AT&T INC. annual report, FY2014

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Business context and reporting period

AT&T Inc.’s Form 10-K covers the fiscal year ended December 31, 2014; it is not a standalone fourth-quarter report. AT&T provides wireless and wireline communications services, with Wireless and Wireline as its reportable segments. The supplied filing text incorporates the annual report’s financial statements and MD&A by reference but does not include their detailed figures.

Financial and operating metrics

  • Financial statements: The supplied text does not provide clear values for consolidated revenue, net income, operating cash flow, capital expenditures, margins, debt balances, cash, or liquidity ratios.
  • Revenue mix: As a share of consolidated operating revenue, wireless service was 46% in 2014 versus 48% in 2013; wireless equipment was 10% versus 6%; wireline service was 43% versus 45%; and wireline equipment was 1% in both years.
  • Segment contribution: Wireless generated approximately 56% of 2014 segment operating revenue and 75% of segment income; Wireline contributed approximately 44% and 25%, respectively.
  • Cash returned to shareholders: AT&T declared dividends of $1.85 per share in 2014, up from $1.81 in 2013. It repurchased 48 million shares for $1.617 billion in 2014; the comparable 2013 repurchases were approximately 366 million shares for $13.028 billion.
  • Research and development: Expense was $1.730 billion in 2014, $1.488 billion in 2013, and $1.278 billion in 2012.
  • Operating scale: AT&T served more than 120 million wireless subscribers and had 12.5 million U-verse subscribers at year-end 2014. Wireline access lines included approximately 9 million retail consumer, 9 million retail business, and 2 million wholesale lines.

Material changes versus the prior comparable period

  • Wireless equipment’s share of consolidated revenue rose four percentage points year over year, while wireless service and wireline service shares each declined two points.
  • AT&T completed its acquisition of Leap Wireless in March 2014 and sold its Connecticut ILEC operations during 2014.
  • In 2014, the company repurchased substantially fewer shares than in 2013, while the declared per-share dividend increased.
  • U-verse broadband and video expansion continued; AT&T reported reaching its goal of extending IP-broadband service to approximately 57 million customer locations.

Outlook, risks, contingencies, and unusual items

  • Management expected equipment revenue to increase in 2015, with a proportionate decline in service revenue, as more postpaid customers use installment-based handset plans. The supplied text does not provide clear consolidated earnings or revenue guidance.
  • AT&T agreed to acquire DIRECTV in 2014. It stated that, after completing the acquisition, its priority would be to use free cash flow after dividends to pay down debt.
  • In January 2015, AT&T reported winning bids for 251 AWS spectrum licenses for $18.189 billion. The filing also disclosed January 2015 term-loan agreements of $9.155 billion and $2.0 billion.
  • AT&T completed a Mexican wireless acquisition in January 2015 and announced an agreement to acquire NII Holdings. These transactions and the pending DIRECTV acquisition could affect financing needs, integration, and results.
  • Key stated risks include wireless spectrum and network-capacity constraints, intense competition and declining traditional wireline services, potential changes to broadband regulation, litigation, benefit costs, severe weather and network or data-security incidents. AT&T expected to discontinue 2G service by approximately January 1, 2017.
  • Contracts covering approximately 41,000 non-Mobility employees were due to expire during 2015; the company warned that work stoppages or labor disruptions could occur if agreements were not reached.
  • AT&T reported an EPA-related compliance audit process that could lead to civil penalties above $100,000 but not expected to be material. A separate California hazardous-waste matter was settled in 2014 for an immaterial sum. The company said it did not believe pending legal proceedings required material-proceeding disclosure.

Important facts for investors to verify

  1. Review the incorporated annual report’s income statement, cash-flow statement, balance sheet, debt disclosures, and MD&A for full-year results and liquidity details; those figures are not present in the supplied text.
  2. Check the status, final financing, and integration implications of the DIRECTV transaction and the announced Mexican wireless transactions.
  3. Verify the cost and funding of spectrum purchases, network investment requirements, and whether wireless capacity constraints affect service quality or subscriber growth.
  4. Assess the impact of equipment-versus-service revenue mix changes, traditional wireline declines, and regulatory developments on future margins and cash generation.
  5. Monitor debt reduction plans, dividends, and share repurchases against actual free cash flow and acquisition-related financing.