TIDM58KN
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 TPRA New York Stock
a 1/1000th interest in a share of 5.000% Exchange
Perpetual Preferred Stock, Series A
Depositary Shares, each representing TPRC New York Stock
a 1/1000th interest in a share of 4.750% Exchange
Perpetual Preferred Stock, Series C
AT&T Inc. Floating Rate Global Notes T 20C New York Stock
due August 3, 2020 Exchange
AT&T Inc. 1.875% Global Notes due December T 20 New York Stock
4, 2020 Exchange
AT&T Inc. 2.650% Global Notes due December T 21B New York Stock
17, 2021 Exchange
AT&T Inc. 1.450% Global Notes due June T 22B New York Stock
1, 2022 Exchange
AT&T Inc. 2.500% Global Notes due March T 23 New York Stock
15, 2023 Exchange
AT&T Inc. 2.750% Global Notes due May T 23C New York Stock
19, 2023 Exchange
AT&T Inc. Floating Rate Global Notes T 23D New York Stock
due September 5, 2023 Exchange
AT&T Inc. 1.050% Global Notes due September T 23E New York Stock
5, 2023 Exchange
AT&T Inc. 1.300% Global Notes due September T 23A New York Stock
5, 2023 Exchange
AT&T Inc. 1.950% Global Notes due September T 23F New York Stock
15, 2023 Exchange
Name of each exchange
Title of each class Trading Symbol(s) on which registered
AT&T Inc. 2.400% Global Notes due March T 24A New York Stock
15, 2024 Exchange
AT&T Inc. 3.500% Global Notes due December T 25 New York Stock
17, 2025 Exchange
AT&T Inc. 0.250% Global Notes due March T 26E New York Stock
4, 2026 Exchange
AT&T Inc. 1.800% Global Notes due September T 26D New York Stock
5, 2026 Exchange
AT&T Inc. 2.900% Global Notes due December T 26A New York Stock
4, 2026 Exchange
AT&T Inc. 2.350% Global Notes due September T 29D New York Stock
5, 2029 Exchange
AT&T Inc. 4.375% Global Notes due September T 29B New York Stock
14, 2029 Exchange
AT&T Inc. 2.600% Global Notes due December T 29A New York Stock
17, 2029 Exchange
AT&T Inc. 0.800% Global Notes due March T 30B New York Stock
4, 2030 Exchange
AT&T Inc. 3.550% Global Notes due December T 32 New York Stock
17, 2032 Exchange
AT&T Inc. 5.200% Global Notes due November T 33 New York Stock
18, 2033 Exchange
AT&T Inc. 3.375% Global Notes due March T 34 New York Stock
15, 2034 Exchange
AT&T Inc. 2.450% Global Notes due March T 35 New York Stock
15, 2035 Exchange
AT&T Inc. 3.150% Global Notes due September T 36A New York Stock
4, 2036 Exchange
AT&T Inc. 1.800% Global Notes due September T 39B New York Stock
14, 2039 Exchange
AT&T Inc. 7.000% Global Notes due April T 40 New York Stock
30, 2040 Exchange
AT&T Inc. 4.250% Global Notes due June T 43 New York Stock
1, 2043 Exchange
AT&T Inc. 4.875% Global Notes due June T 44 New York Stock
1, 2044 Exchange
AT&T Inc. 4.250% Global Notes due March T 50 New York Stock
1, 2050 Exchange
AT&T Inc. 5.350% Global Notes due November TBB New York Stock
1, 2066 Exchange
AT&T Inc. 5.625% Global Notes due August TBC New York Stock
1, 2067 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 [X] Accelerated Filer [ ]
Filer
Non-accelerated [ Smaller reporting [ ]
filer ] 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 17
Stockholder Matters
and Issuer Purchases of Equity Securities
6. Selected Financial Data 18
7. Management's Discussion and Analysis of Financial 18
Condition
and Results of Operations
7A. Quantitative and Qualitative Disclosures about 18
Market Risk
8. Financial Statements and Supplementary Data 18
9. Changes in and Disagreements with Accountants 18
on Accounting
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 21
and
Management and Related Stockholder Matters
13. Certain Relationships and Related Transactions, 22
and Director Independence
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
Chairman of the Board and Chief Executive
Randall L. Stephenson 59 Officer 6/2007
Senior Executive Vice President and
David S. Huntley 61 Chief Compliance Officer 12/2014
Chief Executive Officer-AT&T Latin
Lori M. Lee 54 America and Global Marketing Officer 8/2017
David R. McAtee Senior Executive Vice President and
II 51 General Counsel 10/2015
Jeffery S. McElfresh 49 Chief Executive Officer, AT&T Communications 10/2019
LLC
Senior Executive Vice President - Human
Angela R. Santone 48 Resources 12/2019
John T. Stankey 57 President and Chief Operating Officer 10/2019
Senior Executive Vice President and
John J. Stephens 60 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)
Maximum Number
(or Approximate
Total Number Dollar Value)
of Shares (or of Shares (or
Total Number Units) Purchased Units) That May
of Shares (or Average Price as Part of Publicly Yet Be Purchased
Units) Paid Per Share Announced Plans Under The Plans
Period Purchased(1,2,3) (or Unit) or Programs(1) or Programs
-------------------- ----------------- ----------------- -------------------- --- ------------------
October 1, 2019
-
October 31,
2019 671,252 $ 37.21 - 370,897,657
November 1,
2019 -
November 30,
2019 24,049,128 38.40 24,000,000 346,897,657
December 1,
2019 -
December 31,
2019 28,064,877 38.42 27,398,212 319,499,445
-------------------- ----------------- ---------------- -------------------- --- ------------------
Total 52,785,257 $ 38.40 51,398,212
==================== ================= ================ ==================== === ==================
In December 2019, the Company entered into a $4,000 accelerated
(1) 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.
Of the shares purchased, 886,515 shares were acquired through the
(2) withholding of taxes on the vesting of restricted stock
or through the payment in stock of taxes on the exercise price of
options.
Of the shares repurchased or transferred, 500,530 shares were transferred
(3) 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
-------------------------------------------------------- --------- ------- ---------- ------- ---------
Includes capital expenditures and vendor financing payments and excludes
(1) FirstNet reimbursements of $1,005 in 2019, $1,429 in 2018,
$279 in 2017 and $0 in 2016-2015 (see Note 20).
Cash paid for FCC license and domestic spectrum acquired in business
(2) 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 vs. 2018 vs.
2019 2018 2017 2018 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%
========================= =============== ============= ============= ========== ==========
Includes data-centric devices such as wholesale automobile systems,
(1) 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.
In addition to postpaid phones, includes tablets and wearables and
other. Tablet net adds (losses) were (1,487), (1,200) and 59 for the
(2) 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.
Includes data-centric devices such as session-based tablets, monitoring
(3) devices and primarily wholesale automobile systems. Excludes
postpaid tablets.
Calculated by dividing the aggregate number of wireless subscribers
(4) 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%
================ ============= ============= ============= ============= ==== ============ ===
2019 excludes the impact of 692 subscriber disconnections resulting
(1) 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 -% -%
==================== ============== ============== ============== ============ ==== ====== ===
Excludes subscribers of our equity investment in SKY Mexico, in which
(1) 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.
2019 excludes the impact of 222 subscriber disconnections resulting
(2) from conforming our video credit policy across the region, which is
reflected in beginning of period subscribers.
Excludes SKY Mexico net subscriber losses of 225 in the nine months
(3) 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 TRS 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 EUR1,000 of 0.25% global notes due
2026, EUR1,250 of 0.80% global notes due 2030 and EUR750 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.
-- EUR1,500 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
-------------------------------------------------------------------------------------------
Contractual Less than 1-3 3-5 More than
Obligations Total 1 Year Years Years 5 Years
---------------- ------------------ ---------------- ---------------- ---------------- -----------------
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
================ === ============= ============ ============ ============ =============
Represents principal or payoff amounts of notes and debentures at
maturity or, for putable debt, the next put opportunity (see Note
(1) 12).
The purchase obligations will be funded with cash provided by operations
(2) 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).
Represents contractual commitment to make sustainability payments
(4) 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)
The noncurrent portion of the UTBs is included in the "More than 5
(5) Years" column, as we cannot reasonably estimate the timing or
amounts of additional cash payments, if any, at this time (see Note
14).
Represents future minimum payments under the Crown Castle and other
(6) arrangements (see Note 19), payables subject to extended
payment terms (see Note 22) and finance lease payments (see Note 8).
Represents commitments to repurchase shares of common stock under
(7) 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
Business Business
Mobility Wireline Adjustments(1) 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
Business Business
Mobility Wireline Adjustments(1) 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
Business Business
Mobility Wireline Adjustments(1) 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 EUR1,450 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
Addressed the Matter in Our effectiveness
Audit of certain controls over management's review of the determination of the
discount rates used
in defined benefit pension obligation and postretirement benefit obligation
calculations.
To test the determination of the discount rate used in the calculation of the
defined benefit
pension and postretirement benefit obligations, we performed audit procedures
that focused
on evaluating, with the assistance of our actuarial specialists, the
determination of the
discount rates, among other procedures. For example, we evaluated the selected
yield curve
used to determine the discount rates applied in measuring the defined benefit
pension and
postretirement benefit obligations. As part of this assessment, we considered
the credit quality
of the corporate bonds that comprise the yield curve and compared the timing
and amount of
cash flows at maturity with the expected amounts and duration of the related
benefit payments.
As part of this assessment, we compared the Company's current projections to
historical projected
defined benefit pension obligation cash flows, and compared the current-year
benefits paid
to the prior-year projected cash flows.
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
Addressed the Matter in Our Audit effectiveness
of controls over the Company's accounting process for uncertain tax positions.
This included
controls over identification and measurement of the benefits of the uncertain
tax positions,
including management's review of the inputs and calculations of unrecognized
income tax benefits,
both initially and on an ongoing basis.
We involved our tax professionals to assist us in assessing significant
uncertain tax positions,
including an evaluation of the technical merits of individual positions, the
determination
of whether a tax position was more-likely-than-not to be sustained, and the
Company's measurement
of its uncertain tax positions, including the computation of interest and
penalties, among
other procedures. For significant new positions, we assessed the Company's
filing position,
correspondence with the relevant tax authorities and third-party advice obtained
by the Company,
as appropriate. For existing positions, we assessed changes in facts and law, as
well as settlements
of similar positions for any impact to the recognized liability for the
positions. We analyzed
the Company's assumptions and data used to determine the amount of tax benefit
to recognize
and tested the accuracy of the calculations. We also evaluated the adequacy of
the Company's
financial statement disclosures related to uncertain tax positions included in
Note 14.
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
Addressed the Matter in Our Audit effectiveness
of controls over the Company's goodwill and indefinite-lived intangible assets
impairment
review processes. This included controls over management's review of the
valuation models
and the significant assumptions noted above, utilized in both the discounted
cash flow and
market valuation approaches.
To test the estimated fair value of the Company's reporting units and
indefinite-lived intangible
assets, we involved our valuation specialists to assist us in performing our
audit procedures.
Our procedures included, among others, testing the valuation methodology used
and the significant
assumptions within the valuation methodology. For example, we compared the
significant assumptions
to current industry, market and economic trends, and other guideline companies
in the same
industry and to other factors. Where appropriate, we evaluated whether changes
to the company's
business model, customer base and other factors would affect the significant
assumptions.
We also assessed the historical accuracy of management's estimates, tested the
clerical accuracy
of the valuation calculations, and performed independent sensitivity analyses.
In addition,
we tested management's reconciliation of the fair value of the reporting units
to the market
capitalization of the Company.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1999.
Dallas, Texas
February 19, 2020
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 $907 22,636 26,472
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 December 31, 2018) 7,621 7,621
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.
Net
Net Unrealized Unrealized
Foreign Gains (Losses) Gains Defined Accumulated
Currency on (Losses) Benefit Other
Translation Available-for-Sale on Cash Postretirement Comprehensive
Adjustment Securities Flow Hedges Plans 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.
I nterest 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
--------------------------------------------------------------------------------------------------------------
Equity
in Net
Operations Income
and Depreciation Operating (Loss)
Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
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
--------------------------------------------------------------------------------------------------------------
Equity
in Net
Operations Income
and Depreciation Operating (Loss)
Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
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
--------------------------------------------------------------------------------------------------------------
Equity
in Net
Operations Income
and Depreciation Operating (Loss)
Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
--------------------- -------- ---------- ------- ------------ --------- ---------- ------------
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
Net Property, Net Property, Net Property,
Plant & Plant & Plant &
Revenues Equipment Revenues Equipment Revenues 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 2019 2018
December 31,
Assets Investments Assets Investments
in Equity in Equity
Method Capital Method Capital
Investees Expenditures Investees Expenditures
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
Legacy
Advanced Voice
Wireless Data & 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
Legacy
Advanced Voice
Wireless Data & 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
Dispositions, Dispositions,
Balance currency Balance Balance currency Balance
at Jan. exchange at Dec. at Jan. exchange at Dec.
1 Acquisitions and other 31 1 Reallocation Acquisitions and other 31
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
Gross Currency Gross Currency
Other Intangible Weighted-Average Carrying Accumulated Translation Carrying Accumulated Translation
Assets Life Amount Amortization Adjustment Amount Amortization 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 costs $ 12,434 $ 7,713
Includes the costs of certain programming rights, primarily sports,
(1) for which payments have been made prior to the related
rights being received.
Does not include $5,967, and $7,826 of acquired film and television
(2) 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
Maturities
Interest Rates (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
Maturities assume putable debt is redeemed by the holders at the next opportunity.
(1)
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%
Debt repayments assume putable debt is redeemed by the holders at
(1) 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 period $ 201 $(120) $279
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 EUR1,450 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
entities that would impact goodwill if recognized - (918)
Total UTB that, if recognized, would impact the
effective income tax rate as of the end of the year $ 8,481 $ 7,787
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:
Postretirement
Pension Benefits 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)
=== =============== === ============== ================ ================
At our discretion, certain postretirement benefits may be paid from
(1) 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.
Funded status is not indicative of our ability to pay ongoing pension
(2) 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:
Postretirement
Pension Benefits 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
during the period $ 1,019 $ 1,116 $ 1,128 $ 71 $ 109 $ 138
Interest cost on projected
benefit
obligation 1,960 2,092 1,936 675 778 809
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
cost (credit) $ 2,393 $ (909) $ 651 $ 369 $(3,342) $ (496)
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
comprehensive (income)
loss (86) (124) (106) 2,085 (370) 213
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
31 3.40% 4.50% 3.80% 3.20% 4.40% 3.70%
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%
Weighted-average discount rate for pension benefits in effect from January
(1) 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.
Weighted-average discount rate for postretirement benefits in effect
(2) 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.
Weighted-average interest crediting rates for cash balance pension programs
(3) 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:
Postretirement (VEBA)
Pension Assets 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
Other assets (liabilities) include amounts receivable, accounts payable
(1) 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
Other assets (liabilities) include amounts receivable and accounts
(1) 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:
Fixed Income Real Estate
Pension Assets Equities Funds 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
===
Fixed Income Real Estate
Postretirement Assets Equities Funds 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
=== ================ === =============== =============== ===============
Other assets (liabilities) include amounts receivable, accounts payable
(1) 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
=== ===
Other assets (liabilities) include amounts receivable and accounts
(1) 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:
Fixed Income Real Estate
Pension Assets Equities Funds 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
===
Fixed Income Real Estate
Postretirement Assets Equities Funds 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:
Postretirement
Pension Benefits 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):
Weighted-Average
Grant-Date Fair
Nonvested Stock Units Shares 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 EUR100,000 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 -
======= ==== === ======
Represents amounts to which financial institutions remain entitled,
(1) 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
======= ======
Receivables net of allowance, imputed interest and equipment
(1) 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
====== === ===
These gains are included in "Selling, general and administrative"
(1) 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 - -
Includes initial sale of receivables of $4,300 for the year ended
(1) December 31, 2019.
Receivables net of allowance, return and incentive reserves and imputed
(2) 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
Includes actuarial gains and losses on pension and postretirement
(1) benefit plans (Note 15).
(2) Includes an asset abandonment charge (Note 7).
Quarterly earnings per share impacts may not add to full-year earnings
(3) 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
Includes actuarial gains and losses on pension and postretirement
(1) benefit plans (Note 15).
Quarterly earnings per share impacts may not add to full-year earnings
(2) 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
Number of securities
remaining available
for
Number of securities Weighted average future issuance
to exercise under
be issued upon price of equity compensation
exercise of outstanding plans
outstanding options, options, (excluding securities
warrants and warrants reflected in column
rights and rights (a))
Plan Category (a) (b) (c)
Equity compensation plans
approved by security
holders 40,052,616 (1) $ 27.08 281,094,454 (2)
Equity compensation plans
not approved by security
holders - - -
Total 40,052,616 (3) $ 27.08 281,094,454(2)
Includes the issuance of stock in connection with the following
(1) 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.
Includes 36,806,311shares that may be issued under the SPDP, 241,491,917
(2) 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.
Does not include certain stock options issued by companies acquired
(3) 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 INDEPENCE
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 )
3-b Bylaws ( Exhibit 3 to Form 8-K filed on July 3, 201 9
)
3-c Certificate of Designations with respect to Preferred
Stock ( Exhibit 3.1 to Form 8-K filed on December 12,
201 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
)
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 )
4-d Guarantee of certain obligations of AT&T Corp. ( Exhibit
4-e to Form 10-K for the period ending December 31, 2011
)
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 )
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
)
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 )
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 )
10-b 2016 Incentive Plan ( Exhibit 10-a to Form 10-Q for the
period ending March 31, 2016 )
10-b(i) Resolution Regarding John Donovan ( Exhibit
10-a to Form 10-Q for the period ending September
30, 2017 )
10-b(ii) Resolution Regarding John Stankey ( Exhibit
10-b to Form 10-Q for the period ending September
30, 2017 )
10-b(iii) Resolution Regarding John Stephens ( Exhibit
10-c to Form 10-Q for the period ending September
30, 2017 )
10-c 2011 Incentive Plan ( Exhibit 10-a to Form 10-Q for the
period ending September 30, 2015 )
10-d Short Term Incentive Plan ( Exhibit 10.1 to Form 8-K
filed on February 2, 2018 )
10-e Supplemental Life Insurance Plan ( Exhibit 10-e to Form
10-Q for the period ending September 30, 2015 )
10-f Supplemental Retirement Income Plan ( Exhibit 10-e to
Form 10-K for the period ending December 31, 2013 )
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
)
10-i Stock Savings Plan ( Exhibit 10-l to Form 10-K for the
period ending December 31, 2011 )
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 )
10-m Officer Disability Plan ( Exhibit 10-i to Form 10-Q for
the period ending June 30, 2009 )
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 )
10-p AT&T Inc. Equity Retention and Hedging Policy ( Exhibit
10.2 to Form 8-K filed on December 16, 2011 )
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 )
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 )
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 )
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 )
10-v AT&T Executive Physical Program ( Exhibit 10-ff to Form
10-K for the period ending December 31, 2016 )
10-w Attorney Fee Payment Agreement for John Stankey ( Exhibit
10.1 to Form 8-K filed on July 3, 2018 )
10-x Agreement and Release and Waiver of Claims ( Exhibit
10.1 to Form 8-K filed on September 6, 2019 )
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 )
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 )
10-aa Amended and Restated Contribution Agreement ( Exhibit
10-ee to Form 10-K for the period ending December 31,
2018 )
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 )
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 )
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 )
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 )
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 )
21 Subsidiaries of AT&T Inc.
23 Consent of Ernst & Young LLP
24 Powers of Attorney
31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32 Section 1350 Certification
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)
Charged Charged
Balance to Costs to Other Balance
at Beginning and Expenses Accounts Acquisitions Deductions at End of
of Period (a) (b) (c) (d) 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)
Charged
Balance Charged to Other Balance
at Beginning to Costs Accounts Acquisitions Deductions at End of
of Period and Expenses (a) (b) (c) 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 or visit www.rns.com.
END
FR URAURRRUUUUR
(END) Dow Jones Newswires
February 21, 2020 02:00 ET (07:00 GMT)
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