AT&T Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. Amounts are in millions of dollars, except per-share data and where noted.
Business context
AT&T provides wireless and wireline communications services, including voice, data, broadband, video and managed networking. Its reportable segments are Wireless and Wireline. Results include Leap Wireless from its March 13, 2014 acquisition.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $32,575 | $32,075 | $65,051 | $63,431 |
| Operating income | $5,616 | $6,113 | $11,894 | $12,053 |
| Net income attributable to AT&T | $3,547 | $3,822 | $7,199 | $7,522 |
| Diluted EPS | $0.68 | $0.71 | $1.38 | $1.38 |
| Dividends declared per share | $0.46 | $0.45 | $0.92 | $0.90 |
- Q2 revenue grew 1.6%, while operating income fell 8.1% and AT&T-attributable net income fell 7.2%. For the first half, revenue rose 2.6%, operating income declined 1.3%, and attributable net income declined 4.3%.
- Q2 operating income was pressured by lower wireless service revenue, declining legacy voice and data products, and higher U-verse content costs. Equipment revenue growth, including sales under AT&T Next, partially offset these pressures.
- Wireless segment operating income declined 7.5% in Q2; its operating margin fell to 24.1% from 27.1%. Wireline segment operating income declined 12.9%; its margin fell to 9.7% from 11.1%.
- Wireless subscribers totaled 116.6 million, up 8.1% year over year, including Leap subscribers. Postpaid churn improved to 0.86% from 1.02%, while total churn increased to 1.47% from 1.36%. Mobile Share and installment-plan adoption contributed to lower reported service revenue and ARPU.
- Wireline revenue declined 0.9% in Q2. U-verse Internet connections rose 26.5% and video connections rose 17.0% year over year, while total switched access lines fell 16.0%.
Cash flow, debt and liquidity
- First-half operating cash flow was $16,869, down from $17,711 a year earlier. Capital expenditures were $11,649, versus $9,665. Investing cash outflow was $7,701; financing cash outflow was $1,202.
- Cash and cash equivalents were $11,305 at June 30, 2014, compared with $3,339 at year-end 2013. The increase included proceeds from asset sales and debt issuance.
- Debt totaled $84,052, comprising $10,482 maturing within one year and $73,570 of long-term debt. The reported debt ratio was 47.6%, compared with 45.0% at December 31, 2013. AT&T had no borrowings under its revolving credit agreements and reported compliance with their covenants.
- First-half dividends paid were $4,784 and share repurchases were $1,396. AT&T repurchased approximately 42 million shares in the first half.
Material changes and unusual items
- AT&T sold its remaining América Móvil investment on June 30 for approximately $5,566 and recorded a pretax gain of $1,243. Total first-half other income also included gains on América Móvil shares and other investments. The sale increased the effective tax rate: 40.7% for Q2 and 37.4% for the first half, versus 33.0% and 31.2% in 2013, respectively. Despite the gain, higher taxes and operating pressures contributed to lower net income.
- AT&T changed the estimated useful life of capitalized non-network software to five years effective April 1, 2014. Without the change, reported depreciation and amortization would have been $213 higher in both Q2 and the first half.
- Leap was acquired for $1,248, plus contingent value rights tied to a future license sale. Its associated acquired debt was estimated at $3,889 and was redeemed or matured by July 31, 2014.
- AT&T sold $1,637 of gross equipment-installment receivables in June, receiving $819 in cash and recording a $565 deferred purchase price. The filing says the transaction did not materially affect income or total assets.
Outlook, management commentary and risks
- Management expected 2014 capital expenditures to be approximately $21 billion and described 2014 as the peak investment year for Project VIP. It expected lower operating cash flow in 2014, citing AT&T Next installment collections, Leap integration costs and higher tax payments.
- Management expects continued growth in wireless and wireline IP-based services, alongside ongoing declines in traditional voice and basic wireline data. It expects wireless service revenue pressure as customers adopt Mobile Share plans, with equipment revenue benefiting from AT&T Next.
- The proposed DIRECTV acquisition, announced at approximately $48.5 billion, remained subject to stockholder approval, FCC and Department of Justice review, and other conditions. AT&T identified integration, financing, added debt and shares, regulatory approvals, potential divestitures, and realization of synergies as risks. Closing was expected within 12 months of announcement.
- Other significant risks include wireless spectrum and capacity constraints, changing broadband and net-neutrality regulation, competition and legacy-service declines. AT&T said it intended to bid at least $9 billion in the 600 MHz spectrum auction, subject to sufficient spectrum being available.
- The Connecticut wireline sale for $2 billion remained subject to state regulatory approvals; AT&T expected a fourth-quarter 2014 close. A California hazardous-waste investigation could result in civil penalties, which AT&T did not expect to be material.
Most important facts for investors to verify
- Whether service-revenue and margin pressure from Mobile Share and installment plans continues, and whether equipment revenue offsets it.
- Operating cash flow, capital spending and debt trends, including funding needs for network investment and the proposed DIRECTV transaction.
- DIRECTV regulatory and stockholder approvals, final deal terms, financing impact and realization of expected synergies.
- Progress in obtaining spectrum and addressing network-capacity constraints, and any material regulatory developments affecting broadband or U-verse.
- Completion and proceeds of the Connecticut sale, and receipt of the remaining América Móvil sale consideration.