AT&T Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2012. Comparisons are with the three months ended March 31, 2011 unless otherwise noted. The interim financial statements are unaudited.
Business context and results
AT&T provides wireless and wireline communications services, equipment, managed networking, and advertising solutions in the United States and internationally. It reports Wireless, Wireline, Advertising Solutions, and Other segments.
- Operating revenue was $31.822 billion, up 1.8%. Wireless service and equipment growth and higher U-verse and strategic business services revenue more than offset declines in wireline voice and print advertising.
- Operating income rose 5.0% to $6.101 billion; operating margin increased to 19.2% from 18.6%.
- Net income was $3.652 billion; net income attributable to AT&T was $3.584 billion, up 5.2%. Diluted EPS was $0.60, compared with $0.57. The effective tax rate was 33.8%, versus 34.2%.
- Interest expense was $859 million, up 1.5%, primarily reflecting higher amortization associated with early debt redemption.
- Wireless segment revenue increased 5.4% to $16.136 billion and segment income rose 11.0% to $4.374 billion. Wireless operating margin increased to 27.2% from 25.8%. Data service revenue grew 19.9%; total ARPU declined 2.7%, and net subscriber additions fell 63.4% to 726,000.
- Wireline segment revenue decreased 0.8% to $14.928 billion, while segment income increased 2.4% to $1.823 billion. Data revenue grew 8.7%, but voice revenue declined 10.0%; switched access lines were down 12.7% year over year.
- Advertising Solutions revenue declined 14.3% to $744 million and segment income fell 36.8% to $120 million, primarily due to weaker print advertising.
Cash flow, debt, and liquidity
- Cash from operations was $7.796 billion, compared with $7.732 billion. Investing cash outflow was $4.737 billion, including $4.261 billion of capital expenditures and $433 million for acquisitions, including $376 million for wireless spectrum.
- Financing cash outflow was $3.802 billion. It included $2.606 billion of dividends and $2.066 billion of share repurchases, partly offset by $2.986 billion of long-term debt issuance. Cash decreased $743 million to $2.442 billion from year-end 2011.
- Capital expenditures, excluding interest during construction, were $4.261 billion. Management expected full-year 2012 capital expenditures of approximately $20 billion, assuming a favorable regulatory environment for investment.
- Debt totaled $65.709 billion at March 31, comprising $6.775 billion maturing within one year and $58.934 billion of long-term debt. The reported debt ratio was 38.4%, versus 38.0% at December 31, 2011. The ratio does not take available cash into account.
- Current assets were $20.765 billion and current liabilities were $32.520 billion. AT&T reported no advances under its revolving credit agreements and compliance with their covenants.
- The board had authorized repurchases of up to 300 million shares. AT&T repurchased 67.7 million shares for $2.066 billion in the quarter and said it expected to continue the program. The declared quarterly dividend was $0.44 per share, up from $0.43.
Material changes, outlook, and risks
- Growth was led by wireless data usage and U-verse, while traditional wireline voice and directory advertising continued to contract. Management noted rising smartphone commissions and network costs, as well as ongoing wireless capacity and spectrum constraints that could affect service quality and expansion if not addressed.
- On April 9, 2012, AT&T announced an agreement to sell its Advertising Solutions and Interactive businesses for approximately $750 million cash, a $200 million note, and a 47% equity interest in the new company. Closing was expected mid-year 2012; AT&T did not expect a material gain or loss.
- Contracts covering approximately 40,000 collectively bargained wireline employees expired in early April. Negotiations were continuing; the union could call a work stoppage in the absence of an effective contract.
- AT&T disclosed U-verse-related regulatory and litigation risks, including disputes about video-service regulation and PEG programming. It also cited pending appeals concerning FCC universal-service and intercarrier-compensation rules, but did not expect those rules to materially affect operating results.
- Other disclosed matters included continuing appeals in NSA-related litigation, a universal-service-fees class action that management considered unlikely to have a material effect, and wage-and-hour settlements subject to court approval that were not expected to be material. A California hazardous-waste investigation could result in civil penalties, but AT&T said the amount was not expected to be material.
- Management identified competition, wireline line losses, wireless spectrum availability, network investment needs, regulation, litigation, benefit costs, and economic conditions among factors that could cause future results to differ. The filing provides a capital-spending outlook but no specific full-year revenue, earnings, or EPS guidance.
Important facts for investors to verify
- Whether wireless data revenue growth and improved wireless margins can continue amid lower total ARPU, fewer net additions, and capacity constraints.
- Progress on wireline voice-line declines and the growth and profitability of U-verse and strategic business services.
- Completion and final consideration for the Advertising Solutions and Interactive sale, including the value and terms of the retained 47% interest.
- Execution of the approximately $20 billion 2012 capital-spending plan, debt maturities and refinancing, and the effect of ongoing buybacks and dividends on liquidity.
- Outcomes of labor negotiations, spectrum and U-verse regulatory matters, and other litigation or investigations identified in the filing.