services provided to business and governmental
customers, either directly or through wholesale arrangements with other
service providers. Our circuit-based, traditional data products include
switched and dedicated transport services that allow customers to transmit
data at high speeds, as well as access to the internet using a DSL connection.
Other Services and Equipment
Other service revenues include licensing of intellectual property and customer
premises equipment.
Additional information on our Communications segment is the "Overview" section
of Item 7.
WARNERMEDIA
Our WarnerMedia segment is comprised of leading media and entertainment
businesses that principally develop, produce and distribute feature films,
television content, and other content globally; operate cable networks,
premium pay television and OTT services domestically and internationally; and
operate digital media properties. The WarnerMedia segment provided
approximately 18% of 2019 segment operating revenues and 22% of our 2019 total
segment contribution. This segment consists primarily of the Turner, Home Box
Office and Warner Bros. business units and will include our new HBO Max
steaming platform.
Turner - The Turner business unit operates television networks and related
properties that offer branded news, entertainment, sports and kids
multi-platform content for consumers around the world.
Turner licenses programming to distributors that have contracted to receive
and deliver the programming to subscribers, sells advertising on its networks
and its digital properties owned or managed for other companies, and licenses
its original programming and brands and characters for consumer products and
other business ventures. Turner revenue includes the following categories:
subscription, advertising and content and other.
Subscription
Turner's programming is primarily delivered by distributors and is available
to subscribers of the distributors for viewing live and on demand on
television and on various internet-connected devices through the distributors'
services and Turner's network apps. Turner's license agreements with its
distributors are typically multi-year arrangements that provide for annual
service fee increases and have fee arrangements that are generally related to
the number of subscribers served by the distributor and the networks provided
to the distributor.
Advertising
Advertising arrangements for its networks generally have terms of one year or
less. In the U.S., the advertising revenues generally depend on the size and
demographics of a network's audience delivered to an advertiser, the number of
units of time sold and the price per unit. The price per unit of advertising
is determined considering factors such as the type of program or network
and/or the time of day the advertising is to be run. Certain advertising
inventory is sold in the "upfront" market in advance each year and other
inventory in the "scatter" market closer to the time a program airs. Outside
the U.S., advertising is generally sold at a fixed rate for the unit of time
sold, determined by the time of day and network.
Turner's digital properties consist of owned assets and those managed and/or
operated for sports leagues where Turner holds the related programming rights.
Digital properties managed or operated for sports leagues include NBA.com, NBA
Mobile and NCAA.com.
Content and Other
Turner licenses certain owned original programming to international
territories and to subscription VOD (referred to as "SVOD") services. Turner
also licenses its brands and characters for consumer products and other
business ventures.
Home Box Office - Our Home Box Office business unit owns and operates leading
multichannel premium pay television services, HBO and Cinemax. Our Home Box
Office business unit revenue includes the following categories: subscription
and content and other.
We also hold an 88 percent interest in HBO Latin America Group (HBO LAG),
which owns and operates various television channels in Latin America. We
account for this investment under the equity method of accounting. In October
2019, we entered into an agreement to acquire the remaining interest in HBO
LAG, which we expect to close in the second half of 2020, pending regulatory
approval.
Subscription
In the U.S., HBO and Cinemax programming is available to subscribers of
traditional distributors for viewing live and on demand on television and on
various internet-connected devices. Home Box Office contracts with a number of
digital distributors to provide their subscribers programming on digital
platforms and devices. HBO NOW, a domestic stand-alone OTT service, is
provided through digital distributors, such as Apple, Google, Amazon and Roku,
as well as by some affiliates. At December 31, 2019, Home Box Office had
approximately 43 million domestic subscribers, including HBO NOW. We expect to
launch our streaming platform HBO Max in May 2020 to provide comprehensive
video options for all audience demographics.
Home Box Office's domestic license agreements with distributors are typically
multi-year arrangements that provide for annual service fee increases and
marketing support. Revenues depend on the specific terms of the applicable
agreement, which may include subscriber thresholds, volume discounts and other
performance-based discounts.
Internationally, one or more of the following distribution models are used:
premium pay and basic tier television services delivered by traditional
distributors, licensing of programming to third-party providers, OTT services
distributed by third parties and direct-to-consumer OTT services. HBO and
Cinemax-branded premium pay, basic tier television and/or OTT services are
distributed in over 70 countries in Latin America, Europe and Asia. Home Box
Office had approximately 97 million international premium pay, basic tier
television service and OTT service subscribers at December 31, 2019, including
subscribers through Home Box Office's unconsolidated joint ventures. The
amount of its international subscription revenues depends on factors such as
basic and/or pay television subscribers, performance-based or volume
discounts, negotiated minimum guarantees or flat-fee arrangements.
Content and Other
Original programming is licensed to television networks and OTT services in
over 150 countries, Original programming also is available to customers in
both physical and digital formats in the U.S. and various international
regions through a wide variety of digital storefronts and traditional
retailers.
Warner Bros. - Our Warner Bros. business unit is one of the largest television
and film studios in the world. Warner Bros. produces, distributes and licenses
television programming and feature films and distributes home entertainment
products in both physical and digital formats, as well as producing and
distributing games and licensing consumer products and brands. Warner Bros.
will allow us to offer an expanded library of programming available under HBO
Max, our streaming platform that will launch in May 2020.
At December 31, 2019, Warner Bros.' vast content library consists of more than
100,000 hours of programming, including over 8,600 feature films and 5,000
television programs comprised of tens of thousands of individual episodes.
The home entertainment industry is rapidly moving toward digital formats.
While consumer spending on the higher-margin digital formats has increased in
recent years, it has not offset decline in spending on product in physical
formats, like DVDs. As such, Warner Bros. has been focusing on increasing the
more profitable electronic sell-through and transactional digital VOD rentals
of its film and television content while executing on opportunities to improve
the operational efficiency of the physical distribution business.
Our Warner Bros. business unit revenue includes the following categories:
theatrical product, television product, and games and other.
Theatrical Product
Theatrical product consists of (1) rental fees paid by movie theaters for the
initial exhibition of feature films produced (or co-produced) and/or
distributed by Warner Bros., (2) licensing fees paid by television networks,
premium pay television services and OTT services for the exhibition of feature
films produced or co-produced by Warner Bros. and (3) revenues from the
distribution of Warner Bros.' and other companies' feature films in physical
and digital formats. Our feature films also support Warner Bros.' key brands
and franchises, which helps generate consumer product and brand licensing
revenues based on Warner Bros.' films and characters.
Television Product
Television product consists of (1) fees for the initial broadcast of
television programming on U.S. broadcast and cable television networks and
premium pay television and OTT services, (2) fees for the airing or other
distribution of television programming after the initial broadcast in
secondary U.S. distribution channels (such as basic cable networks, local
television stations and OTT services), (3) fees for the international
distribution of television programming for free-to-air television, basic tier
television services, premium pay television services and OTT services, and (4)
revenues from the sale of the television programming in physical and digital
formats. Our television programming also supports Warner Bros.' key brands and
franchises, which helps generate consumer product and brand licensing revenues
based on the programming for years beyond the initial airing of the
programming on television. Warner Bros. licenses its U.S. programming
globally.
Games and Other
We develop, publishes and distribute games, including mobile and console
games. The games are based on intellectual property owned or licensed by
Warner Bros. (including DC Entertainment properties, Harry Potter and Mortal
Kombat).
Additional information on our WarnerMedia segment is contained in the
"Overview" section of Item 7.
LATIN AMERICA
Our Latin America segment provides entertainment services in Latin America and
wireless services in Mexico. The Latin America segment provided approximately
4% of 2019 segment operating revenues. Our Latin America services and products
are marketed under the AT&T, DIRECTV, SKY and Unefon brand names. This
segment contains the Mexico and Vrio business units.
Mexico - We utilize our regional and national wireless networks in Mexico to
provide consumer and business customers with wireless data and voice
communication services. We divide our revenue into the following categories:
wireless service and wireless equipment.
We provide postpaid and prepaid wireless services in Mexico to approximately
19 million subscribers under the AT&T and Unefon brands. Postpaid services
allow for (1) no annual service contract for subscribers who bring their own
device or purchase a device on installment (the device must be paid in full if
the customer chooses to drop their service from AT&T) and (2) service
contracts for periods up to 24 months for subscribers who purchase their
equipment under the traditional device subsidy model. Plans offer no roaming
charges in the United States or Canada, unlimited minutes and messages to the
extended AT&T community and unlimited data access to social networking. We
also offer prepaid services to customers who prefer to pay in advance. With
the increased capacity from our completed LTE network, we also expect
additional reseller revenue in 2020.
We sell a wide variety of handsets, including smartphones manufactured by
various suppliers for use with our voice and data services. We sell through
our own company-owned stores, agents and third-party retail stores.
Vrio - Video entertainment services are provided to primarily residential
customers using satellite technology. We are a leading provider of digital
television services throughout Latin America, providing a wide selection of
local and international digital-quality video entertainment and audio
programming under the DIRECTV and SKY brands. We provide one of the most
extensive collections of programming available in the Latin America pay-TV
market, including HD sports video content and the most innovative interactive
technology across the region. In addition, we have the unique ability to sell
superior offerings of our differentiated products and services on a
continent-wide basis with an operational cost structure that we believe to be
lower than that of our competition.
We have approximately 13 million video subscribers in Latin America. Our
business encompasses pay television services with satellite operations serving
Argentina, Brazil, Chile, Colombia, Ecuador, Peru, Uruguay, Venezuela and
parts of the Caribbean. Our operations also include our 41% equity method
investment in Innova, S. de R.L. de C.V., or SKY Mexico. Sky Mexico financial
results are accounted for as an equity-method investment.
Additional information on our Latin America segment is contained in the
"Overview" section of Item 7.
XANDR
Our Xandr segment relies on using data from our 170 million customer
relationships, to develop digital and video advertising that is more relevant
to consumers. The Xandr segment provided approximately 1% of 2019 segment
operating revenues and 3% of our 2019 total segment contribution. Advertisers
are interested in capitalizing on our broad video distribution and ability to
offer more precise marketing to customers through a digital platform. We also
are expanding relationships with other video providers and digital publishers
to use our platforms to reach their audiences.
Additional information on our Xandr segment is contained in the "Overview"
section of Item 7.
MAJOR CLASSES OF SERVICE
The following table sets forth the percentage of total consolidated reported
operating revenues by any class of service that accounted for 10% or more of
our consolidated total operating revenues in any of the last three fiscal
years:
Percentage of Total
Consolidated Operating Revenues
2019 2018 2017
Communications Segment
Wireless service (1) 30 % 32 % 36 %
Subscription (2, 3) 17 19 23
Advanced data (4) 12 12 12
Equipment 9 10 9
WarnerMedia Segment
Subscription 8 4 -
Latin America Segment
Subscription (2) 2 3 3
Wireless service 1 1 1
Equipment 1 1 -
(1) 2019 and 2018 exclude $291 and $232, respectively, of advertising revenues
included as Wireless service in our Mobility business unit.
(2 )Subscription is reported as Video in our Entertainment Group and Vrio
business units.
(3) 2019 and 2018 exclude $1,672 and $1,595, respectively, of advertising
revenues included as Video in our Entertainment Group business unit.
(4) Advanced data is reported as High-speed internet and Strategic services in
our Entertainment Group and Business Wireline business units, respectively.
Additional information on our geographical distribution of revenues is
contained in the Annual Report in Note 4 of Item 8.
GOVERNMENT REGULATION
Wireless communications providers in the United States must be licensed by the
FCC to provide communications services at specified spectrum frequencies
within defined geographic areas and must comply with the rules and policies
governing the use of the spectrum as adopted by the FCC. The FCC's rules have
a direct impact on whether the wireless industry has sufficient spectrum
available to support the high-quality, innovative services our customers
demand. Wireless licenses are issued for a fixed time period, typically ten
years, and we must seek renewal of these licenses. While the FCC has generally
renewed licenses given to operating companies such as us, the FCC has
authority to both revoke a license for cause and to deny a license renewal if
a renewal is not in the public interest. Additionally, while wireless
communications providers' prices and service offerings are generally not
subject to regulation, the federal government and various states periodically
consider new regulations and legislation relating to various aspects of
wireless services.
The Communications Act of 1934 and other related acts give the FCC broad
authority to regulate the U.S. operations of our satellite services, which are
licensed by the FCC, and some of WarnerMedia's businesses are also subject to
obligations under the Communications Act and related FCC regulations.
Our ILEC subsidiaries are subject to regulation by state governments, which
have the power to regulate intrastate rates and services, including local,
long-distance and network access services, provided such state regulation is
consistent with federal law. Some states have eliminated or reduced
regulations on our retail offerings. In addition, many states have adopted
legislation that enables us to provide IP-based video service through a single
statewide or state-approved franchise to offer a competitive video product.
These subsidiaries are also subject to the jurisdiction of the FCC with
respect to intercarrier compensation, interconnection, and interstate and
international rates and services, including interstate access charges. Access
charges are a form of intercarrier compensation designed to reimburse our
wireline subsidiaries for the use of their networks by other carriers.
Our subsidiaries operating outside the United States are subject to the
jurisdiction of national and supranational regulatory authorities in the
market where service is provided.
The following discussion highlights significant regulatory issues directly
affecting our operations:
Communications Segment
Wireless
The industry-wide deployment of 5G technology, which is needed to satisfy
extensive demand for video and internet access, will involve significant
deployment of "small cell" equipment and therefore increase the need for local
permitting processes that allow for the placement of small cell equipment on
reasonable timelines and terms. Federal regulations also can delay and impede
broadband services, including small cell equipment. In March, August and
September 2018, the FCC adopted orders to streamline the wireless
infrastructure review process in order to facilitate deployment of
next-generation wireless facilities. Those orders have been appealed and the
various appeals remain pending in the DC Circuit and 9th Circuit Court of
Appeals. In addition, to date, 28 states and Puerto Rico have adopted
legislation to facilitate small cell deployment.
Internet
In February 2015, the FCC released an order classifying both fixed and mobile
consumer broadband internet access services as telecommunications services,
subject to Title II of the Communications Act. This order, which represented a
departure from longstanding bipartisan precedent, significantly expanded the
FCC's authority to regulate broadband internet access services, as well as
internet interconnection arrangements. In December 2017, the FCC reversed its
2015 decision by reclassifying fixed and mobile consumer broadband services as
information services and repealing most of the rules that were adopted in
2015. In lieu of broad conduct prohibitions, the order requires internet
service providers to disclose information about their network practices and
terms of service, including whether they block or throttle internet traffic or
offer paid prioritization. Several parties appealed the FCC's December 2017
decision. On October 1, 2019, the D.C. Circuit issued a unanimous opinion
upholding the FCC's reclassification of broadband as an information service,
and its reliance on transparency requirements and competitive marketplace
dynamics to safeguard net neutrality. While the court vacated the FCC's
express preemption of any state regulation of net neutrality, it nevertheless
stressed that its ruling does not prevent the FCC or ISPs from relying on
conflict preemption to invalidate particular state laws that are inconsistent
with the FCC's regulatory objectives and framework. The court also concluded
that the FCC failed to satisfy its obligation under the Administrative
Procedure Act (APA) to consider the impact of its 2017 order in three discrete
areas-public safety, the Lifeline program, and pole attachment regulation-and
thus remanded it to the FCC for further proceedings on those issues, but
without disturbing the operative effect of that order. A number of states have
adopted legislation that would reimpose the very rules the FCC repealed, and
in some cases, establish additional requirements that go beyond the FCC's
February 2015 order. Additionally, some state governors have issued executive
orders that effectively re-impose the repealed requirements. Suits have
recently been filed concerning laws in California and Vermont, and other
lawsuits are possible. The California and Vermont suits have been stayed
pursuant to agreements by those states not to enforce their laws pending
resolution of appeals of the FCC's December 2017 order. If no one seeks
rehearing or Supreme Court review of the D.C. Circuit's decision, the
foregoing litigation will recommence. We expect that additional states may
seek to regulate net neutrality based on the D.C. Circuit's decision. We will
continue to support congressional action to codify a set of standard consumer
rules for the internet.
Privacy-related legislation has been adopted or considered in a number of
states. Legislative and regulatory action could result in increased costs of
compliance, claims against broadband internet access service providers and
others, and increased uncertainty in the value and availability of data.
Effective as of January 1, 2020, a California state law gives California
consumers the right to know what personal information is being collected about
them, and whether and to whom it is sold or disclosed, and to access and
request deletion of this information. Subject to certain exceptions, it also
gives consumers the right to opt-out of the sale of personal information.
WarnerMedia Segment
WarnerMedia creates, owns and distributes intellectual property, including
copyrights, trademarks and licenses of intellectual property. To protect its
intellectual property, WarnerMedia relies on a combination of laws and license
agreements. Outside the U.S., laws and regulations relating to intellectual
property protection and the effective enforcement of these laws and
regulations vary greatly from country to country. The European Union
Commission is pursuing legislative and regulatory initiatives that could
impair Warner Bros.' current country-by-country licensing approach in the
European Union. Piracy, particularly of digital content, continues to threaten
revenues from WarnerMedia's products and services, as well as revenues from
our pay TV business, and we work to limit that threat through a combination of
approaches, including technological and legislative solutions. Outside the
U.S., various laws and regulations, as well as trade agreements with the U.S.,
also apply to the distribution or licensing of feature films for exhibition in
theaters and on broadcast and cable networks. For example, in certain
countries, including China, laws and regulations limit the number of foreign
films exhibited in such countries in a calendar year.
Additional information relating to regulation of our subsidiaries is contained
under the headings "Operating Environment Overview" and "Regulatory
Developments" of Item 7.
IMPORTANCE, DURATION AND EFFECT OF LICENSES
Certain of our subsidiaries own or have licenses to various patents,
copyrights, trademarks and other intellectual property necessary to conduct
business. Many of our subsidiaries also hold government-issued licenses or
franchises to provide wireline, satellite or wireless services. Additional
information relating to regulation affecting those rights is contained under
the heading "Operating Environment Overview," of Item 7. We actively pursue
patents, trademarks and service marks to protect our intellectual property
within the United States and abroad. We maintain a significant global
portfolio of patents, trademarks and service mark registrations. We have also
entered into agreements that permit other companies, in exchange for fees and
rights, and subject to appropriate safeguards and restrictions, to utilize
certain of our patents, trademarks and service marks. As we transition our
network from a switch-based network to an IP, software-based network, we have
increasingly entered into licensing agreements with software developers.
We periodically receive offers from third parties to obtain licenses for
patents and other intellectual rights in exchange for royalties or other
payments. We also receive notices asserting that our products or services sold
to customers or software-based network functions infringe on their patents and
other intellectual property rights. These claims, whether against us directly,
such as network functions or against third-party suppliers of products or
services that we, in turn, sell to our customers, such as wireless handsets,
could require us to pay damages, royalties, stop offering the relevant
products or services and/or cease network functions or other activities. While
the outcome of any litigation is uncertain, we do not believe that the
resolution of any of these infringement claims or the expiration or
non-renewal of any of our intellectual property rights would have a material
adverse effect on our results of operations.
MAJOR CUSTOMERS
No customer accounted for 10% or more of our consolidated revenues in 2019,
2018 or 2017.
COMPETITION
Competition continues to increase for communications, media entertainment and
digital services from traditional and nontraditional competitors.
Technological advances have expanded the types and uses of services and
products available. In addition, lack of or a reduced level of regulation of
comparable legacy services has lowered costs for alternative communications
service providers. As a result, we face continuing competition as well as some
new opportunities in significant portions of our business.
Wireless We face substantial competition in our wireless businesses. Under
current FCC rules, multiple licensees, who provide wireless services on the
cellular, PCS, Advanced Wireless Services, 700 MHz and other spectrum bands,
may operate in each of our U.S. service areas. Our competitors include three
national wireless providers; a larger number of regional providers and
resellers of those services; and specifically certain cable companies. In
addition, we face competition from providers who offer voice, text messaging
and other services as applications on data networks. Substantially all of the
U.S. population lives in areas with at least three mobile telephone operators,
with most of the population living in areas with at least four competing
carriers. We are one of three facilities-based providers in Mexico, with the
most significant market share controlled by América Móvil. We may experience
significant competition from companies that provide similar services using
other communications technologies and services. While some of these
technologies and services are now operational, others are being developed or
may be developed. We compete for customers based principally on service/device
offerings, price, network quality, coverage area and customer service.
Video/Broadband Our subsidiaries providing communications and digital
entertainment services will face continued competitive pressure in 2020 from
multiple providers, including wireless, satellite, cable, online video
providers, and resellers. In addition, the desire for high-speed data on
demand, including video, is continuing to lead customers to terminate their
traditional wired or linear services and use our or competitors' wireless,
satellite and internet-based services. We have launched our own video OTT
and/or streaming options to attract or retain customers that do not want a
full-scale traditional video package. In most U.S. markets, we compete for
customers with large cable companies for high-speed internet, video and voice
services and other smaller telecommunications companies for both long-distance
and local services. In addition, in Latin American countries served by our
DIRECTV subsidiary, we also face competition from other video providers,
including América Móvil and Telefónica.
Legacy Voice and Data We continue to lose legacy voice and data subscribers
due to competitors (e.g., wireless, cable and VoIP providers) who can provide
comparable services at lower prices because they are not subject to
traditional telephone industry regulation (or the extent of regulation they
are subject to is in dispute), utilize different technologies or promote a
different business model (such as advertising based). In response to these
competitive pressures, for a number of years we have used a bundling strategy
that rewards customers who consolidate their services with us. We continue to
focus on bundling services, including combined packages of wireless and video
service through our satellite and IP-based services. We will continue to
develop innovative and integrated services that capitalize on our wireless and
IP-based network and satellites.
Additionally, we provide local and interstate telephone and switched services
to other service providers, primarily large internet service providers using
the largest class of nationwide internet networks (internet backbone),
wireless carriers, other telephone companies, cable companies and systems
integrators. These services are subject to additional competitive pressures
from the development of new technologies, the introduction of innovative
offerings and increasing satellite, wireless, fiber-optic and cable
transmission capacity for services. We face a number of international
competitors, including Orange Business Services, BT, Singapore
Telecommunications Limited and Verizon Communications Inc., as well as
competition from a number of large systems integrators.
Media Our WarnerMedia businesses face similar shifts in consumer viewing
patterns, increased competition from streaming services and the expansion by
other companies, in particular, technology companies. In May 2020, we plan to
launch HBO Max, our new platform for premium content and video offered
directly to consumers, as well as through our traditional distributors.
WarnerMedia competes with other studios and television production groups and
independents to produce and sell programming. Many television networks and
online platforms have affiliated production companies from which they are
increasingly obtaining their programming, which has reduced their demand for
programming from non-affiliated production companies. WarnerMedia also faces
competition from other television networks, online platforms, and premium pay
television services for distribution and marketing of its television networks
and premium pay and basic tier television services by affiliates.
Our WarnerMedia businesses compete with other production companies and studios
for the services of producers, directors, writers, actors and others and for
the acquisition of literary properties. In recent years, technology companies
also have begun to produce programming and compete with WarnerMedia for talent
and property rights.
Advertising The increased amount of consumer time spent online and on mobile
activities has resulted in the shift of advertising budgets away from
traditional television to digital advertising. WarnerMedia's
advertising-supported television networks and digital properties compete with
streaming services, other networks and digital properties, print, radio and
other media. Our programmatic advertising business faces competition from a
variety of technology companies. Similar to all participants in the
advertising technology sector, we contend with the dominance of Google, as
well as the influence of Facebook, whose practices may result in the decreased
ability and willingness of advertisers and programmers to adopt programmatic
solutions offered by alternative suppliers.
RESEARCH AND DEVELOPMENT
AT&T scientists and engineers conduct research in a variety of areas,
including IP networking, advanced network design and architecture, network and
cyber security, network operations support systems, satellite technology,
video platform development and data analytics. The majority of the development
activities are performed to create new services and to invent tools and
systems to manage secure and reliable networks for us and our customers.
Research and development expenses were $1,276 in 2019, $1,194 in 2018, and
$1,503 in 2017.
EMPLOYEES
As of January 31, 2020, we employed approximately 246,000 persons.
Approximately 40% of our employees are represented by the Communications
Workers of America (CWA), the International Brotherhood of Electrical Workers
(IBEW) or other unions. After expiration of the agreements, work stoppages or
labor disruptions may occur in the absence of new contracts or other
agreements being reached. A contract covering approximately 7,000 traditional
wireline employees in our Midwest region expired in April 2018. In August
2019, a new four-year contract was ratified by employees and will expire in
April 2022. A contract covering approximately 3,000 traditional wireline
employees in our legacy AT&T Corp. business expired in April 2018. In
August 2019, a new four-year contract was ratified by employees and will
expire in April 2022. A contract covering approximately 18,000 traditional
wireline employees in our Southeast region expired in August 2019. In October
2019, a new five-year contract was ratified by employees and will expire in
August 2024. Other contracts covering approximately 20,000 employees are
scheduled to expire during 2020, including a contract expiring in February
covering approximately 7,000 Mobility employees and a contract expiring in
April covering approximately 13,000 traditional wireline employees in our West
region.
At December 31, 2019, we had approximately 540,000 retirees and dependents
that were eligible to receive retiree benefits.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this document, including the
matters contained under the caption "Cautionary Language Concerning
Forward-Looking Statements," you should carefully read the matters described
below. We believe that each of these matters could materially affect our
business. We recognize that most of these factors are beyond our ability to
control and therefore we cannot predict an outcome.
Macro-economic Factors:
Adverse changes in medical costs, the U.S. securities markets and interest
rates could materially increase our benefit plan costs.
Our costs to provide current benefits and funding for future benefits are
subject to increases, primarily due to continuing increases in medical and
prescription drug costs, and can be affected by lower returns on funds held by
our pension and other benefit plans, which are reflected in our financial
statements for that year. Favorable market returns in 2019 have led to higher
than assumed investment returns on our plan assets, with a lower end-of-period
yield curve contributing to higher benefit obligations resulting in an
insignificant change to our overall funding obligations. Should favorable
market returns continue, we may need to adjust our assumed rate of return on
plan assets. In calculating the costs included on our financial statements of
providing benefits under our plans, we have made certain assumptions regarding
future investment returns, medical costs and interest rates. While we have
made some changes to the benefit plans to limit our risk from increasing
medical costs, if actual investment returns, medical costs and interest rates
are worse than those previously assumed, our expenses will increase.
The Financial Accounting Standards Board requires companies to recognize the
funded status of defined benefit pension and postretirement plans as an asset
or liability in our statement of financial position and to recognize changes
in that funded status in the year in which the changes occur. We have elected
to reflect the annual adjustments to the funded status in our consolidated
statement of income. Therefore, an increase in our costs or adverse market
conditions will have a negative effect on our operating results.
Adverse changes in global financial markets could limit our ability and our
larger customers' ability to access capital or increase the cost of capital
needed to fund business operations.
During 2019, volatility in the credit, currency, equity and fixed income
markets persisted due to continued uncertainty surrounding global growth
rates. Uncertainty regarding ongoing U.S. tariffs on Chinese goods and vice
versa, the withdrawal of the United Kingdom from the European Union and other
political developments in Europe and Asia could significantly affect global
financial markets in 2020. Volatility in other areas, such as in emerging
markets, may affect companies' access to the credit markets, leading to higher
borrowing costs, or, in some cases, the inability to fund ongoing operations.
In addition, we contract with large financial institutions to support our own
treasury operations, including contracts to hedge our exposure on interest
rates and foreign exchange and the funding of credit lines and other
short-term debt obligations, including commercial paper. These financial
institutions face stricter capital-related and other regulations in the United
States and Europe, as well as ongoing legal and financial issues concerning
their loan portfolios, which may hamper their ability to provide credit or
raise the cost of providing such credit.
The interest rate used to calculate the rate of variable rate indebtedness,
the LIBOR benchmark, will not be reported after 2021. Although our securities
may provide for alternative methods of calculating the interest rate payable
on such indebtedness, uncertainty as to the extent and manner of future
changes may adversely affect the current trading market for LIBOR-based
securities, and the value of variable rate indebtedness in general. A
company's cost of borrowing is also affected by evaluations given by various
credit rating agencies and these agencies have been applying tighter credit
standards when evaluating debt levels and future growth prospects. While we
have been successful in continuing to access the credit and fixed income
markets when needed, adverse changes in the financial markets could render us
either unable to access these markets or able to access these markets only at
higher interest costs and with restrictive financial or other conditions,
severely affecting our business operations.
Our international operations have increased our exposure to political
instability, to changes in the international economy and to the level of
regulation on our business and these risks could offset our expected growth
opportunities.
We have international operations, particularly Latin America, including
Mexico, and worldwide through WarnerMedia's content distribution as well as
services to our large U.S.-based businesses. We need to comply with a wide
variety of complex local laws, regulations and treaties. We are exposed to
restrictions on cash repatriation, foreign exchange controls, fluctuations in
currency values, changes in relationships between U.S. and foreign
governments, trade restrictions including potential tariffs, differences in
intellectual property protection laws, and other regulations that may affect
materially our earnings. Our Mexico operations in particular rely on a
continuation of a regulatory regime that fosters competition. While our
foreign operations represent significant opportunities to sell our services, a
number of foreign countries where we operate have experienced unstable growth
patterns, high inflation, currency devaluation, foreign exchange controls,
instability in the banking sector and high unemployment. In addition, several
Latin America countries have experienced significant political turmoil during
2019. Should these conditions persist, our ability to offer service in one or
more countries could be adversely affected and customers in these countries
may be unable to purchase the services we offer or pay for services already
provided.
In addition, operating in foreign countries also typically involves
participating with local businesses, either to comply with local laws or, for
example, to enhance product marketing, deploy networks or execute on other
capital projects. Involvement with foreign firms exposes us to the risk of
being unable to control the actions of those firms and therefore exposes us to
risks associated with our obligation to comply with the Foreign Corrupt
Practices Act (FCPA). Violations of the FCPA could have a material adverse
effect on our operating results.
Industry-wide Factors:
Changes to federal, state and foreign government regulations and decisions in
regulatory proceedings could further increase our operating costs and/or alter
customer perceptions of our operations, which could materially adversely
affect us.
Our subsidiaries providing wired services are subject to significant federal
and state regulation while many of our competitors are not. In addition, our
subsidiaries and affiliates operating outside the United States are also
subject to the jurisdiction of national and supranational regulatory
authorities in the market where service is provided. Our wireless and various
video subsidiaries are regulated to varying degrees by the FCC and in some
instances, by state and local agencies. Adverse regulations and rulings by the
FCC relating to broadband, wireless deployment and satellite video issues
could impede our ability to manage our networks and recover costs and lessen
incentives to invest in our networks. The continuing growth of IP-based
services, especially when accessed by wireless devices, has created or
potentially could create conflicting regulation between the FCC and various
state and local authorities, which may involve lengthy litigation to resolve
and may result in outcomes unfavorable to us. In addition, increased public
focus on a variety of issues related to our operations, such as privacy
issues, government requests or orders for customer data, and concerns about
global climate changes, have led to proposals or new legislation at state,
federal and foreign government levels to change or increase regulation on our
operations. Enactment of new privacy laws and regulations could, among other
things, adversely affect our ability to collect and offer targeted
advertisements, an expected growth area for the company, or result in
additional costs of compliance or litigation. Should customers decide that our
competitors offer a more customer-friendly environment, our competitive
position, results of operations or financial condition could be materially
adversely affected.
Continuing growth in and the converging nature of wireless, video and
broadband services will require us to deploy significant amounts of capital
and require ongoing access to spectrum in order to provide attractive services
to customers.
Wireless, video and broadband services are undergoing rapid and significant
technological changes and a dramatic increase in usage, in particular, the
demand for faster and seamless usage of video and data across mobile and fixed
devices. We must continually invest in our networks in order to improve our
wireless, video and broadband services to meet this increasing demand and
remain competitive. Improvements in these services depend on many factors,
including continued access to and deployment of adequate spectrum and the
capital needed to expand our wireline network to support transport of these
services. In order to stem broadband subscriber losses to cable competitors in
our non-fiber wireline areas, we have been expanding our all-fiber wireline
network. We must maintain and expand our network capacity and coverage for
transport of video, data and voice between cell and fixed landline sites. To
this end, we have participated in spectrum auctions and continue to deploy
software and other technology advancements in order to efficiently invest in
our network.
Network service enhancements and product launches may not occur as scheduled
or at the cost expected due to many factors, including delays in determining
equipment and wireless handset operating standards, supplier delays, software
issues, increases in network and handset component costs, regulatory
permitting delays for tower sites or enhancements, or labor-related delays.
Deployment of new technology also may adversely affect the performance of the
network for existing services. If we cannot acquire needed spectrum or deploy
the services customers desire on a timely basis with acceptable quality and at
adequate cost, then our ability to attract and retain customers, and,
therefore, maintain and improve our operating margins, could be materially
adversely affected.
Increasing competition for wireless customers could materially adversely
affect our operating results.
We have multiple wireless competitors in each of our service areas and compete
for customers based principally on service/device offerings, price, network
quality, coverage area and customer service. In addition, we are facing
growing competition from providers offering services using advanced wireless
technologies and IP-based networks. We expect market saturation to continue to
cause the wireless industry's customer growth rate to moderate in comparison
with historical growth rates, leading to increased competition for customers.
We also expect that our customers' growing demand for high-speed video and
data services will place constraints on our network capacity. These
competition and capacity constraints will continue to put pressure on pricing
and margins as companies compete for potential customers. Our ability to
respond will depend, among other things, on continued improvement in network
quality and customer service as well as effective marketing of attractive
products and services. These efforts will involve significant expenses and
require strategic management decisions on, and timely implementation of,
equipment choices, network deployment and service offerings.
Ongoing changes in the television industry and consumer viewing patterns could
materially adversely affect our operating results.
Our video subsidiaries derive substantial revenues and profits from cable
networks and premium pay television services and the production and licensing
of television programming to broadcast and cable networks and premium pay
television services. The U.S. television industry is continuing to evolve
rapidly, with developments in technology leading to new methods for the
distribution of video content and changes in when, where and how audiences
consume video content. These changes have led to (1) new, internet-based OTT
competitors, which are increasing in number and some of which have significant
and growing subscriber/user bases, and (2) reduced viewers of traditional
advertising-supported television resulting from increased video consumption
through SVOD services, time-shifted viewing of television programming and the
use of DVRs to skip advertisements. The number of subscribers to traditional
linear programming in the U.S. has been declining in recent years and the U.S.
television industry has generally experienced declines in ratings for
programming, which have negatively affected subscription and advertising
revenues, and these trends are expected to continue. The popularity of
content, whether on television, on the internet, or through movies, is
difficult to predict and can change rapidly, and low public acceptance of our
television, OTT and movie content, including WarnerMedia's content, could
adversely affect our results of operations. We are taking steps to mitigate
the risks from these changes, such as our 2020 launch of our HBO Max
direct-to-consumer streaming platform and new, enhanced advertising
opportunities, but there can be no assurance that these and other efforts will
be successful in responding to these changes.
Intellectual property rights may be adversely affected by piracy or be
inadequate to take advantage of business opportunities, such as new
distribution platforms, which may materially adversely affect our operations.
Increased piracy of video content, products and other intellectual property,
particularly in our foreign WarnerMedia and Latin American operations, will
decrease revenues. Mobile and broadband technological developments have made
it easier to reproduce and distribute high-quality unauthorized copies of
content. Piracy is particularly prevalent in countries that lack effective
copyright and other legal protections or enforcement measures and thieves can
attract users throughout the world. Effective intellectual property protection
may not be available in every country where we operate. We may need to spend
significant amounts of money to protect our rights. We are also increasingly
negotiating broader licensing agreements to expand our ability to use new
methods to distribute content to customers. Any impairment of our intellectual
property rights, including due to changes in U.S. or foreign intellectual
property laws or the absence of effective legal protections or enforcement
measures, or our inability to negotiate broader distribution rights, could
materially adversely impact our operations.
Company-Specific Financial Factors:
Adoption of new software-based technologies may involve quality and supply
chain issues and could increase capital costs.
The communications and digital entertainment industry has experienced rapid
changes in the past several years. An increasing number of our customers are
using mobile devices as the primary means of viewing video and an increasing
number of nontraditional video providers are developing content and
technologies to satisfy the desire for video entertainment demand. In
addition, businesses and government bodies are broadly shifting to
wireless-based services for homes and infrastructure to improve services to
their respective customers and constituencies. In order to meet this demand
and remain competitive, we now offer a mobile TV service and continue to
upgrade our sophisticated wired and wireless networks, including satellites,
as well as research other technologies. We are spending significant capital to
shift our wired network to software-based technology to manage this demand and
are launching 5G wireless technology to address these consumer demands. We are
entering into a significant number of software licensing agreements and
working with software developers to provide network functions in lieu of
installing switches or other physical network equipment in order to respond to
rapid developments in video and wireless demand. While software-based
functionality can be changed much more quickly than, for example, physical
switches, the rapid pace of development means that we may increasingly need to
rely on single-source and software solutions that have not previously been
deployed in production environments. Should this software not function as
intended or our license agreements provide inadequate protection from
intellectual property infringement claims, we could be forced to either
substitute (if available), or else spend time to develop alternative
technologies at a much higher cost and incur harm to our reputation for
reliability, and, as a result, our ability to remain competitive could be
materially adversely affected.
Increasing costs to provide video and other services could adversely affect
operating margins.
Our operating costs, including customer acquisition and retention costs, could
continue to put pressure on margins and customer retention levels. In
addition, most of our video programming that we distribute via our linear
services is provided by other companies and historically the rates they charge
us for programming have often increased more than the rate of inflation. In
addition, as customer viewing habits shift to mobile and on-demand from linear
programming, negotiating licensing rights is increasingly complicated. We are
attempting to use our increased scale and access to wireless customers to
change this trend but such negotiations are difficult and also may result in
programming disruption. Our new HBO Max streaming platform is another
component of our strategy to reach nontraditional video customers and we are
investing heavily to launch a competitive and attractive offering. If we are
unable to restrain these costs or provide programming desired by our
customers, it could impact margins and our ability to attract and retain
customers. Our WarnerMedia operations, which create and license content to
other providers, also may experience increasing difficulties to secure
favorable terms, including those related to pricing, positioning and
packaging, during contract negotiations, which may lead to blackouts of
WarnerMedia programming, and WarnerMedia may face greater difficulty in
achieving placement of its networks and premium pay television services in
smaller bundles or mobile offerings by third parties.
A number of our competitors offering comparable legacy services that rely on
alternative technologies and business models are typically subject to less (or
no) regulation, and therefore are able to operate with lower costs. These
competitors generally can focus on discrete customer segments since they do
not have regulatory obligations to provide universal service. Also, these
competitors have cost advantages compared to us, due in part to operating on
newer, more technically advanced and lower-cost networks and a nonunionized
workforce, lower employee benefits and fewer retirees. We have begun
initiatives at both the state and federal levels to obtain regulatory
approvals, where needed, to transition services from our older copper-based
network to an advanced IP-based network. If we do not obtain regulatory
approvals for our network transition or obtain approvals with onerous
conditions, we could experience significant cost and competitive
disadvantages.
If our efforts to attract and retain subscribers to our new HBO Max platform
are not successful, our business will be adversely affected.
As with any new product launch, HBO Max's future success is subject to
inherent uncertainty. Our ability to attract subscribers to the HBO Max
platform will depend in part on our ability to consistently provide
subscribers with compelling content choices, as well as a quality experience
for selecting and viewing those content choices. Furthermore, the relative
service levels, content offerings, promotions, and pricing and related
features of competitors to HBO Max may adversely impact our ability to attract
and retain subscribers. Competitors include other entertainment video
providers, such as multichannel video programming distributors and
internet-based movie and TV content providers. If consumers do not perceive
our offerings to be of value, including if we introduce new or adjust existing
features, adjust pricing or offerings, terminate or modify promotional or
trial period offerings, experience technical issues, or change the mix of
content in a manner that is not favorably received by them, we may not be able
to attract and retain subscribers. In addition, many subscribers to these
types of offerings originate from word-of-mouth advertising from then existing
subscribers. If our efforts to satisfy subscribers are not successful,
including because we terminate or modify promotional or trial-period offerings
or because of technical issues with the platform, we may not be able to
attract subscribers, and as a result, our ability to maintain and/or grow our
business will be adversely affected.
If subscribers cancel or decide to not continue subscriptions for many
reasons, including a perception that they do not use it sufficiently, the need
to cut household expenses, unsatisfactory availability of content, promotions
or trial-period offers expire or are modified, competitive services or
promotions provide a better value or experience, and customer service or
technical issues are not satisfactorily resolved, our business will be
adversely affected. We must continually add new subscribers both to replace
canceled subscribers and to grow our business. If we do not grow as expected,
given, in particular, that a significant portion of our content costs are
committed and contracted over several years based on minimum subscriber
delivery levels, we may not be able to adjust our expenditures or increase our
(per subscriber) revenues commensurate with the lowered growth rate such that
our margins, liquidity and results of operations may be adversely impacted. If
we are unable to successfully compete with competitors in retaining and
attracting new subscribers, our business will be adversely affected. Further,
if excessive numbers of subscribers do cancel, we may be required to incur
significantly higher marketing expenditures or offer significantly more
generous promotions to replace these subscribers with new subscribers.
Unfavorable litigation or governmental investigation results could require us
to pay significant amounts or lead to onerous operating procedures.
We are subject to a number of lawsuits both in the United States and in
foreign countries, including, at any particular time, claims relating to
antitrust; patent infringement; wage and hour; personal injury; customer
privacy violations; regulatory proceedings; and selling and collection
practices. We also spend substantial resources complying with various
government standards, which may entail related investigations and litigation.
In the wireless area, we also face current and potential litigation relating
to alleged adverse health effects on customers or employees who use such
technologies including, for example, wireless devices. We may incur
significant expenses defending such suits or government charges and may be
required to pay amounts or otherwise change our operations in ways that could
materially adversely affect our operations or financial results.
Cyberattacks, equipment failures, natural disasters and terrorist acts may
materially adversely affect our operations.
Cyberattacks, major equipment failures or natural disasters, such as flooding,
hurricanes and forest fires, whether caused by discrete severe weather events
and/or precipitated by long-term climate change and earthquakes, software
problems, terrorist acts or other breaches of network or IT security that
affect our networks, including software and switches, microwave links,
third-party-owned local and long-distance networks on which we rely, our cell
sites or other equipment, our satellites, our customer account support and
information systems, or employee and business records could have a material
adverse effect on our operations. Our wired network in particular is becoming
increasingly reliant on software as it evolves to handle increasing demands
for video transmission. While we have been subject to security incidents or
cyberattacks, these did not result in a material adverse effect on our
operations. However, as such attacks continue to increase in scope and
frequency, we may be unable to prevent a significant attack in the future. Our
ability to maintain and upgrade our video programming also depends on our
ability to successfully deploy and operate video satellites. Our inability to
deploy or operate our networks or customer support systems or protect
sensitive personal information of customers or valuable technical and
marketing information could result in significant expenses, potential legal
liability, a loss of current or future customers and reputation damage, any of
which could have a material adverse effect on our operations and financial
condition.
Increases in our debt levels to fund acquisitions, additional spectrum
purchases, or other strategic decisions could adversely affect our ability to
finance future debt at attractive rates and reduce our ability to respond to
competition and adverse economic trends.
We have incurred debt to fund significant acquisitions, as well as spectrum
purchases needed to compete in our industry. While we believe such decisions
were prudent and necessary to take advantage of both growth opportunities and
respond to industry developments, we did experience credit-rating downgrades
from historical levels. Banks and potential purchasers of our publicly traded
debt may decide that these strategic decisions and similar actions we may take
in the future, as well as expected trends in the industry, will continue to
increase the risk of investing in our debt and may demand a higher rate of
interest, impose restrictive covenants or otherwise limit the amount of
potential borrowing. Additionally, our capital allocation plan is focused on,
among other things, further reducing our debt going forward. Any failure to
successfully execute this plan could adversely affect our cost of funds,
liquidity, competitive position and access to capital markets.
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this report contains forward-looking statements that
are subject to risks and uncertainties, and actual results could differ
materially. Many of these factors are discussed in more detail in the "Risk
Factors" section. We claim the protection of the safe harbor for
forward-looking statements provided by the Private Securities Litigation
Reform Act of 1995.
The following factors could cause our future results to differ materially from
those expressed in the forward-looking statements:
· Adverse economic, political and/or capital access changes in the
markets served by us or in countries in which we have significant investments
and/or operations, including the impact on customer demand and our ability and
our suppliers' ability to access financial markets at favorable rates and
terms.
· Increases in our benefit plans' costs, including increases due to
adverse changes in the United States and foreign securities markets, resulting
in worse-than-assumed investment returns and discount rates; adverse changes
in mortality assumptions; adverse medical cost trends; and unfavorable or
delayed implementation or repeal of healthcare legislation, regulations or
related court decisions.
· The final outcome of FCC and other federal, state or foreign
government agency proceedings (including judicial review, if any, of such
proceedings) and legislative efforts involving issues that are important to
our business, including, without limitation, pending Notices of Apparent
Liability; the transition from legacy technologies to IP-based infrastructure,
including the withdrawal of legacy TDM-based services; universal service;
broadband deployment; wireless equipment siting regulations and, in
particular, siting for 5G service; E911 services; competition policy; privacy;
net neutrality; multichannel video programming distributor services and
equipment; content licensing and copyright protection; availability of new
spectrum on fair and balanced terms; and wireless and satellite license awards
and renewals.
· Enactment of additional state, local, federal and/or foreign
regulatory and tax laws and regulations, or changes to existing standards and
actions by tax agencies and judicial authorities including the resolution of
disputes with any taxing jurisdictions, pertaining to our subsidiaries and
foreign investments, including laws and regulations that reduce our incentive
to invest in our networks, resulting in lower revenue growth and/or higher
operating costs.
· Potential changes to the electromagnetic spectrum currently used
for broadcast television and satellite distribution being considered by the
FCC could negatively impact WarnerMedia's ability to deliver linear network
feeds of its domestic cable networks to its affiliates, and in some cases,
WarnerMedia's ability to produce high-value news and entertainment programming
on location.
· U.S. and foreign laws and regulations regarding intellectual
property rights protection and privacy, personal data protection and user
consent are complex and rapidly evolving and could result in adverse impacts
to our business plans, increased costs, or claims against us that may harm our
reputation.
· The ability of our competitors to offer product/service offerings
at lower prices due to lower cost structures and regulatory and legislative
actions adverse to us, including non-regulation of comparable alternative
technologies and/or government-owned or subsidized networks.
· The continued development and delivery of attractive and
profitable wireless, video and broadband offerings and devices, and, in
particular, the success of our new HBO Max platform; the extent to which
regulatory and build-out requirements apply to our offerings; our ability to
match speeds offered by our competitors and the availability, cost and/or
reliability of the various technologies and/or content required to provide
such offerings.
· Our ability to generate advertising revenue from attractive video
content, especially from WarnerMedia, in the face of unpredictable and rapidly
evolving public viewing habits and legal restrictions on the use of personal
data.
· The availability and cost and our ability to adequately fund
additional wireless spectrum and network upgrades; and regulations and
conditions relating to spectrum use, licensing, obtaining additional spectrum,
technical standards and deployment and usage, including network management
rules.
· Our ability to manage growth in wireless data services, including
network quality and acquisition of adequate spectrum at reasonable costs and
terms.
· The outcome of pending, threatened or potential litigation (which
includes arbitrations), including, without limitation, patent and product
safety claims by or against third parties.
· The impact from major equipment or software failures on our
networks, including satellites operated by DIRECTV; the effect of security
breaches related to the network or customer information; our inability to
obtain handsets, equipment/software or have handsets, equipment/software
serviced in a timely and cost-effective manner from suppliers; and in the case
of satellites launched, timely provisioning of services from vendors; or
severe weather conditions including flooding and hurricanes, natural disasters
including earthquakes and forest fires, pandemics, energy shortages, wars or
terrorist attacks.
· The issuance by the Financial Accounting Standards Board or other
accounting oversight bodies of new accounting standards or changes to existing
standards.
· Our ability to successfully integrate our WarnerMedia operations,
including the ability to manage various businesses in widely dispersed
business locations and with decentralized management.
· Changes in our corporate strategies, such as changing
network-related requirements or acquisitions and dispositions, which may
require significant amounts of cash or stock, to respond to competition and
regulatory, legislative and technological developments.
· The uncertainty surrounding further congressional action to
address spending reductions, which may result in a significant decrease in
government spending and reluctance of businesses and consumers to spend in
general.
Readers are cautioned that other factors discussed in this report, although
not enumerated here, also could materially affect our future earnings.
ITEM 2. PROPERTIES
Our properties do not lend themselves to description by character and location
of principal units. At December 31, 2019, of our total property, plant and
equipment, central office equipment represented 29%; outside plant (including
cable, wiring and other non-central office network equipment) represented
approximately 22%; satellites represented 1%; other equipment, comprised
principally of wireless network equipment attached to towers, furniture and
office equipment and vehicles and other work equipment, represented 28%; land,
building and wireless communications towers represented 12%; and other
miscellaneous property represented 8%.
For our Communications segment, substantially all of the installations of
central office equipment are located in buildings and on land we own. Many
garages, administrative and business offices, wireless towers, telephone
centers and retail stores are leased. Property on which communication towers
are located may be either owned or leased.
For our WarnerMedia segment, we own or leases offices; studios; technical,
production and warehouse spaces; communications facilities and other
properties in numerous locations globally.
ITEM 3. LEGAL PROCEEDINGS
We are a party to numerous lawsuits, regulatory proceedings and other matters
arising in the ordinary course of business. As of the date of this report, we
do not believe any pending legal proceedings to which we or our subsidiaries
are subject are required to be disclosed as material legal proceedings
pursuant to this item.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Information about our Executive Officers
(As of February 1, 2020)
Name Age Position Held Since
Randall L. Stephenson 59 Chairman of the Board and Chief Executive Officer 6/2007
David S. Huntley 61 Senior Executive Vice President and Chief Compliance Officer 12/2014
Lori M. Lee 54 Chief Executive Officer-AT&T Latin America and Global Marketing Officer 8/2017
David R. McAtee II 51 Senior Executive Vice President and General Counsel 10/2015
Jeffery S. McElfresh 49 Chief Executive Officer, AT&T Communications LLC 10/2019
Angela R. Santone 48 Senior Executive Vice President - Human Resources 12/2019
John T. Stankey 57 President and Chief Operating Officer 10/2019
John J. Stephens 60 Senior Executive Vice President and Chief Financial Officer 6/2011
All of the above executive officers have held high-level managerial positions
with AT&T or its subsidiaries for more than the past five years, except
for Ms. Santone. Ms. Santone was previously Chief Administrative Officer of
AT&T from May 2019 to December 2019, Executive Vice President and Global
Chief Human Resources Officer of Turner from February 2016 to April 2019, and
Senior Vice President and Chief Human Resources Officer of Turner from June
2013 to January 2016. Executive officers are not appointed to a fixed term of
office.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange under the ticker
symbol "T". The number of stockholders of record as of December 31, 2019 and
2018 was 891,449 and 937,230. The number of stockholders of record as of
February 12, 2020, was 887,276. We declared dividends, on a quarterly basis,
totaling $2.05 per share in 2019 and $2.01 per share in 2018.
STOCK PERFORMANCE GRAPH
The comparison above assumes $100 invested on December 31, 2014, in AT&T
common stock and the following Standard & Poor's (S&P) Indices:
S&P 500 Index, S&P 500 Integrated Telecom Index and S&P 500
Communications Services Index. We have adopted the S&P 500 Communications
Services Index, which permits us to use a more diversified set of companies in
the communications and media sectors that are relevant to our businesses.
Total return equals stock price appreciation plus reinvestment of dividends.
Our Board of Directors has approved the following authorizations to repurchase
common stock: (1) March 2013 authorization program of 300 million shares, with
19 million outstanding at December 31, 2019 and (2) March 2014 authorization
program for an additional 300 million shares, with all 300 million outstanding
at December 31, 2019. Excluding the impact of acquisitions, our 2020 financing
activities will focus on managing our debt level, repurchasing common stock
and paying dividends, subject to approval by our Board of Directors. We plan
to fund our financing uses of cash through a combination of cash from
operations, issuance of debt, issuance of additional preferred stock and asset
sales. The timing and mix of any debt issuance and/or refinancing will be
guided by credit market conditions and interest rate trends.
To implement these authorizations, we used open market repurchase programs,
relying on Rule 10b5-1 of the Securities Exchange Act of 1934, where feasible.
We entered into an Accelerated Share Repurchase program and repurchased $4,000
million of common stock during the first quarter of 2020.
We will continue to fund any share repurchases through a combination of cash
from operations, borrowings dependent on market conditions, or cash from the
disposition of certain non-strategic investments.
A summary of our repurchases of common stock during the fourth quarter of 2019
is as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
(a) (b) (c) (d)
Period
Total Number of Shares (or Units) Purchased(1,2,3) Average Price Paid Per Share (or Unit) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet
Plans or Programs(1) Be Purchased Under The Plans or Programs
October 1, 2019 - 671,252 $ 37.21 - 370,897,657
October 31, 2019
November 1, 2019 - 24,049,128 38.40 24,000,000 346,897,657
November 30, 2019
December 1, 2019 - 28,064,877 38.42 27,398,212 319,499,445
December 31, 2019
Total 52,785,257 $ 38.40 51,398,212
(1) In December 2019, the Company entered into a $4,000 accelerated share
repurchase agreement (ASR). Through
purchases under the ASR, the Company plans to repurchase shares of our common
stock during the first quarter of 2020.
In March 2014, our Board of Directors approved an authorization to
repurchase up to 300 million shares of our common
( ) stock. In March 2013, our Board of Directors approved an authorization to
repurchase up to 300 million shares of our
( ) common stock. The authorizations have no expiration date.
(2) Of the shares purchased, 886,515 shares were acquired through the
withholding of taxes on the vesting of restricted stock
or through the payment in stock of taxes on the exercise price of options.
(3) Of the shares repurchased or transferred, 500,530 shares were transferred
from AT&T maintained VEBA trusts.
ITEM 6. SELECTED FINANCIAL DATA
At December 31 and for the year ended: 2019 2018 2017 2016 2015
Financial Data
Operating revenues $ 181,193 $ 170,756 $ 160,546 $ 163,786 $ 146,801
Operating expenses $ 153,238 $ 144,660 $ 140,576 $ 140,243 $ 126,439
Operating income $ 27,955 $ 26,096 $ 19,970 $ 23,543 $ 20,362
Interest expense $ 8,422 $ 7,957 $ 6,300 $ 4,910 $ 4,120
Equity in net income (loss) of affiliates $ 6 $ (48) $ (128) $ 98 $ 79
Other income (expense) - net $ (1,071) $ 6,782 $ 1,597 $ 1,081 $ 4,371
Income tax (benefit) expense $ 3,493 $ 4,920 $ (14,708) $ 6,479 $ 7,005
Net Income $ 14,975 $ 19,953 $ 29,847 $ 13,333 $ 13,687
Less: Net Income Attributable to Noncontrolling Interest $ (1,072) $ (583) $ (397) $ (357) $ (342)
Net Income Attributable to AT&T $ 13,903 $ 19,370 $ 29,450 $ 12,976 $ 13,345
Net Income Attributable to Common Stock $ 13,900 $ 19,370 $ 29,450 $ 12,976 $ 13,345
Basic Earnings Per Common Share:
Net Income Attributable to Common Stock $ 1.90 $ 2.85 $ 4.77 $ 2.10 $ 2.37
Diluted Earnings Per Common Share:
Net Income Attributable to Common Stock $ 1.89 $ 2.85 $ 4.76 $ 2.10 $ 2.37
Weighted-average common shares outstanding (000,000) 7,319 6,778 6,164 6,168 5,628
Weighted-average common shares outstanding
with dilution (000,000) 7,348 6,806 6,183 6,189 5,646
End of period common shares outstanding (000,000) 7,255 7,282 6,139 6,139 6,145
Dividends declared per common share $ 2.05 $ 2.01 $ 1.97 $ 1.93 $ 1.89
Cash and cash equivalents $ 12,130 $ 5,204 $ 50,498 $ 5,788 $ 5,121
Total assets $ 551,669 $ 531,864 $ 444,097 $ 403,821 $ 402,672
Long-term debt $ 151,309 $ 166,250 $ 125,972 $ 113,681 $ 118,515
Total debt $ 163,147 $ 176,505 $ 164,346 $ 123,513 $ 126,151
Debt ratio 44.7% 47.7% 53.6% 49.9% 50.5%
Net debt ratio 41.4% 46.2% 37.2% 47.5% 48.5%
Book value per common share $ 27.84 $ 26.63 $ 23.13 $ 20.22 $ 20.12
Capital expenditures $ 19,635 $ 21,251 $ 21,550 $ 22,408 $ 20,015
Vendor financing payments $ 3,050 $ 560 $ 572 $ - $ -
Gross capital investment(1) $ 23,690 $ 23,240 $ 22,401 $ 22,408 $ 20,015
Spectrum acquisitions(2) $ 1,316 $ 447 $ (1,380) $ 2,477 $ 17,740
Number of employees 247,800 268,220 254,000 268,540 281,450
(1) Includes capital expenditures and vendor financing payments and excludes
FirstNet reimbursements of $1,005 in 2019, $1,429 in 2018,
$279 in 2017 and $0 in 2016-2015 (see Note 20).
(2) Cash paid for FCC license and domestic spectrum acquired in business
acquisitions and swaps, net of auction deposit returns.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout
this document, and the names of the particular subsidiaries and affiliates
providing the services generally have been omitted. AT&T is a holding
company whose subsidiaries and affiliates operate worldwide in the
telecommunications, media and technology industries. You should read this
discussion in conjunction with the consolidated financial statements and
accompanying notes (Notes). We completed the acquisition of Time Warner Inc.
(Time Warner) on June 14, 2018, and have included its results after that date.
In accordance with U.S. generally accepted accounting principles (GAAP),
operating results from Time Warner prior to the acquisition are excluded.
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this document generally discusses 2019 and 2018 items
and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items
and year-to-year comparisons between 2018 and 2017 that are not included in
this document can be found in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II, Item 7 of our
Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
We have four reportable segments: (1) Communications, (2) WarnerMedia, (3)
Latin America and (4) Xandr. Our segment results presented in Note 4 and
discussed below follow our internal management reporting. We analyze our
segments based on segment operating contribution, which consists of operating
income, excluding acquisition-related costs and other significant items and
equity in net income (loss) of affiliates for investments managed within each
segment. Each segment's percentage calculation of total segment operating
revenue and contribution is derived from our segment results table in Note 4
and may total more than 100% due to losses in one or more segments. Percentage
increases and decreases that are not considered meaningful are denoted with a
dash. We have recast our segment results for all prior periods presented to
exclude wireless and wireline operations in Puerto Rico and the U.S. Virgin
Islands from our Mobility and Business Wireline business units of the
Communications segment, instead reporting them with Corporate and Other (see
Note 6).
Percent Change
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Operating Revenues
Communications $ 142,359 $ 143,721 $ 149,457 (0.9) % (3.8) %
WarnerMedia 33,499 18,941 430 76.9 -
Latin America 6,963 7,652 8,269 (9.0) (7.5)
Xandr 2,022 1,740 1,373 16.2 26.7
Corporate and other 1,603 2,101 2,200 (23.7) (4.5)
Eliminations and consolidation (5,253) (3,399) (1,183) (54.5) -
AT&T Operating Revenues 181,193 170,756 160,546 6.1 6.4
Operating Contribution
Communications 32,230 32,108 31,488 0.4 2.0
WarnerMedia 9,326 5,695 62 63.8 -
Latin America (635) (710) (266) 10.6 -
Xandr 1,318 1,333 1,202 (1.1) 10.9
Segment Operating Contribution $ 42,239 $ 38,426 $ 32,486 9.9 % 18.3 %
The Communications segment accounted for approximately 77% of our 2019 total
segment operating revenues compared to 84% in 2018 and 76% of our 2019 total
segment operating contribution as compared to 84% in 2018. This segment
provides services to businesses and consumers located in the U.S. and
businesses globally. Our business strategies reflect bundled product offerings
that cut across product lines and utilize shared assets. This segment contains
the following business units:
· Mobility provides nationwide wireless service and equipment.
· Entertainment Group provides video, including over-the-top (OTT)
services, broadband and voice communications services to residential
customers. This segment also sells advertising on DIRECTV and U-verse
distribution platforms.
· Business Wireline provides advanced IP-based services, as well as
traditional voice and data services to business customers.
The WarnerMedia segment accounted for approximately 18% of our 2019 total
segment operating revenues compared to 11% in 2018 and 22% of our 2019 total
segment operating contribution compared to 15% in 2018. This segment develops,
produces and distributes feature films, television, gaming and other content
over various physical and digital formats. This segment contains the following
business units:
· Turner primarily operates multichannel basic television networks
and digital properties. Turner also sells advertising on its networks and
digital properties.
· Home Box Office consists of premium pay television and OTT and
streaming services domestically and premium pay, basic tier television and OTT
and streaming services internationally, as well as content licensing and home
entertainment.
· Warner Bros. consists of the production, distribution and
licensing of television programming and feature films, the distribution of
home entertainment products and the production and distribution of games.
The Latin America segment accounted for approximately 4% of our 2019 and 2018
total segment operating revenues. This segment provides entertainment and
wireless services outside of the U.S. This segment contains the following
business units:
· Mexico provides wireless service and equipment to customers in
Mexico.
· Vrio provides video services primarily to residential customers
using satellite technology in Latin America and the Caribbean.
The Xandr segment accounted for approximately 1% of our total segment
operating revenues in 2019 and 2018 and 3% of our total segment operating
contribution in 2019 and 2018. This segment provides advertising services.
These services utilize data insights to develop and deliver targeted
advertising across video and digital platforms.
RESULTS OF OPERATIONS
Consolidated Results Our financial results are summarized in the following
table. We then discuss factors affecting our overall results for the past
three years. Additional analysis is discussed in our "Segment Results"
section. We also discuss our expected revenue and expense trends for 2020 in
the "Operating Environment and Trends of the Business" section. Certain prior
period amounts have been reclassified to conform to the current period's
presentation.
Percent Change
2019 vs. 2018 vs.
2019 2018 2017 2018 2017
Operating revenues
Service $ 17,694 $ 18,411 $ 14,949 (3.9) % 23.2 %
Equipment 181,193 170,756 160,546 6.1 6.4
Operating expenses
Operations and support 100,229 91,968 83,925 9.0 9.6
Depreciation and amortization 153,238 144,660 140,576 5.9 2.9
Total Operating Expenses 27,955 26,096 19,970 7.1 30.7
Interest expense (6) 48 128 - (62.5)
Equity in net income (loss) of affiliates (1,071) 6,782 1,597 - -
Other income (expense) - net (9,487) (1,223) (4,831) - 74.7
Income Before Income Taxes 3,493 4,920 (14,708) (29.0) -
Net Income (1,072) (583) (397) (83.9) (46.9)
Net Income Attributable to AT&T (3) - - - -
OVERVIEW
Operating revenues decreased in 2019, primarily due to including a full year's
worth of Time Warner results, which was acquired in June 2018. Partially
offsetting the increase were declines in the Communications segment driven by
continued pressure in legacy and video services and lower wireless equipment
upgrades that were offset by growth in advanced data and wireless services.
Operations and support expenses increased in 2019, primarily due to our 2018
acquisition of Time Warner and the abandonment of certain copper assets that
will not be necessary to support future network activity (see Note 7). The
increase was partially offset by lower costs in our Communications segment,
specifically fewer subscribers contributing to lower content costs, lower
upgrades driving a decline in wireless equipment costs and our continued focus
on cost management.
Depreciation and amortization expense decreased in 2019.
Amortization expense decreased $415, or 5.0%, in 2019 primarily due to the
amortization of intangibles associated with WarnerMedia. We expect continued
declines in amortization expense, reflecting the accelerated method of
amortization applied to certain of the WarnerMedia intangibles.
Depreciation expense increased $202, or 1.0%, in 2019 primarily due to the
Time Warner acquisition.
Operating income increased in 2019 and 2018. Our operating margin was 15.4% in
2019, compared to 15.3% in 2018 and 12.4% in 2017.
Interest expense increased in 2019, primarily due to lower capitalized
interest associated with putting spectrum into network service.
Equity in net income (loss) of affiliates increased in 2019, primarily due to
the sale of Hulu, which had losses of $44 in 2019 and $105 in 2018. (See Note
6)
Other income (expense) - net decreased in 2019 primarily due to the
recognition of $5,171 in actuarial losses, compared to gains of $3,412 in
2018. Also contributing to the decline were higher debt redemption costs,
partially offset by increased income from Rabbi trusts and other investments
and gains from the sales of nonstrategic assets.
Income tax expense decreased in 2019, primarily driven by a decrease in income
before income taxes. Our effective tax rate was 18.9% in 2019, 19.8% in 2018,
and (97.2)% in 2017. All years were impacted by The Tax Cuts and Jobs Act,
which was enacted in 2017.
Segment Results Our segments are strategic business units that offer
different products and services over various technology platforms and/or in
different geographies that are managed accordingly. Our segment results
presented below follow our internal management reporting. In addition to
segment operating contribution, we also evaluate segment performance based on
EBITDA and/or EBITDA margin. EBITDA is defined as segment operating
contribution, excluding equity in net income (loss) of affiliates and
depreciation and amortization. We believe EBITDA to be a relevant and useful
measurement to our investors as it is part of our internal management
reporting and planning processes and it is an important metric that management
uses to evaluate operating performance. EBITDA does not give effect to cash
used for debt service requirements and thus does not reflect available funds
for distributions, reinvestment or other discretionary uses. EBITDA margin is
EBITDA divided by total revenues.
COMMUNICATIONS SEGMENT Percent Change
2019 vs. 2018 vs.
2019 2018 2017 2018 2017
Segment Operating Revenues
Mobility $ 71,056 $ 70,521 $ 70,259 0.8 % 0.4 %
Entertainment Group 45,126 46,460 49,995 (2.9) (7.1)
Business Wireline 26,177 26,740 29,203 (2.1) (8.4)
Total Segment Operating Revenues 142,359 143,721 149,457 (0.9) (3.8)
Segment Operating Contribution
Mobility 22,321 21,568 20,011 3.5 7.8
Entertainment Group 4,822 4,715 5,471 2.3 (13.8)
Business Wireline 5,087 5,825 6,006 (12.7) (3.0)
Total Segment Operating Contribution $ 32,230 $ 32,108 $ 31,488 0.4 % 2.0 %
Selected Subscribers and Connections
December 31,
(000s) 2019 2018 2017
Mobility subscribers 165,889 151,921 139,986
Total domestic broadband connections 14,659 14,751 14,487
Network access lines in service 8,487 10,002 11,754
U-verse VoIP connections 4,370 5,114 5,682
Operating revenues decreased in 2019, driven by declines in our Entertainment
Group and Business Wireline business units, partially offset by increases in
our Mobility business unit. The decrease reflects the continued shift away
from legacy voice and data products and linear video, largely offset by higher
wireless service revenues from growth in postpaid phone subscribers and
average revenue per subscriber (ARPU), and growth in our prepaid subscriber
base.
Operating contribution increased in 2019 and 2018. The 2019 contribution
includes improvements in our Mobility and Entertainment Group business units,
partially offset by declines in our Business Wireline business unit. Our
Communications segment operating income margin was 22.6% in 2019, 22.3% in
2018 and 21.1% in 2017.
Communications Business Unit Discussion
Mobility Results
Percent Change
2019 vs. 2018 vs.
2019 2018 2017 2018 2017
Operating revenues
Service $ 55,331 $ 54,294 $ 57,023 1.9 % (4.8) %
Equipment 15,725 16,227 13,236 (3.1) 22.6
Total Operating Revenues 71,056 70,521 70,259 0.8 0.4
Operating expenses
Operations and support 40,681 40,690 42,317 - (3.8)
Depreciation and amortization 8,054 8,263 7,931 (2.5) 4.2
Total Operating Expenses 48,735 48,953 50,248 (0.4) (2.6)
Operating Income 22,321 21,568 20,011 3.5 7.8
Equity in Net Income (Loss) of Affiliates - - - - -
Operating Contribution $ 22,321 $ 21,568 $ 20,011 3.5 % 7.8 %
The following tables highlight other key measures of performance for Mobility:
Mobility Subscribers
Percent Change
2019 vs. 2018 vs.
(in 000s) 2019 2018 2017 2018 2017
Postpaid Phone Subscribers 63,018 62,882 63,197 0.2 % (0.5) %
Total Phone Subscribers 79,700 78,767 77,657 1.2 1.4
Postpaid smartphones 60,664 60,131 59,298 0.9 1.4
Postpaid feature phones and other devices 14,543 15,937 17,376 (8.7) (8.3)
Postpaid 75,207 76,068 76,674 (1.1) (0.8)
Prepaid 17,803 16,828 15,154 5.8 11.0
Reseller 6,893 7,693 9,171 (10.4) (16.1)
Connected devices(1) 65,986 51,332 38,987 28.5 31.7
Total Mobility Subscribers 165,889 151,921 139,986 9.2 % 8.5 %
(1) Includes data-centric devices such as wholesale automobile systems, monitoring
devices, fleet management and session-based tablets.
Mobility Net Additions
Percent Change
2019 vs. 2018 vs.
(in 000s) 2019 2018 2017 2018 2017
Postpaid Phone Net Additions 483 194 (186) 149.0 % 204.3 %
Total Phone Net Additions 989 1,248 659 (20.8) 89.4
Postpaid(2) (435) (90) 853 - -
Prepaid 677 1,301 996 (48.0) 30.6
Reseller (928) (1,599) (1,765) 42.0 9.4
Connected devices(3) 14,645 12,324 9,694 18.8 27.1
Mobility Net Subscriber Additions(1) 13,959 11,936 9,778 16.9 % 22.1 %
Postpaid Churn(4) 1.18 % 1.12 % 1.07 % 6 BP 5 BP
Postpaid Phone-Only Churn(4) 0.95 % 0.90 % 0.85 % 5 BP 5 BP
(1) Excludes acquisition-related additions during the period.
(2) In addition to postpaid phones, includes tablets and wearables and other.
Tablet net adds (losses) were (1,487), (1,200) and 59 for the years ended
December 31, 2019, 2018 and 2017, respectively. Wearables and other net adds
were 569, 916 and 980 for the years ended December 31, 2019, 2018
and 2017, respectively.
(3) Includes data-centric devices such as session-based tablets, monitoring
devices and primarily wholesale automobile systems. Excludes
postpaid tablets.
(4) Calculated by dividing the aggregate number of wireless subscribers who
canceled service during a month divided by the total number
of wireless subscribers at the beginning of that month. The churn rate for the
period is equal to the average of the churn rate for
each month of that period.
Service revenue increased during 2019 largely due to prepaid subscriber gains
and higher postpaid phone ARPU driven by the adoption of unlimited plans.
ARPU
ARPU increased primarily due to pricing actions that were not in effect in the
prior year and a continued shift by subscribers to our unlimited plans.
Churn
The effective management of subscriber churn is critical to our ability to
maximize revenue growth and to maintain and improve margins. Competitive
pricing in the industry contributed to higher postpaid churn rates in 2019,
and our move to unlimited plans combined with an improved customer experience
in 2018 contributed to lower churn rates in that year.
Equipment revenue decreased in 2019. The 2019 decrease was driven by lower
postpaid sales, resulting from the continuing trend of customers choosing to
upgrade devices less frequently or bring their own, which is generally offset
by lower equipment expense.
Operations and support expenses decreased in 2019, primarily due to lower
equipment expense driven by low upgrade rates and increased operational
efficiencies, partially offset by higher bad debt expense and handset
insurance costs.
Depreciation expenses decreased in 2019, primarily due to fully depreciated
assets, partially offset by ongoing capital spending for network upgrades and
expansion.
Operating income increased in 2019 and 2018. Our Mobility operating income
margin was 31.4% in 2019, 30.6% in 2018 and 28.5% in 2017. Our Mobility EBITDA
margin was 42.7% in 2019, 42.3% in 2018 and 39.8% in 2017.
Subscriber Relationships
As the wireless industry has matured, we believe future wireless growth will
depend on our ability to offer innovative services, plans and devices that
take advantage of our premier 5G wireless network, and to provide these
services in bundled product offerings. Subscribers that purchase two or more
services from us have significantly lower churn than subscribers that purchase
only one service. To support higher mobile data usage, our priority is to best
utilize a wireless network that has sufficient spectrum and capacity to
support these innovations on as broad a geographic basis as possible.
To attract and retain subscribers in a mature and highly competitive market,
we have launched a wide variety of plans, including our FirstNet and prepaid
products, and arrangements that bundle our video services. Virtually all of
our postpaid smartphone subscribers are on plans that provide for service on
multiple devices at reduced rates, and such subscribers tend to have higher
retention and lower churn rates. Such offerings are intended to encourage
existing subscribers to upgrade their current services and/or add devices,
attract subscribers from other providers and/or minimize subscriber churn. We
also offer unlimited data plans and such subscribers also tend to have higher
retention and lower churn rates.
Connected Devices
Connected devices include data-centric devices such as wholesale automobile
systems, monitoring devices, fleet management and session-based tablets.
Connected device subscribers increased in 2019, and we added approximately 8.4
million wholesale connected cars through agreements with various carmakers,
and experienced strong growth in other Internet of Things (IoT) connections as
well. We believe that these connected car agreements give us the opportunity
to create future retail relationships with the car owners.
Entertainment Group Results
Percent Change
2019 vs. 2018 vs.
2019 2018 2017 2018 2017
Operating revenues
Video entertainment $ 32,110 $ 33,357 $ 36,167 (3.7) % (7.8) %
High-speed internet 8,403 7,956 7,674 5.6 3.7
Legacy voice and data services 2,573 3,041 3,767 (15.4) (19.3)
Other service and equipment 2,040 2,106 2,387 (3.1) (11.8)
Total Operating Revenues 45,126 46,460 49,995 (2.9) (7.1)
Operating expenses
Operations and support 35,028 36,430 38,903 (3.8) (6.4)
Depreciation and amortization 5,276 5,315 5,621 (0.7) (5.4)
Total Operating Expenses 40,304 41,745 44,524 (3.5) (6.2)
Operating Income 4,822 4,715 5,471 2.3 (13.8)
Equity in Net Income (Loss) of Affiliates - - - - -
Operating Contribution $ 4,822 $ 4,715 $ 5,471 2.3 % (13.8) %
The following tables highlight other key measures of performance for
Entertainment Group:
Connections
Percent Change
2019 vs. 2018 vs.
(in 000s) 2019 2018 2017 2018 2017
Video Connections
Premium TV 19,473 22,903 24,089 (15.0) % (4.9) %
AT&T TV NOW 926 1,591 1,155 (41.8) 37.7
Total Video Connections 20,399 24,494 25,244 (16.7) (3.0)
Broadband Connections
IP 13,598 13,729 13,462 (1.0) 2.0
DSL 521 680 888 (23.4) (23.4)
Total Broadband Connections 14,119 14,409 14,350 (2.0) 0.4
Retail Consumer Switched Access Lines 3,329 3,967 4,774 (16.1) (16.9)
U-verse Consumer VoIP Connections 3,794 4,582 5,222 (17.2) (12.3)
Total Retail Consumer Voice Connections 7,123 8,549 9,996 (16.7) (14.5)
Fiber Broadband Connections (included in IP) 3,887 2,763 1,767 40.7 % 56.4 %
Net Additions
Percent Change
2019 vs. 2018 vs.
(in 000s) 2019 2018 2017 2018 2017
Video Net Additions
Premium TV (3,430) (1,186) (1,176) - % (0.9) %
AT&T TV NOW (665) 436 888 - (50.9)
Net Video Additions (4,095) (750) (288) - -
Broadband Net Additions
IP (131) 267 574 - (53.5)
DSL (159) (208) (403) 23.6 48.4
Net Broadband Additions (290) 59 171 - (65.5)
Fiber Broadband Net Additions 1,124 1,034 1,525 8.7 % (32.2) %
Video entertainment revenues are comprised of subscription and advertising
revenues. Revenues decreased in 2019, largely driven by a 15.0% decline in
premium TV subscribers, as we continue to focus on high-value customers,
partially offset by subscription-based advertising growth of 4.8%. Our
customers continue to shift, consistent with the rest of the industry, from a
premium linear service to our more economically priced OTT video service, or
to competitors, which has pressured our video revenues.
Revenue declines in our premium TV products were partially offset by growth in
revenues from our OTT service, AT&T TV NOW, which were primarily
attributable to pricing actions. AT&T TV NOW subscriber net additions
declined in 2019 due to price increases and fewer promotions.
High-speed internet revenues increased in 2019, reflecting higher ARPU
resulting from the continued shift of subscribers to our higher-speed fiber
services. Our bundling strategy is helping to lower churn with subscribers who
bundle broadband with another AT&T service.
Legacy voice and data service revenues decreased in 2019, reflecting the
continued migration of customers to our more advanced IP-based offerings or to
competitors. The trend at which we are experiencing these revenue declines has
slowed, with a decrease of $468 in 2019 compared to $726 in 2018.
Operations and support expenses decreased in 2019, largely driven by lower
content costs from fewer subscribers and our ongoing focus on cost
initiatives. Partially offsetting the decreases were higher amortization of
fulfillment cost deferrals, including the impact of second-quarter updates to
decrease the estimated economic life for our Entertainment Group customers,
and costs associated with NFL SUNDAY TICKET. We expect the second-quarter 2019
update to estimated economic customer lives, and our launch of AT&T TV,
our new streaming premium TV product, to contribute to expense pressure in the
first half of 2020.
Depreciation expenses decreased in 2019, due to network assets becoming fully
depreciated. Partially offsetting the decreases was ongoing capital spending
for network upgrades and expansion, including the completion of the fiber
commitment under the DIRECTV acquisition.
Operating income increased in 2019 and decreased in 2018. Our Entertainment
Group operating income margin was 10.7% in 2019, 10.1% in 2018 and 10.9% in
2017. Our Entertainment Group EBITDA margin was 22.4% in 2019, 21.6% in 2018
and 22.2% in 2017.
Business Wireline Results
Percent Change
2019 vs. 2018 vs.
2019 2018 2017 2018 2017
Operating revenues
Strategic and managed services $ 15,440 $ 14,660 $ 13,880 5.3 % 5.6 %
Legacy voice and data services 9,180 10,674 13,791 (14.0) (22.6)
Other service and equipment 1,557 1,406 1,532 10.7 (8.2)
Total Operating Revenues 26,177 26,740 29,203 (2.1) (8.4)
Operating expenses
Operations and support 16,091 16,201 18,441 (0.7) (12.1)
Depreciation and amortization 4,999 4,714 4,756 6.0 (0.9)
Total Operating Expenses 21,090 20,915 23,197 0.8 (9.8)
Operating Income 5,087 5,825 6,006 (12.7) (3.0)
Equity in Net Income (Loss) of Affiliates - - - - -
Operating Contribution $ 5,087 $ 5,825 $ 6,006 (12.7) % (3.0) %
Strategic and managed services revenues increased in 2019. Our strategic
services are made up of (1) data services, including our VPN, dedicated
internet ethernet and broadband, (2) voice service, including VoIP and
cloud-based voice solutions, (3) security and cloud solutions, and (4)
managed, professional and outsourcing services. Revenue increases were
primarily attributable to our data services and security and cloud solutions.
Legacy voice and data service revenues decreased in 2019, primarily due to
lower demand as customers continue to shift to our more advanced IP-based
offerings or our competitors. The trend at which we are experiencing these
revenue declines has slowed, with a decrease of $1,494 in 2019 compared to
$3,117 in 2018.
Other service and equipment revenues increased in 2019, driven by higher
intellectual property licensing activity. Revenues from the licensing of
intellectual property assets vary from period-to-period and can impact revenue
trends. Other service revenues include project-based revenue, which is
nonrecurring in nature, as well as revenues from customer premises equipment.
Operations and support expenses decreased in 2019. The 2019 decrease was
primarily due to our continued efforts to shift to a software-based network
and automate and digitize our customer support activities, partially offset by
higher fulfillment deferral amortization.
Depreciation expense increased in 2019, primarily due to increases in capital
spending for network upgrades and expansion.
Operating income decreased in 2019 and 2018. Our Business Wireline operating
income margin was 19.4% in 2019, 21.8% in 2018 and 20.6% in 2017. Our Business
Wireline EBITDA margin was 38.5% in 2019, 39.4% in 2018 and 36.9% in 2017.
WARNERMEDIA SEGMENT
2019 2018 2017
Segment Operating Revenues
Turner $ 13,122 $ 6,979 $ 430
Home Box Office 6,749 3,598 -
Warner Bros. 14,358 8,703 -
Eliminations & Other (730) (339) -
Total Segment Operating Revenues 33,499 18,941 430
Segment Operating Contribution
Turner 5,199 3,108 140
Home Box Office 2,365 1,384 -
Warner Bros. 2,350 1,449 -
Eliminations & Other (588) (246) (78)
Total Segment Operating Contribution $ 9,326 $ 5,695 $ 62
Our WarnerMedia segment consists of our Turner, Home Box Office and Warner
Bros. business units. The order of presentation reflects the consistency of
revenue streams, rather than overall magnitude as that is subject to timing
and frequency of studio releases. WarnerMedia also includes our financial
results for regional sports networks (RSNs).
The WarnerMedia segment does not include results from Time Warner operations
for the periods prior to our June 14, 2018 acquisition. Otter Media is
included as an equity method investment for periods prior to our August 7,
2018 acquisition of the remaining interest and is in the segment operating
results following the acquisition. Consistent with our past practice, many of
the impacts of the fair value adjustments from the application of purchase
accounting required under GAAP have not been allocated to the segment, instead
they are reported as acquisition-related items in the reconciliation to
consolidated results.
Due to the June 2018 acquisition of Time Warner, segment and business unit
results for 2019 are not comparable to prior periods, and, therefore,
comparative results are not discussed.
WarnerMedia Business Unit Discussion
Turner Results
2019 2018 2017
Operating revenues
Subscription $ 7,736 $ 4,207 $ 365
Advertising 4,566 2,330 65
Content and other 820 442 -
Total Operating Revenues 13,122 6,979 430
Operating expenses
Operations and support 7,740 3,794 331
Depreciation and amortization 235 131 4
Total Operating Expenses 7,975 3,925 335
Operating Income 5,147 3,054 95
Equity in Net Income of Affiliates 52 54 45
Operating Contribution $ 5,199 $ 3,108 $ 140
Turner includes the WarnerMedia businesses managed by Turner as well as our
financial results for RSNs.
Operating revenues are generated primarily from licensing programming to
distribution affiliates and from selling advertising on its networks and
digital properties. We expect strong advertising revenue growth in 2020 as
Turner advertising revenues are expected to benefit from presidential election
political spend and from airing the NCAA Final Four and Championship games.
Operating income increased in 2019. Our Turner operating income margin was
39.2% for 2019 and 43.8% for 2018. Our Turner EBITDA margin was 41.0% for 2019
and 45.6% for 2018.
Home Box Office Results
2019 2018 2017
Operating revenues
Subscription $ 5,814 $ 3,201 $ -
Content and other 935 397 -
Total Operating Revenues 6,749 3,598 -
Operating expenses
Operations and support 4,312 2,187 -
Depreciation and amortization 102 56 -
Total Operating Expenses 4,414 2,243 -
Operating Income 2,335 1,355 -
Equity in Net Income of Affiliates 30 29 -
Operating Contribution $ 2,365 $ 1,384 $ -
Operating revenues are generated from the exploitation of original and
licensed programming through distribution outlets.
Operating income increased in 2019. Our Home Box Office operating income
margin was 34.6% for 2019 and 37.7% for 2018. Our Home Box Office EBITDA
margin was 36.1% for 2019 and 39.2% for 2018.
Warner Bros. Results
2019 2018 2017
Operating revenues
Theatrical product $ 5,978 $ 4,002 $ -
Television product 6,367 3,621 -
Games and other 2,013 1,080 -
Total Operating Revenues 14,358 8,703 -
Operating expenses
Operations and support 11,816 7,130 -
Depreciation and amortization 162 96 -
Total Operating Expenses 11,978 7,226 -
Operating Income 2,380 1,477 -
Equity in Net Income (Loss) of Affiliates (30) (28) -
Operating Contribution $ 2,350 $ 1,449 $ -
Operating revenues primarily relate to theatrical product (which is content
made available for initial exhibition in theaters) and television product
(which is content made available for initial airing on television or OTT
services). During 2019, fourth-quarter revenues were pressured from foregone
content licensing revenues as we prepare for our launch of HBO Max in 2020 and
lower theatrical product resulting from a more favorable mix of box office and
home entertainment releases in the prior year. The timing of theatrical
releases varies from year to year and is based on several factors. The
variability of the release schedule and the difficulty in predicting the
popularity of content can result in meaningful/material changes in quarterly
revenue results as well as difficult year-over-year comparisons.
Operating income increased in 2019. Our Warner Bros. operating income margin
was 16.6% for 2019 and 17.0% for 2018. Our Warner Bros. EBITDA margin was
17.7% for 2019 and 18.1% for 2018.
LATIN AMERICA SEGMENT
Percent Change
2019 vs. 2018 vs.
2019 2018 2017 2018 2017
Segment Operating Revenues
Vrio $ 4,094 $ 4,784 $ 5,456 (14.4) % (12.3) %
Mexico 2,869 2,868 2,813 - 2.0
Total Segment Operating Revenues 6,963 7,652 8,269 (9.0) (7.5)
Segment Operating Contribution
Vrio 83 347 522 (76.1) (33.5)
Mexico (718) (1,057) (788) 32.1 (34.1)
Total Segment Operating Contribution $ (635) $ (710) $ (266) 10.6 % - %
Operating Results
Our Latin America operations conduct business in their local currency and
operating results are converted to U.S. dollars using official exchange rates,
subjecting results to foreign currency fluctuations.
Operating revenues decreased in 2019, driven by lower revenues for Vrio,
primarily resulting from foreign exchange pressure related to Argentina's
hyperinflationary economy. Mexico revenues were stable, with service revenue
growth offset by lower equipment sales.
Operating contribution increased in 2019 and decreased in 2018, reflecting
foreign exchange pressure, offset by improvement in Mexico. Our Latin America
segment operating income margin was (9.5)% in 2019, (9.7)% in 2018 and (4.3)%
in 2017.
Latin America Business Unit Discussion
Mexico Results
Percent Change
2019 vs. 2018 vs.
2019 2018 2017 2018 2017
Operating revenues
Service $ 1,863 $ 1,701 $ 2,047 9.5 % (16.9) %
Equipment 1,006 1,167 766 (13.8) 52.3
Total Operating Revenues 2,869 2,868 2,813 - 2.0
Operating expenses
Operations and support 3,085 3,415 3,232 (9.7) 5.7
Depreciation and amortization 502 510 369 (1.6) 38.2
Total Operating Expenses 3,587 3,925 3,601 (8.6) 9.0
Operating Income (Loss) (718) (1,057) (788) 32.1 (34.1)
Equity in Net Income of Affiliates - - - - -
Operating Contribution $ (718) $ (1,057) $ (788) 32.1 % (34.1) %
The following tables highlight other key measures of performance for Mexico:
Percent Change
2019 vs. 2018 vs.
(in 000s) 2019 2018 2017 2018 2017
Mexico Wireless Subscribers(1)
Postpaid 5,103 5,805 5,498 (12.1) % 5.6 %
Prepaid 13,584 12,264 9,397 10.8 30.5
Reseller 472 252 204 87.3 23.5
Total Mexico Wireless Subscribers 19,159 18,321 15,099 4.6 % 21.3 %
Percent Change
2019 vs. 2018 vs.
(in 000s) 2019 2018 2017 2018 2017
Mexico Wireless Net Additions
Postpaid (608) 307 533 - % (42.4) %
Prepaid 1,919 2,867 2,670 (33.1) 7.4
Reseller 219 48 (77) - -
Mexico Wireless Net Subscriber Additions 1,530 3,222 3,126 (52.5) % 3.1 %
(1) 2019 excludes the impact of 692 subscriber disconnections resulting from the
churn of customers related to sales by certain third-party
distributors and the sunset of 2G services in Mexico, which are reflected in
beginning of period subscribers.
Service revenues increased in 2019, primarily due to growth in our subscriber
base.
Equipment revenues decreased in 2019, reflecting higher demand in the prior
year for our initial offering of equipment installment programs.
Operations and support expenses decreased in 2019, driven by lower equipment
costs. Approximately 6% of Mexico expenses are U.S. dollar-based, with the
remainder in the local currency.
Depreciation expense decreased in 2019, primarily due to changes in the useful
lives of certain assets, partially offset by the amortization of spectrum
licenses and higher in-service assets.
Operating income increased in 2019 and decreased in 2018. Our Mexico operating
income margin was (25.0)% in 2019, (36.9)% in 2018 and (28.0)% in 2017. Our
Mexico EBITDA margin was (7.5)% in 2019, (19.1)% in 2018 and (14.9)% in 2017.
Vrio Results
Percent Change
2019 vs. 2018 vs.
2019 2018 2017 2018 2017
Operating revenues $ 4,094 $ 4,784 $ 5,456 (14.4) % (12.3) %
Operating expenses
Operations and support 3,378 3,743 4,172 (9.8) (10.3)
Depreciation and amortization 660 728 849 (9.3) (14.3)
Total Operating Expenses 4,038 4,471 5,021 (9.7) (11.0)
Operating Income 56 313 435 (82.1) (28.0)
Equity in Net Income of Affiliates 27 34 87 (20.6) (60.9)
Operating Contribution $ 83 $ 347 $ 522 (76.1) % (33.5) %
The following tables highlight other key measures of performance for Vrio:
Percent Change
2019 vs. 2018 vs.
(in 000s) 2019 2018 2017 2018 2017
Vrio Video Subscribers(1,2) 13,331 13,838 13,629 (3.7) % 1.5 %
Percent Change
2019 vs. 2018 vs.
(in 000s) 2019 2018 2017 2018 2017
Vrio Video Net Subscriber Additions(3) (285) 250 42 - % - %
(1) Excludes subscribers of our equity investment in SKY Mexico, in which we own a
41.3% stake. SKY Mexico had 7.4 million
subscribers at September 30, 2019 and 7.6 million and 8.0 million at December
31, 2018 and 2017, respectively.
(2) 2019 excludes the impact of 222 subscriber disconnections resulting from
conforming our video credit policy across the region, which is
reflected in beginning of period subscribers.
(3) Excludes SKY Mexico net subscriber losses of 225 in the nine months ended
September 30, 2019 and losses of 366 and 23 for
years ended December 31, 2018 and 2017, respectively.
Operating revenues decreased in 2019, due to foreign exchange pressures.
Operations and support expenses decreased in 2019, reflecting changes in
foreign currency exchange rates. Approximately 19% of Vrio expenses are U.S.
dollar-based, with the remainder in the local currency.
Depreciation expense decreased in 2019, primarily due to changes in foreign
currency exchange rates.
Operating income decreased in 2019 and 2018. Our Vrio operating income margin
was 1.4% in 2019, 6.5% in 2018 and 8.0% in 2017. Our Vrio EBITDA margin was
17.5% in 2019, 21.8% in 2018 and 23.5% in 2017.
XANDR SEGMENT
Percent Change
2019 vs. 2018 vs.
2019 2018 2017 2018 2017
Segment Operating Revenues $ 2,022 $ 1,740 $ 1,373 16.2 % 26.7 %
Segment Operating Expenses
Operations and support 646 398 169 62.3 -
Depreciation and amortization 58 9 2 - -
Total Segment Operating Expenses 704 407 171 73.0 -
Segment Operating Income 1,318 1,333 1,202 (1.1) 10.9
Equity in Net Income of Affiliates - - - - -
Segment Operating Contribution $ 1,318 $ 1,333 $ 1,202 (1.1) % 10.9 %
Operating revenues increased in 2019 due to growth in subscription-based
advertising revenue and our acquisition of AppNexus in August 2018 (see Note
6).
Operations and support expenses increased in 2019 reflecting our acquisition
of AppNexus and our ongoing development of the platform supporting Xandr's
business.
Operating income decreased in 2019 and increased 2018. Our Xandr segment
operating income margin was 65.2% in 2019, 76.6% in 2018 and 87.5% in 2017.
SUPPLEMENTAL TOTAL ADVERTISING REVENUE INFORMATION
As a supplemental presentation to our Xandr segment operating results, we are
providing a view of total advertising revenues generated by AT&T. This
combined view presents the entire portfolio of advertising revenues reported
across all operating segments and represents a significant strategic
initiative and growth opportunity for AT&T. See the revenue categories
table in Note 5 for a reconciliation.
Total Advertising Revenues
Percent Change
2019 vs. 2018 vs.
2019 2018 2017 2018 2017
Advertising Revenues
WarnerMedia $ 4,676 $ 2,461 $ 65 90.0 % - %
Communications 1,963 1,827 1,513 7.4 20.8
Xandr 2,022 1,740 1,373 16.2 26.7
Eliminations (1,672) (1,595) (1,357) (4.8) (17.5)
Total Advertising Revenues $ 6,989 $ 4,433 $ 1,594 57.7 % - %
SUPPLEMENTAL COMMUNICATIONS OPERATING INFORMATION
As a supplemental presentation to our Communications segment operating
results, we are providing a view of our AT&T Business Solutions results
which includes both wireless and wireline operations. This combined view
presents a complete profile of the entire business customer relationship,
including mobile solutions for our business customers. Wireless business
relationships include FirstNet customers, IoT connections and other company
paid-for devices. See "Discussion and Reconciliation of Non-GAAP Measure" for
a reconciliation of these supplemental measures to the most directly
comparable financial measures calculated and presented in accordance with
GAAP.
Business Solutions Results
Percent Change
2019 vs. 2018 vs.
2019 2018 2017 2018 2017
Operating revenues
Wireless service $ 7,925 $ 7,323 $ 7,928 8.2 % (7.6) %
Strategic and managed services 15,440 14,660 13,880 5.3 5.6
Legacy voice and data services 9,180 10,674 13,791 (14.0) (22.6)
Other service and equipment 1,557 1,406 1,532 10.7 (8.2)
Wireless equipment 2,757 2,510 1,532 9.8 63.8
Total Operating Revenues 36,859 36,573 38,663 0.8 (5.4)
Operating expenses
Operations and support 22,735 22,608 24,376 0.6 (7.3)
Depreciation and amortization 6,213 5,900 5,859 5.3 0.7
Total Operating Expenses 28,948 28,508 30,235 1.5 (5.7)
Operating Income 7,911 8,065 8,428 (1.9) (4.3)
Equity in Net Income (Loss) of Affiliates - - - - -
Operating Contribution $ 7,911 $ 8,065 $ 8,428 (1.9) % (4.3) %
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
2020 Revenue Trends We expect revenue growth in our wireless and broadband
businesses as customers demand premium content, instant connectivity and
higher speeds made possible by our fiber network expansion and wireless
network enhancements through 5G deployment. In our Communications segment, we
expect that our network quality and First Responder Network Authority
(FirstNet) deployment will contribute to wireless subscriber and service
revenue growth, and that 5G handset introductions during 2020 will drive
wireless equipment revenue growth. We anticipate that applications like video
streaming will also drive greater demand for broadband. In our WarnerMedia
segment, we expect our premium content to drive revenue growth from both the
current wholesale distribution through traditional pay-TV providers and our
new video streaming platform, HBO Max, to be launched in May 2020. Across
AT&T, we expect to provide consumers with a broad variety of video
entertainment services, from mobile-centric and OTT live-TV streaming
packages, to traditional full-size linear video. We expect growth in our
advertising businesses from combining the data insights from our 170 million
direct-to-consumer relationships with our premium video and digital
advertising inventory. Revenue from business customers will continue to grow
for mobile and IP-based services, but decline for legacy wireline services.
Overall, we believe growth in wireless, broadband and WarnerMedia's premium
content should offset pressure from our linear video and legacy voice and data
services.
2020 Expense Trends We expect the spending required to support growth
initiatives, primarily our 5G deployment and FirstNet build, as well as the
launch of the HBO Max platform, to pressure expense trends in 2020. To the
extent 5G handset introductions in 2020 are as expected, the expenses
associated with those device sales will also contribute to higher costs. In
addition, we expect the second-quarter 2019 update to estimated economic
customer lives, and our launch of AT&T TV, our new streaming premium TV
product, to contribute to expense pressure in the first half of the year.
During 2020, we will also continue to transition our hardware-based network
technology to more efficient and less expensive software-based technology.
These investments will prepare us to meet increased customer demand for
enhanced wireless and broadband services, including video streaming, augmented
reality and "smart" technologies. The software benefits of our 5G wireless
technology and new video delivery platforms should result in a more efficient
use of capital and lower network-related expenses in the coming years.
To offset the costs of these initiatives, we anticipate savings from corporate
initiatives to lower labor-related costs and corporate overhead, digital
transformation of customer service and ordering functions, vendor discounts
and WarnerMedia merger synergies. Cost savings and non-strategic asset sales
should help to further reduce our debt level.
Market Conditions The U.S. stock market experienced a positive year although
general business investment remained modest, which affected our business
services. Most of our products and services are not directly affected by the
imposition of tariffs on Chinese goods. To date, we have not experienced any
disruptions from our wireless handset supply chain due to the coronavirus
epidemic in China but we continue to monitor the situation. While unemployment
remains historically low, our residential customers continue to be price
sensitive in selecting offerings, especially in the video area, and continue
to focus on products that give them efficient access to video and broadcast
services. We expect ongoing pressure on pricing during 2020 as we respond to
the competitive marketplace, especially in wireless and video services.
Included on our consolidated balance sheets are assets held by benefit plans
for the payment of future benefits. Our pension plans are subject to funding
requirements of the Employee Retirement Income Security Act of 1974, as
amended (ERISA). We expect only minimal ERISA contribution requirements to our
pension plans for 2020. Investment returns on these assets depend largely on
trends in the economy, and a weakness in the equity, fixed income and real
asset markets could require us to make future contributions to the pension
plans. In addition, our policy of recognizing actuarial gains and losses
related to our pension and other postretirement plans in the period in which
they arise subjects us to earnings volatility caused by changes in market
conditions; however, these actuarial gains and losses do not impact segment
performance as they are required to be recorded in other income (expense) -
net. Changes in our discount rate, which are tied to changes in the bond
market, and changes in the performance of equity markets, may have significant
impacts on the valuation of our pension and other postretirement obligations
at the end of 2020 (see "Critical Accounting Policies and Estimates").
OPERATING ENVIRONMENT OVERVIEW
AT&T subsidiaries operating within the United States are subject to
federal and state regulatory authorities. AT&T subsidiaries operating
outside the United States are subject to the jurisdiction of national and
supranational regulatory authorities in the markets where service is provided.
In the Telecommunications Act of 1996 (Telecom Act), Congress established a
national policy framework intended to bring the benefits of competition and
investment in advanced telecommunications facilities and services to all
Americans by opening all telecommunications markets to competition and
reducing or eliminating regulatory burdens that harm consumer welfare.
Nonetheless, over the ensuing two decades, the Federal Communications
Commission (FCC) and some state regulatory commissions have maintained or
expanded certain regulatory requirements that were imposed decades ago on our
traditional wireline subsidiaries when they operated as legal monopolies. More
recently, the FCC has pursued a more deregulatory agenda, eliminating a
variety of antiquated and unnecessary regulations and streamlining its
processes in a number of areas. In addition, we are pursuing, at both the
state and federal levels, additional legislative and regulatory measures to
reduce regulatory burdens that are no longer appropriate in a competitive
telecommunications market and that inhibit our ability to compete more
effectively and offer services wanted and needed by our customers, including
initiatives to transition services from traditional networks to all IP-based
networks. At the same time, we also seek to ensure that legacy regulations are
not further extended to broadband or wireless services, which are subject to
vigorous competition.
We have organized the following discussion by reportable segment.
Communications Segment
Internet The FCC currently classifies fixed and mobile consumer broadband
services as information services, subject to light-touch regulation. Although
the D.C. Circuit upheld the FCC's current classification, challenges to that
decision remain pending. A more detailed discussion can be found under
"Regulatory Developments".
A number of states have adopted legislation or issued executive orders that
would reimpose net neutrality rules repealed by the FCC, and in some cases,
established additional requirements. Suits have been filed concerning laws in
certain states, but have been stayed pursuant to agreements by those states
not to enforce their laws pending final resolution of all appeals. We will
continue to support congressional action to codify a set of standard consumer
rules for the internet. A more detailed discussion can be found under
"Regulatory Developments".
In October 2016, the FCC adopted new rules governing the use of customer
information by providers of broadband internet access service. Those rules
were more restrictive in certain respects than those governing other
participants in the internet economy, including so-called "edge" providers
such as Google and Facebook. In April 2017, the president signed a resolution
passed by Congress repealing the new rules under the Congressional Review Act.
Privacy-related legislation has been considered or adopted in a number of
states. Legislative and regulatory action could result in increased costs of
compliance, claims against broadband internet access service providers and
others, and increased uncertainty in the value and availability of data.
Effective as of January 1, 2020, a California state law gives consumers the
right to know what personal information is being collected about them, and
whether and to whom it is sold or disclosed, and to access and request
deletion of this information. Subject to certain exceptions, it also gives
California consumers the right to opt out of the sale of personal information.
Wireless The industry-wide deployment of 5G technology, which is needed to
satisfy extensive demand for video and internet access, will involve
significant deployment of "small cell" equipment and therefore increase the
need for local permitting processes that allow for the placement of small cell
equipment on reasonable timelines and terms. Federal regulations also can
delay and impede the deployment of infrastructure used to provide
telecommunications and broadband services, including small cell equipment. In
March, August and September 2018, the FCC adopted orders to streamline federal
and local wireless infrastructure review processes in order to facilitate
deployment of next-generation wireless facilities. Specifically, the FCC's
March 2018 Order streamlined historical, tribal, and environmental review
requirements for wireless infrastructure, including by excluding most small
cell facilities from such review. The Order was appealed and in August 2019,
the D.C. Circuit Court of Appeals vacated the FCC's finding that most small
cell facilities are excluded from review, but otherwise upheld the FCC's
Order. The FCC's August and September 2018 Orders simplified the regulations
for attaching telecommunications equipment to utility poles and clarified when
local government right-of-way access and use restrictions can be preempted
because they unlawfully prohibit the provision of telecommunications services.
Those orders were appealed to the 9th Circuit Court of Appeals, where they
remain pending. In addition to the FCC's actions, to date, 28 states and
Puerto Rico have adopted legislation to facilitate small cell deployment.
In December 2018, we introduced the nation's first commercial mobile 5G
service. We expect to have mobile 5G service available nationwide to more than
200 million people by the second quarter of 2020; we anticipate the
introduction of 5G handsets and devices will contribute to a renewed interest
in equipment upgrades.
As the U.S. wireless industry has matured, we believe future wireless growth
will depend on our ability to offer innovative services, plans and devices and
to provide these services in bundled product offerings to best utilize a
wireless network that has sufficient spectrum and capacity to support these
innovations on as broad a geographic basis as possible. We continue to invest
significant capital in expanding our network capacity, as well as to secure
and utilize spectrum that meets our long-term needs. We secured the FirstNet
contract, which provides us with access to 20 MHz of nationwide low band
spectrum, and invested in 5G and millimeter-wave technologies with our
acquisition of Fiber-Tower Corporation, which holds significant amounts of
spectrum in the millimeter wave bands (39 GHz) that the FCC reallocated for
mobile broadband services. We were also awarded 24 GHz licenses covering a
nationwide footprint in a recent FCC auction. These bands will help to
accelerate our entry into 5G services.
Video We provide domestic satellite video service through our subsidiary
DIRECTV, whose satellites are licensed by the FCC. The Communications Act of
1934 and other related acts give the FCC broad authority to regulate the U.S.
operations of DIRECTV, and some of WarnerMedia's businesses are also subject
to obligations under the Communications Act and related FCC regulations.
WarnerMedia Segment
We create, own and distribute intellectual property, including copyrights,
trademarks and licenses of intellectual property. To protect our intellectual
property, we rely on a combination of laws and license agreements. Outside of
the U.S., laws and regulations relating to intellectual property protection
and the effective enforcement of these laws and regulations vary greatly from
country to country. The European Union Commission is pursuing legislative and
regulatory initiatives that could impair Warner Bros.' current
country-by-country licensing approach in the European Union. Piracy,
particularly of digital content, continues to threaten WarnerMedia's revenues
from products and services, and we work to limit that threat through a
combination of approaches, including technological and legislative solutions.
Outside the U.S., various laws and regulations, as well as trade agreements
with the U.S., also apply to the distribution or licensing of feature films
for exhibition in movie theaters and on broadcast and cable networks. For
example, in certain countries, including China, laws and regulations limit the
number of foreign films exhibited in such countries in a calendar year.
EXPECTED GROWTH AREAS
Over the next few years, we expect our growth to come from wireless,
software-based video offerings like HBO Max, IP-based broadband services and
advertising and data insights (especially with WarnerMedia). We now provide
integrated services to diverse groups of customers in the U.S. on an
integrated telecommunications network utilizing different technological
platforms, including wireless, satellite and wireline. In 2020, our key
initiatives include:
· Launching 5G service nationwide on our premier wireless network.
· Generating mobile subscriber growth from FirstNet and our premier
network quality.
· Launching HBO Max, our new platform for premium content and video
offered directly to consumers, as well as through our traditional
distributors.
· Increasing fiber penetration and growing broadband revenues.
· Continuing to develop a competitive advantage through our
industry-leading network cost structure.
· Growing profitability in our Mexico business unit.
Wireless We expect to continue to deliver revenue growth in the coming
years. We are in a period of rapid growth in wireless video usage and believe
that there are substantial opportunities available for next-generation
converged services that combine technologies and services. We secured the
FirstNet contract, which provides us with access to 20 MHz of nationwide low
band spectrum and the opportunity to grow subscribers through the first
responder agencies served, and invested in 5G and millimeter-wave technologies
with our acquisition of FiberTower Corporation, which holds significant
amounts of spectrum in the millimeter wave bands (39 GHz) that the FCC
reallocated for mobile broadband services. These bands will help to accelerate
our entry into 5G services.
As of December 31, 2019, we served 185 million wireless subscribers in North
America, with 166 million in the United States. Our LTE technology covers over
430 million people in North America, and in the United States, we cover all
major metropolitan areas and more than 330 million people. We also provide 4G
coverage using another technology (HSPA+), and when combined with our upgraded
backhaul network, we provide enhanced network capabilities and superior mobile
broadband speeds for data and video services. In December 2018, we introduced
the nation's first commercial mobile 5G service and plan to expand that
deployment nationwide by the second quarter of 2020 to cover approximately 200
million people.
Our networks covering both the U.S. and Mexico have enabled our customers to
use wireless services without roaming on other companies' networks. We believe
this seamless access will prove attractive to customers and provide a
significant growth opportunity. As of the end of 2019, we provided LTE
coverage to approximately 100 million people in Mexico.
Integration of Data/Broadband and Entertainment Services As the
communications industry has evolved into internet-based technologies capable
of blending wireline, satellite and wireless services, we plan to focus on
expanding our wireless network capabilities and provide high-speed internet
and video offerings that allow customers to integrate their home or business
fixed services with their mobile service. During 2020, we will continue to
develop and provide unique integrated video, mobile and broadband solutions.
The launch of the HBO Max platform will facilitate our customers' desire to
view video anywhere on demand and encourage customer retention.
REGULATORY DEVELOPMENTS
Set forth below is a summary of the most significant regulatory proceedings
that directly affected our operations during 2019. Industry-wide regulatory
developments are discussed above in Operating Environment Overview. While
these issues may apply only to certain subsidiaries, the words "we,"
"AT&T" and "our" are used to simplify the discussion. The following
discussions are intended as a condensed summary of the issues rather than as a
comprehensive legal analysis and description of all of these specific issues.
International Regulation Our subsidiaries operating outside the United
States are subject to the jurisdiction of regulatory authorities in the
territories in which the subsidiaries operate. Our licensing, compliance and
advocacy initiatives in foreign countries primarily enable the provision of
enterprise (i.e., large business), wireless and satellite television services.
AT&T is engaged in multiple efforts with foreign regulators to open
markets to competition, foster conditions favorable to investment and increase
our scope of services and products.
The General Data Protection Regulation went into effect in Europe in May of
2018. AT&T processes and handles personal data of its customers and
subscribers, employees of its enterprise customers and its employees. This
regulation created a range of new compliance obligations and significantly
increased financial penalties for noncompliance.
Federal Regulation We have organized our following discussion by service
impacted.
Internet In February 2015, the FCC released an order classifying both fixed
and mobile consumer broadband internet access services as telecommunications
services, subject to Title II of the Communications Act. The Order, which
represented a departure from longstanding bipartisan precedent, significantly
expanded the FCC's authority to regulate broadband internet access services,
as well as internet interconnection arrangements. In December 2017, the FCC
reversed its 2015 decision by reclassifying fixed and mobile consumer
broadband services as information services and repealing most of the rules
that were adopted in 2015. In lieu of broad conduct prohibitions, the order
requires internet service providers to disclose information about their
network practices and terms of service, including whether they block or
throttle internet traffic or offer paid prioritization. Several parties
appealed the FCC's December 2017 decision and the D.C. Circuit heard oral
argument on the appeals on February 1, 2019. On October 1, 2019, the court
issued a unanimous opinion upholding the FCC's reclassification of broadband
as an information service, and its reliance on transparency requirements and
competitive marketplace dynamics to safeguard net neutrality. While the court
vacated the FCC's express preemption of any state regulation of net
neutrality, it nevertheless stressed that its ruling does not prevent the FCC
or ISPs from relying on conflict preemption to invalidate particular state
laws that are inconsistent with the FCC's regulatory objectives and framework.
The court also concluded that the FCC failed to satisfy its obligation under
the Administrative Procedure Act (APA) to consider the impact of its 2017
order in three discrete areas: public safety, the Lifeline program, and pole
attachment regulation, and thus remanded it to the FCC for further proceedings
on those issues, but without disturbing the operative effect of that order.
Several petitions for rehearing of the D.C. Circuit's October 1 decision have
been filed. Those petitions remain pending. A number of states have adopted
legislation to reimpose the very rules the FCC repealed. In some cases, state
legislation imposes requirements that go beyond the FCC's February 2015 order.
Additionally, some state governors have issued executive orders that
effectively reimpose the repealed requirements. Suits have been filed
concerning laws in California and Vermont. Both lawsuits have been stayed
pursuant to agreements by those states not to enforce their laws pending final
resolution of all appeals of the FCC's December 2017 order. We expect that
going forward additional states may seek to impose net neutrality
requirements. We will continue to support congressional action to codify a set
of standard consumer rules for the internet.
Wireless and Broadband Since November 2017, the FCC has adopted four
significant rulings designed to accelerate broadband infrastructure
deployment. In November 2017, the FCC updated and streamlined certain rules
governing pole attachments, copper retirement, and service discontinuances. In
March 2018, the FCC eliminated lengthy environmental, historical and tribal
reviews for most small cell deployments and streamlined processes that must be
followed when those reviews are required. The D.C. Circuit Court of Appeals
vacated the FCC's finding in this Order that small cell facilities do not
require environmental, historical and tribal reviews, but left intact all
other processes adopted to streamline review when required. In August 2018,
the FCC adopted more comprehensive pole attachment reform, including by
simplifying the attaching process (i.e., one-touch make-ready) and clarified
that the Communications Act precludes local governments from imposing
moratoria on the deployment of communications facilities. And, in September
2018, the FCC restricted the ability of state and local governments to impede
small cell deployments in rights-of-way and on government-owned structures,
through exorbitant fees, unreasonable aesthetic requirements and other
actions. These decisions will remove regulatory barriers and reduce the costs
of the infrastructure needed for 5G deployment, which will enhance our ability
to place small cell facilities on utility poles and to replace legacy
facilities and services with advanced broadband infrastructure and services.
Appeals of the August and September 2018 Orders remain pending in the 9th
Circuit Court of Appeals.
In 2018, the FCC took several actions to make spectrum available for 5G
services. In late 2018, the FCC adopted auction rules for the 39 GHz band that
will allow the FCC to auction remaining unlicensed 39 GHz spectrum and realign
the band to allow large, contiguous blocks of spectrum that will support 5G.
This auction, which also includes spectrum in the 37 GHz and 47 GHz bands, is
currently underway. The FCC has granted AT&T special temporary authority
to launch its 5G service in 400 MHz of contiguous spectrum in the 37/39 GHz
band in a total of 32 markets. In addition, the FCC completed auctions in 2019
of 24 and 28 GHz spectrum, two other bands that will support 5G. AT&T was
awarded 24 GHz licenses covering a nationwide footprint.
ACCOUNTING POLICIES AND STANDARDS
Critical Accounting Policies and Estimates Because of the size of the
financial statement line items they relate to or the extent of judgment
required by our management, some of our accounting policies and estimates have
a more significant impact on our consolidated financial statements than
others. The following policies are presented in the order in which the topics
appear in our consolidated statements of income.
Pension and Postretirement Benefits Our actuarial estimates of retiree benefit
expense and the associated significant weighted-average assumptions are
discussed in Note 15. Our assumed weighted-average discount rates for pension
and postretirement benefits of 3.40% and 3.20%, respectively, at December 31,
2019, reflect the hypothetical rate at which the projected benefit obligations
could be effectively settled or paid out to participants. We determined our
discount rate based on a range of factors, including a yield curve composed of
the rates of return on several hundred high-quality, fixed income corporate
bonds available at the measurement date and corresponding to the related
expected durations of future cash outflows for the obligations. These bonds
were all rated at least Aa3 or AA- by one of the nationally recognized
statistical rating organizations, denominated in U.S. dollars, and neither
callable, convertible nor index linked. For the year ended December 31, 2019,
when compared to the year ended December 31, 2018, we decreased our pension
discount rate by 1.10%, resulting in an increase in our pension plan benefit
obligation of $8,018 and decreased our postretirement discount rate by 1.20%,
resulting in an increase in our postretirement benefit obligation of $2,399.
Our expected long-term rate of return on pension plan assets is 7.00% for 2020
and 2019. Our expected long-term rate of return on postretirement plan assets
is 4.75% for 2020 and 5.75% for 2019. Our expected return on plan assets is
calculated using the actual fair value of plan assets. If all other factors
were to remain unchanged, we expect that a 0.50% decrease in the expected
long-term rate of return would cause 2020 combined pension and postretirement
cost to increase $273, which under our accounting policy would be adjusted to
actual returns in the current year as part of our fourth-quarter remeasurement
of our retiree benefit plans.
We recognize gains and losses on pension and postretirement plan assets and
obligations immediately in "Other income (expense) - net" in our consolidated
statements of income. These gains and losses are generally measured annually
as of December 31, and accordingly, will normally be recorded during the
fourth quarter, unless an earlier remeasurement is required. Should actual
experience differ from actuarial assumptions, the projected pension benefit
obligation and net pension cost and accumulated postretirement benefit
obligation and postretirement benefit cost would be affected in future years.
See Note 15 for additional discussions regarding our assumptions.
Depreciation Our depreciation of assets, including use of composite group
depreciation for certain subsidiaries and estimates of useful lives, is
described in Notes 1 and 7.
If all other factors were to remain unchanged, we expect that a one-year
increase in the useful lives of our plant in service would have resulted in a
decrease of approximately $3,027 in our 2019 depreciation expense and that a
one-year decrease would have resulted in an increase of approximately $4,196
in our 2019 depreciation expense. See Notes 7 and 8 for depreciation and
amortization expense applicable to property, plant and equipment, including
our finance lease right-of-use assets.
Asset Valuations and Impairments Goodwill and other indefinite-lived
intangible assets are not amortized but tested at least annually for
impairment. For impairment testing, we estimate fair values using models that
predominantly rely on the expected cash flows to be derived from the use of
the asset. We recorded an impairment in 2019 for our SKY Brasil trade name
(see Note 9).
We test goodwill on a reporting unit basis by comparing the estimated fair
value of each reporting unit to its book value. If the fair value exceeds the
book value, then no impairment is measured. We estimate fair values using an
income approach (also known as a discounted cash flow) and a market multiple
approach. The income approach utilizes our 10-year cash flow projections with
a perpetuity value discounted at an appropriate weighted average cost of
capital. The market multiple approach uses the multiples of publicly traded
companies whose services are comparable to those offered by the reporting
units. In 2019, the calculated fair values of the reporting units exceeded
their book values in all circumstances. If either the projected rate of
long-term growth of cash flows or revenues declined by 0.5%, or if the
discount rate increased by 0.5%, the fair values would still be higher than
the book value of the goodwill. In the event of a 10% drop in the fair values
of the reporting units, the fair values still would have exceeded the book
values of the reporting units.
We assess fair value for U.S. wireless licenses using a discounted cash flow
model (the Greenfield Approach) and a corroborative market approach based on
auction prices, depending upon auction activity. The Greenfield Approach
assumes a company initially owns only the wireless licenses and makes
investments required to build an operation comparable to current use. Inputs
to the model include subscriber growth, churn, revenue per user, capital
investment and acquisition costs per subscriber, ongoing operating costs and
resulting EBITDA margins. We based our assumptions on a combination of average
marketplace participant data and our historical results, trends and business
plans. These licenses are tested annually for impairment on an aggregated
basis, consistent with their use on a national scope for the United States.
For impairment testing, we assume subscriber and revenue growth will trend up
to projected levels, with a long-term growth rate reflecting expected
long-term inflation trends. We assume churn rates will initially exceed our
current experience, but decline to rates that are in line with
industry-leading churn. We used a discount rate of 8.75%, based on the optimal
long-term capital structure of a market participant and its associated cost of
debt and equity for the licenses, to calculate the present value of the
projected cash flows. If either the projected rate of long-term growth of cash
flows or revenues declined by 0.5%, or if the discount rate increased by 0.5%,
the fair values of these wireless licenses would still be higher than the book
value of the licenses. The fair value of these wireless licenses exceeded
their book values by more than 10%.
Orbital slots are also valued using the Greenfield Approach. The projected
cash flows are based on various factors, including satellite cost, other
capital investment per subscriber, acquisition costs per subscriber and usage
per subscriber, as well as revenue growth, subscriber growth and churn rates.
For impairment testing purposes, we assumed sustainable long-term growth
assumptions consistent with the business plan and industry counterparts in the
United States. We used a discount rate of 8.5% to calculate the present value
of the projected cash flows. In 2019, the fair value of orbital slots was
slightly lower than the prior year, which exceeded the book value by
approximately 10% in 2018. The decrease in fair value was driven by the
transition of the video business to OTT and streaming technology.
We review customer relationships, licenses in Mexico and other finite-lived
intangible assets for impairment whenever events or circumstances indicate
that the book value may not be recoverable over their remaining life. For this
analysis, we compare the expected undiscounted future cash flows attributable
to the asset to its book value.
We review operating lease right-of-use assets for impairment whenever events
or circumstances indicated that the book value may not be recoverable over the
remaining life.
We periodically assess our network assets for impairment (see Note 1).
Income Taxes Our estimates of income taxes and the significant items giving
rise to the deferred assets and liabilities are shown in Note 14 and reflect
our assessment of actual future taxes to be paid on items reflected in the
financial statements, giving consideration to both timing and probability of
these estimates. Actual income taxes could vary from these estimates due to
future changes in income tax law or the final review of our tax returns by
federal, state or foreign tax authorities.
We use our judgment to determine whether it is more likely than not that we
will sustain positions that we have taken on tax returns and, if so, the
amount of benefit to initially recognize within our financial statements. We
regularly review our uncertain tax positions and adjust our unrecognized tax
benefits (UTBs) in light of changes in facts and circumstances, such as
changes in tax law, interactions with taxing authorities and developments in
case law. These adjustments to our UTBs may affect our income tax expense.
Settlement of uncertain tax positions may require use of our cash.
New Accounting Standards
Beginning with 2019 interim and annual reporting periods, we adopted the
FASB's new accounting guidance related to leasing. The most significant impact
of the new guidance was to our balance sheet, as we recorded a right-of-use
asset and corresponding liability for our operating leases existing at January
1, 2019. We adopted the new leasing standard using a modified retrospective
transition method as of the beginning of the period of adoption, which did not
require us to adjust the balance sheet for prior periods, therefore affecting
the comparability of our financial statements. See Note 1 for discussion of
the impact of the standard.
See Note 1 for discussion of the expected impact of other new standards.
OTHER BUSINESS MATTERS
Unlimited Data Plan Claims In October 2014, the FTC filed a civil suit in
the U.S. District Court for the Northern District of California against
AT&T Mobility, LLC seeking injunctive relief and unspecified money damages
under Section 5 of the Federal Trade Commission Act. The FTC's allegations
concern the application of AT&T's Maximum Bit Rate (MBR) program to
customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR
temporarily reduces in certain instances the download speeds of a small
portion of our legacy Unlimited Data Plan customers each month after the
customer exceeds a designated amount of data during the customer's billing
cycle. MBR is an industry-standard practice that is designed to affect only
the most data-intensive applications (such as video streaming). Texts, emails,
tweets, social media posts, internet browsing and many other applications are
typically unaffected. Contrary to the FTC's allegations, our MBR program is
permitted by our customer contracts, was fully disclosed in advance to our
Unlimited Data Plan customers, and was implemented to protect the network for
the benefit of all customers. We reached a tentative agreement (Stipulated
Order) with the FTC staff in August 2019, pending FTC approval. The FTC
approved the Stipulated Order on November 4, 2019, and the Court approved and
entered the Order on December 3, 2019. In the resolution of this matter, we
did not admit the FTC's allegations, and the settlement amount is not material
to our financial results. In addition to the FTC case, several class actions
were filed challenging our MBR program. We have secured dismissals in each of
these cases except Roberts v. AT&T Mobility LLC, which is ongoing.
Labor Contracts As of January 31, 2020, we employed approximately 246,000
persons. Approximately 40% of our employees are represented by the
Communications Workers of America (CWA), the International Brotherhood of
Electrical Workers (IBEW) or other unions. After expiration of the collective
bargaining agreements, work stoppages or labor disruptions may occur in the
absence of new contracts or other agreements being reached.
· A contract covering approximately 7,000 traditional wireline
employees in our Midwest region expired in April 2018. In August 2019, a new
four-year contract was ratified by employees and will expire in April 2022.
· A contract covering approximately 3,000 traditional wireline
employees in our legacy AT&T Corp. business expired in April 2018. In
August 2019, a new four-year contract was ratified by employees and will
expire in April 2022.
· A contract covering approximately 18,000 traditional wireline
employees in our Southeast region expired in August 2019. In October 2019, a
new five-year contract was ratified by employees and will expire in August
2024.
· Contracts covering approximately 20,000 employees are scheduled
to expire during 2020, including a contract expiring in February covering
approximately 7,000 Mobility employees and a contract expiring in April
covering approximately 13,000 traditional wireline employees in our West
region.
Environmental We are subject from time to time to judicial and
administrative proceedings brought by various governmental authorities under
federal, state or local environmental laws. We reference in our Forms 10-Q and
10-K certain environmental proceedings that could result in monetary sanctions
(exclusive of interest and costs) of one hundred thousand dollars or more.
However, we do not believe that any of those currently pending will have a
material adverse effect on our results of operations.
LIQUIDITY AND CAPITAL RESOURCES
We had $12,130 in cash and cash equivalents available at December 31, 2019.
Cash and cash equivalents included cash of $2,654 and money market funds and
other cash equivalents of $9,476. Approximately $2,681 of our cash and cash
equivalents were held by our foreign entities in accounts predominantly
outside of the U.S. and may be subject to restrictions on repatriation.
Cash and cash equivalents increased $6,926 since December 31, 2018. In 2019,
cash inflows were primarily provided by cash receipts from operations,
including cash from an increased amount of sales and transfers of our
receivables to third parties, sale of investments, issuance of long-term debt,
collateral received from banks and other participants in our derivative
arrangements and issuances of nonconvertible perpetual preferred interests in
subsidiaries and cumulative preferred stock. These inflows were offset by cash
used to meet the needs of the business, including, but not limited to, payment
of operating expenses, debt repayments, funding capital expenditures and
vendor financing payments, spectrum purchases and dividends to stockholders.
Cash Provided by or Used in Operating Activities
During 2019, cash provided by operating activities was $48,668 compared to
$43,602 in 2018. Higher operating cash flows in 2019 were primarily due to
contributions from full year of WarnerMedia and higher cash flows from working
capital initiatives, including sales of receivables (see Note 18), partly
offset by higher spend on film and television production and net tax payments
in 2019 compared to net tax refunds in 2018.
We actively manage the timing of our supplier payments for non-capital items
to optimize the use of our cash. Among other things, we seek to make payments
on 90-day or greater terms, while providing the suppliers with access to bank
facilities that permit earlier payments at their cost. In addition, for
payments to a key supplier, we have arrangements that allow us to extend
payment terms up to 90 days at an additional cost to us (referred to as
supplier financing). The net impact of supplier financing on cash from
operating activities was to improve working capital $909 in 2019, and $1,869
in 2018. All supplier financing payments are due within one year.
Cash Used in or Provided by Investing Activities
During 2019, cash used in investing activities totaled $16,690, and consisted
primarily of $19,635 (including interest during construction) for capital
expenditures ($1,616 lower than the prior-year), and $982 of wireless spectrum
offset by proceeds from the sales of our ownership interests in Hulu and
WarnerMedia's headquarters (Hudson Yards) under a sale-leaseback arrangement
(see Note 6).
For capital improvements, we have negotiated favorable vendor payment terms of
120 days or more (referred to as vendor financing) with some of our vendors,
which are excluded from capital expenditures and reported as financing
activities. Vendor financing payments were $3,050 in 2019, compared to $560 in
2018. Capital expenditures in 2019 were $19,635, and when including $3,050
cash paid for vendor financing and excluding $1,005 of FirstNet
reimbursements, gross capital investment was $23,690 ($450 higher than the
prior-year). The vast majority of our capital expenditures are spent on our
networks, including product development and related support systems. In 2019,
we placed $2,632 of equipment in service under vendor financing arrangements
(compared to $2,162 in 2018) and $1,116 of assets related to the FirstNet
build (compared to $1,500 in 2018). Total reimbursements from the government
for FirstNet were $1,374 for 2019 and $1,670 for 2018, predominately for
capital expenditures.
The amount of capital expenditures is influenced by demand for services and
products, capacity needs and network enhancements. In 2020, we expect that our
gross capital investment, which includes capital expenditures and cash paid
for vendor financing and excludes expected FirstNet reimbursement of
approximately $1,000, will be in the $20,000 range.
Cash Used in or Provided by Financing Activities
For the full year, cash used in financing activities totaled $25,083 and
included net proceeds from debt issuances of $17,039, which consisted
primarily of the following issuances:
Issued and redeemed in 2019
· January draw of $2,850 on an 11-month syndicated term loan
agreement (repaid in the third quarter).
· January draw of $750 on a private financing agreement (repaid in
the first quarter).
· August borrowings of $400 under a private financing agreement
(repaid in the third quarter).
Issued and outstanding in 2019
· February issuance of $3,000 of 4.350% global notes due 2029.
· February issuance of $2,000 of 4.850% global notes due 2039.
· Borrowings of $725 in January and $525 in June that are supported
by government agencies to support network equipment purchases.
· June draw of $300 on a private financing agreement.
· September issuance of €1,000 of 0.25% global notes due 2026,
€1,250 of 0.80% global notes due 2030 and €750 of 1.80% global notes due
2039 (when combined, $3,308 at issuance).
· September draw of $1,300 on a Bank of America term loan credit
agreement.
· November draw of $750 on a private financing agreement.
· December issuance of $1,265 of 4.250% global notes due 2050.
During 2019, repayment of long-term debt totaled $27,592. Repayments primarily
consisted of the following:
Notes redeemed at maturity:
· $1,850 of 2.300% AT&T global notes in the first quarter.
· $400 of AT&T floating-rate notes in the first quarter.
· €1,500 of AT&T floating-rate notes in the second quarter
($1,882 at maturity).
· $650 of 2.100% Warner Media, LLC notes in the second quarter.
· CHF 450 0.500% senior fixed-rate notes in the fourth quarter
($467 at maturity).
Notes redeemed or repurchased prior to maturity:
· $2,010 of AT&T global notes with interest rates ranging from
5.000% to 5.200% and original maturities in 2020 and 2021, in the first
quarter.
· $2,000 of Warner Media, LLC notes with interest rates ranging
from 4.700% to 4.750% and original maturities in 2021, in the first quarter.
· $1,295 of 4.700% AT&T global notes with an original maturity
in 2044, in the fourth quarter.
· $590 of Warner Media, LLC and/or Historic TW Inc. notes that were
tendered for cash in our second quarter obligor debt exchange. The notes had
interest rates ranging between 6.500% and 9.150% and original maturities
ranging from 2023 to 2036.
· $1,409 of subsidiary notes that were tendered for cash in
December 2019. The notes had interest rates ranging between 2.950% and 9.150%
and original maturities ranging from 2022 to 2097.
· $243 of open market repurchases of AT&T Corp, AT&T
Mobility LLC, and New Cingular Wireless Services, Inc. notes, with interest
rates ranging from 7.125% to 8.750% and original maturities in 2031, in the
second quarter.
· $154 of open market repurchases of Warner Media, LLC, Historic TW
Inc., BellSouth LLC and AT&T Mobility LLC notes, with interest rates
ranging from 2.95% to 7.625% and original maturities ranging from 2022 to
2097, in the third quarter.
Credit facilities repaid and other redemptions:
· $2,625 of final amounts outstanding under our Acquisition Term
Loan (defined below) in the first quarter.
· $750 of January borrowings under a private financing agreement,
in the first quarter.
· $1,500 of four-year and five-year borrowings under the Nova
Scotia Credit Agreement (defined below) in the second quarter and $750 of
three-year borrowings in the third quarter.
· $600 of borrowings under our credit agreement with Canadian
Imperial Bank of Commerce in the second quarter.
· $500 of advances under our November 2018 Term Loan (defined
below) in the second quarter, with payment of the remaining $3,050 of advances
in the third quarter.
· $250 of borrowings under a U.S. Bank credit agreement in the
second quarter.
· $750 of borrowings under a private credit agreement in the third
quarter.
· $400 of borrowings under a private financing agreement in the
third quarter.
· $2,850 of borrowings under an 11-month syndicated term loan
agreement from January 2019 in the third quarter.
Our weighted average interest rate of our entire long-term debt portfolio,
including the impact of derivatives, was approximately 4.4% as of December 31,
2019 and 4.4% as of December 31, 2018. We had $161,109 of total notes and
debentures outstanding at December 31, 2019, which included Euro, British
pound sterling, Canadian dollar, Mexican peso, Australian dollar, Brazilian
real and Swiss franc denominated debt that totaled approximately $42,485.
At December 31, 2019, we had $11,838 of debt maturing within one year,
consisting of $4 of other short-term borrowings and $11,834 of long-term debt
issuances. Debt maturing within one year includes the following notes that may
be put back to us by the holders:
· $1,000 of annual put reset securities issued by BellSouth that
may be put back to us each April until maturity in 2021.
· An accreting zero-coupon note that may be redeemed each May until
maturity in 2022. If the remainder of the zero-coupon note (issued for
principal of $500 in 2007 and partially exchanged in the 2017 debt exchange
offers) is held to maturity, the redemption amount will be $592.
During 2019, we paid $3,050 of cash under our vendor financing program. Total
vendor financing payables included in our December 31, 2019 consolidated
balance sheet were approximately $2,067, with $1,625 due within one year (in
"Accounts payable and accrued liabilities") and the remainder predominantly
due within two to three years (in "Other noncurrent liabilities").
Financing activities in 2019 also included $7,876 of capital from the issuance
of nonconvertible preferred interests issued by subsidiaries and $1,164 for
the December issuance of cumulative 5.00% preferred stock. In February 2020,
we issued Series B and Series C preferred stock for approximately $3,900. (See
Note 17)
At December 31, 2019, we had approximately 319 million shares remaining from
share repurchase authorizations approved by the Board of Directors in 2013 and
2014 (see Note 17). For the year ended December 31, 2019, we repurchased
approximately 56 million shares under these authorizations. In January 2020,
we repurchased $4,000 of AT&T common stock under an accelerated share
repurchase agreement (see Note 2).
We paid dividends on common shares of $14,888 in 2019 and $13,410 in 2018,
primarily reflecting the increase in the number of shares outstanding related
to our acquisition of Time Warner as well as an increase in our quarterly
dividend approved by our Board of Directors in December 2018. Dividends
declared by our Board of Directors totaled $2.05 per share in 2019 and $2.01
per share in 2018. Our dividend policy considers the expectations and
requirements of stockholders, capital funding requirements of AT&T and
long-term growth opportunities. It is our intent to provide the financial
flexibility to allow our Board of Directors to consider dividend growth and to
recommend an increase in dividends to be paid in future periods. All dividends
remain subject to declaration by our Board of Directors.
Our 2020 financing activities will focus on managing our debt level,
repurchasing common stock and paying dividends, subject to approval by our
Board of Directors. We plan to fund our financing uses of cash through a
combination of cash from operations, issuance of debt, issuance of additional
preferred stock and asset sales. The timing and mix of any debt issuance
and/or refinancing will be guided by credit market conditions and interest
rate trends.
Credit Facilities
The following summary of our various credit and loan agreements does not
purport to be complete and is qualified in its entirety by reference to each
agreement filed as exhibits to our Annual Report on Form 10-K.
We use credit facilities as a tool in managing our liquidity status. In
December 2018, we amended our five-year revolving credit agreement (the
"Amended and Restated Credit Agreement") and concurrently entered into a new
five-year agreement (the "Five Year Credit Agreement") such that we now have
two $7,500 revolving credit agreements totaling $15,000. The Amended and
Restated Credit Agreement terminates on December 11, 2021 and the Five Year
Credit Agreement terminates on December 11, 2023. No amounts were outstanding
under either agreement as of December 31, 2019.
In September 2019, we entered into and drew on a $1,300 term loan credit
agreement containing (i) a 1.25 year $400 facility due in 2020 (BAML Tranche
A Facility), (ii) a 2.25 year $400 facility due in 2021 (BAML Tranche B
Facility), and (iii) a 3.25 year $500 facility due in 2022 (BAML Tranche C
Facility), with Bank of America, N.A., as agent. No repayment had been made
under these facilities as of December 31, 2019.
We also utilize other external financing sources, which include various credit
arrangements supported by government agencies to support network equipment
purchases, as well as a commercial paper program.
Each of our credit and loan agreements contains covenants that are customary
for an issuer with an investment grade senior debt credit rating as well as a
net debt-to-EBITDA financial ratio covenant requiring AT&T to maintain, as
of the last day of each fiscal quarter, a ratio of not more than 3.5-to-1. As
of December 31, 2019, we were in compliance with the covenants for our credit
facilities.
Collateral Arrangements
During the year, we amended collateral arrangements with certain
counterparties to require cash collateral posting by AT&T only when
derivative market values exceed certain thresholds. Under these arrangements,
counterparties are still required to post collateral. During 2019, we received
$1,413 of cash collateral, on a net basis, primarily driven by the amended
arrangements. Cash postings under these arrangements vary with changes in
credit ratings and netting agreements. (See Note 13)
Other
Our total capital consists of debt (long-term debt and debt maturing within
one year) and stockholders' equity. Our capital structure does not include
debt issued by our equity method investees. At December 31, 2019, our debt
ratio was 44.7%, compared to 47.7% at December 31, 2018 and 53.6% at December
31, 2017. Our net debt ratio was 41.4% at December 31, 2019, compared to 46.2%
at December 31, 2018 and 37.2% at December 31, 2017. The debt ratio is
affected by the same factors that affect total capital, and reflects debt
issuances, repayments and debt acquired in business combinations.
A significant amount of our cash outflows is related to tax items and benefits
paid for current and former employees. Total taxes incurred, collected and
remitted by AT&T during 2019 and 2018, were $24,170 and $22,172. These
taxes include income, franchise, property, sales, excise, payroll, gross
receipts and various other taxes and fees. Total health and welfare benefits
provided to certain active and retired employees and their dependents totaled
$4,059 in 2019, with $941 paid from plan assets. Of those benefits, $3,707
related to medical and prescription drug benefits. In addition, in 2019 we
prefunded $500 for future benefit payments. During 2019, we paid $6,356 of
pension benefits out of plan assets.
During 2019, we received $4,684 from the disposition of assets, and when
combined with capital received from issuing preferred interests to external
investors, an amendment of collateral arrangements, and working capital
monetization initiatives, which include the sale of receivables, total cash
received from monetization efforts, net of spectrum acquisitions, was
approximately $18,000. We plan to continue to explore similar opportunities.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES
Our contractual obligations as of December 31, 2019 are in the following
table:
Payments Due By Period
Total Less than 1-3 3-5 More than
1 Year Years Years 5 Years
Contractual Obligations
Long-term debt obligations(1) $ 168,065 $ 12,149 $ 22,225 $ 21,262 $ 112,429
Interest payments on long-term debt 108,976 7,204 13,259 11,847 76,666
Purchase obligations(2) 67,807 16,590 21,121 11,153 18,943
Operating lease obligations(3) 31,155 4,723 8,377 6,689 11,366
FirstNet sustainability payments(4) 17,640 120 315 390 16,815
Unrecognized tax benefits(5) 10,236 569 - - 9,667
Other finance obligations(6) 11,028 2,459 2,034 1,429 5,106
Authorized share repurchases(7) 4,000 4,000 - - -
Total Contractual Obligations $ 418,907 $ 47,814 $ 67,331 $ 52,770 $ 250,992
(1) Represents principal or payoff amounts of notes and debentures at maturity or,
for putable debt, the next put opportunity (see Note 12).
(2) The purchase obligations will be funded with cash provided by operations or
through incremental borrowings. The minimum
commitment for certain obligations is based on termination penalties that
could be paid to exit the contracts. If we elect to exit these
contracts, termination fees for all such contracts in the year of termination
could be approximately $257 in 2020, $344 in the
aggregate for 2021 and 2022, $129 in the aggregate for 2023 and 2024, and $22
in the aggregate thereafter. Certain termination fees
are excluded from the above table, as the fees would not be paid every year
and the timing of such payments, if any, is uncertain. (See Note 21)
(3) Represents operating lease payments (see Note 8).
(4) Represents contractual commitment to make sustainability payments over the
25-year contract. These sustainability payments represent
our commitment to fund FirstNet's operating expenses and future reinvestment
in the network, which we will own and operate.
FirstNet has a statutory requirement to reinvest funds that exceed the
agency's operating expenses, which we anticipate
to be $15,000. (See Note 20)
(5) The noncurrent portion of the UTBs is included in the "More than 5 Years"
column, as we cannot reasonably estimate the timing or
amounts of additional cash payments, if any, at this time (see Note 14).
(6) Represents future minimum payments under the Crown Castle and other
arrangements (see Note 19), payables subject to extended
payment terms (see Note 22) and finance lease payments (see Note 8).
(7) Represents commitments to repurchase shares of common stock under an
accelerated share repurchase program (see Note 2).
Certain items were excluded from this table, as the year of payment is unknown
and could not be reliably estimated since past trends were not deemed to be an
indicator of future payment, the obligations are immaterial or because the
settlement of the obligation will not require the use of cash. These items
include: deferred income tax liability of $59,502 (see Note 14); net
postemployment benefit obligations of $20,316; expected pension and
postretirement payments (see Note 15); other noncurrent liabilities of
$13,412; third-party debt guarantees; and fair value of our interest rate
swaps.
DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURE
We believe the following measure is relevant and useful information to
investors as it is used by management as a method of comparing performance
with that of many of our competitors. This supplemental measure should be
considered in addition to, but not as a substitute of, our consolidated and
segment financial information.
Business Solutions Reconciliation
We provide a supplemental discussion of our Business Solutions operations that
is calculated by combining our Mobility and Business Wireline business units,
and then adjusting to remove non-business operations. The following table
presents a reconciliation of our supplemental Business Solutions results.
Year Ended December 31, 2019
Mobility Business Wireline Adjustments(1) Business Solutions
Operating revenues
Wireless service $ 55,331 $ - $ (47,406) $ 7,925
Strategic and managed services - 15,440 - 15,440
Legacy voice and data services - 9,180 - 9,180
Other service and equipment - 1,557 - 1,557
Wireless equipment 15,725 - (12,968) 2,757
Total Operating Revenues 71,056 26,177 (60,374) 36,859
Operating expenses
Operations and support 40,681 16,091 (34,037) 22,735
EBITDA 30,375 10,086 (26,337) 14,124
Depreciation and amortization 8,054 4,999 (6,840) 6,213
Total Operating Expenses 48,735 21,090 (40,877) 28,948
Operating Income $ 22,321 $ 5,087 $ (19,497) $ 7,911
(1)Non-business wireless reported in the Communications segment under the
Mobility business unit.
Year Ended December 31, 2018
Mobility Business Wireline Adjustments(1) Business Solutions
Operating revenues
Wireless service $ 54,294 $ - $ (46,971) $ 7,323
Strategic managed services - 14,660 - 14,660
Legacy voice and data services - 10,674 - 10,674
Other service and equipment - 1,406 - 1,406
Wireless equipment 16,227 - (13,717) 2,510
Total Operating Revenues 70,521 26,740 (60,688) 36,573
Operating expenses
Operations and support 40,690 16,201 (34,283) 22,608
EBITDA 29,831 10,539 (26,405) 13,965
Depreciation and amortization 8,263 4,714 (7,077) 5,900
Total Operating Expenses 48,953 20,915 (41,360) 28,508
Operating Income $ 21,568 $ 5,825 $ (19,328) $ 8,065
(1)Non-business wireless reported in the Communications segment under the
Mobility business unit.
Year Ended December 31, 2017
Mobility Business Wireline Adjustments(1) Business Solutions
Operating revenues
Wireless service $ 57,023 $ - $ (49,095) $ 7,928
Strategic and managed services - 13,880 - 13,880
Legacy voice and data services - 13,791 - 13,791
Other service and equipment - 1,532 - 1,532
Wireless equipment 13,236 - (11,704) 1,532
Total Operating Revenues 70,259 29,203 (60,799) 38,663
Operating expenses
Operations and support 42,317 18,441 (36,382) 24,376
EBITDA 27,942 10,762 (24,417) 14,287
Depreciation and amortization 7,931 4,756 (6,828) 5,859
Total Operating Expenses 50,248 23,197 (43,210) 30,235
Operating Income $ 20,011 $ 6,006 $ (17,589) $ 8,428
(1)Non-business wireless reported in the Communications segment under the
Mobility business unit.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks primarily from changes in interest rates and
foreign currency exchange rates. These risks, along with other business risks,
impact our cost of capital. It is our policy to manage our debt structure and
foreign exchange exposure in order to manage capital costs, control financial
risks and maintain financial flexibility over the long term. In managing
market risks, we employ derivatives according to documented policies and
procedures, including interest rate swaps, interest rate locks, foreign
currency exchange contracts and combined interest rate foreign currency
contracts (cross-currency swaps). We do not use derivatives for trading or
speculative purposes. We do not foresee significant changes in the strategies
we use to manage market risk in the near future.
One of the most significant assumptions used in estimating our postretirement
benefit obligations is the assumed weighted-average discount rate, which is
the hypothetical rate at which the projected benefit obligations could be
effectively settled or paid out to participants. We determined our discount
rate based on a range of factors, including a yield curve composed of the
rates of return on several hundred high-quality, fixed income corporate bonds
available at the measurement date and corresponding to the related expected
durations of future cash outflows for the obligations. In recent years, the
discount rates have been increasingly volatile, and on average have been lower
than in historical periods. Lower discount rates used to measure our pension
and postretirement plans result in higher obligations. Future increases in
these rates could result in lower obligations, improved funded status and
actuarial gains.
Interest Rate Risk
The majority of our financial instruments are medium- and long-term fixed-rate
notes and debentures. Changes in interest rates can lead to significant
fluctuations in the fair value of these instruments. The principal amounts by
expected maturity, average interest rate and fair value of our liabilities
that are exposed to interest rate risk are described in Notes 12 and 13. In
managing interest expense, we control our mix of fixed and floating rate debt
through term loans, floating rate notes, and interest rate swaps. We have
established interest rate risk limits that we closely monitor by measuring
interest rate sensitivities in our debt and interest rate derivatives
portfolios.
Most of our foreign-denominated long-term debt has been swapped from
fixed-rate or floating-rate foreign currencies to fixed-rate U.S. dollars at
issuance through cross-currency swaps, removing interest rate risk and foreign
currency exchange risk associated with the underlying interest and principal
payments. Likewise, periodically we enter into interest rate locks to
partially hedge the risk of increases in the benchmark interest rate during
the period leading up to the probable issuance of fixed-rate debt. We expect
gains or losses in our cross-currency swaps and interest rate locks to offset
the losses and gains in the financial instruments they hedge.
Following are our interest rate derivatives subject to material interest rate
risk as of December 31, 2019. The interest rates illustrated below refer to
the average rates we expect to pay based on current and implied forward rates
and the average rates we expect to receive based on derivative contracts. The
notional amount is the principal amount of the debt subject to the interest
rate swap contracts. The fair value asset (liability) represents the amount we
would receive (pay) if we terminated the contracts as of December 31, 2019.
Maturity
Fair Value
2020 2021 2022 2023 2024 Thereafter Total 12/31/19
Interest Rate Derivatives
Interest Rate Swaps:
Receive Fixed/Pay
Variable Notional
Amount Maturing $ - $ 853 $ - $ - $ - $ - $ 853 $ 2
Weighted-Average
Variable Rate Payable(1) 4.2% 4.1% 0.0% 0.0% 0.0% 0.0%
Weighted-Average
Fixed Rate Receivable 4.5% 4.5% 0.0% 0.0% 0.0% 0.0%
(1) Interest payable based on current and implied forward rates for One Month
LIBOR plus a spread ranging between
approximately 254 and 274 basis points.
Foreign Exchange Risk
We principally use foreign exchange contracts to hedge certain film production
costs denominated in foreign currencies. We are also exposed to foreign
currency exchange risk through our foreign affiliates and equity investments
in foreign companies. We have designated €1,450 million aggregate principal
amount of debt as a hedge of the variability of certain Euro-denominated net
investments of our subsidiaries. The gain or loss on the debt that is
designated as, and is effective as, an economic hedge of the net investment in
a foreign operation is recorded as a currency translation adjustment within
accumulated other comprehensive income, net on the consolidated balance sheet.
Through cross-currency swaps, most of our foreign-denominated debt has been
swapped from fixed-rate or floating-rate foreign currencies to fixed-rate U.S.
dollars at issuance, removing interest rate and foreign currency exchange risk
associated with the underlying interest and principal payments. We expect
gains or losses in our cross-currency swaps to offset the gains and losses in
the financial instruments they hedge.
For the purpose of assessing specific risks, we use a sensitivity analysis to
determine the effects that market risk exposures may have on the fair value of
our financial instruments and results of operations. We had foreign exchange
forward contracts with a notional value of $269 and a fair value of $89
outstanding at December 31, 2019.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Management
The consolidated financial statements have been prepared in conformity with
U.S. generally accepted accounting principles. The integrity and objectivity
of the data in these financial statements, including estimates and judgments
relating to matters not concluded by year end, are the responsibility of
management, as is all other information included in the Annual Report, unless
otherwise indicated.
The financial statements of AT&T Inc. (AT&T) have been audited by
Ernst & Young LLP, Independent Registered Public Accounting Firm.
Management has made available to Ernst & Young LLP all of AT&T's
financial records and related data, as well as the minutes of stockholders'
and directors' meetings. Furthermore, management believes that all
representations made to Ernst & Young LLP during its audit were valid
and appropriate.
Management maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed by AT&T is recorded,
processed, summarized, accumulated and communicated to its management,
including its principal executive and principal financial officers, to allow
timely decisions regarding required disclosure, and reported within the time
periods specified by the Securities and Exchange Commission's rules and forms.
Management also seeks to ensure the objectivity and integrity of its financial
data by the careful selection of its managers, by organizational arrangements
that provide an appropriate division of responsibility and by communication
programs aimed at ensuring that its policies, standards and managerial
authorities are understood throughout the organization.
The Audit Committee of the Board of Directors meets periodically with
management, the internal auditors and the independent auditors to review the
manner in which they are performing their respective responsibilities and to
discuss auditing, internal accounting controls and financial reporting
matters. Both the internal auditors and the independent auditors periodically
meet alone with the Audit Committee and have access to the Audit Committee at
any time.
Assessment of Internal Control
The management of AT&T is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in Rule
13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934. AT&T's
internal control system was designed to provide reasonable assurance to the
company's management and Board of Directors regarding the preparation and fair
presentation of published financial statements.
AT&T management assessed the effectiveness of the company's internal
control over financial reporting as of December 31, 2019. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control -
Integrated Framework (2013 framework). Based on its assessment, AT&T
management believes that, as of December 31, 2019, the company's internal
control over financial reporting is effective based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that
audited the financial statements included in this Annual Report, has issued an
attestation report on the company's internal control over financial reporting.
/s/Randall Stephenson
/s/John J. Stephens
Randall Stephenson
John J. Stephens
Chairman of the
Board
Senior Executive Vice President and
and Chief Executive
Officer
Chief Financial Officer
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of AT&T Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AT&T Inc.
(the Company) as of December 31, 2019 and 2018, the related consolidated
statements of income, comprehensive income, cash flows and changes in
stockholders' equity for each of the three years in the period ended December
31, 2019, and the related notes and financial statement schedule listed in
Item 15(a) (collectively referred to as the "consolidated financial
statements"). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company at
December 31, 2019 and 2018, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2019, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States) (PCAOB), the Company's internal
control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (2013 framework) and
our report dated February 19, 2020 expressed an unqualified opinion thereon.
Adoption of Accounting Standards Updates
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2019, the Company changed its method for accounting for leases as a
result of the modified retrospective adoption of Accounting Standards Update
(ASU) No. 2016-02, Leases (Topic 842), as amended. Effective January 1, 2018,
the Company changed its method for recognizing revenue as a result of the
modified retrospective adoption of ASU No. 2014-09, Revenue from Contracts
with Customers (Topic 606), as amended, which is also discussed in Note 1.
Basis for Opinion
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Critical Audit Matters( )
The critical audit matters communicated below are matters arising from the
current period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to
accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective or complex judgments. The
communication of critical audit matters does not alter in any way our opinion
on the consolidated( )financial statements, taken as a whole, and we are not,
by communicating the critical audit matters below, providing separate opinions
on the critical audit matters or on the accounts or disclosures to which they
relate.
Discount rates used in determining pension and postretirement benefit
obligations
Description of the Matter
At December 31, 2019, the Company's pension benefit obligation was $59,873
million and exceeded the fair value of defined benefit pension plan assets of
$53,530 million, resulting in an unfunded benefit obligation of $6,343
million. Additionally, at December 31, 2019, the Company's postretirement
benefit obligation was $16,041 million and exceeded the fair value of
postretirement plan assets of $4,145 million, resulting in an unfunded benefit
obligation of $11,896 million. As explained in Note 15 to the consolidated
financial statements, the Company updates the assumptions used to measure the
defined benefit pension and postretirement benefit obligations, including
discount rates, at December 31 or upon a remeasurement event. The Company
determines the discount rates used to measure the obligations based on the
development of a yield curve using high-quality corporate bonds selected to
yield cash flows that correspond to the expected timing and amount of the
expected future benefit payments. The selected discount rate has a significant
effect on the measurement of the defined benefit pension and postretirement
benefit obligations.
Auditing the defined benefit pension and postretirement benefit obligations
was complex due to the need to evaluate the highly judgmental nature of the
actuarial assumptions made by management, primarily the discount rate, used in
the Company's measurement process. Auditing the discount rates associated with
the measurement of the defined benefit pension and postretirement benefit
obligations was complex because it required an evaluation of the credit
quality of the corporate bonds used to develop the discount rate and the
correlation of those bonds' cash inflows to the timing and amount of future
expected benefit payments.
How We We obtained an understanding, evaluated the design and tested the operating
effectiveness of certain controls over management's review of the
Addressed the Matter in Our determination of the discount rates used in defined benefit pension obligation
and postretirement benefit obligation calculations.
Audit
To test the determination of the discount rate used in the calculation of the
defined benefit pension and postretirement benefit obligations, we performed
audit procedures that focused on evaluating, with the assistance of our
actuarial specialists, the determination of the discount rates, among other
procedures. For example, we evaluated the selected yield curve used to
determine the discount rates applied in measuring the defined benefit pension
and postretirement benefit obligations. As part of this assessment, we
considered the credit quality of the corporate bonds that comprise the yield
curve and compared the timing and amount of cash flows at maturity with the
expected amounts and duration of the related benefit payments. As part of this
assessment, we compared the Company's current projections to historical
projected defined benefit pension obligation cash flows, and compared the
current-year benefits paid to the prior-year projected cash flows.
Uncertain tax positions
Description of the Matter As discussed in Note 14 to the consolidated financial statements, at December
31, 2019 the Company had recorded unrecognized tax benefits of $13,687 million
for uncertain tax positions. Uncertainty in a tax position may arise as tax
laws are subject to interpretation. The Company uses judgment to (1) determine
whether, based on the technical merits, a tax position is more likely than not
to be sustained and (2) measure the amount of tax benefit that qualifies for
recognition within the financial statements. Changes in facts and
circumstances, such as changes in tax laws, new regulations issued by taxing
authorities and communications with taxing authorities may affect the amount
of uncertain tax positions and, in turn, income tax expense. Estimated tax
benefits related to uncertain tax positions that are not more likely than not
to be sustained are reported as unrecognized income tax benefits.
Auditing the measurement of uncertain tax positions was challenging because
the measurement is based on interpretations of tax laws and legal rulings.
Each tax position involves unique facts and circumstances that must be
evaluated, and there may be many uncertainties around initial recognition and
de-recognition of tax positions, including regulatory changes, litigation and
examination activity.
How We We obtained an understanding, evaluated the design and tested the operating
effectiveness of controls over the Company's accounting process for uncertain
Addressed the Matter in Our Audit tax positions. This included controls over identification and measurement of
the benefits of the uncertain tax positions, including management's review of
the inputs and calculations of unrecognized income tax benefits, both
initially and on an ongoing basis.
We involved our tax professionals to assist us in assessing significant
uncertain tax positions, including an evaluation of the technical merits of
individual positions, the determination of whether a tax position was
more-likely-than-not to be sustained, and the Company's measurement of its
uncertain tax positions, including the computation of interest and penalties,
among other procedures. For significant new positions, we assessed the
Company's filing position, correspondence with the relevant tax authorities
and third-party advice obtained by the Company, as appropriate. For existing
positions, we assessed changes in facts and law, as well as settlements of
similar positions for any impact to the recognized liability for the
positions. We analyzed the Company's assumptions and data used to determine
the amount of tax benefit to recognize and tested the accuracy of the
calculations. We also evaluated the adequacy of the Company's financial
statement disclosures related to uncertain tax positions included in Note 14.
Evaluation of goodwill and indefinite-lived intangible assets for impairment
Description of the Matter At December 31, 2019, the Company's goodwill balance was $146,241 million and
its total indefinite-lived intangible assets were $101,392 million. The
Company's indefinite-lived intangible assets consist of wireless licenses,
orbital slots and trade names. As discussed in Note 9 to the consolidated
financial statements, reporting unit goodwill and indefinite-lived intangible
assets are tested for impairment at least annually. This involves estimating
the fair value of the reporting units and indefinite-lived intangible assets,
which are determined using discounted cash flow models and a market multiples
valuations approach. These fair value estimates are sensitive to significant
assumptions, such as cash flow projections, operating margin, discount rates,
terminal values, subscriber growth and churn, royalty rates and capital
investment. The Company also considers market multiples for peer companies
which offer comparable services to its reporting units. These assumptions are
affected by expectations about future market and economic conditions.
Auditing management's annual impairment tests for goodwill and
indefinite-lived intangible assets was complex because of the significant
judgment required to evaluate the management assumptions described above used
to determine the fair value of the reporting units and other assets.
How We We obtained an understanding, evaluated the design and tested the operating
effectiveness of controls over the Company's goodwill and indefinite-lived
Addressed the Matter in Our Audit intangible assets impairment review processes. This included controls over
management's review of the valuation models and the significant assumptions
noted above, utilized in both the discounted cash flow and market valuation
approaches.
To test the estimated fair value of the Company's reporting units and
indefinite-lived intangible assets, we involved our valuation specialists to
assist us in performing our audit procedures. Our procedures included, among
others, testing the valuation methodology used and the significant assumptions
within the valuation methodology. For example, we compared the significant
assumptions to current industry, market and economic trends, and other
guideline companies in the same industry and to other factors. Where
appropriate, we evaluated whether changes to the company's business model,
customer base and other factors would affect the significant assumptions. We
also assessed the historical accuracy of management's estimates, tested the
clerical accuracy of the valuation calculations, and performed independent
sensitivity analyses. In addition, we tested management's reconciliation of
the fair value of the reporting units to the market capitalization of the
Company.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1999.
Dallas, Texas
February 19, 2020
Consolidated Statements of Income
2019 2018 2017
Operating Revenues
Service $ 163,499 $ 152,345 $ 145,597
Equipment 17,694 18,411 14,949
Total operating revenues 181,193 170,756 160,546
Operating Expenses
Cost of revenues
Equipment 18,653 19,786 18,709
Broadcast, programming and operations 31,132 26,727 21,159
Other cost of revenues (exclusive of depreciation
and amortization shown separately below) 34,356 32,906 37,942
Selling, general and administrative 39,422 36,765 35,465
Asset abandonments and impairments 1,458 46 2,914
Depreciation and amortization 28,217 28,430 24,387
Total operating expenses 153,238 144,660 140,576
Operating Income 27,955 26,096 19,970
Other Income (Expense)
Interest expense (8,422) (7,957) (6,300)
Equity in net income (loss) of affiliates 6 (48) (128)
Other income (expense) - net (1,071) 6,782 1,597
Total other income (expense) (9,487) (1,223) (4,831)
Income Before Income Taxes 18,468 24,873 15,139
Income tax (benefit) expense 3,493 4,920 (14,708)
Net Income 14,975 19,953 29,847
Less: Net Income Attributable to Noncontrolling Interest (1,072) (583) (397)
Net Income Attributable to AT&T $ 13,903 $ 19,370 $ 29,450
Less: Preferred Stock Dividends (3) - -
Net Income Attributable to Common Stock $ 13,900 $ 19,370 $ 29,450
Basic Earnings Per Share Attributable to Common Stock $ 1.90 $ 2.85 $ 4.77
Diluted Earnings Per Share Attributable to Common Stock $ 1.89 $ 2.85 $ 4.76
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statements of Comprehensive Income
2019 2018 2017
Net income $ 14,975 $ 19,953 $ 29,847
Other comprehensive income, net of tax:
Foreign Currency:
Translation adjustment (includes $(9), $(32) and $(5) attributable to
noncontrolling interest), net of taxes of $18, $(45) and $123 19 (1,062) 15
Securities:
Net unrealized gains (losses), net of taxes of $17, $(1) and $109 50 (4) 187
Reclassification adjustment included in net income, net of taxes of $0,
$0
and $(117) - - (185)
Derivative Instruments:
Net unrealized gains (losses), net of taxes of $(240), $(156) and $200 (900) (597) 371
Reclassification adjustment included in net income, net of taxes of $12,
$6
and $21 45 13 39
Defined benefit postretirement plans:
Net prior service credit arising during period, net of taxes of $1,134,
$271
and $675 3,457 830 1,083
Amortization of net prior service credit included in net income, net of
taxes of
$(475), $(431) and $(604) (1,459) (1,322) (988)
Other comprehensive income (loss) 1,212 (2,142) 522
Total comprehensive income 16,187 17,811 30,369
Less: Total comprehensive income attributable to noncontrolling interest (1,063) (551) (392)
Total Comprehensive Income Attributable to AT&T $ 15,124 $ 17,260 $ 29,977
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Balance Sheets
December 31,
2019 2018
Assets
Current Assets
Cash and cash equivalents $ 12,130 $ 5,204
Accounts receivable - net of allowances for doubtful accounts of $1,235 and 22,636 26,472
$907
Prepaid expenses 1,631 2,047
Other current assets 18,364 17,704
Total current assets 54,761 51,427
Noncurrent inventories and theatrical film and television production costs 12,434 7,713
Property, Plant and Equipment - Net 130,128 131,473
Goodwill 146,241 146,370
Licenses - Net 97,907 96,144
Trademarks and Trade Names - Net 23,567 24,345
Distribution Networks - Net 15,345 17,069
Other Intangible Assets - Net 20,798 26,269
Investments in and Advances to Equity Affiliates 3,695 6,245
Operating lease right-of-use assets 24,039 -
Other Assets 22,754 24,809
Total Assets $ 551,669 $ 531,864
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year $ 11,838 $ 10,255
Accounts payable and accrued liabilities 45,956 43,184
Advanced billings and customer deposits 6,124 5,948
Accrued taxes 1,212 1,179
Dividends payable 3,781 3,854
Total current liabilities 68,911 64,420
Long-Term Debt 151,309 166,250
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 59,502 57,859
Postemployment benefit obligation 18,788 19,218
Operating lease liabilities 21,804 -
Other noncurrent liabilities 29,421 30,233
Total deferred credits and other noncurrent liabilities 129,515 107,310
Stockholders' Equity
Preferred stock ($1 par value, 5% cumulative, 10,000,000 authorized, 48,000
shares issued
and outstanding at December 31, 2019 and 0 issued and outstanding at - -
December 31, 2018)
Common stock ($1 par value, 14,000,000,000 authorized at December 31, 2019 and
December 31, 2018: issued 7,620,748,598 at December 31, 2019 and at 7,621 7,621
December 31, 2018)
Additional paid-in capital 126,279 125,525
Retained earnings 57,936 58,753
Treasury stock (366,193,458 at December 31, 2019 and 339,120,073 at December
31, 2018,
at cost) (13,085) (12,059)
Accumulated other comprehensive income 5,470 4,249
Noncontrolling interest 17,713 9,795
Total stockholders' equity 201,934 193,884
Total Liabilities and Stockholders' Equity $ 551,669 $ 531,864
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statements of Cash Flows
2019 2018 2017
Operating Activities
Net income $ 14,975 $ 19,953 $ 29,847
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 28,217 28,430 24,387
Amortization of film and television costs 9,587 3,772 -
Undistributed earnings from investments in equity affiliates 295 292 174
Provision for uncollectible accounts 2,575 1,791 1,642
Deferred income tax expense (benefit) 1,806 4,931 (15,265)
Net (gain) loss from sale of investments, net of impairments (1,218) (739) (282)
Pension and postretirement benefit expense (credit) (2,002) (1,148) (1,031)
Actuarial (gain) loss on pension and postretirement benefits 5,171 (3,412) 1,258
Asset abandonments and impairments 1,458 46 2,914
Changes in operating assets and liabilities:
Receivables 2,812 (1,580) (986)
Other current assets, inventories and theatrical film and television
production costs (12,852) (6,442) (778)
Accounts payable and other accrued liabilities (1,524) 1,602 816
Equipment installment receivables and related sales 548 (490) (1,239)
Deferred customer contract acquisition and fulfillment costs (910) (3,458) (1,422)
Postretirement claims and contributions (1,008) (936) (2,064)
Other - net 738 990 39
Total adjustments 33,693 23,649 8,163
Net Cash Provided by Operating Activities 48,668 43,602 38,010
Investing Activities
Capital expenditures:
Purchase of property and equipment (19,435) (20,758) (20,647)
Interest during construction (200) (493) (903)
Acquisitions, net of cash acquired (1,809) (43,309) 1,123
Dispositions 4,684 2,148 59
(Purchases), sales and settlement of securities and investments, net 435 (183) 449
Advances to and investments in equity affiliates (365) (1,050) -
Cash collections of deferred purchase price - 500 976
Net Cash Used in Investing Activities (16,690) (63,145) (18,943)
Financing Activities
Net change in short-term borrowings with original maturities of
three months or less (276) (821) (2)
Issuance of other short-term borrowings 4,012 4,898 -
Repayment of other short-term borrowings (6,904) (2,098) -
Issuance of long-term debt 17,039 41,875 48,793
Repayment of long-term debt (27,592) (52,643) (12,339)
Payment of vendor financing (3,050) (560) (572)
Issuance of preferred stock 1,164 - -
Purchase of treasury stock (2,417) (609) (463)
Issuance of treasury stock 631 745 33
Issuance of preferred interests in subsidiary 7,876 - -
Dividends paid (14,888) (13,410) (12,038)
Other (678) (3,366) 2,518
Net Cash (Used in) Provided by Financing Activities (25,083) (25,989) 25,930
Net increase (decrease) in cash and cash equivalents and restricted cash 6,895 (45,532) 44,997
Cash and cash equivalents and restricted cash beginning of year 5,400 50,932 5,935
Cash and Cash Equivalents and Restricted Cash End of Year $ 12,295 $ 5,400 $ 50,932
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statements of Changes in Stockholders' Equity
2019 2018 2017
Shares Amount Shares Amount Shares Amount
Preferred Stock
Balance at beginning of year - $ - - $ - - $ -
Issuance of stock - - - - - -
Balance at end of year - $ - - $ - - $ -
Common Stock
Balance at beginning of year 7,621 $ 7,621 6,495 $ 6,495 6,495 $ 6,495
Issuance of stock - - 1,126 1,126 - -
Balance at end of year 7,621 $ 7,621 7,621 $ 7,621 6,495 $ 6,495
Additional Paid-In Capital
Balance at beginning of year $ 125,525 $ 89,563 $ 89,604
Issuance of preferred stock 1,164 - -
Issuance of common stock - 35,473 -
Issuance of treasury stock (125) (115) 2
Share-based payments (271) 604 (43)
Changes related to acquisition of interests
held by noncontrolling owners (14) - -
Balance at end of year $ 126,279 $ 125,525 $ 89,563
Retained Earnings
Balance at beginning of year $ 58,753 $ 50,500 $ 34,734
Net income attributable to AT&T ($1.89,
$2.85 and $4.76 per diluted share) 13,903 19,370 29,450
Preferred stock dividends (8) - -
Common stock dividends ($2.05, $2.01
and $1.97 per share) (15,028) (14,117) (12,157)
Cumulative effect of accounting changes
and other adjustments 316 3,000 (1,527)
Balance at end of year $ 57,936 $ 58,753 $ 50,500
Treasury Stock
Balance at beginning of year (339) $ (12,059) (356) $ (12,714) (356) $ (12,659)
Repurchase and acquisition of common stock (67) (2,492) (20) (692) (14) (551)
Issuance of treasury stock 40 1,466 37 1,347 14 496
Balance at end of year (366) $ (13,085) (339) $ (12,059) (356) $ (12,714)
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statements of Changes in Stockholders' Equity - continued
2019 2018 2017
Shares Amount Shares Amount Shares Amount
Accumulated Other Comprehensive Income
Attributable to AT&T, net of tax:
Balance at beginning of year $ 4,249 $ 7,017 $ 4,961
Other comprehensive income (loss)
attributable to AT&T 1,221 (2,110) 527
Cumulative effect of accounting changes
and other adjustments - (658) 1,529
Balance at end of year $ 5,470 $ 4,249 $ 7,017
Noncontrolling Interest:
Balance at beginning of year $ 9,795 $ 1,146 $ 975
Net income attributable to noncontrolling
interest 1,072 583 397
Interest acquired by noncontrolling owners 7,876 8,803 -
Acquisitions of noncontrolling interests 5 1 140
Distributions (1,055) (732) (361)
Acquisition of interests held by
noncontrolling owners - (9) -
Translation adjustments attributable to
noncontrolling interest, net of taxes (9) (32) (5)
Cumulative effect of accounting changes
and other adjustments 29 35 -
Balance at end of year $ 17,713 $ 9,795 $ 1,146
Total Stockholders' Equity at beginning of year $ 193,884 $ 142,007 $ 124,110
Total Stockholders' Equity at end of year $ 201,934 $ 193,884 $ 142,007
The accompanying notes are an integral part of the consolidated financial
statements.
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation Throughout this document, AT&T Inc. is referred to
as "AT&T," "we" or the "Company." The consolidated financial statements
include the accounts of the Company and our majority-owned subsidiaries and
affiliates, including the results of Time Warner Inc. (referred to as "Time
Warner" or "WarnerMedia"), which was acquired on June 14, 2018 (see Note 6).
AT&T is a holding company whose subsidiaries and affiliates operate
worldwide in the telecommunications, media and technology industries.
All significant intercompany transactions are eliminated in the consolidation
process. Investments in less than majority-owned subsidiaries and partnerships
where we have significant influence are accounted for under the equity method.
Earnings from certain investments accounted for using the equity method are
included for periods ended within up to one quarter of our period end. We also
record our proportionate share of our equity method investees' other
comprehensive income (OCI) items, including translation adjustments. We treat
distributions received from equity method investees as returns on investment
and classify them as cash flows from operating activities until those
distributions exceed our cumulative equity in the earnings of that investment.
We treat the excess amount as a return of investment and classify it as cash
flows from investing activities.
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles (GAAP) requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes, including estimates of probable losses and expenses.
Actual results could differ from those estimates. Certain prior period amounts
have been conformed to the current period's presentation. See Note 4 for a
discussion on the recast of our segment results.
Accounting Policies and Adopted Accounting Standards
Leases As of January 1, 2019, we adopted, with modified retrospective
application, Financial Accounting Standards Board (FASB) Accounting Standards
Update (ASU) No. 2016-02, "Leases (Topic 842)" (ASC 842), which replaces
existing leasing rules with a comprehensive lease measurement and recognition
standard and expanded disclosure requirements (see Note 8). ASC 842 requires
lessees to recognize most leases on their balance sheets as liabilities, with
corresponding "right-of-use" assets. For income statement recognition
purposes, leases are classified as either a finance or an operating lease
without relying upon bright-line tests.
The key change upon adoption of the standard was balance sheet recognition,
given that the recognition of lease expense on our income statement is similar
to our historical accounting. Using the modified retrospective transition
method of adoption, we did not adjust the balance sheet for comparative
periods but recorded a cumulative effect adjustment to retained earnings on
January 1, 2019. We elected the package of practical expedients permitted
under the transition guidance within the new standard, which, among other
things, allowed us to carry forward our historical lease classification. We
also elected the practical expedient related to land easements, allowing us to
carry forward our accounting treatment for land easements on existing
agreements that were not accounted for as leases. We excluded leases with
original terms of one year or less. Additionally, we elected to not separate
lease and non-lease components for certain classes of assets. Our accounting
for finance leases did not change from our prior accounting for capital
leases.
The adoption of ASC 842 resulted in the recognition of an operating lease
liability of $22,121 and an operating right-of-use asset of the same amount.
Existing prepaid and deferred rent accruals were recorded as an offset to the
right-of-use asset, resulting in a net asset of $20,960. The cumulative effect
of the adoption to retained earnings was an increase of $316 reflecting the
reclassification of deferred gains related to sale/leaseback transactions. The
standard did not materially impact our income statements or statements of cash
flows, and had no impact on our debt-covenant compliance under our current
agreements.
Deferral of Episodic Television and Film Costs In March 2019, the FASB
issued ASU No. 2019-02, "Entertainment-Films-Other Assets-Film Costs (Subtopic
926-20) and Entertainment-Broadcasters-Intangibles-Goodwill and Other
(Subtopic 920-350): Improvements to Accounting for Costs of Films and License
Agreements for Program Materials" (ASU 2019-02), which we early adopted as of
January 1, 2019, with prospective application. The standard eliminates certain
revenue-related constraints on capitalization of inventory costs for episodic
television that existed under prior guidance. In addition, the balance sheet
classification requirements that existed in prior guidance for film production
costs and programming inventory were eliminated. As of January 1, 2019, we
reclassified $2,274 of our programming inventory costs from "Other current
assets" to "Other Assets" in accordance with the guidance (see Note 11). This
change in accounting does not materially impact our income statement.
Revenue Recognition As of January 1, 2018, we adopted ASU No. 2014-09,
"Revenue from Contracts with Customers (Topic 606)," as modified (ASC 606),
using the modified retrospective method, which does not allow us to adjust
prior periods. We applied the rules to all open contracts existing as of
January 1, 2018, recording an increase of $2,342 to retained earnings for the
cumulative effect of the change, with an offsetting contract asset of $1,737,
deferred contract acquisition costs of $1,454, other asset reductions of $239,
other liability reductions of $212, deferred income tax liability of $787 and
increase to noncontrolling interest of $35. (See Note 5)
Financial Instruments As of January 1, 2018, we adopted ASU No. 2016-01,
"Financial Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities" (ASU 2016-01),
which requires us to prospectively record changes in the fair value of our
equity investments, except for those accounted for under the equity method, in
net income instead of in accumulated other comprehensive income (accumulated
OCI). As of January 1, 2018, we recorded an increase of $658 in retained
earnings for the cumulative effect of the adoption of ASU 2016-01, with an
offset to accumulated OCI.
Income Taxes We record deferred income taxes for temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the computed tax basis of those assets and liabilities. We record
valuation allowances against the deferred tax assets (included, together with
our deferred income tax assets, as part of our reportable net deferred income
tax liabilities on our consolidated balance sheets), for which the realization
is uncertain. We review these items regularly in light of changes in federal
and state tax laws and changes in our business.
The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act
reduced the U.S. federal corporate income tax rate from 35% to 21% and
required companies to pay a one-time transition tax on earnings of certain
foreign subsidiaries that were previously tax deferred. Recognizing the late
enactment of the Act and complexity of accurately accounting for its impact,
the Securities and Exchange Commission (SEC) in Staff Accounting Bulletin
(SAB) 118 provided guidance that allowed registrants to provide a reasonable
estimate of the impact to their financial statements and adjust the reported
impact in a measurement period not to exceed one year. We included the
estimated impact of the Act in our financial results at or for the period
ended December 31, 2017, with additional adjustments recorded in 2018. (See
Note 14)
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement-
Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income" (ASU 2018-02), which
allows entities the option to reclassify from accumulated OCI to retained
earnings the stranded tax effects resulting from the application of the Act.
We elected to adopt ASU 2018-02 in the period in which the estimated income
tax effects of the Act were recognized, reflecting a $1,529 adjustment for
2017 in the consolidated statements of changes in stockholders' equity. (See
Note 3)
Cash and Cash Equivalents Cash and cash equivalents include all highly
liquid investments with original maturities of three months or less. The
carrying amounts approximate fair value. At December 31, 2019, we held $2,654
in cash and $9,476 in money market funds and other cash equivalents. Of our
total cash and cash equivalents, $2,681 resided in foreign jurisdictions, some
of which is subject to restrictions on repatriation.
Allowance for Doubtful Accounts We record expense to maintain an allowance
for doubtful accounts for estimated losses that result from the failure or
inability of our customers to make required payments deemed collectible from
the customer when the service was provided or product was delivered. When
determining the allowance, we consider the probability of recoverability of
accounts receivable based on past experience, taking into account current
collection trends as well as general economic factors, including bankruptcy
rates. Credit risks are assessed based on historical write-offs, net of
recoveries, as well as an analysis of the aged accounts receivable balances
with allowances generally increasing as the receivable ages. Accounts
receivable may be fully reserved for when specific collection issues are known
to exist, such as catastrophes or pending bankruptcies.
Equipment Inventory Equipment inventories, which primarily consist of
wireless devices and accessories, are included in "Other current assets" on
our consolidated balance sheets. Equipment inventories are valued at the lower
of cost or net realizable value and were $2,864 at December 31, 2019 and
$2,771 at December 31, 2018.
Licensed Programming Inventory Cost Recognition and Impairment We enter into
agreements to license programming exhibition rights from licensors. A
programming inventory asset related to these rights and a corresponding
liability payable to the licensor are recorded (on a discounted basis if the
license agreements are long-term) when (i) the cost of the programming is
reasonably determined, (ii) the programming material has been accepted in
accordance with the terms of the agreement, (iii) the programming is available
for its first showing or telecast, and (iv) the license period has commenced.
There are variations in the amortization methods of these rights, depending on
whether the network is advertising-supported (e.g., TNT and TBS) or not
advertising-supported (e.g., HBO and Turner Classic Movies).
For the advertising-supported networks, our general policy is to amortize each
program's costs on a straight-line basis (or per-play basis, if greater) over
its license period. In circumstances where the initial airing of the program
has more value than subsequent airings, an accelerated method of amortization
is used. The accelerated amortization upon the first airing versus subsequent
airings is determined based on a study of historical and estimated future
advertising sales for similar programming. For rights fees paid for sports
programming arrangements, such rights fees are amortized using a
revenue-forecast model, in which the rights fees are amortized using the ratio
of current period advertising revenue to total estimated remaining advertising
revenue over the term of the arrangement.
For premium pay television, streaming and over-the-top (OTT) services that are
not advertising-supported, each licensed program's costs are amortized on a
straight-line basis over its license period or estimated period of use,
beginning with the month of initial exhibition. When we have the right to
exhibit feature theatrical programming in multiple windows over a number of
years, historical audience viewership is used as the basis for determining the
amount of programming amortization attributable to each window.
Licensed programming inventory is carried at the lower of unamortized cost or
fair value. For networks that generate both advertising and subscription
revenues, the net realizable value of unamortized programming costs is
generally evaluated based on the network's programming taken as a whole. In
assessing whether the programming inventory for a particular
advertising-supported network is impaired, the net realizable value for all of
the network's programming inventory is determined based on a projection of the
network's profitability. This assessment would occur upon the occurrence of
certain triggering events. Similarly, for premium pay television, streaming
and OTT services that are not advertising-supported, an evaluation of the fair
value of unamortized programming costs is performed based on services'
licensed programming taken as a whole. Specifically, the fair value for all
premium pay television, streaming and OTT service licensed programming is
determined based on projections of estimated subscription revenues less
certain costs of delivering and distributing the licensed programming. Changes
in management's intended usage of a specific program, such as a decision to no
longer exhibit that program and forgo the use of the rights associated with
the program license, results in a reassessment of that program's fair value,
which could result in an impairment. (See Note 11)
Film and Television Production Cost Recognition, Participations and Residuals
and Impairments Film and television production costs on our consolidated
balance sheets include the unamortized cost of completed theatrical films and
television episodes, theatrical films and television series in production and
undeveloped film and television rights. Film and television production costs
are stated at the lower of cost, less accumulated amortization, or fair value.
For films and television programs predominantly monetized individually, the
amount of capitalized film and television production costs and the amount of
participations and residuals to be recognized as broadcast, programming and
operations expenses for a given film or television series in a particular
period was determined using the film forecast computation method. Under this
method, the amortization of capitalized costs and the accrual of
participations and residuals was based on the proportion of the film's (or
television program's) revenues recognized for such period to the film's (or
television program's) estimated remaining ultimate revenues (i.e., the total
revenue to be received throughout a film's (or television program's) life
cycle).
The process of estimating a film's ultimate revenues requires us to make a
series of judgments related to future revenue-generating activities associated
with a particular film. We estimate the ultimate revenues, less additional
costs to be incurred (including exploitation and participation costs), in
order to determine whether the value of a film or television series is
impaired and requires an immediate write-off of unrecoverable film and
television production costs. To the extent that the ultimate revenues are
adjusted, the resulting gross margin reported on the exploitation of that film
or television series in a period is also adjusted.
Prior to the theatrical release of a film, our estimates are based on factors
such as the historical performance of similar films, the star power of the
lead actors, the rating and genre of the film, pre-release market research
(including test market screenings), international distribution plans and the
expected number of theaters in which the film will be released. In the absence
of revenues directly related to the exhibition of owned film or television
programs on our television networks, premium pay television, streaming or OTT
services, we estimate a portion of the unamortized costs that are
representative of the utilization of that film or television program in that
exhibition and expense such costs as the film or television program is
exhibited. The period over which ultimate revenues are estimated was generally
not to exceed ten years from the initial release of a motion picture or from
the date of delivery of the first episode of an episodic television series.
Estimates were updated based on information available during the film's
production and, upon release, the actual results of each film.
For a film (or television program) predominantly monetized as part of a film
(or television program) group, the amount of capitalized film and television
production costs is amortized using a reasonably reliable estimate of the
portion of unamortized film costs that is representative of the use of the
film. Production costs are expensed as the film (or television program) is
exhibited or exploited.
Property, Plant and Equipment Property, plant and equipment is stated at
cost, except for assets acquired using acquisition accounting, which are
initially recorded at fair value (see Note 7). The cost of additions and
substantial improvements to property, plant and equipment is capitalized, and
includes internal compensation costs for these projects. The cost of
maintenance and repairs of property, plant and equipment is charged to
operating expenses. Property, plant and equipment costs are depreciated using
straight-line methods over their estimated economic lives. Certain
subsidiaries follow composite group depreciation methodology. Accordingly,
when a portion of their depreciable property, plant and equipment is retired
in the ordinary course of business, the gross book value is reclassified to
accumulated depreciation, and no gain or loss is recognized on the disposition
of these assets.
Property, plant and equipment is reviewed for recoverability whenever events
or changes in circumstances indicate that the carrying amount of an asset
group may not be recoverable. We recognize an impairment loss when the
carrying amount of a long-lived asset is not recoverable. The carrying amount
of a long-lived asset is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual
disposition of the asset. See Note 7 for a discussion of asset abandonments.
The liability for the fair value of an asset retirement obligation is recorded
in the period in which it is incurred if a reasonable estimate of fair value
can be made. In periods subsequent to initial measurement, we recognize
period-to-period changes in the liability resulting from the passage of time
and revisions to either the timing or the amount of the original estimate. The
increase in the carrying value of the associated long-lived asset is
depreciated over the corresponding estimated economic life.
Software Costs We capitalize certain costs incurred in connection with
developing or obtaining internal-use software. Capitalized software costs are
included in "Property, Plant and Equipment" on our consolidated balance
sheets. In addition, there is certain network software that allows the
equipment to provide the features and functions unique to the AT&T
network, which we include in the cost of the equipment categories for
financial reporting purposes.
We amortize our capitalized software costs over a three-year to seven-year
period, reflecting the estimated period during which these assets will remain
in service.
Goodwill and Other Intangible Assets We have the following major classes of
intangible assets: goodwill; licenses, which include Federal Communications
Commission (FCC) and other wireless licenses and orbital slots; distribution
networks; film and television libraries; intellectual properties and
franchises; trademarks and trade names; customer lists; and various other
finite-lived intangible assets (see Note 9).
Goodwill represents the excess of consideration paid over the fair value of
identifiable net assets acquired in business combinations. Wireless licenses
provide us with the exclusive right to utilize certain radio frequency
spectrum to provide wireless communications services. While wireless licenses
are issued for a fixed period of time (generally ten years), renewals of
domestic wireless licenses have occurred routinely and at nominal cost. We
have determined that there are currently no legal, regulatory, contractual,
competitive, economic or other factors that limit the useful lives of our FCC
wireless licenses.
During the first quarter of 2019, in conjunction with the renewal process of
certain wireless licenses in Mexico, we reassessed the estimated economic
lives and renewal assumptions for these licenses. As a result, we have changed
the life of these licenses from indefinite to finite-lived. On January 1,
2019, we began amortizing our wireless licenses in Mexico over their average
remaining economic life of 25 years. This change in accounting does not
materially impact our income statement.
Orbital slots represent the space in which we operate the broadcast satellites
that support our digital video entertainment service offerings. Similar to our
FCC wireless licenses, there are limited legal and regulatory factors that
constrain the useful lives of our orbital slots. We acquired the rights to the
AT&T and other trade names in previous acquisitions, classifying certain
of those trade names as indefinite-lived. We have the effective ability to
retain these exclusive rights permanently at a nominal cost.
Goodwill, FCC wireless licenses and other indefinite-lived intangible assets
are not amortized but are tested at least annually for impairment. The testing
is performed on the value as of October 1 each year, and compares the book
values of the assets to their fair values. Goodwill is tested by comparing the
carrying amount of each reporting unit, deemed to be our principal operating
segments or one level below them, to the fair value using both discounted cash
flow as well as market multiple approaches. FCC wireless licenses are tested
on an aggregate basis, consistent with our use of the licenses on a national
scope, using a discounted cash flow approach. Orbital slots are similarly
aggregated for purposes of impairment testing and valued using a discounted
cash flow approach. Trade names are tested by comparing their book values to
their fair values calculated using a discounted cash flow approach on a
presumed royalty rate derived from the revenues related to each brand name.
Intangible assets that have finite useful lives are amortized over their
estimated useful lives (see Note 9). Customer lists and relationships are
amortized using primarily the sum-of-the-months-digits method of amortization
over the period in which those relationships are expected to contribute to our
future cash flows. Finite-lived trademarks and trade names and distribution
networks are amortized using the straight-line method over the estimated
useful life of the assets. Film library is amortized using the film forecast
computation method, as previously disclosed. The remaining finite-lived
intangible assets are generally amortized using the straight-line method.
Advertising Costs We expense advertising costs for products and services or
for promoting our corporate image as we incur them (see Note 22).
Foreign Currency Translation Our foreign subsidiaries and foreign
investments generally report their earnings in their local currencies. We
translate their foreign assets and liabilities at exchange rates in effect at
the balance sheet dates. We translate their revenues and expenses using
average rates during the year. The resulting foreign currency translation
adjustments are recorded as a separate component of accumulated OCI in our
consolidated balance sheets (see Note 3). Operations in countries with highly
inflationary economies consider the U.S. dollar as the functional currency.
We hedge a portion of the foreign currency exchange risk involved in certain
foreign currency-denominated transactions, which we explain further in our
discussion of our methods of managing our foreign currency risk (see Note 13).
Pension and Other Postretirement Benefits See Note 15 for a comprehensive
discussion of our pension and postretirement benefit expense, including a
discussion of the actuarial assumptions, our policy for recognizing the
associated gains and losses and our method used to estimate service and
interest cost components.
New Accounting Standards
Credit Loss Standard In June 2016, the FASB issued ASU No. 2016-13,
"Financial Instruments-Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments" (ASU 2016-13, as amended), which replaces the
incurred loss impairment methodology under current GAAP. ASU 2016-13 affects
trade receivables, loans and other financial assets that are not subject to
fair value through net income, as defined by the standard. The amendments
under ASU 2016-13 will be effective as of January 1, 2020, and interim periods
within that year. We do not expect the standard to have a material impact on
our financial statements.
Income Taxes In December 2019, the FASB issued ASU No. 2019-12, "Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes" (ASU
2019-12), which is expected to simplify income tax accounting requirements in
areas deemed costly and complex. The amendments under ASU 2019-12 will be
effective as of January 1, 2021, and interim periods within that year, with
early adoption permitted in its entirety as of the beginning of the year of
adoption. At adoption, the guidance allows for modified retrospective
application through a cumulative effect adjustment to retained earnings. We
are evaluating ASU 2019-12 for its impact to our financial statements.
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per share is shown in the table below:
Year Ended December 31, 2019 2018 2017
Numerators
Numerator for basic earnings per share:
Net income $ 14,975 $ 19,953 $ 29,847
Less: Net income attributable to noncontrolling interest (1,072) (583) (397)
Net income attributable to AT&T 13,903 19,370 29,450
Less: Preferred stock dividends (3) - -
Net income attributable to common stock 13,900 19,370 29,450
Dilutive potential common shares:
Share-based payment 21 19 13
Numerator for diluted earnings per share $ 13,921 $ 19,389 $ 29,463
Denominators (000,000)
Denominator for basic earnings per share:
Weighted-average number of common shares outstanding 7,319 6,778 6,164
Dilutive potential common shares:
Share-based payment (in shares) 29 28 19
Denominator for diluted earnings per share 7,348 6,806 6,183
Basic earnings per share attributable to Common Stock $ 1.90 ( ) $ 2.85 $ 4.77
Diluted earnings per share attributable to Common Stock $ 1.89 ( ) $ 2.85 $ 4.76
We executed an accelerated share repurchase agreement with a third-party
financial institution to repurchase AT&T common stock (see Note 17). Under
the terms of the agreement, on January 3, 2020, we paid the financial
institution $4,000 and received approximately 80% of the stock, or 82.3
million shares. The final number of shares to be repurchased under the
agreement will be based on the average of the daily volume-weighted average
prices of AT&T common stock during the repurchase period, which is
expected to conclude late in the first quarter of 2020. Upon final settlement
of the agreement, we may be entitled to receive additional shares of AT&T
common stock, or, under certain circumstances, we may be required to deliver
shares of AT&T common stock or make a cash payment, at our election.
NOTE 3. OTHER COMPREHENSIVE INCOME
Changes in the balances of each component included in accumulated OCI are
presented below. All amounts are net of tax
and exclude noncontrolling interest.
Foreign Currency Translation Adjustment Net Unrealized Gains (Losses) on Available-for-Sale Securities Net Unrealized Gains (Losses) on Cash Flow Hedges Defined Benefit Postretirement Plans Accumulated Other Comprehensive Income
Balance as of December 31, 2016 $ (1,995) $ 541 $ 744 $ 5,671 $ 4,961
Other comprehensive income
(loss) before reclassifications 20 187 371 1,083 1,661
Amounts reclassified
from accumulated OCI - (1) (185) (1) 39 (2) (988) (3) (1,134)
Net other comprehensive
income (loss) 20 2 410 95 527
Amounts reclassified to
retained earnings(4) (79) 117 248 1,243 1,529
Balance as of December 31, 2017 (2,054) 660 1,402 7,009 7,017
Other comprehensive income
(loss) before reclassifications (1,030) (4) (597) 830 (801)
Amounts reclassified
from accumulated OCI - (1) - (1) 13 (2) (1,322) (3) (1,309)
Net other comprehensive
income (loss) (1,030) (4) (584) (492) (2,110)
Amounts reclassified to
retained earnings(5) - (658) - - (658)
Balance as of December 31, 2018 (3,084) (2) 818 6,517 4,249
Other comprehensive income
(loss) before reclassifications 28 50 (900) 3,457 2,635
Amounts reclassified
from accumulated OCI - (1) - (1) 45 (2) (1,459) (3) (1,414)
Net other comprehensive
income (loss) 28 50 (855) 1,998 1,221
Balance as of December 31, 2019 $ (3,056) $ 48 $ (37) $ 8,515 $ 5,470
( 1 ) (Gains) losses are included in Other income (expense) - net in the
consolidated statements of income.
( 2 ) (Gains) losses are included in Interest expense in the consolidated statements
of income (see Note 13).
( 3 ) The amortization of prior service credits associated with postretirement
benefits is included in Other income (expense) in the
consolidated statements of income (see Note 15).
( 4 ) With the adoption of ASU 2018-02, the stranded tax effects resulting from the
application of the Tax Cuts and Jobs Act are reclassified
to retained earnings (see Note 1).
( 5 ) With the adoption of ASU 2016-01, the unrealized (gains) losses on our equity
investments are reclassified to retained earnings
(see Note 1).
NOTE 4. SEGMENT INFORMATION
Our segments are strategic business units that offer products and services to
different customer segments over various technology platforms and/or in
different geographies that are managed accordingly. We analyze our segments
based on segment operating contribution, which consists of operating income,
excluding acquisition-related costs and other significant items (as discussed
below), and equity in net income (loss) of affiliates for investments managed
within each segment. We have four reportable segments: (1) Communications,
(2) WarnerMedia, (3) Latin America, and (4) Xandr.
We also evaluate segment and business unit performance based on EBITDA and/or
EBITDA margin. EBITDA is defined as operating contribution excluding equity in
net income (loss) of affiliates and depreciation and amortization. We believe
EBITDA to be a relevant and useful measurement to our investors as it is part
of our internal management reporting and planning processes and it is an
important metric that management uses to evaluate operating performance.
EBITDA does not give effect to cash used for debt service requirements and
thus does not reflect available funds for distributions, reinvestment or other
discretionary uses. EBITDA margin is EBITDA divided by total revenues.
We have recast our segment results for all prior periods to exclude wireless
and wireline operations in Puerto Rico and the U.S. Virgin Islands from our
Mobility and Business Wireline business units of the Communications segment,
instead reporting them with Corporate and Other (see Note 6).
The Communications segment provides wireless and wireline telecom, video and
broadband services to consumers located in the U.S. and businesses globally.
This segment contains the following business units:
· Mobility provides nationwide wireless service and equipment.
· Entertainment Group provides video, including OTT services,
broadband and voice communications services primarily to residential
customers. This segment also sells advertising on DIRECTV and U-verse
distribution platforms.
· Business Wireline provides advanced IP-based services, as well as
traditional voice and data services to business customers.
The WarnerMedia segment develops, produces and distributes feature films,
television, gaming and other content in various physical and digital formats
globally. This segment contains the following business units:
· Turner primarily operates multichannel basic television networks
and digital properties. Turner also sells advertising on its networks and
digital properties.
· Home Box Office consists of premium pay television and OTT and
streaming services domestically and premium pay, basic tier television and OTT
and streaming services internationally, as well as content licensing and home
entertainment.
· Warner Bros. consists of the production, distribution and
licensing of television programming and feature films, the distribution of
home entertainment products and the production and distribution of games.
The Latin America segment provides entertainment and wireless services outside
of the U.S. This segment contains the following business units:
· Mexico provides wireless service and equipment to customers in
Mexico.
· Vrio provides video services primarily to residential customers
using satellite technology in Latin America and the Caribbean.
The Xandr segment provides advertising services. These services utilize data
insights to develop higher-value targeted advertising across video and digital
platforms. Certain revenues in this segment are also reported by the
Communications segment and are eliminated upon consolidation.
Corporate and Other reconciles our segment results to consolidated operating
income and income before income taxes, and includes:
· Corporate, which consists of: (1) businesses no longer integral
to our operations or which we no longer actively market, (2) corporate support
functions, (3) impacts of corporate-wide decisions for which the individual
operating segments are not being evaluated, (4) the reclassification of the
amortization of prior service credits, which we continue to report with
segment operating expenses, to consolidated other income (expense) - net and
(5) the recharacterization of programming intangible asset amortization, for
released programming acquired in the Time Warner acquisition, which we
continue to report within WarnerMedia segment operating expense, to
consolidated amortization expense. The programming and intangible asset
amortization reclass was $472 and $1,416 for the year ended December 31, 2019
and 2018, respectively.
· Acquisition-related items which consists of items associated with
the merger and integration of acquired businesses, including amortization of
intangible assets.
· Certain significant items includes (1) employee separation
charges associated with voluntary and/or strategic offers, (2) losses
resulting from abandonment or impairment of assets and (3) other items for
which the segments are not being evaluated.
· Eliminations and consolidations, which (1) removes transactions
involving dealings between our segments, including content licensing between
WarnerMedia and Communications, and (2) includes adjustments for our reporting
of the advertising business.
Interest expense and other income (expense) - net, are managed only on a total
company basis and are, accordingly, reflected only in consolidated results.
For the year ended December 31, 2019
Revenues Operations EBITDA Depreciation Operating Equity in Net Segment
and Support and Income (Loss) Income (Loss) of Contribution
Expenses Amortization Affiliates
Communications
Mobility $ 71,056 $ 40,681 $ 30,375 $ 8,054 $ 22,321 $ - $ 22,321
Entertainment Group 45,126 35,028 10,098 5,276 4,822 - 4,822
Business Wireline 26,177 16,091 10,086 4,999 5,087 - 5,087
Total Communications 142,359 91,800 50,559 18,329 32,230 - 32,230
WarnerMedia
Turner 13,122 7,740 5,382 235 5,147 52 5,199
Home Box Office 6,749 4,312 2,437 102 2,335 30 2,365
Warner Bros. 14,358 11,816 2,542 162 2,380 (30) 2,350
Other (730) (71) (659) 39 (698) 110 (588)
Total WarnerMedia 33,499 23,797 9,702 538 9,164 162 9,326
Latin America
Vrio 4,094 3,378 716 660 56 27 83
Mexico 2,869 3,085 (216) 502 (718) - (718)
Total Latin America 6,963 6,463 500 1,162 (662) 27 (635)
Xandr 2,022 646 1,376 58 1,318 - 1,318
Segment Total 184,843 122,706 62,137 20,087 42,050 $ 189 $ 42,239
Corporate and Other
Corporate 1,675 3,008 (1,333) 629 (1,962)
Acquisition-related items (72) 960 (1,032) 7,460 (8,492)
Certain significant items - 2,082 (2,082) 43 (2,125)
Eliminations and consolidations (5,253) (3,735) (1,518) (2) (1,516)
AT&T Inc. $ 181,193 $ 125,021 $ 56,172 $ 28,217 $ 27,955
For the year ended December 31, 2018
Revenues Operations EBITDA Depreciation Operating Equity in Net Segment
and Support and Income (Loss) Income (Loss) of Contribution
Expenses Amortization Affiliates
Communications
Mobility $ 70,521 $ 40,690 $ 29,831 $ 8,263 $ 21,568 $ - $ 21,568
Entertainment Group 46,460 36,430 10,030 5,315 4,715 - 4,715
Business Wireline 26,740 16,201 10,539 4,714 5,825 - 5,825
Total Communications 143,721 93,321 50,400 18,292 32,108 - 32,108
WarnerMedia
Turner 6,979 3,794 3,185 131 3,054 54 3,108
Home Box Office 3,598 2,187 1,411 56 1,355 29 1,384
Warner Bros. 8,703 7,130 1,573 96 1,477 (28) 1,449
Other (339) (145) (194) 22 (216) (30) (246)
Total WarnerMedia 18,941 12,966 5,975 305 5,670 25 5,695
Latin America
Vrio 4,784 3,743 1,041 728 313 34 347
Mexico 2,868 3,415 (547) 510 (1,057) - (1,057)
Total Latin America 7,652 7,158 494 1,238 (744) 34 (710)
Xandr 1,740 398 1,342 9 1,333 - 1,333
Segment Total 172,054 113,843 58,211 19,844 38,367 $ 59 $ 38,426
Corporate and Other
Corporate 2,150 2,250 (100) 1,630 (1,730)
Acquisition-related items (49) 1,185 (1,234) 6,931 (8,165)
Certain significant items - 899 (899) 26 (925)
Eliminations and consolidations (3,399) (1,947) (1,452) (1) (1,451)
AT&T Inc. $ 170,756 $ 116,230 $ 54,526 $ 28,430 $ 26,096
For the year ended December 31, 2017
Revenues Operations EBITDA Depreciation Operating Equity in Net Segment
and Support and Income (Loss) Income (Loss) of Contribution
Expenses Amortization Affiliates
Communications
Mobility $ 70,259 $ 42,317 $ 27,942 $ 7,931 $ 20,011 $ - $ 20,011
Entertainment Group 49,995 38,903 11,092 5,621 5,471 - 5,471
Business Wireline 29,203 18,441 10,762 4,756 6,006 - 6,006
Total Communications 149,457 99,661 49,796 18,308 31,488 - 31,488
WarnerMedia
Turner 430 331 99 4 95 45 140
Home Box Office - - - - - - -
Warner Bros. - - - - - - -
Other - 4 (4) - (4) (74) (78)
Total WarnerMedia 430 335 95 4 91 (29) 62
Latin America
Vrio 5,456 4,172 1,284 849 435 87 522
Mexico 2,813 3,232 (419) 369 (788) - (788)
Total Latin America 8,269 7,404 865 1,218 (353) 87 (266)
Xandr 1,373 169 1,204 2 1,202 - 1,202
Segment Total 159,529 107,569 51,960 19,532 32,428 $ 58 $ 32,486
Corporate and Other
Corporate 2,443 3,911 (1,468) 214 (1,682)
Acquisition-related items - 798 (798) 4,608 (5,406)
Certain significant items (243) 3,880 (4,123) 33 (4,156)
Eliminations and consolidations (1,183) 31 (1,214) - (1,214)
AT&T Inc. $ 160,546 $ 116,189 $ 44,357 $ 24,387 $ 19,970
The following table is a reconciliation of operating income (loss) to Income
Before Income Taxes reported in our
consolidated statements of income:
2019 2018 2017
Communications $ 32,230 $ 32,108 $ 31,488
WarnerMedia 9,326 5,695 62
Latin America (635) (710) (266)
Xandr 1,318 1,333 1,202
Segment Contribution 42,239 38,426 32,486
Reconciling Items:
Corporate and Other (1,962) (1,730) (1,682)
Merger and integration items (1,032) (1,234) (798)
Amortization of intangibles acquired (7,460) (6,931) (4,608)
Abandonments and impairments (1,458) (46) (2,914)
Employee separation charges (624) (587) (445)
Other noncash charges (credits), net (43) (111) 49
Natural disaster items - (181) (626)
Tax reform special bonus - - (220)
Segment equity in net income of affiliates (189) (59) (58)
Eliminations and consolidations (1,516) (1,451) (1,214)
AT&T Operating Income 27,955 26,096 19,970
Interest Expense 8,422 7,957 6,300
Equity in net income (loss) of affiliates 6 (48) (128)
Other income (expense) - net (1,071) 6,782 1,597
Income Before Income Taxes $ 18,468 $ 24,873 $ 15,139
The following table sets forth revenues earned from customers, and property,
plant and equipment located in different geographic areas.
2019 2018 2017
Revenues Net Property, Plant & Equipment Revenues Net Property, Plant & Equipment Revenues Net Property, Plant & Equipment
United States $ 162,344 $ 122,567 $ 154,795 $ 123,457 $ 149,841 $ 118,200
Europe 6,137 1,854 4,073 1,634 1,064 392
Mexico 3,198 3,648 3,100 3,467 2,913 3,619
Brazil 2,761 1,057 2,724 1,213 2,948 1,447
All other Latin America 3,219 544 3,055 1,217 2,743 1,294
Asia/Pacific Rim 2,651 390 2,214 408 829 194
Other 883 68 795 77 208 76
Total $ 181,193 $ 130,128 $ 170,756 $ 131,473 $ 160,546 $ 125,222
The following tables present intersegment revenues, assets, investments in
equity affiliates and capital expenditures by
segment.
Intersegment Reconciliation
2019 2018 2017
Intersegment revenues
Communications $ 26 $ 13 $ -
WarnerMedia 3,308 1,875 134
Latin America - - -
Xandr 10 - -
Total Intersegment Revenues 3,344 1,888 134
Consolidations 1,909 1,511 1,049
Eliminations and consolidations $ 5,253 $ 3,399 $ 1,183
At or for the years ended December 31, 2019 2018
Investments in Equity Method Investees Capital Expenditures Investments in Equity Method Investees Capital Expenditures
Assets Assets
Communications $ 521,252 $ - $ 17,410 $ 485,357 $ - $ 19,509
WarnerMedia 137,264 3,011 1,013 132,453 5,547 581
Latin America 20,606 650 757 18,148 677 745
Xandr 3,116 - 192 2,718 - 106
Corporate and eliminations (130,569) 34 263 (106,812) 21 310
Total $ 551,669 $ 3,695 $ 19,635 $ 531,864 $ 6,245 $ 21,251
NOTE 5. REVENUE RECOGNITION
We report our revenues net of sales taxes and record certain regulatory fees,
primarily Universal Service Fund (USF) fees, on a net basis.
Wireless, Advanced Data, Legacy Voice & Data Services and Equipment
Revenue
We offer service-only contracts and contracts that bundle equipment used to
access the services and/or with other service offerings. Some contracts have
fixed terms and others are cancellable on a short-term basis (i.e.,
month-to-month arrangements).
Examples of service revenues include wireless, video entertainment (e.g.,
AT&T U-verse and DIRECTV), strategic services (e.g., virtual private
network service), and legacy voice and data (e.g., traditional local and
long-distance). These services represent a series of distinct services that is
considered a separate performance obligation. Service revenue is recognized
when services are provided, based upon either usage (e.g., minutes of
traffic/bytes of data processed) or period of time (e.g., monthly service
fees).
Some of our services require customer premises equipment that, when combined
and integrated with AT&T's specific network infrastructure, facilitate the
delivery of service to the customer. In evaluating whether the equipment is a
separate performance obligation, we consider the customer's ability to benefit
from the equipment on its own or together with other readily available
resources and if so, whether the service and equipment are separately
identifiable (i.e., is the service highly dependent on, or highly interrelated
with the equipment). When the equipment does not meet the criteria to be a
distinct performance obligation (e.g., equipment associated with certain video
services), we allocate the total transaction price to the related service.
When equipment is a distinct performance obligation, we record the sale of
equipment when title has passed and the products are accepted by the customer.
For devices sold through indirect channels (e.g., national dealers), revenue
is recognized when the dealer accepts the device, not upon activation.
Our equipment and service revenues are predominantly recognized on a gross
basis, as most of our services do not involve a third party and we typically
control the equipment that is sold to our customers.
Revenue recognized from fixed term contracts that bundle services and/or
equipment is allocated based on the stand-alone selling price of all required
performance obligations of the contract (i.e., each item included in the
bundle). Promotional discounts are attributed to each required component of
the arrangement, resulting in recognition over the contract term. Stand-alone
selling prices are determined by assessing prices paid for service-only
contracts (e.g., arrangements where customers bring their own devices) and
stand-alone device pricing.
We offer the majority of our customers the option to purchase certain wireless
devices in installments over a specified period of time, and, in many cases,
they may be eligible to trade in the original equipment for a new device and
have the remaining unpaid balance paid or settled. For customers that elect
these equipment installment payment programs, at the point of sale, we
recognize revenue for the entire amount of revenue allocated to the customer
receivable net of fair value of the trade-in right guarantee. The difference
between the revenue recognized and the consideration received is recorded as a
note receivable when the devices are not discounted and our right to
consideration is unconditional. When installment sales include promotional
discounts (e.g., "buy one get one free"), the difference between revenue
recognized and consideration received is recorded as a contract asset to be
amortized over the contract term.
Less commonly, we offer certain customers highly discounted devices when they
enter into a minimum service agreement term. For these contracts, we recognize
equipment revenue at the point of sale based on a stand-alone selling price
allocation. The difference between the revenue recognized and the cash
received is recorded as a contract asset that will amortize over the contract
term.
Our contracts allow for customers to frequently modify their arrangement,
without incurring penalties in many cases. When a contract is modified, we
evaluate the change in scope or price of the contract to determine if the
modification should be treated as a new contract or if it should be considered
a change of the existing contract. We generally do not have significant
impacts from contract modifications.
Revenues from transactions between us and our customers are recorded net of
revenue-based regulatory fees and taxes. Cash incentives given to customers
are recorded as a reduction of revenue. Nonrefundable, upfront service
activation and setup fees associated with service arrangements are deferred
and recognized over the associated service contract period or customer life.
Subscription Revenue
Subscription revenues from cable networks and premium pay and basic-tier
television services are recognized over the license period as programming is
provided to affiliates or digital distributors based on negotiated contractual
programming rates. When a distribution contract with an affiliate has expired
and a new distribution contract has not been executed, revenues are based on
estimated rates, giving consideration to factors including the previous
contractual rates, inflation, current payments by the affiliate and the status
of the negotiations on a new contract. When the new distribution contract
terms are finalized, an adjustment to revenue is recorded, if necessary, to
reflect the new terms.
Subscription revenues from end-user subscribers are recognized when services
are provided, based upon either usage or period of time. Subscription revenues
from streaming services are recognized as programming services are provided to
customers.
Content Revenue
Feature films typically are produced or acquired for initial exhibition in
theaters, followed by distribution, generally commencing within three years of
such initial exhibition. Revenues from film rentals by theaters are recognized
as the films are exhibited.
Television programs and series are initially produced for broadcast and may be
subsequently licensed or sold in physical format and/or electronic delivery.
Revenues from the distribution of television programming through broadcast
networks, cable networks, first-run syndication and streaming services are
recognized when the programs or series are available to the licensee. In
certain circumstances, pursuant to the terms of the applicable contractual
arrangements, the availability dates granted to customers may precede the date
in which the customer can be billed for these sales.
Revenues from sales of feature films and television programming in physical
format are recognized at the later of the delivery date or the date when made
widely available for sale or rental by retailers based on gross sales less a
provision for estimated returns, rebates and pricing allowances. Revenues from
the licensing of television programs and series for electronic sell-through or
video-on-demand are recognized when the product has been purchased by and made
available to the consumer to either download or stream.
Upfront or guaranteed payments for the licensing of intellectual property are
recognized as revenue at either the inception of the license term if the
intellectual property has significant standalone functionality or over the
corresponding license term if the licensee's ability to derive utility is
dependent on our continued support of the intellectual property throughout the
license term.
Revenues from the sales of console games are recognized at the later of the
delivery date or the date that the product is made widely available for sale
or rental by retailers based on gross sales less a provision for estimated
returns, rebates and pricing allowances.
Advertising Revenue
Advertising revenues are recognized, net of agency commissions, in the period
that the advertisements are aired. If there is a targeted audience guarantee,
revenues are recognized for the actual audience delivery and revenues are
deferred for any shortfall until the guaranteed audience delivery is met,
typically by providing additional advertisements. Advertising revenues from
digital properties are recognized as impressions are delivered or the services
are performed.
Revenue Categories
The following tables set forth reported revenue by category and by business
unit:
For the year ended December 31, 2019
Service Revenues
Wireless Advanced Data Legacy Voice & Data Subscription Content Advertising Other Equipment Total
Communications
Mobility $ 55,040 $ - $ - $ - $ - $ 291 $ - $ 15,725 $ 71,056
Entertainment Group - 8,403 2,573 30,438 - 1,672 2,032 8 45,126
Business Wireline - 12,926 9,180 - - - 3,286 785 26,177
WarnerMedia
Turner - - - 7,736 481 4,566 339 - 13,122
Home Box Office - - - 5,814 925 - 10 - 6,749
Warner Bros. - - - 88 13,532 41 697 - 14,358
Eliminations and Other - - - 222 (1,058) 69 37 - (730)
Latin America
Vrio - - - 4,094 - - - - 4,094
Mexico 1,863 - - - - - - 1,006 2,869
Xandr - - - - - 2,022 - - 2,022
Corporate and Other 549 51 155 - - - 678 170 1,603
Eliminations and
consolidations - - - - (3,249) (1,672) (332) - (5,253)
Total Operating Revenues $ 57,452 $ 21,380 $ 11,908 $ 48,392 $ 10,631 $ 6,989 $ 6,747 $ 17,694 $ 181,193
For the year ended December 31, 2018
Service Revenues
Wireless Advanced Data Legacy Voice & Data Subscription Content Advertising Other Equipment Total
Communications
Mobility $ 54,062 $ - $ - $ - $ - $ 232 $ - $ 16,227 $ 70,521
Entertainment Group - 7,956 3,041 31,762 - 1,595 2,097 9 46,460
Business Wireline - 12,245 10,674 - - - 2,998 823 26,740
WarnerMedia
Turner - - - 4,207 295 2,330 147 - 6,979
Home Box Office - - - 3,201 391 - 6 - 3,598
Warner Bros. - - - 47 8,216 53 387 - 8,703
Eliminations and Other - - - 74 (518) 78 27 - (339)
Latin America
Vrio - - - 4,784 - - - - 4,784
Mexico 1,701 - - - - - - 1,167 2,868
Xandr - - - - - 1,740 - - 1,740
Corporate and Other 638 52 36 - - - 1,190 185 2,101
Eliminations and
consolidations - - - - (1,843) (1,595) 39 - (3,399)
Total Operating Revenues $ 56,401 $ 20,253 $ 13,751 $ 44,075 $ 6,541 $ 4,433 $ 6,891 $ 18,411 $ 170,756
No customer accounted for more than 10% of consolidated revenues in 2019, 2018
or 2017.
Deferred Customer Contract Acquisition and Fulfillment Costs
Costs to acquire and fulfill customer contracts, including commissions on
service activations, for our wireless, business wireline and video
entertainment services, are deferred and amortized over the contract period or
expected customer relationship life, which typically ranges from three years
to five years. For contracts with an estimated amortization period of less
than one year, we expense incremental costs immediately.
The following table presents the deferred customer contract acquisition and
fulfillment costs included on our consolidated
balance sheets at December 31:
Consolidated Balance Sheets 2019 2018
Deferred Acquisition Costs
Other current assets $ 2,462 $ 1,901
Other Assets 2,991 2,073
Total deferred customer contract acquisition costs $ 5,453 $ 3,974
Deferred Fulfillment Costs
Other current assets $ 4,519 $ 4,090
Other Assets 6,439 7,450
Total deferred customer contract fulfillment costs $ 10,958 $ 11,540
The following table presents amortization of deferred customer contract
acquisition and fulfillment cost, which are recorded in other cost of revenues
in our consolidated statements of income, for the year ended December 31:
Consolidated Statements of Income 2019 2018
Deferred acquisition cost amortization $ 2,174 $ 1,433
Deferred fulfillment cost amortization 4,947 4,039
Contract Assets and Liabilities
A contract asset is recorded when revenue is recognized in advance of our
right to bill and receive consideration. The contract asset will decrease as
services are provided and billed. For example, when installment sales include
promotional discounts (e.g., "buy one get one free") the difference between
revenue recognized and consideration received is recorded as a contract asset
to be amortized over the contract term.
When consideration is received in advance of the delivery of goods or
services, a contract liability is recorded for deferred revenue. Reductions in
the contract liability will be recorded as revenue as we satisfy the
performance obligations.
The following table presents contract assets and liabilities on our
consolidated balance sheets at December 31:
Consolidated Balance Sheets 2019 2018
Contract assets $ 2,472 $ 1,896
Contract liabilities 6,999 6,856
Our beginning of period contract liabilities recorded as customer contract
revenue during 2019 was $5,394.
Our consolidated balance sheets at December 31, 2019 and 2018 included
approximately $1,611 and $1,244, respectively, for the current portion of our
contract assets in "Other current assets" and $5,939 and $5,752, respectively,
for the current portion of our contract liabilities in "Advanced billings and
customer deposits."
Remaining Performance Obligations
Remaining performance obligations represent services we are required to
provide to customers under bundled or discounted arrangements, which are
satisfied as services are provided over the contract term. In determining the
transaction price allocated, we do not include nonrecurring charges and
estimates for usage, nor do we consider arrangements with an original expected
duration of less than one year, which are primarily prepaid wireless, video
and residential internet agreements.
Remaining performance obligations associated with business contracts reflect
recurring charges billed, adjusted to reflect estimates for sales incentives
and revenue adjustments. Performance obligations associated with wireless
contracts are estimated using a portfolio approach in which we review all
relevant promotional activities, calculating the remaining performance
obligation using the average service component for the portfolio and the
average device price.
As of December 31, 2019, the aggregate amount of the transaction price
allocated to remaining performance obligations was $39,245, of which we expect
to recognize approximately 60% by the end of 2020, with the balance recognized
thereafter.
2017 Results
Prior to the adoption of ASC 606 in 2018, revenue recognized from contracts
that bundle services and equipment was limited to the lesser of the amount
allocated based on the relative selling price of the equipment and service
already delivered or the consideration received from the customer for the
equipment and service already delivered. Our prior accounting also separately
recognized regulatory fees as operating revenue when received and as an
expense when incurred. Sales commissions were previously expensed as incurred.
NOTE 6. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
Time Warner On June 14, 2018, we completed our acquisition of Time Warner, a
leader in media and entertainment whose major businesses encompass an array of
some of the most respected media brands. We paid Time Warner shareholders
$36,599 in AT&T stock and $42,100 in cash. Total consideration, including
share-based payment arrangements and other adjustments, totaled $79,358,
excluding Time Warner's net debt at acquisition.
The fair values of the assets acquired and liabilities assumed were determined
using the income, cost and market approaches. The fair value measurements were
primarily based on significant inputs that are not observable in the market
and thus represent a Level 3 measurement as defined in ASC 820, "Fair Value
Measurement," other than cash and long-term debt acquired in the acquisition.
The income approach was primarily used to value the intangible assets,
consisting primarily of distribution network, released TV and film content,
in-place advertising network, trade names, and franchises. The income approach
estimates fair value for an asset based on the present value of cash flow
projected to be generated by the asset. Projected cash flow is discounted at a
required rate of return that reflects the relative risk of achieving the cash
flow and the time value of money. The cost approach, which estimates value by
determining the current cost of replacing an asset with another of equivalent
economic utility, was used, as appropriate, for plant, property and equipment.
The cost to replace a given asset reflects the estimated reproduction or
replacement cost for the property, less an allowance for loss in value due to
depreciation.
Goodwill is calculated as the difference between the acquisition date fair
value of the consideration transferred and the fair value of the net assets
acquired, and represents the future economic benefits that we expect to
achieve as a result of the acquisition.
The following table summarizes the fair values of the Time Warner assets
acquired and liabilities assumed and related
deferred income taxes as of the acquisition date:
Assets acquired
Cash $ 1,889
Accounts receivable 9,020
All other current assets 2,913
Noncurrent inventory and theatrical film and television production costs 5,591
Property, plant and equipment 4,693
Intangible assets subject to amortization
Distribution network 18,040
Released television and film content 10,806
Trademarks and trade names 18,081
Other 10,300
Investments and other assets 9,438
Goodwill 38,801
Total assets acquired 129,572
Liabilities assumed
Current liabilities, excluding current portion of long-term debt 8,294
Debt maturing within one year 4,471
Long-term debt 18,394
Other noncurrent liabilities 19,054
Total liabilities assumed 50,213
Net assets acquired 79,359
Noncontrolling interest (1)
Aggregate value of consideration paid $ 79,358
For the 200-day period ended December 31, 2018, our consolidated statement of
income included $18,209 of revenues and $1,400 of operating income, which
included $3,296 of intangible amortization, from Time Warner and its
affiliates. The following unaudited pro forma consolidated results of
operations assume that the acquisition of Time Warner was completed as of
January 1, 2017.
(Unaudited)
Year Ended
December 31,
2018 2017
Total operating revenues $ 183,651 $ 188,769
Net Income Attributable to AT&T 20,814 31,380
Basic Earnings Per Share Attributable to Common Stock $ 2.86 $ 4.30
Diluted Earnings Per Share Attributable to Common Stock $ 2.85 $ 4.26
These unaudited pro forma consolidated results reflect the adoption of ASC 606
for 2018, which is not on a comparable basis with 2017 (see Note 5). Pro forma
data may not be indicative of the results that would have been obtained had
these events occurred at the beginning of the periods presented, nor is it
intended to be a projection of future results.
Otter Media On August 7, 2018, we acquired the remaining interest in Otter
Media Holdings (Otter Media) for $157 in cash and the conversion to equity of
the $1,480 advance made in the first quarter of 2018. At acquisition, we
remeasured the fair value of the total business, which exceeded the carrying
amount of our equity method investment and resulted in a pre-tax gain of $395.
We consolidated that business upon close and recorded those assets at fair
value, including $1,239 of goodwill that is reported in the WarnerMedia
segment.
AppNexus On August 15, 2018, we purchased AppNexus for $1,432 and recorded
$1,220 of goodwill that is reported in the Xandr segment. Our investment will
allow us to create a marketplace for TV and digital video advertising.
Spectrum Auctions In December 2019, we acquired $982 of 24 GHz spectrum in
an FCC auction.
In April 2017, the FCC announced that we were the successful bidder for $910
of spectrum in 18 markets. We provided the FCC an initial deposit of $2,348 in
July 2016 and received a refund of $1,438 in April 2017, which was recorded as
cash from investing activities in our consolidated statement of cash flows. In
2018, we sold these wireless licenses at the auction price.
Dispositions
Hudson Yards In June 2019, we sold our ownership in Hudson Yards North Tower
Holdings LLC under a sale-leaseback arrangement for cash proceeds of $2,081
and recorded a loss of approximately $100 resulting from transaction costs
(primarily real estate transfer taxes).
Hulu In April 2019, we sold our ownership in Hulu for cash proceeds of
$1,430 and recorded a gain of $740.
Data Colocation Operations On December 31, 2018, we sold certain data
centers to Brookfield Infrastructure Partners for $1,100 and recorded a
pre-tax gain of $432. The sale included assets; primarily consisting of
property, plant and equipment, of $298; and goodwill of $215.
Held-for-Sale
In October 2019, we entered into an agreement to sell wireless and wireline
operations in Puerto Rico and the U.S. Virgin Islands for approximately
$1,950. We expect the transaction to close in the first half of 2020, subject
to customary closing conditions.
We applied held-for-sale treatment to the assets and liabilities of these
operations, and, accordingly, included the assets in "Other current assets,"
and the related liabilities in "Accounts payable and accrued liabilities," on
our consolidated balance sheet at December 31, 2019.
The assets and liabilities primarily consist of approximately $700 of net
property, plant and equipment; $1,100 of FCC licenses; $300 of goodwill; and
$400 of net tax liabilities.
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at December 31:
Lives (years) 2019 2018
Land - $ 2,651 $ 2,714
Buildings and improvements 2-44 38,924 38,013
Central office equipment(1) 3-10 96,061 95,173
Cable, wiring and conduit 15-50 72,042 73,397
Satellites 14-17 2,489 2,961
Other equipment 3-20 94,951 93,782
Software 3-7 22,244 19,124
Under construction - 4,176 5,526
333,538 330,690
Accumulated depreciation and amortization 203,410 199,217
Property, plant and equipment - net $ 130,128 $ 131,473
(1) Includes certain network software.
Our depreciation expense was $20,285 in 2019, $20,083 in 2018 and $19,761 in
2017. Depreciation expense included amortization of software totaling $3,313
in 2019, $3,092 in 2018 and $2,810 in 2017.
In 2017, as a result of planned fiber deployment, we recorded a noncash
pre-tax charge of $2,883 to abandon certain copper assets that we did not plan
to utilize to support network activity. Largely due to the pace at which our
customers have migrated to fiber, which exceeded previous forecasts, we
identified additional copper assets that we no longer expect will be utilized
to support future network activity. In the fourth quarter of 2019, we recorded
a noncash pre-tax charge of $1,290 to abandon these copper assets. Each of
these abandonments is considered outside the ordinary course of business.
NOTE 8. LEASES
We have operating and finance leases for certain facilities and equipment used
in our operations. As of December 31, 2019, our leases have remaining lease
terms of up to 15 years. Some of our real estate operating leases contain
renewal options that may be exercised, and some of our leases include options
to terminate the leases within one year.
Upon the adoption of ASC 842 on January 1, 2019, we recognized a right-of-use
asset for operating leases, and an operating lease liability that represents
the present value of our obligation to make payments over the lease terms. The
present value of the lease payments is calculated using the incremental
borrowing rate for operating and finance leases, which is determined using a
portfolio approach based on the rate of interest that we would have to pay to
borrow an amount equal to the lease payments on a collateralized basis over a
similar term. We use the unsecured borrowing rate and risk-adjust that rate to
approximate a collateralized rate in the currency of the lease, which is
updated on a quarterly basis for measurement of new lease obligations.
The components of lease expense are as follows:
2019
Operating lease cost $ 5,684
Finance lease cost:
Amortization of right-of-use assets $ 271
Interest on lease obligation 169
Total finance lease cost $ 440
The following tables set forth supplemental balance sheet information related
to leases at December 31, 2019:
Operating Leases
Operating lease right-of-use assets $ 24,039
Accounts payable and accrued liabilities $ 3,451
Operating lease obligation 21,804
Total operating lease obligation $ 25,255
Finance Leases
Property, plant and equipment, at cost $ 3,534
Accumulated depreciation and amortization (1,296)
Property, plant and equipment, net $ 2,238
Current portion of long-term debt $ 162
Long-term debt 1,872
Total finance lease obligation $ 2,034
Weighted-Average Remaining Lease Term
Operating leases 8.4 yrs
Finance leases 10.3 yrs
Weighted-Average Discount Rate
Operating leases 4.2 %
Finance leases 8.4 %
The following table provides the expected future minimum maturities of lease
obligations:
Operating Finance
Leases Leases
2020 $ 4,723 $ 340
2021 4,349 305
2022 4,028 289
2023 3,611 274
2024 3,078 258
Thereafter 11,366 1,649
Total lease payments 31,155 3,115
Less: imputed interest (5,900) (1,081)
Total $ 25,255 $ 2,034
NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table sets forth the changes in the carrying amounts of goodwill
by operating segment. We test goodwill for impairment at a reporting unit
level, which is deemed to be our principal operating segments or one level
below. Our Communications segment has three reporting units: Mobility,
Entertainment Group and Business Wireline. Our WarnerMedia segment has three
reporting units: Turner, Home Box Office and Warner Bros. Our Latin America
segment has two reporting units: Mexico and Vrio.
2019 2018
Balance at Jan. 1 Acquisitions Dispositions, Balance at Dec. 31 Balance at Jan. 1 Reallocation Acquisitions Dispositions, Balance at Dec. 31
currency exchange currency exchange
and other and other
Communications $ 100,551 $ - $ (317) $ 100,234 $ 39,280 $ 61,075 $ 422 $ (226) $ 100,551
WarnerMedia 40,698 - 181 40,879 - 681 40,036 (19) 40,698
Latin America 3,718 - (56) 3,662 4,234 (32) - (484) 3,718
Xandr 1,403 66 (3) 1,466 - 211 1,220 (28) 1,403
Business Solutions - - - - 45,395 (45,395) - - -
Consumer Mobility - - - - 16,540 (16,540) - - -
Total $ 146,370 $ 66 $ (195) $ 146,241 $ 105,449 $ - $ 41,678 $ (757) $ 146,370
Changes to our goodwill in 2019, primarily resulted from the held-for-sale
treatment of wireless and wireline operations in Puerto Rico and the U.S.
Virgin Islands (see Note 6) and final valuations related to our acquisitions
of Time Warner and Otter Media, as well as changes from foreign currency
translation.
The majority of our goodwill acquired in 2018 is from our acquisitions of Time
Warner, AppNexus and Otter Media. Other changes to our goodwill in 2018
include the sale of our data colocation operations, as well as changes from
foreign currency translation. With our segment realignment in 2018, we
reallocated goodwill within our reporting units.
Our other intangible assets at December 31 are summarized as follows:
2019 2018
Other Intangible Assets Weighted-Average Life Gross Carrying Amount Accumulated Amortization Currency Translation Adjustment Gross Carrying Amount Accumulated Amortization Currency Translation Adjustment
Amortized intangible assets:
Wireless licenses 24.5 years $ 2,981 $ 156 $ (243) $ - $ - $ -
Trademarks and trade names 37.3 years 18,359 853 (6) 18,371 293 (7)
Distribution network 10.0 years 18,138 2,793 - 18,040 971 -
Released television and film content 16.4 years 10,941 4,974 - 10,814 2,988 -
Customer lists and relationships 9.1 years 20,304 14,773 (281) 20,516 12,451 (314)
Other 20.4 years 11,427 1,843 (3) 11,624 907 (25)
Total 21.5 years $ 82,150 $ 25,392 $ (533) $ 79,365 $ 17,610 $ (346)
Indefinite-lived intangible assets not subject to amortization, net of
currency translation adjustment:
Licenses:
Wireless licenses $ 83,623 $ 84,442
Orbital slots 11,702 11,702
Trade names 6,067 6,274
Total $ 101,392 $ 102,418
Amortized intangible assets are definite-life assets, and, as such, we record
amortization expense based on a method that most appropriately reflects our
expected cash flows from these assets. Amortization expense for definite-life
intangible assets was $7,932 for the year ended December 31, 2019, $8,347 for
the year ended December 31, 2018 and $4,626 for the year ended December 31,
2017. Amortization expense is estimated to be $6,614 in 2020, $5,683 in 2021,
$4,961 in 2022, $4,299 in 2023 and $3,644 in 2024.
We review amortized intangible assets for impairment whenever events or
circumstances indicate that the carrying amount may not be recoverable over
the remaining life of the asset or asset group. In 2019, we recorded a $145
impairment on the SKY Brasil trade name. In 2018, we wrote off approximately
$2,892 of fully amortized trade names and $2,890 of fully amortized customer
lists.
In 2019, we began amortizing wireless licenses in Mexico over their average
remaining economic life (see Note 1). Renewal fees on these licenses are
recorded as intangible assets and amortized over the renewal term on a
straight-line basis, generally 20 years. In 2019, we recorded $1,561 of these
intangible assets, with the majority to be amortized over 20 years.
Changes to our indefinite-lived wireless licenses in 2019 were partially due
to the held-for-sale treatment of wireless and wireline operations in Puerto
Rico and the U.S. Virgin Islands (see Note 6).
NOTE 10. EQUITY METHOD INVESTMENTS
Investments in partnerships, joint ventures and less than majority-owned
subsidiaries in which we have significant influence are accounted for under
the equity method.
During the second quarter of 2019, we sold our ownership in Hudson Yards and
Hulu. (See Note 6)
In 2018, we acquired Time Warner (see Note 6), which included various equity
method investments. The difference between the fair values and the
proportional carrying amounts of these investments' net assets was $2,135 at
December 31, 2019. Of this amount, $1,397 is attributed to amortizing
intangibles, which will be amortized into earnings in our "Equity net income
(loss) of affiliates" over a weighted-average life of 19.4 years. The earnings
from these investments, subsequent to the acquisition date, are included in
the following table as well as our consolidated statements of income.
Our investments in equity affiliates at December 31, 2019 primarily include
our interests in HBO Latin America Group, Central European Media Enterprises
Ltd. and SKY Mexico.
HBO Latin America Group (HBO LAG) We hold an 88.2% interest in HBO LAG,
which owns and operates various television channels in Latin America. We do
not have the power to direct the activities that most significantly impact
this entity's economic performance, and therefore, account for this investment
under the equity method of accounting.
In October 2019, we entered into an agreement to acquire the remaining
interest in HBO LAG for $230. That agreement also included a call option for
HBO Brasil, which we have not exercised. We expect the transaction to close in
the second half of 2020, pending regulatory approval. Upon closing, we will
consolidate the HBO LAG operating results and record the assets at fair value.
Central European Media Enterprises Ltd. (CME) We hold a 65.7% interest in
CME, a broadcasting company that operates leading television networks in
Bulgaria, the Czech Republic, Romania and the Slovak Republic, as well as
develops and produces content for its television networks. We do not have the
power to direct the activities that most significantly impact this entity's
economic performance, and therefore, account for this investment under the
equity method of accounting.
In October 2019, we entered into an agreement to sell our interest in CME for
approximately $1,100. We expect the deal to close in the first half of 2020,
pending regulatory approval.
SKY Mexico We hold a 41.3% interest in SKY Mexico, which is a leading pay-TV
provider in Mexico.
The following table is a reconciliation of our investments in equity
affiliates as presented on our consolidated balance sheets:
2019 2018
Beginning of year $ 6,245 $ 1,560
Additional investments 448 237
Disposition of Hudson Yards (1,681) -
Disposition of Hulu (689) -
Disposition of Game Show Network (288) -
Time Warner investments acquired - 4,912
Acquisition of remaining interest in Otter Media - (166)
Equity in net income (loss) of affiliates 6 (48)
Dividends and distributions received (301) (243)
Currency translation adjustments (10) (14)
Other adjustments (35) 7
End of year $ 3,695 $ 6,245
NOTE 11. INVENTORIES AND THEATRICAL FILM AND TELEVISION PRODUCTION COSTS
Film and television production costs are stated at the lower of cost, less
accumulated amortization, or fair value and include the unamortized cost of
completed theatrical films and television episodes, theatrical films and
television series in production and undeveloped film and television rights.
The amount of capitalized film and television production costs recognized as
broadcast, programming and operations expenses for a given period is
determined using the film forecast computation method. As of January 1, 2019,
we reclassified $2,274 of our programming inventory costs from "Other current
assets" to "Other Assets" in connection with the adoption of ASU 2019-02 (see
Note 1).
The following table summarizes inventories and theatrical film and television
production costs as of December 31:
2019 2018
Inventories:
Programming costs, less amortization(1) $ 4,599 $ 4,097
Other inventory, primarily DVD and Blu-ray Discs 96 146
Total inventories 4,695 4,243
Less: current portion of inventory (96) (2,420)
Total noncurrent inventories 4,599 1,823
Theatrical film production costs:(2)
Released, less amortization 392 451
Completed and not released 437 435
In production 1,475 866
Development and pre-production 171 159
Television production costs:(2)
Released, less amortization 1,752 965
Completed and not released 1,344 1,087
In production 2,207 1,898
Development and pre-production 57 29
Total theatrical film and television production costs 7,835 5,890
Total noncurrent inventories and theatrical film and television production $ 12,434 $ 7,713
costs
( 1 ) Includes the costs of certain programming rights, primarily sports, for which
payments have been made prior to the related
rights being received.
(2) Does not include $5,967, and $7,826 of acquired film and television library
intangible assets as of December 31, 2019, and 2018,
respectively, which are included in "Other Intangible Assets - Net" on our
consolidated balance sheet.
Approximately 95% of unamortized film costs for released theatrical and
television content are expected to be amortized within three years from
December 31, 2019. In addition, approximately $2,195 of the film costs of
released and completed and not released theatrical and television product are
expected to be amortized during 2020.
NOTE 12. DEBT
Long-term debt of AT&T and its subsidiaries, including interest rates and
maturities, is summarized as follows
at December 31:
2019 2018
Notes and debentures
Interest Rates Maturities(1)
1.80% - 2.99% 2019 - 2039 $ 17,404 $ 14,404
3.00% - 4.99% 2019 - 2050 102,595 104,291
5.00% - 6.99% 2019 - 2095 34,513 37,175
7.00% - 9.15% 2019 - 2097 5,050 5,976
Credit agreement borrowings 4,969 12,618
Other - 89
Fair value of interest rate swaps recorded in debt 26 (32)
164,557 174,521
Unamortized (discount) premium - net (2,996) (2,526)
Unamortized issuance costs (452) (466)
Total notes and debentures 161,109 171,529
Finance lease obligations 2,034 1,911
Total long-term debt, including current maturities 163,143 173,440
Current maturities of long-term debt (11,834) (7,190)
Total long-term debt $ 151,309 $ 166,250
(1) Maturities assume putable debt is redeemed by the holders at the next
opportunity.
We had outstanding Euro, British pound sterling, Canadian dollar, Mexican
peso, Australian dollar, Brazilian real, and Swiss franc denominated debt of
approximately $42,485 and $41,356 at December 31, 2019 and 2018, respectively.
The weighted-average interest rate of our entire long-term debt portfolio,
including the impact of derivatives, remained unchanged at 4.4% at December
31, 2019 and 2018.
Current maturities of long-term debt include debt that may be put back to us
by the holders in 2020. We have $1,000 of annual put reset securities that may
be put each April until maturity in 2021. If the holders do not require us to
repurchase the securities, the interest rate will be reset based on current
market conditions. Likewise, we have 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 and partially exchanged in the 2017 debt exchange
offers) is held to maturity, the redemption amount will be $592.
Debt maturing within one year consisted of the following at December 31:
2019 2018
Current maturities of long-term debt $ 11,834 $ 7,190
Commercial paper - 3,048
Bank borrowings(1) 4 4
Other - 13
Total $ 11,838 $ 10,255
(1) Outstanding balance of short-term credit facility of a foreign subsidiary.
Financing Activities
During 2019, we received net proceeds of $17,039 on the issuance of $17,235 in
long-term debt in various markets, with an average weighted maturity of
approximately nine years and a weighted average coupon of 3.4%. We repaid
$27,440 in borrowings of various notes with a weighted average coupon of
3.5%.
In February 2020, we redeemed $2,619 of 4.600% global notes with an original
maturity in 2045 and issued $2,995 of 4.000% global notes due 2049.
Debt Exchange and Tender Offers
In June 2019, we completed exchange tender offers. In the exchange offer,
approximately $11,041 of notes issued by WarnerMedia subsidiaries with rates
between 1.950% and 9.150%, were tendered and accepted in exchange for new
series of AT&T Inc. global notes with interest rates and maturities that
were identical to the interest rates and maturities of the tendered notes, as
well as identical interest payment dates and substantially identical optional
redemption provisions. Also, in June 2019, we purchased $590 notes issued by
WarnerMedia subsidiaries.
On December 19, 2019, we purchased $1,409 of notes issued by various
subsidiaries.
As of December 31, 2019 and 2018, we were in compliance with all covenants and
conditions of instruments governing our debt. Substantially all of our
outstanding long-term debt is unsecured. Maturities of outstanding long-term
notes and debentures, as of December 31, 2019, and the corresponding
weighted-average interest rate scheduled for repayment are as follows:
2020 2021 2022 2023 2024 Thereafter
Debt repayments(1) $ 12,149 $ 11,036 $ 11,189 $ 10,037 $ 11,225 $ 112,429
Weighted-average interest rate 2.9 % 3.8 % 3.5 % 3.5 % 3.6 % 4.8 %
(1) Debt repayments assume putable debt is redeemed by the holders at the next
opportunity.
Credit Facilities
General
In December 2018, we amended our five-year revolving credit agreement (the
"Amended and Restated Credit Agreement") and concurrently entered into a new
five-year agreement (the "Five Year Credit Agreement," and, together with the
Amended and Restated Credit Agreement, the "Credit Agreements") such that we
now have two $7,500 revolving credit agreements totaling $15,000. The Amended
and Restated Credit Agreement terminates on December 11, 2021 and the Five
Year Credit Agreement terminates on December 11, 2023. No amounts were
outstanding under either agreement as of December 31, 2019.
In September 2019, we entered into and drew on a $1,300 term loan credit
agreement containing (i) a 1.25 year $400 facility due in 2020 (BAML Tranche
A Facility), (ii) a 2.25 year $400 facility due in 2021 (BAML Tranche B
Facility), and (iii) a 3.25 year $500 facility due in 2022 (BAML Tranche C
Facility), with Bank of America, N.A., as agent. No repayment had been made
under these facilities as of December 31, 2019.
Each of the Agreements contains covenants that are customary for an issuer
with an investment grade senior debt credit rating, as well as a net
debt-to-EBITDA (earnings before interest, taxes, depreciation and
amortization, and other modifications described in each agreement) financial
ratio covenant requiring AT&T to maintain, as of the last day of each
fiscal quarter, a ratio of not more than 3.5-to-1. The events of default are
customary for agreements of this type and such events would result in the
acceleration of, or would permit the lenders to accelerate, as applicable,
required payments and would increase each agreement's relevant Applicable
Margin by 2.00% per annum.
Revolving Credit Agreements
The obligations of the lenders under the Amended and Restated Credit Agreement
to provide advances will terminate on December 11, 2021, and under the Five
Year Credit Agreement to provide advances will terminate on December 11, 2023,
unless the commitments are terminated in whole prior to that date. All
advances must be repaid no later than the date on which lenders are no longer
obligated to make any advances under the applicable Credit Agreement.
Each of the Credit Agreements provides that we and lenders representing more
than 50% of the facility amount may agree to extend their commitments under
such Credit Agreement for two one-year periods beyond the initial termination
date. We have the right to terminate, in whole or in part, amounts committed
by the lenders under each of the Credit Agreements in excess of any
outstanding advances; however, any such terminated commitments may not be
reinstated.
Advances under these agreements would bear interest, at AT&T's option,
either:
· at a variable annual rate equal to: (1) the highest of (but not
less than zero) (a) the rate of interest announced publicly by Citibank in New
York, New York, from time to time, as Citibank's base rate, (b) 0.5% per annum
above the federal funds rate, and (c) the London interbank offered rate (or
the successor thereto) ("LIBOR") applicable to dollars for a period of one
month plus 1.00%, plus (2) an applicable margin, as set forth in the
applicable Credit Agreement (the "Applicable Margin for Base Advances"); or
· at a rate equal to: (i) LIBOR (adjusted upwards to reflect any
bank reserve costs) for a period of one, two, three or six months, as
applicable, plus (ii) an applicable margin, as set forth in the applicable
Credit Agreement (the "Applicable Margin for Eurodollar Rate Advances").
We pay a facility fee of 0.070%, 0.080%, 0.100% or 0.125% per annum of the
amount of the lender commitments, depending on AT&T's credit rating.
NOTE 13. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework in ASC 820 provides a
three-tiered fair value hierarchy based on the reliability of the inputs used
to determine fair value. Level 1 refers to fair values determined based on
quoted prices in active markets for identical assets. Level 2 refers to fair
values estimated using significant other observable inputs and Level 3
includes fair values estimated using significant unobservable inputs.
The 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. Our valuation techniques 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, 2018.
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:
December 31, 2019 December 31, 2018
Carrying Fair Carrying Fair
Amount Value Amount Value
Notes and debentures(1) $ 161,109 $ 182,124 $ 171,529 $ 172,287
Commercial paper - - 3,048 3,048
Bank borrowings 4 4 4 4
Investment securities(2) 3,723 3,723 3,409 3,409
(1) Includes credit agreement borrowings.
(2) Excludes investments accounted for under the equity method.
The carrying amount of debt with an original maturity of less than one year
approximates fair 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 investment securities that are
measured at fair value and derivatives as of December 31, 2019, and December
31, 2018. Derivatives designated as hedging instruments are reflected as
"Other assets," "Other noncurrent liabilities" and, for a portion of interest
rate swaps, "Other current assets" on our consolidated balance sheets.
December 31, 2019
Level 1 Level 2 Level 3 Total
Equity Securities
Domestic equities $ 844 $ - $ - $ 844
International equities 183 - - 183
Fixed income equities 229 - - 229
Available-for-Sale Debt Securities - 1,444 - 1,444
Asset Derivatives
Interest rate swaps - 2 - 2
Cross-currency swaps - 172 - 172
Interest rate locks - 11 - 11
Foreign exchange contracts - 89 - 89
Liability Derivatives
Cross-currency swaps - (3,187) - (3,187)
Interest rate locks - (95) - (95)
December 31, 2018
Level 1 Level 2 Level 3 Total
Equity Securities
Domestic equities $ 1,061 $ - $ - $ 1,061
International equities 256 - - 256
Fixed income equities 172 - - 172
Available-for-Sale Debt Securities - 870 - 870
Asset Derivatives
Cross-currency swaps - 472 - 472
Foreign exchange contracts - 87 - 87
Liability Derivatives
Interest rate swaps - (39) - (39)
Cross-currency swaps - (2,563) - (2,563)
Foreign exchange contracts - (2) - (2)
Investment Securities
Our investment securities include both equity and debt securities that are
measured at fair value, as well as equity securities without readily
determinable fair values. A substantial portion of the fair values of our
investment securities is estimated based on quoted market prices. Investments
in equity securities not traded on a national securities exchange are valued
at cost, less any impairment, and adjusted for changes resulting from
observable, orderly transactions for identical or similar securities.
Investments in debt securities not traded on a national securities exchange
are valued using pricing models, quoted prices of securities with similar
characteristics or discounted cash flows.
The components comprising total gains and losses in the period on equity
securities are as follows:
For the years ended December 31, 2019 2018 2017
Total gains (losses) recognized on equity securities $ 301 $ (130) $ 326
Gains (losses) recognized on equity securities sold 100 (10) 47
Unrealized gains (losses) recognized on equity securities held at end of $ 201 $ (120) $ 279
period
At December 31, 2019, available-for-sale debt securities totaling $1,444 have
maturities as follows - less than one year: $54; one to three years: $172;
three to five years: $161; for five or more years: $1,057.
Our cash equivalents (money market securities), short-term investments
(certificate and time deposits) and nonrefundable customer deposits are
recorded at amortized cost, and the respective carrying amounts approximate
fair values. Short-term investments and nonrefundable customer deposits are
recorded in "Other current assets" and our investment securities are recorded
in "Other Assets" on the consolidated balance sheets.
Derivative Financial Instruments
We enter into derivative transactions 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.
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.
We also designate some of our foreign exchange contracts as fair value hedges.
The purpose of these contracts is to hedge currency risk associated with
foreign-currency-denominated operating assets and liabilities.
Accrued and realized gains or losses from fair value hedges impact the same
category on the consolidated statements of income as the item being hedged.
Unrealized gains on fair value hedges are recorded at fair market value as
assets, and unrealized losses are recorded at fair market value as
liabilities. Changes in the fair value of derivative instruments designated as
fair value hedges are offset against the change in fair value of the hedged
assets or liabilities through earnings. In the year ended December 31, 2019
and 2018, no ineffectiveness was measured on 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 foreign-denominated debt.
These agreements include initial and final exchanges of principal from fixed
foreign currency denominated amounts to fixed U.S. dollar denominated amounts,
to be exchanged at a specified rate that is usually determined by the market
spot rate upon issuance. They also include an interest rate swap of a fixed or
floating foreign currency-denominated interest rate to a fixed U.S. dollar
denominated interest rate.
We also designate some of our foreign exchange contracts as cash flow hedges.
The purpose of these contracts is to hedge certain film production costs
denominated in foreign currencies.
Unrealized gains on derivatives designated as cash flow hedges are recorded at
fair value as assets, and unrealized losses are recorded at fair value as
liabilities. For derivative instruments designated as cash flow hedges, the
effective portion is reported as a component of accumulated OCI until
reclassified into the consolidated statements of income in the same period the
hedged transaction affects earnings.
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. Over the next 12 months, we
expect to reclassify $61 from accumulated OCI to interest expense due to the
amortization of net losses on historical interest rate locks.
Net Investment Hedging We have designated €1,450 million aggregate
principal amount of debt as a hedge of the variability of some of the
Euro-denominated net investments of our subsidiaries. The gain or loss on the
debt that is designated as, and is effective as, an economic hedge of the net
investment in a foreign operation is recorded as a currency translation
adjustment within accumulated OCI, net on the consolidated balance sheet. Net
gains on net investment hedges recognized in accumulated OCI for 2019 were $4.
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 December 31, 2019, we had
posted collateral of $204 (a deposit asset) and held collateral of $44 (a
receipt liability). Under the agreements, if AT&T's credit rating had been
downgraded one rating level by Fitch Ratings, before the final collateral
exchange in December, we would have been required to post additional
collateral of $35. If AT&T's credit rating had been downgraded four rating
levels by Fitch Ratings, two levels by S&P, and two levels by Moody's, we
would have been required to post additional collateral of $2,678. If DIRECTV
Holdings LLC's credit rating had been downgraded below BBB- (S&P), we
would have been required to post additional collateral of $232. At December
31, 2018, we had posted collateral of $1,675 (a deposit asset) and held
collateral of $103 (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) exists, against the fair
value of the derivative instruments.
Following are the notional amounts of our outstanding derivative positions at
December 31:
2019 2018
Interest rate swaps $ 853 $ 3,483
Cross-currency swaps 42,325 42,192
Interest rate locks 3,500 -
Foreign exchange contracts 269 2,094
Total $ 46,947 $ 47,769
Following are the related hedged items affecting our financial position and
performance:
Effect of Derivatives on the Consolidated Statements of Income
Fair Value Hedging Relationships
For the years ended December 31, 2019 2018 2017
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ 58 $ (12) $ (68)
Gain (Loss) on long-term debt (58) 12 68
The net swap settlements that accrued and settled in the periods above were
included in interest expense.
Cash Flow Hedging Relationships
For the years ended December 31, 2019 2018 2017
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI $ (1,066) $ (825) $ 571
Foreign exchange contracts:
Gain (Loss) recognized in accumulated OCI 10 51 -
Other income (expense) - net reclassified from
accumulated OCI into income 6 39 -
Interest rate locks:
Gain (Loss) recognized in accumulated OCI (84) - -
Interest income (expense) reclassified from
accumulated OCI into income (63) (58) (60)
NOTE 14. INCOME TAXES
The Tax Cuts and Jobs Acts (the Act) was enacted on December 22, 2017. The Act
reduces the U.S. federal corporate income tax rate from 35% to 21% and
required companies to pay a one-time transition tax on earnings of certain
foreign subsidiaries that were previously tax deferred. ASC 740, "Income
Taxes," requires effects of changes in tax rates to be recognized in the
period enacted. Recognizing the late enactment of the Act and complexity of
accurately accounting for its impact, the Securities and Exchange Commission
in SAB 118 provided guidance that allowed registrants to provide a reasonable
estimate of the Act in their financial statements at December 31, 2017 and
adjust the reported impact in a measurement period not to exceed one year.
In 2018, we completed our accounting for the tax effects of the enactment of
the Act and the measurement of our deferred tax assets and liabilities based
on the rates at which they were expected to reverse in the future; the total
benefit was $22,211, of which $20,271 was recorded in 2017 as a provisional
amount. The total net benefit for the year ended December 31, 2018 was $718
for all enactment date and measurement period adjustments from the Act. The
impact of the enactment of the Act is reflected in the following tables.
Significant components of our deferred tax liabilities (assets) are as follows
at December 31:
2019 2018
Depreciation and amortization $ 44,896 $ 43,105
Licenses and nonamortizable intangibles 17,355 17,561
Employee benefits (5,143) (5,366)
Deferred fulfillment costs 3,050 2,679
Net operating loss and other carryforwards (7,301) (6,470)
Other - net 1,536 1,651
Subtotal 54,393 53,160
Deferred tax assets valuation allowance 4,941 4,588
Net deferred tax liabilities $ 59,334 $ 57,748
Noncurrent deferred tax liabilities $ 59,502 $ 57,859
Less: Noncurrent deferred tax assets (168) (111)
Net deferred tax liabilities $ 59,334 $ 57,748
At December 31, 2019, we had combined net operating and capital loss
carryforwards (tax effected) for federal income tax purposes of $693, state of
$970 and foreign of $2,948, expiring through 2039. Additionally, we had
federal credit carryforwards of $664 and state credit carryforwards of $2,025,
expiring primarily through 2039.
We recognize a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion, or all, of a deferred
tax asset will not be realized. Our valuation allowances at December 31, 2019
and 2018 related primarily to state and foreign net operating losses and state
credit carryforwards.
The Company considers post-1986 unremitted foreign earnings subjected to the
one-time transition tax not to be indefinitely reinvested as such earnings can
be repatriated without any significant incremental tax costs. U.S. income and
foreign withholding taxes have not been recorded on temporary differences
related to investments in certain foreign subsidiaries as such differences are
considered indefinitely reinvested. Determination of the amount of
unrecognized deferred tax liability is not practicable.
We recognize the financial statement effects of a tax return position when it
is more likely than not, based on the technical merits, that the position will
ultimately be sustained. For tax positions that meet this recognition
threshold, we apply our judgment, taking into account applicable tax laws, our
experience in managing tax audits and relevant GAAP, to determine the amount
of tax benefits to recognize in our financial statements. For each position,
the difference between the benefit realized on our tax return and the benefit
reflected in our financial statements is recorded on our consolidated balance
sheets as an unrecognized tax benefit (UTB). We update our UTBs at each
financial statement date to reflect the impacts of audit settlements and other
resolutions of audit issues, the expiration of statutes of limitation,
developments in tax law and ongoing discussions with taxing authorities. A
reconciliation of the change in our UTB balance from January 1 to December 31
for 2019 and 2018 is as follows:
Federal, State and Foreign Tax 2019 2018
Balance at beginning of year $ 10,358 $ 7,648
Increases for tax positions related to the current year 903 336
Increases for tax positions related to prior years 1,106 2,615
Decreases for tax positions related to prior years (1,283) (394)
Lapse of statute of limitations (32) (52)
Settlements (283) (664)
Current year acquisitions 205 872
Foreign currency effects 5 (3)
Balance at end of year 10,979 10,358
Accrued interest and penalties 2,708 2,588
Gross unrecognized income tax benefits 13,687 12,946
Less: Deferred federal and state income tax benefits (886) (811)
Less: Tax attributable to timing items included above (4,320) (3,430)
Less: UTBs included above that relate to acquired - (918)
entities that would impact goodwill if recognized
Total UTB that, if recognized, would impact the $ 8,481 $ 7,787
effective income tax rate as of the end of the year
Periodically we make deposits to taxing jurisdictions which reduce our UTB
balance but are not included in the reconciliation above. The amount of
deposits that reduced our UTB balance was $2,584 at December 31, 2019 and
$2,115 at December 31, 2018.
Accrued interest and penalties included in UTBs were $2,708 as of December 31,
2019, and $2,588 as of December 31, 2018. We record interest and penalties
related to federal, state and foreign UTBs in income tax expense. The net
interest and penalty expense included in income tax expense was $267 for 2019,
$1,290 for 2018 and $107 for 2017.
We file income tax returns in the U.S. federal jurisdiction and various state,
local and foreign jurisdictions. As a large taxpayer, our income tax returns
are regularly audited by the Internal Revenue Service (IRS) and other taxing
authorities. The IRS has completed field examinations of our tax returns
through 2010. All audit periods prior to 2003 are closed for federal
examination purposes. Contested issues from our 2003 through 2010 returns are
at various stages of resolution with the IRS Appeals Division. While we do not
expect material changes, we are generally unable to estimate the range of
impacts on the balance of uncertain tax positions or the impact on the
effective tax rate from the resolution of these issues until the close of the
examination process; and it is possible that the amount of unrecognized
benefit with respect to our uncertain tax positions could increase or decrease
within the next 12 months.
The components of income tax (benefit) expense are as follows:
2019 2018 2017
Federal:
Current $ 584 $ 3,258 $ 682
Deferred 1,656 277 (17,970)
2,240 3,535 (17,288)
State and local:
Current 603 513 79
Deferred 144 473 1,041
747 986 1,120
Foreign:
Current 605 539 471
Deferred (99) (140) 989
506 399 1,460
Total $ 3,493 $ 4,920 $ (14,708)
"Income Before Income Taxes" in the Consolidated Statements of Income included
the following components for the years
ended December 31:
2019 2018 2017
U.S. income before income taxes $ 18,301 $ 25,379 $ 16,438
Foreign income (loss) before income taxes 167 (506) (1,299)
Total $ 18,468 $ 24,873 $ 15,139
A reconciliation of income tax expense (benefit) and the amount computed by
applying the statutory federal income tax rate (21% for 2019 and 2018 and 35%
for 2017) to income from continuing operations before income taxes is as
follows:
2019 2018 2017
Taxes computed at federal statutory rate $ 3,878 $ 5,223 $ 5,299
Increases (decreases) in income taxes resulting from:
State and local income taxes - net of federal income tax benefit 611 738 509
Enactment date and measurement period adjustments from the Act - (718) (20,271)
Tax on foreign investments (115) (466) 73
Noncontrolling interest (230) (121) (133)
Other - net (651) 264 (185)
Total $ 3,493 $ 4,920 $ (14,708)
Effective Tax Rate 18.9 % 19.8 % (97.2) %
NOTE 15. PENSION AND POSTRETIREMENT BENEFITS
We offer noncontributory pension programs covering the majority of domestic
nonmanagement employees in our Communications business. Nonmanagement
employees' pension benefits are generally calculated using one of two
formulas: a flat dollar amount applied to years of service according to job
classification or a cash balance plan with negotiated annual pension band
credits as well as interest credits. Most employees can elect to receive their
pension benefits in either a lump sum payment or an annuity.
Pension programs covering U.S. management employees are closed to new
entrants. These programs continue to provide benefits to participants that
were generally hired before January 1, 2015, who receive benefits under either
cash balance pension programs that include annual or monthly credits based on
salary as well as interest credits, or a traditional pension formula (i.e., a
stated percentage of employees' adjusted career income).
We also provide a variety of medical, dental and life insurance benefits to
certain retired employees under various plans and accrue actuarially
determined postretirement benefit costs as active employees earn these
benefits.
WarnerMedia and certain of its subsidiaries have both funded and unfunded
defined benefit pension plans, the substantial majority of which are
noncontributory plans covering domestic employees. WarnerMedia also sponsors
unfunded domestic postretirement benefit plans covering certain retirees and
their dependents. At acquisition, the plans were already closed to new
entrants and frozen for new accruals. In 2018, we recorded the fair value of
the WarnerMedia plans using assumptions and accounting policies consistent
with those disclosed by AT&T. Upon acquisition, the excess of projected
benefit obligation over the plan assets was recognized as a liability and
previously existing deferred actuarial gains and losses and unrecognized
service costs or benefits were eliminated.
In 2019, for certain management participants in our pension plan who
terminated employment before April 1, 2019, we offered the option of more
favorable 2018 interest rates and mortality basis for determining lump-sum
distributions. We recorded special termination benefits of $81 associated with
this offer in "Other income (expense) - net." We also committed to a plan to
offer certain terminated vested pension plan participants the opportunity to
receive their benefit in a lump-sum amount.
During the fourth quarter of 2019, we committed to plan changes impacting the
cost of postretirement health and welfare benefits, which are reflected in our
results. Future retirees will not receive health retirement subsidies but will
have access to a new cost-efficient comprehensive plan.
During 2018, we communicated and reflected in results the plan changes
involving the frequency of future health reimbursement account credit
increases, and the ability of certain participants of the pension plan to
receive their benefit in a lump-sum amount upon retirement.
Obligations and Funded Status
For defined benefit pension plans, the benefit obligation is the projected
benefit obligation, the actuarial present value, as of our December 31
measurement date, of all benefits attributed by the pension benefit formula to
employee service rendered to that date. The amount of benefit to be paid
depends on a number of future events incorporated into the pension benefit
formula, including estimates of the average life of employees and their
beneficiaries and average years of service rendered. It is measured based on
assumptions concerning future interest rates and future employee compensation
levels as applicable.
For postretirement benefit plans, the benefit obligation is the accumulated
postretirement benefit obligation, the actuarial present value as of the
measurement date of all future benefits attributed under the terms of the
postretirement benefit plan to employee service.
The following table presents the change in the projected benefit obligation
for the years ended December 31:
Pension Benefits Postretirement Benefits
2019 2018 2019 2018
Benefit obligation at beginning of year $ 55,439 $ 59,294 $ 19,378 $ 24,059
Service cost - benefits earned during the period 1,019 1,116 71 109
Interest cost on projected benefit obligation 1,960 2,092 675 778
Amendments - 50 (4,590) (1,145)
Actuarial (gain) loss 7,734 (5,046) 2,050 (2,815)
Special termination benefits 81 1 - 1
Benefits paid (6,356) (4,632) (1,543) (1,680)
Acquisitions - 2,559 - 71
Plan transfers (4) 5 - -
Benefit obligation at end of year $ 59,873 $ 55,439 $ 16,041 $ 19,378
The following table presents the change in the fair value of plan assets for
the years ended December 31 and the plans'
funded status at December 31:
Pension Benefits Postretirement Benefits
2019 2018 2019 2018
Fair value of plan assets at beginning of year $ 51,681 $ 45,463 $ 4,277 $ 5,973
Actual return on plan assets 8,207 (1,044) 609 (218)
Benefits paid(1) (6,356) (4,632) (941) (1,503)
Contributions 2 9,307 200 25
Acquisitions - 2,582 - -
Plan transfers (4) 5 - -
Fair value of plan assets at end of year 53,530 51,681 4,145 4,277
Unfunded status at end of year(2) $ (6,343) $ (3,758) $ (11,896) $ (15,101)
(1) At our discretion, certain postretirement benefits may be paid from AT&T
cash accounts, which does not reduce
Voluntary Employee Benefit Association (VEBA) assets. Future benefit
payments may be made from VEBA trusts and
thus reduce those asset balances.
(2) Funded status is not indicative of our ability to pay ongoing pension
benefits or of our obligation to fund retirement trusts.
Required pension funding is determined in accordance with the Employee
Retirement Income Security Act of 1974, as
amended (ERISA) and applicable regulations.
In 2013, we made a voluntary contribution of a preferred equity interest in
AT&T Mobility II LLC (Mobility II), the primary holding company for our
wireless business, to the trust used to pay pension benefits under certain of
our qualified pension plans. In 2018, we simplified transferability and
enhanced marketability of the preferred equity interest, which resulted in it
being recognized as a plan asset in our consolidated financial statements and
reflected a noncash contribution of $8,803 included as "Contributions" in the
above table. Since 2013, the preferred equity interest was a plan asset under
ERISA and has been recognized as such in the plan's separate financial
statements. (See Note 17)
Amounts recognized on our consolidated balance sheets at December 31 are
listed below:
Pension Benefits Postretirement Benefits
2019 2018 2019 2018
Current portion of employee benefit obligation(1) $ - $ - $ (1,365) $ (1,464)
Employee benefit obligation(2) (6,343) (3,758) (10,531) (13,637)
Net amount recognized $ (6,343) $ (3,758) $ (11,896) $ (15,101)
(1) Included in "Accounts payable and accrued liabilities."
(2) Included in "Postemployment benefit obligation."
The accumulated benefit obligation for our pension plans represents the
actuarial present value of benefits based on employee service and compensation
as of a certain date and does not include an assumption about future
compensation levels. The accumulated benefit obligation for our pension plans
was $58,150 at December 31, 2019, and $53,963 at December 31, 2018.
Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive
Income
Periodic Benefit Costs
Our combined net pension and postretirement cost (credit) recognized in our
consolidated statements of income was $2,762, $(4,251) and $155 for the years
ended December 31, 2019, 2018 and 2017.
The following table presents the components of net periodic benefit cost
(credit):
Pension Benefits Postretirement Benefits
2019 2018 2017 2019 2018 2017
Service cost - benefits earned $ 1,019 $ 1,116 $ 1,128 $ 71 $ 109 $ 138
during the period
Interest cost on projected benefit 1,960 2,092 1,936 675 778 809
obligation
Expected return on assets (3,561) (3,190) (3,134) (227) (304) (319)
Amortization of prior service credit (113) (115) (123) (1,820) (1,635) (1,466)
Actuarial (gain) loss 3,088 (812) 844 1,670 (2,290) 342
Net pension and postretirement $ 2,393 $ (909) $ 651 $ 369 $ (3,342) $ (496)
cost (credit)
Other Changes in Benefit Obligations Recognized in Other Comprehensive Income
The following table presents the after-tax changes in benefit obligations
recognized in OCI and the after-tax prior service
credits that were amortized from OCI into net periodic benefit costs:
Pension Benefits Postretirement Benefits
2019 2018 2017 2019 2018 2017
Balance at beginning of year $ 447 $ 571 $ 575 $ 6,086 $ 6,456 $ 5,089
Prior service (cost) credit - (37) (30) 3,457 864 1,120
Amortization of prior service credit (86) (87) (76) (1,372) (1,234) (907)
Total recognized in other (86) (124) (106) 2,085 (370) 213
comprehensive (income) loss
Adoption of ASU 2018-02 - - 102 - - 1,154
Balance at end of year $ 361 $ 447 $ 571 $ 8,171 $ 6,086 $ 6,456
Assumptions
In determining the projected benefit obligation and the net pension and
postretirement benefit cost, we used the following
significant weighted-average assumptions:
Pension Benefits Postretirement Benefits
2019 2018 2017 2019 2018 2017
Weighted-average discount rate for determining benefit obligation at December 3.40 % 4.50 % 3.80 % 3.20 % 4.40 % 3.70 %
31
Discount rate in effect for determining service cost(1,2) 4.10 % 4.20 % 4.60 % 4.40 % 4.30 % 4.60 %
Discount rate in effect for determining interest cost(1,2) 3.50 % 3.80 % 3.60 % 3.70 % 3.60 % 3.40 %
Weighted-average interest crediting rate for cash balance pension programs(3) 3.30 % 3.70 % 3.50 % - % - % - %
Long-term rate of return on plan assets 7.00 % 7.00 % 7.75 % 5.75 % 5.75 % 5.75 %
Composite rate of compensation increase for determining benefit obligation 3.00 % 3.00 % 3.00 % 3.00 % 3.00 % 3.00 %
Composite rate of compensation increase for determining net cost (benefit) 3.00 % 3.00 % 3.00 % 3.00 % 3.00 % 3.00 %
(1) Weighted-average discount rate for pension benefits in effect from January 1,
2019 through March 31, 2019 was 4.60% for service cost and
4.20% for interest cost, from April 1, 2019 through June 30, 2019 was 4.30%
for service cost and 3.70% for interest cost, from July 1, 2019
through September 30, 2019 was 3.90% for service cost and 3.20% for interest
cost, and, from October 1, 2019 through December 31, 2019
was 3.50% for service cost and 3.00% for interest cost.
(2) Weighted-average discount rate for postretirement benefits in effect from
January 1, 2019 through October 1, 2019 was 4.70% for service
cost and 4.00% for interest cost, and, from October 2, 2019 through December
31, 2019 was 3.40% for service cost and 2.70% for interest cost.
(3) Weighted-average interest crediting rates for cash balance pension programs
relate only to the cash balance portion of total pension benefits.
A 0.50% increase in the weighted-average interest crediting rate would
increase the pension benefit obligation by $130.
We recognize gains and losses on pension and postretirement plan assets and
obligations immediately in "Other income (expense) - net" in our consolidated
statements of income. These gains and losses are generally measured annually
as of December 31, and accordingly, will normally be recorded during the
fourth quarter, unless an earlier remeasurement is required. Should actual
experience differ from actuarial assumptions, the projected pension benefit
obligation and net pension cost and accumulated postretirement benefit
obligation and postretirement benefit cost would be affected in future years.
Discount Rate Our assumed weighted-average discount rate for pension and
postretirement benefits of 3.40% and 3.20% respectively, at December 31, 2019,
reflects the hypothetical rate at which the projected benefit obligation could
be effectively settled or paid out to participants. We determined our discount
rate based on a range of factors, including a yield curve composed of the
rates of return on several hundred high-quality, fixed income corporate bonds
available at the measurement date and corresponding to the related expected
durations of future cash outflows. These bonds were all rated at least Aa3 or
AA- by one of the nationally recognized statistical rating organizations,
denominated in U.S. dollars, and neither callable, convertible nor index
linked. For the year ended December 31, 2019, when compared to the year ended
December 31, 2018, we decreased our pension discount rate by 1.10%, resulting
in an increase in our pension plan benefit obligation of $8,018 and decreased
our postretirement discount rate by 1.20%, resulting in an increase in our
postretirement benefit obligation of $2,399. For the year ended December 31,
2018, we increased our pension discount rate by 0.70%, resulting in a decrease
in our pension plan benefit obligation of $4,394 and increased our
postretirement discount rates by 0.70%, resulting in a decrease in our
postretirement benefit obligation of $1,509.
We utilize a full yield curve approach in the estimation of the service and
interest components of net periodic benefit costs for pension and other
postretirement benefits. Under this approach, we apply discounting using
individual spot rates from a yield curve composed of the rates of return on
several hundred high-quality, fixed income corporate bonds available at the
measurement date. These spot rates align to each of the projected benefit
obligations and service cost cash flows. The service cost component relates to
the active participants in the plan, so the relevant cash flows on which to
apply the yield curve are considerably longer in duration on average than the
total projected benefit obligation cash flows, which also include benefit
payments to retirees. Interest cost is computed by multiplying each spot rate
by the corresponding discounted projected benefit obligation cash flows. The
full yield curve approach reduces any actuarial gains and losses based upon
interest rate expectations (e.g., built-in gains in interest cost in an upward
sloping yield curve scenario), or gains and losses merely resulting from the
timing and magnitude of cash outflows associated with our benefit obligations.
Neither the annual measurement of our total benefit obligations nor annual net
benefit cost is affected by the full yield curve approach.
Expected Long-Term Rate of Return In 2020, our expected long-term rate of
return is 7.00% on pension plan assets and 4.75% on postretirement plan
assets. Our expected long-term rate of return on postretirement plan assets
was adjusted to 4.75% for 2020 from 5.75% for 2019 due to a change in the
asset mix, holding more VEBA assets in cash and short-term fixed income
securities. Our long-term rates of return reflect the average rate of earnings
expected on the funds invested, or to be invested, to provide for the benefits
included in the projected benefit obligations. In setting the long-term
assumed rate of return, management considers capital markets' future
expectations, the asset mix of the plans' investment and average historical
asset return. Actual long-term returns can, in relatively stable markets, also
serve as a factor in determining future expectations. We consider many factors
that include, but are not limited to, historical returns on plan assets,
current market information on long-term returns (e.g., long-term bond rates)
and current and target asset allocations between asset categories. The target
asset allocation is determined based on consultations with external investment
advisers. If all other factors were to remain unchanged, we expect that a
0.50% decrease in the expected long-term rate of return would cause 2020
combined pension and postretirement cost to increase $273. However, any
differences in the rate and actual returns will be included with the actuarial
gain or loss recorded in the fourth quarter when our plans are remeasured.
Composite Rate of Compensation Increase Our expected composite rate of
compensation increase cost of 3.00% in 2019 and 2018 reflects the long-term
average rate of salary increases.
Mortality Tables At December 31, 2019, we updated our assumed mortality rates
to reflect our best estimate of future mortality, which decreased our pension
obligation by $147 and our postretirement obligations by $4. At December 31,
2018, we updated our assumed mortality rates, which decreased our pension
obligation by $488 and our postretirement obligations by $61.
Healthcare Cost Trend Our healthcare cost trend assumptions are developed
based on historical cost data, the near-term outlook and an assessment of
likely long-term trends. Based on historical experience, updated expectations
of healthcare industry inflation and recent prescription drug cost
experience, our 2020 assumed annual healthcare prescription drug cost trend
and medical cost trend for eligible participants will decrease from an annual
and ultimate trend rate of 4.50% to an annual and ultimate trend rate of
4.00%. This change in assumption decreased our obligation by $102. In addition
to the healthcare cost trend, we assumed an annual 2.50% growth in
administrative expenses and an annual 3.00% growth in dental claims.
Plan Assets
Plan assets consist primarily of private and public equity, government and
corporate bonds, and real assets (real estate and natural resources). The
asset allocations of the pension plans are maintained to meet ERISA
requirements. Any plan contributions, as determined by ERISA regulations, are
made to a pension trust for the benefit of plan participants. We do not have
significant ERISA required contributions to our pension plans for 2020.
We maintain VEBA trusts to partially fund postretirement benefits; however,
there are no ERISA or regulatory requirements that these postretirement
benefit plans be funded annually. We made a discretionary contribution of $200
to our postretirement plan in December 2019.
The principal investment objectives are to ensure the availability of funds to
pay pension and postretirement benefits as they become due under a broad range
of future economic scenarios, maximize long-term investment return with an
acceptable level of risk based on our pension and postretirement obligations,
and diversify broadly across and within the capital markets to insulate asset
values against adverse experience in any one market. Each asset class has
broadly diversified characteristics. Substantial biases toward any particular
investing style or type of security are sought to be avoided by managing the
aggregation of all accounts with portfolio benchmarks. Asset and benefit
obligation forecasting studies are conducted periodically, generally every two
to three years, or when significant changes have occurred in market
conditions, benefits, participant demographics or funded status. Decisions
regarding investment policy are made with an understanding of the effect of
asset allocation on funded status, future contributions and projected
expenses.
The plans' weighted-average asset targets and actual allocations as a
percentage of plan assets, including the notional
exposure of future contracts by asset categories at December 31, are as
follows:
Pension Assets Postretirement (VEBA) Assets
Target 2019 2018 Target 2019 2018
Equity securities:
Domestic 15 % - 25 % 17 % 16 % 15 % - 25 % 20 % 25 %
International 7 % - 17 % 12 12 8 % - 18 % 12 18
Fixed income securities 29 % - 39 % 35 37 47 % - 57 % 52 39
Real assets 4 % - 14 % 9 9 - % - 6 % 1 1
Private equity 2 % - 12 % 8 8 - % - 7 % 2 2
Preferred interest 13 % - 23 % 17 18 - % - - % - -
Other - % - 5 % 2 - 9 % - 19 % 13 15
Total 100 % 100 % 100 % 100 %
At December 31, 2019, AT&T securities represented 17% of assets held by
our pension trust, including preferred interest in Mobility II, and 3% of
assets (primarily common stock) held by our VEBA trusts included in these
financial statements.
Investment Valuation
Investments are stated at fair value. Fair value is the price that would be
received to sell an asset or paid to transfer a liability at the measurement
date.
Investments in securities traded on a national securities exchange are valued
at the last reported sales price on the final business day of the year. If no
sale was reported on that date, they are valued at the last reported bid
price. 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. Shares of registered investment
companies are valued based on quoted market prices, which represent the net
asset value of shares held at year-end.
Other commingled investment entities are valued at quoted redemption values
that represent the net asset values of units held at year-end which management
has determined approximates fair value.
Real estate and natural resource direct investments are valued at amounts
based upon appraisal reports. Fixed income securities valuation is based upon
observable prices for comparable assets, broker/dealer quotes (spreads or
prices), or a pricing matrix that derives spreads for each bond based on
external market data, including the current credit rating for the bonds,
credit spreads to Treasuries for each credit rating, sector add-ons or
credits, issue-specific add-ons or credits as well as call or other options.
The preferred interest is valued using an income approach by an independent
fiduciary.
Purchases and sales of securities are recorded as of the trade date. Realized
gains and losses on sales of securities are determined on the basis of average
cost. Interest income is recognized on the accrual basis. Dividend income is
recognized on the ex-dividend date.
Non-interest bearing cash and overdrafts are valued at cost, which
approximates fair value.
Fair Value Measurements
See Note 13 for a discussion of fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value.
The following tables set forth by level, within the fair value hierarchy, the
pension and postretirement assets and liabilities at fair value as of December
31, 2019:
Pension Assets and Liabilities at Fair Value as of December 31, 2019
Level 1 Level 2 Level 3 Total
Non-interest bearing cash $ 85 $ - $ - $ 85
Interest bearing cash 529 - - 529
Foreign currency contracts - 5 - 5
Equity securities:
Domestic equities 8,068 - 4 8,072
International equities 3,929 11 6 3,946
Preferred interest - - 8,806 8,806
Fixed income securities:
Corporate bonds and other investments - 10,469 4 10,473
Government and municipal bonds 49 6,123 - 6,172
Mortgage-backed securities - 522 2 524
Real estate and real assets - - 2,817 2,817
Securities lending collateral 103 1,658 - 1,761
Receivable for variation margin 5 - - 5
Assets at fair value 12,768 18,788 11,639 43,195
Investments sold short and other liabilities at fair value (513) (2) - (515)
Total plan net assets at fair value $ 12,255 $ 18,786 $ 11,639 $ 42,680
Assets held at net asset value practical expedient
Private equity funds 4,544
Real estate funds 2,062
Commingled funds 5,710
Total assets held at net asset value practical expedient 12,316
Other assets (liabilities)(1) (1,466)
Total Plan Net Assets $ 53,530
(1) Other assets (liabilities) include amounts receivable, accounts payable and
net adjustment for securities lending payable.
Postretirement Assets and Liabilities at Fair Value as of December 31, 2019
Level 1 Level 2 Level 3 Total
Interest bearing cash $ 248 $ 301 $ - $ 549
Equity securities:
Domestic equities 438 - - 438
International equities 265 - - 265
Fixed income securities:
Corporate bonds and other investments 7 492 31 530
Government and municipal bonds 6 182 1 189
Mortgage-backed securities - 294 - 294
Securities lending collateral - 36 - 36
Assets at fair value 964 1,305 32 2,301
Securities lending payable and other liabilities - (36) - (36)
Total plan net assets at fair value $ 964 $ 1,269 $ 32 $ 2,265
Assets held at net asset value practical expedient
Private equity funds 66
Real estate funds 27
Commingled funds 1,797
Total assets held at net asset value practical expedient 1,890
Other assets (liabilities)(1) (10)
Total Plan Net Assets $ 4,145
(1) Other assets (liabilities) include amounts receivable and accounts payable.
The tables below set forth a summary of changes in the fair value of the Level
3 pension and postretirement assets for the
year ended December 31, 2019:
Pension Assets Equities Fixed Income Funds Real Estate and Real Assets Total
Balance at beginning of year $ 8,750 $ 4 $ 2,579 $ 11,333
Realized gains (losses) - - 64 64
Unrealized gains (losses) 58 - 45 103
Transfers in 8 5 134 147
Transfers out - (6) - (6)
Purchases - 7 228 235
Sales - (4) (233) (237)
Balance at end of year $ 8,816 $ 6 $ 2,817 $ 11,639
Postretirement Assets Equities Fixed Income Funds Real Estate and Real Assets Total
Balance at beginning of year $ 1 $ 12 $ - $ 13
Transfers in - 28 - 28
Transfers out - (1) - (1)
Sales (1) (7) - (8)
Balance at end of year $ - $ 32 $ - $ 32
The following tables set forth by level, within the fair value hierarchy, the
pension and postretirement assets and liabilities at fair value as of December
31, 2018:
Pension Assets and Liabilities at Fair Value as of December 31, 2018
Level 1 Level 2 Level 3 Total
Non-interest bearing cash $ 52 $ - $ - $ 52
Interest bearing cash 167 41 - 208
Foreign currency contracts - 5 - 5
Equity securities:
Domestic equities 6,912 - 1 6,913
International equities 3,594 8 - 3,602
Preferred interest - - 8,749 8,749
Fixed income securities:
Corporate bonds and other investments - 10,719 4 10,723
Government and municipal bonds 51 6,170 - 6,221
Mortgage-backed securities - 382 - 382
Real estate and real assets - - 2,579 2,579
Securities lending collateral 12 1,466 - 1,478
Purchased options, futures, and swaps - 3 - 3
Receivable for variation margin 19 - - 19
Assets at fair value 10,807 18,794 11,333 40,934
Investments sold short and other liabilities at fair value (657) (6) - (663)
Total plan net assets at fair value $ 10,150 $ 18,788 $ 11,333 $ 40,271
Assets held at net asset value practical expedient
Private equity funds 4,384
Real estate funds 2,162
Commingled funds 5,740
Total assets held at net asset value practical expedient 12,286
Other assets (liabilities)(1) (876)
Total Plan Net Assets $ 51,681
(1) Other assets (liabilities) include amounts receivable, accounts payable and
net adjustment for securities lending payable.
Postretirement Assets and Liabilities at Fair Value as of December 31, 2018
Level 1 Level 2 Level 3 Total
Interest bearing cash $ 45 $ 624 $ - $ 669
Equity securities:
Domestic equities 745 8 - 753
International equities 541 - 1 542
Fixed income securities:
Corporate bonds and other investments 7 602 11 620
Government and municipal bonds 2 377 1 380
Mortgage-backed securities - 283 - 283
Securities lending collateral - 63 - 63
Assets at fair value 1,340 1,957 13 3,310
Securities lending payable and other liabilities - (74) - (74)
Total plan net assets at fair value $ 1,340 $ 1,883 $ 13 $ 3,236
Assets held at net asset value practical expedient
Private equity funds 79
Real estate funds 36
Commingled funds 973
Total assets held at net asset value practical expedient 1,088
Other assets (liabilities)(1) (47)
Total Plan Net Assets $ 4,277
(1) Other assets (liabilities) include amounts receivable and accounts payable.
The tables below set forth a summary of changes in the fair value of the Level
3 pension and postretirement assets for the
year ended December 31, 2018:
Pension Assets Equities Fixed Income Funds Real Estate and Real Assets Total
Balance at beginning of year $ 4 $ 2 $ 2,287 $ 2,293
Realized gains (losses) - - 120 120
Unrealized gains (losses) (408) (1) 170 (239)
Transfers in 9,158 1 266 9,425
Transfers out (4) (1) - (5)
Purchases - 8 85 93
Sales - (5) (349) (354)
Balance at end of year $ 8,750 $ 4 $ 2,579 $ 11,333
Postretirement Assets Equities Fixed Income Funds Real Estate and Real Assets Total
Balance at beginning of year $ - $ 5 $ - $ 5
Transfers in 1 8 - 9
Transfers out - (1) - (1)
Purchases - 1 - 1
Sales - (1) - (1)
Balance at end of year $ 1 $ 12 $ - $ 13
Estimated Future Benefit Payments
Expected benefit payments are estimated using the same assumptions used in
determining our benefit obligation at December 31, 2019. Because benefit
payments will depend on future employment and compensation levels; average
years employed; average life spans; and payment elections, among other
factors, changes in any of these assumptions could significantly affect these
expected amounts. The following table provides expected benefit payments under
our pension and postretirement plans:
Pension Benefits Postretirement Benefits
2020 $ 5,540 $ 1,539
2021 4,471 1,441
2022 4,362 1,343
2023 4,272 1,258
2024 4,174 1,015
Years 2025 - 2029 19,965 4,307
Supplemental Retirement Plans
We also provide certain senior- and middle-management employees with
nonqualified, unfunded supplemental retirement and savings plans. While these
plans are unfunded, we have assets in a designated non-bankruptcy remote trust
that are independently managed and used to provide for certain of these
benefits. These plans include supplemental pension benefits as well as
compensation-deferral plans, some of which include a corresponding match by us
based on a percentage of the compensation deferral. For our supplemental
retirement plans, the projected benefit obligation was $2,605 and the net
supplemental retirement pension cost was $438 at and for the year ended
December 31, 2019. The projected benefit obligation was $2,397 and the net
supplemental retirement pension credit was $53 at and for the year ended
December 31, 2018.
We use the same significant assumptions for the composite rate of compensation
increase in determining our projected benefit obligation and the net pension
and postemployment benefit cost. Our discount rates of 3.20% at December 31,
2019 and 4.40% at December 31, 2018 were calculated using the same
methodologies used in calculating the discount rate for our qualified pension
and postretirement benefit plans.
Deferred compensation expense was $199 in 2019, $128 in 2018 and $138 in 2017.
Contributory Savings Plans
We maintain contributory savings plans that cover substantially all employees.
Under the savings plans, we match in cash or company stock a stated percentage
of eligible employee contributions, subject to a specified ceiling. There are
no debt-financed shares held by the Employee Stock Ownership Plans, allocated
or unallocated.
Our match of employee contributions to the savings plans is fulfilled with
purchases of our stock on the open market or company cash. Benefit cost, which
is based on the cost of shares or units allocated to participating employees'
accounts or the cash contributed to participant accounts, was $793, $724 and
$703 for the years ended December 31, 2019, 2018 and 2017.
NOTE 16. SHARE-BASED PAYMENTS
Under our various plans, senior and other management employees and nonemployee
directors have received nonvested stock and stock units. In conjunction with
the acquisition of Time Warner, restricted stock units issued under Time
Warner plans were converted to AT&T share units that will be distributed
in the form of AT&T common stock and cash. The shares will vest over a
period of one to four years in accordance with the terms of those plans. In
addition, outstanding Time Warner stock options were converted to AT&T
stock options that vested within one year. We do not intend to issue any
additional grants under the Time Warner Inc. plans. Future grants to eligible
employees will be issued under AT&T plans.
We grant performance stock units, which are nonvested stock units, based upon
our stock price at the date of grant and award them in the form of AT&T
common stock and cash at the end of a three-year period, subject to the
achievement of certain performance goals. We treat the cash settled portion of
these awards as a liability. We grant forfeitable restricted stock and stock
units, which are valued at the market price of our common stock at the date of
grant and predominantly vest over a four- or five-year period. We also grant
other nonvested stock units and award them in cash at the end of a three-year
period, subject to the achievement of certain market based conditions. As of
December 31, 2019, we were authorized to issue up to approximately 293 million
shares of common stock (in addition to shares that may be issued upon exercise
of outstanding options or upon vesting of performance stock units or other
nonvested stock units) to officers, employees and directors pursuant to these
various plans.
We account for our share-based payment arrangements based on the fair value of
the awards on their respective grant date, which may affect our ability to
fully realize the value shown on our consolidated balance sheets of deferred
tax assets associated with compensation expense. We record a valuation
allowance when our future taxable income is not expected to be sufficient to
recover the asset. Accordingly, there can be no assurance that the current
stock price of our common shares will rise to levels sufficient to realize the
entire tax benefit currently reflected on our consolidated balance sheets.
However, to the extent we generate excess tax benefits (i.e., those additional
tax benefits in excess of the deferred taxes associated with compensation
expense previously recognized) the potential future impact on income would be
reduced.
Our consolidated statements of income include the compensation cost recognized
for those plans as operating expenses, as
well as the associated tax benefits, which are reflected in the table below:
2019 2018 2017
Performance stock units $ 544 $ 301 $ 395
Restricted stock and stock units 273 153 90
Other nonvested stock units 7 4 (5)
Stock options (5) 5 -
Total $ 819 $ 463 $ 480
Income tax benefit $ 202 $ 114 $ 184
A summary of the status of our nonvested stock units as of December 31, 2019,
and changes during the year then ended is
presented as follows (shares in millions):
Nonvested Stock Units Shares Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2019 39 $ 38.44
Granted 27 31.18
Vested (21) 39.03
Forfeited (3) 34.26
Nonvested at December 31, 2019 42 $ 33.80
As of December 31, 2019, there was $693 of total unrecognized compensation
cost related to nonvested share-based payment arrangements granted. That cost
is expected to be recognized over a weighted-average period of 2.21 years. The
total fair value of shares vested during the year was $798 for 2019, compared
to $766 for 2018 and $473 for 2017.
It is our intent to satisfy share option exercises using our treasury stock.
Cash received from stock option exercises was $446 for 2019, $361 for 2018 and
$33 for 2017.
NOTE 17. STOCKHOLDERS' EQUITY
Authorized Shares We have authorized 14 billion common shares of AT&T
stock and 10 million preferred shares of AT&T stock, each with a par value
of $1.00 per share. At December 31, 2019, there were 48 thousand shares of
Series A perpetual preferred stock, with a $25,000 per share liquidation
preference, outstanding. There were no preferred shares outstanding at
December 31, 2018. In February 2020, we issued 20 thousand shares of Series B
cumulative perpetual preferred stock, with a €100,000 per share liquidation
preference, and an initial rate of 2.875%, subject to reset beginning after
five years. We also issued 70 thousand shares of Series C, 4.75% cumulative
perpetual preferred stock with a $25,000 per share liquidation preference.
So long as the quarterly preferred dividends are declared and paid on a timely
basis on each series of preferred shares, there are no limitations on our
ability to declare a dividend on or repurchase AT&T common shares. The
preferred shares are optionally redeemable by AT&T at the liquidation
price on or after five years from the issuance date, or upon certain other
contingent events.
Stock Repurchase Program From time to time, we repurchase shares of common
stock for distribution through our employee benefit plans or in connection
with certain acquisitions. Our Board of Directors has approved the following
authorizations to repurchase common stock: (1) March 2013 authorization
program of 300 million shares, with 19 million outstanding at December 31,
2019 and (2) March 2014 authorization program for an additional 300 million
shares, with all 300 million outstanding at December 31, 2019.
To implement these authorizations, we used open market repurchase programs,
relying on Rule 10b5-1 of the Securities Exchange Act of 1934, where feasible.
We also use accelerated share repurchase programs with large financial
institutions to repurchase our stock. During 2019, we repurchased
approximately 56 million shares totaling $2,135 under the March 2013
authorization.
Dividend Declarations In December 2019, AT&T declared a quarterly
preferred dividend of $8 and an increase in its quarterly common dividend to
$0.52 per share of common stock. In December 2018, AT&T declared an
increase in its quarterly common dividend to $0.51 per share of common stock.
Preferred Interests Issued by Subsidiaries We have issued cumulative perpetual
preferred membership interests in certain subsidiaries. The preferred
interests are entitled to cash distributions, subject to declaration. The
preferred interests are included in "Noncontrolling interest" on the
consolidated balance sheets.
Mobility II
We have issued 320 million Series A Cumulative Perpetual Preferred Membership
Interests in Mobility II (Mobility preferred interests), representing all
currently outstanding Mobility preferred equity interests, which pay cash
distributions of $560 per annum, subject to declaration. So long as the
distributions are declared and paid, the terms of the Mobility preferred
equity interests will not impose any limitations on cash movements between
affiliates, or our ability to declare a dividend on or repurchase AT&T
shares.
A holder of the Mobility preferred interests may put the interests to Mobility
II on or after the earliest of certain events or September 9, 2020. Mobility
II may redeem the interests upon a change in control of Mobility II or on or
after September 9, 2022. When either options arise due to a passage of time,
that option may be exercised only during certain periods.
The price at which a put option or a redemption option can be exercised is the
greater of (1) the market value of the interests as of the last date of the
quarter preceding the date of the exercise of a put or redemption option and
(2) the sum of (a) twenty-five dollars ($8,000 in the aggregate) plus (b) any
accrued and unpaid distributions. The redemption price may be paid with cash,
AT&T common stock, or a combination of cash and AT&T common stock, at
Mobility II's sole election. In no event shall Mobility II be required to
deliver more than 250 million shares of AT&T common stock to settle put
and redemption options. We have the intent and ability to settle the Mobility
preferred equity interests with cash. The preferred interests are included in
"Noncontrolling interest" on the consolidated balance sheets.
Tower Holdings
In 2019, we issued $6,000 nonconvertible cumulative preferred interests in a
wireless subsidiary (Tower Holdings) that holds interests in various tower
assets and have the right to receive approximately $6,000 if the purchase
options from the tower companies are exercised.
The membership interests in Tower Holdings consist of (1) common interests,
which are held by a consolidated subsidiary of AT&T, and (2) two series of
preferred interests (collectively the "Tower preferred interests"). The
September series (Class A-1) of the preferred interests totals $1,500 and pays
an initial preferred distribution of 5.0%, and the December series (Class A-2)
totals $4,500 and pays an initial preferred distribution of 4.75%.
Distributions are paid quarterly, subject to declaration, and reset every five
years. Any failure to declare or pay distributions on the Tower preferred
interests would not impose any limitation on cash movements between
affiliates, or our ability to declare a dividend on or repurchase AT&T
shares. We can call the Tower preferred interests at the issue price beginning
five years from the issuance date or upon the receipt of proceeds from the
sale of the underlying assets.
The holders of the Tower preferred interests have the option to require
redemption upon the occurrence of certain contingent events, such as the
failure of AT&T to pay the preferred distribution for two or more periods
or to meet certain other requirements, including a minimum credit rating. If
notice is given upon such an event, all other holders of equal or more
subordinate classes of membership interests in Tower Holdings are entitled to
receive the same form of consideration payable to the holders of the preferred
interests, resulting in a deemed liquidation for accounting purposes. The
preferred interests are included in "Noncontrolling interest" on the
consolidated balance sheets.
PR Holdings
In December 2019, we issued $1,950 nonconvertible cumulative preferred
interests in a subsidiary (PR Holdings) that holds notes secured by the
proceeds from the agreement to sell wireless and wireline operations in Puerto
Rico and the U.S. Virgin Islands. (See Note 6)
The membership interests in PR Holdings consist of (1) common interests, which
are held by consolidated subsidiaries of AT&T, and (2) preferred interests
(PR preferred interests). The PR preferred interests pay an initial preferred
distribution at an annual rate of 4.75%. Distributions are paid quarterly,
subject to declaration, and reset every five years. Any failure to declare or
pay distributions on the PR preferred interests would not impose any
limitation on cash movements between affiliates, or our ability to declare a
dividend on or repurchase AT&T shares. We can call the PR preferred
interests at the issue price beginning five years from the issuance date or
upon the closing or termination of the sale of the underlying assets.
The holders of the PR preferred interests have the option to require
redemption upon the occurrence of certain contingent events, such as the
failure of AT&T to pay the preferred distribution for two or more periods
or to meet certain other requirements, including a minimum AT&T credit
rating. If notice is given upon such an event, all other holders of equal or
more subordinate classes of membership interests in PR Holdings are entitled
to receive the same form of consideration payable to the holders of the
preferred interests, resulting in a deemed liquidation for accounting
purposes. The preferred interests are included in "Noncontrolling interest" on
the consolidated balance sheets.
NOTE 18. SALES OF RECEIVABLES
We have agreements with various third-party financial institutions pertaining
to the sales of certain types of our accounts receivable. The most significant
of these programs are discussed in detail below and generally consist of (1)
receivables arising from equipment installment plans, which are sold for cash
and a deferred purchase price, and (2) receivables related to our WarnerMedia
business. Under these programs, we transfer receivables to purchasers in
exchange for cash and additional consideration upon settlement of the
receivables, where applicable. Under the terms of our agreements for these
programs, we continue to bill and collect the payments from our customers on
behalf of the financial institutions.
The sales of receivables did not have a material impact on our consolidated
statements of income or to "Total Assets" reported on our consolidated balance
sheets. We reflect cash receipts on sold receivables as cash flows from
operations in our consolidated statements of cash flows. Cash receipts on the
deferred purchase price are classified as cash flows from investing
activities.
Our equipment installment and WarnerMedia programs are discussed in detail
below. The following table sets forth a
summary of the receivables and accounts being serviced at December 31:
2019 2018
Equipment Equipment
Installment WarnerMedia Installment WarnerMedia
Gross receivables: $ 4,576 $ 3,324 $ 5,994 $ -
Balance sheet classification
Accounts receivable
Notes receivable 2,467 - 3,457 -
Trade receivables 477 2,809 438 -
Other Assets
Noncurrent notes and trade receivables 1,632 515 2,099 -
Outstanding portfolio of receivables derecognized from
our consolidated balance sheets 9,713 4,300 9,065 -
Cash proceeds received, net of remittances(1) 7,211 4,300 6,508 -
(1) Represents amounts to which financial institutions remain entitled, excluding
the deferred purchase price.
Equipment Installment Receivables
We offer our customers the option to purchase certain wireless devices in
installments over a specified period of time and, in many cases, once certain
conditions are met, they may be eligible to trade in the original equipment
for a new device and have the remaining unpaid balance paid or settled.
We maintain a program under which we transfer a portion of these receivables
in exchange for cash and additional consideration upon settlement of the
receivables, referred to as the deferred purchase price. In the event a
customer trades in a device prior to the end of the installment contract
period, we agree to make a payment to the financial institutions equal to any
outstanding remaining installment receivable balance. Accordingly, we record a
guarantee obligation for this estimated amount at the time the receivables are
transferred.
The following table sets forth a summary of equipment installment receivables
sold:
2019 2018 2017
Gross receivables sold $ 9,921 $ 9,391 $ 8,058
Net receivables sold(1) 9,483 8,871 7,388
Cash proceeds received 8,189 7,488 5,623
Deferred purchase price recorded 1,451 1,578 2,077
Guarantee obligation recorded 341 361 215
(1) Receivables net of allowance, imputed interest and equipment trade-in right
guarantees.
The deferred purchase price and guarantee obligation are initially recorded at
estimated fair value and subsequently carried at the lower of cost or net
realizable value. The estimation of their fair values is based on remaining
installment payments expected to be collected and the expected timing and
value of device trade-ins. The estimated value of the device trade-ins
considers prices offered to us by independent third parties that contemplate
changes in value after the launch of a device model. The fair value
measurements used for the deferred purchase price and the guarantee obligation
are considered Level 3 under the Fair Value Measurement and Disclosure
framework (see Note 13).
The following table presents the previously transferred equipment installment
receivables, which we repurchased in exchange
for the associated deferred purchase price:
2019 2018 2017
Fair value of repurchased receivables $ 1,418 $ 1,480 $ 1,699
Carrying value of deferred purchase price 1,350 1,393 1,524
Gain on repurchases(1) $ 68 $ 87 $ 175
(1) These gains are included in "Selling, general and administrative" in the
consolidated statements of income.
At December 31, 2019 and December 31, 2018, our deferred purchase price
receivable was $2,336 and $2,370, respectively, of which $1,569 and $1,448 are
included in "Other current assets" on our consolidated balance sheets, with
the remainder in "Other Assets." The guarantee obligation at December 31, 2019
and December 31, 2018 was $384 and $439, respectively, of which $148 and $196
are included in "Accounts payable and accrued liabilities" on our consolidated
balance sheets, with the remainder in "Other noncurrent liabilities." Our
maximum exposure to loss as a result of selling these equipment installment
receivables is limited to the total amount of our deferred purchase price and
guarantee obligation.
WarnerMedia Receivables
In 2019, we entered into a revolving agreement to transfer up to $4,300 of
certain receivables from our WarnerMedia business to various financial
institutions on a recurring basis in exchange for cash equal to the gross
receivables transferred. As customers pay their balances, we transfer
additional receivables into the program, resulting in our gross receivables
sold exceeding net cash flow impacts (e.g., collect and reinvest). The
transferred receivables are fully guaranteed by our bankruptcy-remote
subsidiary, which holds additional receivables in the amount of $3,324 that
are pledged as collateral under this agreement. The transfers are recorded at
fair value of the proceeds received and obligations assumed less derecognized
receivables. Our maximum exposure to loss related to selling these receivables
is limited to the amount outstanding.
The following table sets forth a summary of WarnerMedia receivables sold:
2019 2018 2017
Gross receivables sold/cash proceeds received(1) $ 11,989 $ - $ -
Collections reinvested under revolving agreement 7,689 - -
Net cash proceeds received (remitted) $ 4,300 $ - $ -
Net receivables sold(2) $ 11,604 $ - $ -
Obligations recorded 530 - -
(1) Includes initial sale of receivables of $4,300 for the year ended December 31,
2019.
(2) Receivables net of allowance, return and incentive reserves and imputed
interest.
NOTE 19. TOWER TRANSACTION
In December 2013, we closed our transaction with Crown Castle International
Corp. (Crown Castle) in which Crown Castle gained the exclusive rights to
lease and operate 9,048 wireless towers and purchased 627 of our wireless
towers for $4,827 in cash. The leases have various terms with an average
length of approximately 28 years. As the leases expire, Crown Castle will have
fixed price purchase options for these towers totaling approximately $4,200,
based on their estimated fair market values at the end of the lease terms. We
sublease space on the towers from Crown Castle for an initial term of ten
years at current market rates, subject to optional renewals in the future.
We determined that we did not transfer control of the tower assets, which
prevented us from achieving sale-leaseback accounting for the transaction, and
we accounted for the cash proceeds from Crown Castle as a financing obligation
on our consolidated balance sheets. We record interest on the financing
obligation using the effective interest method at a rate of approximately
3.9%. The financing obligation is increased by interest expense and estimated
future net cash flows generated and retained by Crown Castle from operation of
the tower sites, and reduced by our contractual payments. We continue to
include the tower assets in "Property, plant and equipment" on our
consolidated balance sheets and depreciate them accordingly. At December 31,
2019 and 2018, the tower assets had a balance of $804 and $843, respectively.
Our depreciation expense for these assets was $39 for each of 2019, 2018 and
2017.
Payments made to Crown Castle under this arrangement were $244 for 2019. At
December 31, 2019, the future minimum payments under the sublease arrangement
are $248 for 2020, $253 for 2021, $258 for 2022, $264 for 2023, $269 for 2024
and $1,427 thereafter.
NOTE 20. FIRSTNET
In March 2017, the First Responder Network Authority (FirstNet) announced its
selection of AT&T to build and manage the first nationwide broadband
network dedicated to America's first responders. All 56 jurisdictions,
including 50 states, the District of Columbia and five U.S. territories,
elected to participate in the network. Under the awarded 25-year agreement,
FirstNet provided 20 MHz of valuable telecommunications spectrum and will
provide success-based payments of $6,500 over the first five years to support
network buildout. The spectrum provides priority use to first responders,
which are included as wireless subscribers and contribute to our wireless
revenues. As allowed under the agreement, excess capacity on the spectrum is
used for any of AT&T's subscriber base.
Under the agreement, we are required to construct a network that achieves
coverage and nationwide interoperability requirements. We have a contractual
commitment to make sustainability payments of $18,000 over the 25-year
contract. These sustainability payments represent our commitment to fund
FirstNet's operating expenses and future reinvestments in the network which we
will own and operate. FirstNet has a statutory requirement to reinvest funds
that exceed the agency's operating expenses, which are anticipated to be in
the $75-$100 range annually, and when including increases for inflation, we
expect to be in the $3,000 or less range over the life of the 25-year
contract. Being subject to federal acquisition rules, FirstNet is prohibited
from contractually committing to a specific vendor for future network
reinvestment. However, it is highly probable that AT&T will receive
substantially all of the funds reinvested into the network since AT&T owns
and operates the infrastructure and has exclusive rights to use the spectrum
as all states have opted in. After FirstNet's operating expenses are paid, we
anticipate that the remaining amount, expected to be in the $15,000 range,
will be reinvested into the network.
As of December 31, 2019, we have submitted $360 in sustainability payments,
with future payments under the agreement of $120 for 2020 and 2021; $195 for
2022, 2023 and 2024; and $16,815 thereafter. Amounts paid to FirstNet which
are not expected to be returned to AT&T to be reinvested into our network
will be expensed in the period paid. In the event FirstNet does not reinvest
any funds to construct, operate, improve and maintain this network, our
maximum exposure to loss is the total amount of the sustainability payments,
which would be reflected in higher expense.
The $6,500 of initial funding from FirstNet is contingent on the achievement
of six operating capability milestones and certain first responder subscriber
adoption targets. These milestones are based on coverage objectives of the
first responder network during the construction period, which is expected to
be over five years, and subscriber adoption targets. Funding payments to be
received from FirstNet are reflected as a reduction from the costs capitalized
in the construction of the network and, as appropriate, a reduction of
associated operating expenses.
As of December 31, 2019, we have completed certain task orders related to the
construction of the network and have collected $3,372 to date from FirstNet.
We have reflected these amounts as a reduction to the costs incurred to
complete the task orders. We anticipate collecting the remainder of the $6,500
from FirstNet as we achieve milestones set out by FirstNet over the next three
years.
NOTE 21. CONTINGENT LIABILITIES
We are party to numerous lawsuits, regulatory proceedings and other matters
arising in the ordinary course of business. In evaluating these matters on an
ongoing basis, we take into account amounts already accrued on the balance
sheet. In our opinion, although the outcomes of these proceedings are
uncertain, they should not have a material adverse effect on our financial
position, results of operations or cash flows.
We have contractual obligations to purchase certain goods or services from
various other parties. Our purchase obligations are expected to be
approximately $16,590 in 2020, $21,121 in total for 2021 and 2022, $11,153 in
total for 2023 and 2024 and $18,943 in total for years thereafter.
See Note 13 for a discussion of collateral and credit-risk contingencies.
NOTE 22. ADDITIONAL FINANCIAL INFORMATION
December 31,
Consolidated Balance Sheets 2019 2018
Accounts payable and accrued liabilities:
Accounts payable $ 29,640 $ 27,018
Accrued payroll and commissions 3,126 3,379
Current portion of employee benefit obligation 1,528 1,464
Accrued interest 2,498 2,557
Other 9,164 8,766
Total accounts payable and accrued liabilities $ 45,956 $ 43,184
Consolidated Statements of Income 2019 2018 2017
Advertising expense $ 6,121 $ 5,100 $ 3,772
Interest expense incurred $ 8,622 $ 8,450 $ 7,203
Capitalized interest (200) (493) (903)
Total interest expense $ 8,422 $ 7,957 $ 6,300
Cash and Cash Flows We typically maintain our restricted cash balances for
purchases and sales of certain investment securities and funding of certain
deferred compensation benefit payments.
The following table summarizes cash and cash equivalents and restricted cash
balances contained on our consolidated balance sheets:
December 31,
Cash and Cash Equivalents and Restricted Cash 2019 2018 2017 2016
Cash and cash equivalents $ 12,130 $ 5,204 $ 50,498 $ 5,788
Restricted cash in Other current assets 69 61 6 7
Restricted cash in Other Assets 96 135 428 140
Cash and cash equivalents and restricted cash $ 12,295 $ 5,400 $ 50,932 $ 5,935
The following table summarizes cash paid during the periods for interest and
income taxes:
Consolidated Statements of Cash Flows 2019 2018 2017
Cash paid (received) during the year for:
Interest $ 8,693 $ 8,818 $ 6,622
Income taxes, net of refunds 1,421 (354) 2,006
The following table provides supplemental disclosures for the statement of
cash flows related to operating leases:
2019
Cash Flows from Operating Activities
Cash paid for amounts included in lease obligations:
Operating cash flows from operating leases $ 4,583
Supplemental Lease Cash Flow Disclosures
Operating lease right-of-use assets obtained
in exchange for new operating lease obligations 7,818
Noncash Investing and Financing Activities In connection with capital
improvements and the acquisition of other productive assets, we negotiate
favorable payment terms (referred to as vendor financing), which are reported
as financing activities when paid. We recorded $2,632 of vendor financing
commitments related to capital investments in 2019, $2,162 in 2018 and $1,000
in 2017.
Labor Contracts As of January 31, 2020, we employed approximately 246,000
persons. Approximately 40% of our employees are represented by the
Communications Workers of America (CWA), the International Brotherhood of
Electrical Workers (IBEW) or other unions. After expiration of the agreements,
work stoppages or labor disruptions may occur in the absence of new contracts
or other agreements being reached. A contract covering approximately 13,000
traditional wireline employees in our West region expires in April 2020. Other
contracts covering approximately 7,000 employees are scheduled to expire
during 2020.
NOTE 23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables represent our quarterly financial results:
2019 Calendar Quarter
First(1) Second(1) Third(1) Fourth(1,2) Annual
Total Operating Revenues $ 44,827 $ 44,957 $ 44,588 $ 46,821 $ 181,193
Operating Income 7,233 7,500 7,901 5,321 27,955
Net Income 4,348 3,974 3,949 2,704 14,975
Net Income Attributable to AT&T 4,096 3,713 3,700 2,394 13,903
Basic Earnings Per Share
Attributable to Common Stock(3) $ 0.56 $ 0.51 $ 0.50 $ 0.33 $ 1.90
Diluted Earnings Per Share
Attributable to Common Stock(3) $ 0.56 $ 0.51 $ 0.50 $ 0.33 $ 1.89
Stock Price
High $ 31.64 $ 33.55 $ 38.75 $ 39.70
Low 28.30 30.05 31.52 36.40
Close 31.36 33.51 37.84 39.08
(1) Includes actuarial gains and losses on pension and postretirement benefit
plans (Note 15).
(2) Includes an asset abandonment charge (Note 7).
(3) Quarterly earnings per share impacts may not add to full-year earnings per
share impacts due to the difference in weighted-average
common shares for the quarters versus the weighted-average common shares for
the year.
2018 Calendar Quarter
First(1) Second(1) Third Fourth(1) Annual
Total Operating Revenues $ 38,038 $ 38,986 $ 45,739 $ 47,993 $ 170,756
Operating Income 6,201 6,466 7,269 6,160 26,096
Net Income 4,759 5,248 4,816 5,130 19,953
Net Income Attributable to AT&T 4,662 5,132 4,718 4,858 19,370
Basic Earnings Per Share
Attributable to Common Stock(2) $ 0.75 $ 0.81 $ 0.65 $ 0.66 $ 2.85
Diluted Earnings Per Share
Attributable to Common Stock(2) $ 0.75 $ 0.81 $ 0.65 $ 0.66 $ 2.85
Stock Price
High $ 39.29 $ 36.39 $ 34.28 $ 34.30
Low 34.44 31.17 30.13 26.80
Close 35.65 32.11 33.58 28.54
(1) Includes actuarial gains and losses on pension and postretirement benefit
plans (Note 15).
(2) Quarterly earnings per share impacts may not add to full-year earnings per
share impacts due to the difference in weighted-average
common shares for the quarters versus the weighted-average common shares for
the year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
During our two most recent fiscal years, there has been no change in the
independent accountant engaged as the principal accountant to audit our
financial statements, and the independent accountant has not expressed
reliance on other independent accountants in its reports during such time
period.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure 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 SEC'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 December 31, 2019. 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 December 31, 2019.
Internal Control Over Financial Reporting
(a) Management's Annual Report on Internal Control over Financial Reporting
The management of AT&T is responsible for establishing and maintaining
adequate internal control over financial reporting. AT&T's internal
control system was designed to provide reasonable assurance as to the
integrity and reliability of the published financial statements. AT&T
management assessed the effectiveness of the company's internal control over
financial reporting as of December 31, 2019. In making this assessment, it
used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control - Integrated Framework
(2013 framework). Based on its assessment, AT&T management believes that,
as of December 31, 2019, the Company's internal control over financial
reporting is effective based on those criteria.
(b) Attestation Report of the Independent Registered Public Accounting Firm
The independent registered public accounting firm that audited the financial
statements included in the Annual Report containing the disclosure required by
this Item, Ernst & Young LLP, has issued an attestation report on the
Company's internal control over financial reporting. The attestation report
issued by Ernst & Young LLP is included herein.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of AT&T Inc.
Opinion on Internal Control Over Financial Reporting
We have audited AT&T Inc.'s internal control over financial reporting as
of December 31, 2019, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria).
In our opinion, AT&T Inc. (the Company) maintained, in all material
respects, effective internal control over financial reporting as of December
31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States) (PCAOB), the 2019 consolidated
financial statements of the Company and our report dated February 19, 2020
expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting included in the accompanying
Report of Management. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit. We are
a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting
was maintained in all material respects.
Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Dallas, Texas
February 19, 2020
ITEM 9B. Other Information
There is no information that was required to be disclosed in a report on Form
8-K during the fourth quarter of 2019 but was not reported.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding executive officers required by Item 401 of Regulation
S-K is furnished in a separate disclosure at the end of Part I of this report
entitled "Information about our Executive Officers". Information regarding
directors required by Item 401 of Regulation S-K is incorporated herein by
reference pursuant to General Instruction G(3) from the registrant's
definitive proxy statement, dated on or about March 11, 2020 (Proxy Statement)
under the heading "Management Proposal Item No. 1. Election of Directors."
The registrant has a separately-designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934. The members of the committee are Messrs. Di Piazza, Jr. and
McCallister, and Mses. Taylor and Tyson. The additional information required
by Item 407(d)(5) of Regulation S-K is incorporated herein by reference
pursuant to General Instruction G(3) from the registrant's Proxy Statement
under the heading "Audit Committee."
The registrant has adopted a code of ethics entitled "Code of Ethics" that
applies to the registrant's principal executive officer, principal financial
officer, principal accounting officer, or controller or persons performing
similar functions. The additional information required by Item 406 of
Regulation S-K is provided in this report under the heading "General" under
Part I, Item 1. Business.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated herein by reference pursuant
to General Instruction G(3) from the registrant's Proxy Statement under the
headings "Director Compensation," "CEO Pay Ratio," and the pages beginning
with the heading "Compensation Discussion and Analysis" and ending with, and
including, the pages under the heading "Potential Payments upon Change in
Control.".
Information required by Item 407(e)(5) of Regulation S-K is included in the
registrant's Proxy Statement under the heading "Compensation Committee Report"
and is incorporated herein by reference pursuant to General Instruction G(3)
and shall be deemed furnished in this Annual Report on Form 10-K and will not
be deemed incorporated by reference into any filing under the Securities Act
of 1933 or the Securities Exchange Act of 1934.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by Item 403 of Regulation S-K is included in the
registrant's Proxy Statement under the heading "Common Stock Ownership," which
is incorporated herein by reference pursuant to General Instruction G(3).
Equity Compensation Plan Information
The following table provides information as of December 31, 2019, concerning
shares of AT&T common stock authorized for issuance under AT&T's
existing equity compensation plans.
Equity Compensation Plan Information
Plan Category Number of securities to Weighted average Number of securities
be issued upon
exercise price of
remaining available for
exercise of
outstanding
future issuance under
options, warrants
equity compensation plans
outstanding options,
and rights
(excluding securities
warrants and rights
(b) reflected in column (a))
(a)
(c)
Equity compensation plans 40,052,616 ((1)) $ 27.08 281,094,454 ((2))
approved by security holders
Equity compensation plans not approved by security holders - - -
Total 40,052,616 ((3)) $ 27.08 281,094,454((2))
((1)) Includes the issuance of stock in connection with the following stockholder
approved plans: (a) 1,887,212 stock options under the Stock Purchase and
Deferral Plan (SPDP), (b) 552,667 phantom stock units under the Stock Savings
Plan (SSP), 13,166,723 phantom stock units under the SPDP, 1,670,691
restricted stock units under the 2011 Incentive Plan, 1,599,037 restricted
stock units under the 2016 Incentive Plan and 1,251,399 restricted stock units
under the 2018 Incentive Plan, (c) 0 target number of stock-settled
performance shares under the 2011 Incentive Plan, 9,590,869 target number of
stock-settled performance shares under the 2016 Incentive Plan, and 7,102,831
target number of stock-settled performance shares under the 2018 Incentive
Plan. At payout, the target number of performance shares may be reduced to
zero or increased by up to 150%. Each phantom stock unit and performance share
is settleable in stock on a 1-to-1 basis. The weighted-average exercise price
in the table does not include outstanding performance shares or phantom stock
units.
( ) The SSP was approved by stockholders in 1994 and then was amended by the Board
of Directors in 2000 to increase the number of shares available for purchase
under the plan (including shares from the Company match and reinvested
dividend equivalents). Stockholder approval was not required for the
amendment. To the extent applicable, the amount shown for approved plans in
column (a), in addition to the above amounts, includes 3,231,187 phantom stock
units (computed on a first-in-first-out basis) that were approved by the Board
in 2000. Under the SSP, shares could be purchased with payroll deductions and
reinvested dividend equivalents by mid-level and above managers and limited
Company partial matching contributions. No new contributions may be made to
the plan.
((2)) Includes 36,806,311shares that may be issued under the SPDP, 241,491,917
shares that may be issued under the 2018 Incentive Plan, and up to 2,796,226
shares that may be purchased through reinvestment of dividends on phantom
shares held in the SSP.
((3)) Does not include certain stock options issued by companies acquired by
AT&T that were converted into options to acquire AT&T stock. As of
December 31, 2019, there were 7,819,476 shares of AT&T common stock
subject to the converted options, having a weighted-average exercise price of
$15.69. Also, does not include 2,958,201 outstanding phantom stock units that
were issued by companies acquired by AT&T that are convertible into stock
on a 1-to-1 basis, along with an estimated 113,188 shares that may be
purchased with reinvested dividend equivalents paid on the outstanding phantom
stock units. No further phantom stock units, other than reinvested dividends,
may be issued under the assumed plans. The weighted-average exercise price in
the table does not include outstanding performance shares or phantom stock
units.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information required by Item 404 of Regulation S-K is included in the
registrant's Proxy Statement under the heading "Related Person Transactions,"
which is incorporated herein by reference pursuant to General Instruction
G(3). Information required by Item 407(a) of Regulation S-K is included in the
registrant's Proxy Statement under the heading "Director Independence," which
is incorporated herein by reference pursuant to General Instruction G(3).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this Item is included in the registrant's Proxy
Statement under the heading "Principal Accountant Fees and Services," which is
incorporated herein by reference pursuant to General Instruction G(3).
Part IV
ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as a part of the report:
Page
(1) Report of Independent Registered Public Accounting
Firm.................................................. *
Financial Statements covered by Report of Independent Registered Public
Accounting Firm:
Consolidated Statements of
Income....................................................................................
*
Consolidated Statements of
Comprehensive Income.......................................................
*
Consolidated Balance
Sheets...............................................................................................
*
Consolidated Statements of Cash
Flows............................................................................
*
Consolidated Statements of
Changes in Stockholders' Equity.......................................
*
Notes to Consolidated Financial
Statements.....................................................................
*
Page
(2) Financial Statement Schedules:
II - Valuation and Qualifying
Accounts..............................................................................
27
Financial statement schedules other than those listed
above have been omitted because the required information is contained in the
financial statements and notes thereto, or because such schedules are not
required or applicable.
(3) Exhibits:
Exhibits identified in parentheses below, on file with
the SEC, are incorporated herein by reference as exhibits hereto. Unless
otherwise indicated, all exhibits so incorporated are from File No. 1-8610.
Exhibit Number
3-a Restated Certificate of Incorporation, filed with the Secretary of State of
Delaware on December 13, 2013 (Exhibit 3.1 to Form 8-K filed on December 16,
2013
(http://www.sec.gov/Archives/edgar/data/732717/000073271713000103/item901.htm)
)
3-b Bylaws (Exhibit 3 to Form 8-K filed on July 3, 201
(http://www.sec.gov/Archives/edgar/data/732717/000119312519188389/d774635dex3.htm)
9)
3-c Certificate of Designations with respect to Preferred Stock (Exhibit 3.1 to
Form 8-K filed on December 12, 201
(http://www.sec.gov/Archives/edgar/data/732717/000119312519312505/d768240dex31.htm)
9)
4-a No instrument which defines the rights of holders of long-term debt of the
registrant and all of its consolidated subsidiaries is filed herewith pursuant
to Regulation S-K, Item 601(b)(4)(iii)(A), except for the instruments referred
to in 4-b, 4-c, 4-d, 4-e, 4-f below. Pursuant to this regulation, the
registrant hereby agrees to furnish a copy of any such instrument not filed
herewith to the SEC upon request.
4-b Guaranty of certain obligations of Pacific Bell Telephone Co. and Southwestern
Bell Telephone Co. (Exhibit 4-c to Form 10-K for the period ending December
31, 2011
(http://www.sec.gov/Archives/edgar/data/732717/000073271712000025/ex4c.htm) )
4-c Guaranty of certain obligations of Ameritech Capital Funding Corp., Indiana
Bell Telephone Co. Inc., Michigan Bell Telephone Co., Pacific Bell Telephone
Co., Southwestern Bell Telephone Company, Illinois Bell Telephone Company,
The Ohio Bell Telephone Company, The Southern New England Telephone Company,
Southern New England Telecommunications Corporation, and Wisconsin Bell, Inc.
(Exhibit 4-d to Form 10-K for the period ending December 31, 2011
(http://www.sec.gov/Archives/edgar/data/732717/000073271712000025/ex4d.htm) )
4-d Guarantee of certain obligations of AT&T Corp. (Exhibit 4-e to Form 10-K
for the period ending December 31, 2011
(http://www.sec.gov/Archives/edgar/data/732717/000073271712000025/ex4e.htm) )
4-e Indenture, dated as of May 15, 2013, between AT&T Inc. and The Bank of New
York Mellon Trust Company, N.A., as Trustee (Exhibit 4.1 to Form 8-K filed on
May 15, 2013
(http://www.sec.gov/Archives/edgar/data/732717/000119312513222435/d539712dex41.htm)
)
4-f Indenture dated as of November 1, 1994 between SBC Communications Inc. and The
Bank of New York, as Trustee (Exhibit 4-h to Form 10-K for the period ending
December 31, 2013
(http://www.sec.gov/Archives/edgar/data/732717/000073271714000010/ex04_h.htm)
)
4-g Deposit Agreement, dated December 12, 2019, among the AT&T Inc.,
Computershare Inc. and Computershare Trust Company, N.A., collectively, as
depositary, and the holders from time to time of the depository receipts
described therein (Exhibit 4.3 to Form 8-K filed December 12, 2019
(http://www.sec.gov/Archives/edgar/data/732717/000119312519312505/d768240dex43.htm)
)
4-h Description of AT&T's Securities Registered Under Section 12 of the
Exchange Act
10-a 2018 Incentive Plan (Exhibit 10-a to Form 10-K for the period ending December
31, 2017
(http://www.sec.gov/Archives/edgar/data/732717/000073271718000009/ex10_a.htm)
)
10-b 2016 Incentive Plan (Exhibit 10-a to Form 10-Q for the period ending March 31,
2016
(http://www.sec.gov/Archives/edgar/data/732717/000073271716000160/ex10a.htm) )
10-b(i) Resolution Regarding John Donovan (Exhibit 10-a to Form 10-Q for the period
ending September 30, 2017
(http://www.sec.gov/Archives/edgar/data/732717/000073271717000101/ex10_a.htm)
)
10-b(ii) Resolution Regarding John Stankey (Exhibit 10-b to Form 10-Q for the period
ending September 30, 2017
(http://www.sec.gov/Archives/edgar/data/732717/000073271717000101/ex10_b.htm)
)
10-b(iii) Resolution Regarding John Stephens (Exhibit 10-c to Form 10-Q for the period
ending September 30, 2017
(http://www.sec.gov/Archives/edgar/data/732717/000073271717000101/ex10_c.htm)
)
10-c 2011 Incentive Plan (Exhibit 10-a to Form 10-Q for the period ending
September 30, 2015
(http://www.sec.gov/Archives/edgar/data/732717/000073271715000121/ex10a.htm) )
10-d Short Term Incentive Plan (Exhibit 10.1 to Form 8-K filed on February 2, 2018
(http://www.sec.gov/Archives/edgar/data/732717/000073271718000005/exhibit10.htm)
)
10-e Supplemental Life Insurance Plan (Exhibit 10-e to Form 10-Q for the period
ending September 30, 2015
(http://www.sec.gov/Archives/edgar/data/732717/000073271715000121/ex10e.htm) )
10-f Supplemental Retirement Income Plan (Exhibit 10-e to Form 10-K for the period
ending December 31, 2013
(http://www.sec.gov/Archives/edgar/data/732717/000073271714000010/ex10_e.htm)
)
10-g 2005 Supplemental Employee Retirement Plan
10-h Salary and Incentive Award Deferral Plan (Exhibit 10-k to Form 10-K for the
period ending December 31, 2011
(http://www.sec.gov/Archives/edgar/data/732717/000073271712000025/ex10k.htm) )
10-i Stock Savings Plan (Exhibit 10-l to Form 10-K for the period ending December
31, 2011
(http://www.sec.gov/Archives/edgar/data/732717/000073271712000025/ex10l.htm) )
10-j Stock Purchase and Deferral Plan effective September 27, 2018
10-j(i) Stock Purchase and Deferral Plan effective January 1, 2020
10-k Cash Deferral Plan effective September 27, 2018
10-k(i) Cash Deferral Plan effective January 1, 2020
10-l Master Trust Agreement for AT&T Inc. Deferred Compensation Plans and Other
Executive Benefit Plans and subsequent amendments dated August 1, 1995 and
November 1, 1999 (Exhibit 10-dd to Form 10-K for the period ending December
31, 2009
(http://www.sec.gov/Archives/edgar/data/732717/000073271710000013/ex10dd.htm)
)
10-m Officer Disability Plan (Exhibit 10-i to Form 10-Q for the period ending June
30, 2009
(http://www.sec.gov/Archives/edgar/data/732717/000073271709000050/ex10i.htm) )
10-n AT&T Inc. Health Plan
10-o Pension Benefit Makeup Plan No.1 (Exhibit 10-n to Form 10-K for the period
ending December 31, 2016
(http://www.sec.gov/Archives/edgar/data/732717/000073271717000021/ex10_n.htm)
)
10-p AT&T Inc. Equity Retention and Hedging Policy (Exhibit 10.2 to Form 8-K
filed on December 16, 2011
(http://www.sec.gov/Archives/edgar/data/732717/000073271711000107/retention.htm)
)
10-q Administrative Plan
10-r AT&T Inc. Non-Employee Director Stock and Deferral Plan (Exhibit 10-r to
Form 10-K for the period ending December 31, 2018
(http://www.sec.gov/Archives/edgar/data/732717/000119312519045608/d705958dex10r.htm)
)
10-s AT&T Inc. Non-Employee Director Stock Purchase Plan (Exhibit 10-t to Form
10-K for the period ending December 31, 2013
(http://www.sec.gov/Archives/edgar/data/732717/000073271714000010/ex10_t.htm)
)
10-t AT&T Inc. Board of Directors Communications Concession Program (Exhibit
10-aa to Form 10-K for the period ending December 31, 2012
(http://www.sec.gov/Archives/edgar/data/732717/000073271713000017/ex10aa.htm)
)
10-u Form of Indemnity Agreement, effective July 1, 1986, between Southwestern Bell
Corporation (now AT&T Inc.) and its directors and officers. (Exhibit 10-bb
to Form 10-K for the period ending December 31, 2011
(http://www.sec.gov/Archives/edgar/data/732717/000073271712000025/ex10bb.htm)
)
10-v AT&T Executive Physical Program (Exhibit 10-ff to Form 10-K for the period
ending December 31, 2016
(http://www.sec.gov/Archives/edgar/data/732717/000073271717000021/ex10_ff.htm)
)
10-w Attorney Fee Payment Agreement for John Stankey (Exhibit 10.1 to Form 8-K
filed on July 3, 2018
(http://www.sec.gov/Archives/edgar/data/732717/000073271718000050/exhibit10.htm)
)
10-x Agreement and Release and Waiver of Claims (Exhibit 10.1 to Form 8-K filed on
September 6, 2019
(http://www.sec.gov/Archives/edgar/data/732717/000119312519239966/d799915dex101.htm)
)
10-y $7,500,000,000 Amended and Restated Credit Agreement, dated as of
December 11, 2018, among AT&T Inc., certain lenders named therein and
Citibank, N.A., as agent. (Exhibit 10.1 to Form 8-K filed on December 13, 2018
(http://www.sec.gov/Archives/edgar/data/732717/000119312518348840/d672774dex101.htm)
)
10-z $7,500,000,000 Five Year Credit Agreement, dated as of December 11, 2018,
among AT&T Inc., certain lenders named therein and Citibank, N.A., as
agent (Exhibit 10.2 to Form 8-K filed on December 13, 2018
(http://www.sec.gov/Archives/edgar/data/732717/000119312518348840/d672774dex102.htm)
)
10-aa Amended and Restated Contribution Agreement (Exhibit 10-ee to Form 10-K for
the period ending December 31, 2018
(http://www.sec.gov/Archives/edgar/data/732717/000119312519045608/d705958dex10ee.htm)
)
10-bb Fourth Amended and Restated Limited Liability Company Agreement of Mobility II
LLC (Exhibit 10-ff to Form 10-K for the period ending December 31, 2018
(http://www.sec.gov/Archives/edgar/data/732717/000119312519045608/d705958dex10ff.htm)
)
10-cc First Amendment to the Fourth Amended and Restated Limited Liability Company
Agreement of Mobility II LLC (Exhibit 10-gg to Form 10-K for the period ending
December 31, 2018
(http://www.sec.gov/Archives/edgar/data/732717/000119312519045608/d705958dex10gg.htm)
)
10-dd Second Amendment to the Fourth Amended and Restated Limited Liability Company
Agreement of Mobility II LLC (Exhibit 10-hh to Form 10-K for the period ending
December 31, 2018
(http://www.sec.gov/Archives/edgar/data/732717/000119312519045608/d705958dex10hh.htm)
)
10-ee Amended and Restated Registration Rights Agreement by and among AT&T Inc.
and The SBC Master Pension Trust and Brock Fiduciary Services LLC (Exhibit
10-ii to Form 10-K for the period ending December 31, 2018
(http://www.sec.gov/Archives/edgar/data/732717/000119312519045608/d705958dex10ii.htm)
)
10-ff Second Amended and Restated Limited Liability Company Agreement of NCWPCS MPL
Holdings, LLC (Exhibit 10.1 to Form 8-K filed on December 12, 2019
(http://www.sec.gov/Archives/edgar/data/732717/000119312519312856/d847484dex101.htm)
)
21 Subsidiaries of AT&T Inc.
(file:///C:/Users/MH8185/AppData/Local/Temp/CDM/F391108B64B96296C5CE91B7B43B33EA710517CCDCC619E0F29EF4F6C6D859B1/exh21.htm)
23 Consent of Ernst & Young LLP
(file:///C:/Users/MH8185/AppData/Local/Temp/CDM/F391108B64B96296C5CE91B7B43B33EA710517CCDCC619E0F29EF4F6C6D859B1/exh23.htm)
24 Powers of Attorney
(file:///C:/Users/MH8185/AppData/Local/Temp/CDM/F391108B64B96296C5CE91B7B43B33EA710517CCDCC619E0F29EF4F6C6D859B1/exh24.htm)
31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Principal Executive Officer
(file:///C:/Users/MH8185/AppData/Local/Temp/CDM/F391108B64B96296C5CE91B7B43B33EA710517CCDCC619E0F29EF4F6C6D859B1/exh311.htm)
31.2 Certification of Principal Financial Officer
(file:///C:/Users/MH8185/AppData/Local/Temp/CDM/F391108B64B96296C5CE91B7B43B33EA710517CCDCC619E0F29EF4F6C6D859B1/exh312.htm)
32 Section 1350 Certification
(file:///C:/Users/MH8185/AppData/Local/Temp/CDM/F391108B64B96296C5CE91B7B43B33EA710517CCDCC619E0F29EF4F6C6D859B1/exh32.htm)
99 Supplemental Interim Financial Information
101 The consolidated financial statements from the Company's Form 10-K for the
year ended December 31, 2019, as filed with the SEC on February 19, 2020,
formatted in Inline XBRL: (i) Consolidated Statements of Cash Flows, (ii)
Consolidated Statements of Operations, (iii) Consolidated Statements of
Comprehensive Income, (iv) Consolidated Balance Sheets, and (v) Notes to
Consolidated Financial Statements, tagged as blocks of text and including
detailed tags.
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in
Exhibit 101)
We will furnish to stockholders upon request, and without charge, a copy of
the Annual Report to Stockholders and the Proxy Statement, portions of which
are incorporated by reference in the Form 10-K. We will furnish any other
exhibit at cost.
ITEM 16. FORM 10-K SUMMARY
None.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
COL. A COL. B COL. C COL. D COL. E
Additions
(1) (2) (3)
Balance at Beginning of Period Charged to Costs and Expenses (a) Charged to Other Accounts (b) Acquisitions (c) Deductions (d) Balance at End of Period
Year 2019 $ 907 2,575 - - 2,247 $ 1,235
Year 2018 $ 663 1,791 - 179 1,726 $ 907
Year 2017 $ 661 1,642 - - 1,640 $ 663
(a) Includes amounts previously written off which were credited
directly to this account when recovered. Excludes direct charges and credits
to expense for nontrade receivables in the consolidated statements of income.
(b) Includes amounts related to long-distance carrier receivables
which were billed by AT&T.
(c) Acquisition of Time Warner in 2018.
(d) Amounts written off as uncollectible, or related to divested
entities.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for Deferred Tax Assets
COL. A COL. B COL. C COL. D COL. E
Additions
(1) (2) (3)
Balance at Beginning of Period Charged to Costs and Expenses Charged to Other Accounts (a) Acquisitions (b) Deductions (c) Balance at End of Period
Year 2019 $ 4,588 (18) 371 - - $ 4,941
Year 2018 $ 4,640 (210) (53) 211 - $ 4,588
Year 2017 $ 2,283 2,376 (19) - - $ 4,640
(a) Includes current year reclassifications from other balance
sheet accounts.
(b) Acquisition of Time Warner in 2018.
(c) Reductions to valuation allowances related to deferred tax
assets.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 19(th) day of February, 2020.
AT&T INC.
/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the date indicated.
Principal Executive Officer:
Randall Stephenson*
Chairman of the Board
and Chief Executive Officer
Principal Financial and Accounting Officer:
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
/s/ John J. Stephens
John J. Stephens, as attorney-in-fact
and on his own behalf as Principal
Financial Officer and Principal
Accounting Officer
February 19, 2020
Directors:
Randall L. Stephenson* Stephen J. Luczo*
Samuel A. Di Piazza, Jr.* Michael B. McCallister*
Richard W. Fisher* Beth E. Mooney*
Scott T. Ford* Matthew K. Rose*
Glenn H. Hutchins* Cynthia B. Taylor*
William E. Kennard* Laura D'Andrea Tyson*
Debra L. Lee* Geoffrey Y. Yang*
* by power of attorney
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
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