AT&T Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2019; comparisons are with the three and nine months ended September 30, 2018. AT&T operates in communications, media and technology. Results include WarnerMedia only from its June 14, 2018 acquisition date, so nine-month comparisons are affected by the acquisition.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $44,588 | $45,739 | $134,372 | $122,763 |
| Operating income | $7,901 | $7,269 | $22,634 | $19,936 |
| Net income attributable to AT&T | $3,700 | $4,718 | $11,509 | $14,512 |
| Diluted EPS | $0.50 | $0.65 | $1.57 | $2.19 |
| Interest expense | $2,083 | $2,051 | $6,373 | $5,845 |
- Third-quarter revenue declined 2.5%, while operating income rose 8.7%. Operating margin increased to 17.7% from 15.9%. Attributable net income fell 21.6%, principally reflecting higher other expense, including pension actuarial losses.
- Nine-month revenue increased 9.5%, primarily because of WarnerMedia; operating income rose 13.5%, but attributable net income declined 20.7%. The filing reports a $4,048 pension and postretirement actuarial loss for the nine months, compared with a $2,726 actuarial gain in the prior-year period.
- Cash flow, nine months: Operating cash flow was $36,725, versus $31,522. Capital expenditures, including construction interest, were $15,843; cash flow less these expenditures was approximately $20,882. Including $2,601 of vendor-financing payments, total capital investment was $18,444. Investing cash outflow was $13,002 and financing cash outflow was $22,341. The filing does not provide quarterly cash-flow figures in the supplied text.
- Liquidity and debt at September 30: Cash and cash equivalents were $6,588; current assets were $50,695 and current liabilities were $68,126. Current debt was $11,608 and long-term debt was $153,568. The company reported a 45.9% debt ratio and 44.1% net debt ratio, and said it complied with its credit-agreement covenants, including the maximum 3.5-to-1 net debt-to-EBITDA covenant. No borrowings were outstanding under its two revolving credit facilities, totaling $15 billion.
- Dividends: $11,162 was paid in the first nine months; dividends declared were $1.53 per share for the period. Dividends remain subject to board declaration.
Material changes and segment trends
- Communications revenue fell 1.7% in Q3. Mobility operating contribution increased 3.0%, while Business Wireline contribution declined 17.8%; legacy services and video pressure continued. Entertainment Group video connections fell 14.3% year over year, while fiber broadband connections rose 47.6%.
- WarnerMedia revenue declined 4.4% in Q3, mainly on lower Warner Bros. theatrical and television product revenue; operating contribution increased 0.6%. HBO revenue rose 10.6%, supported by international licensing and digital and international subscriptions.
- Latin America revenue declined 5.6% in Q3, with foreign-exchange pressure; the segment remained loss-making. Xandr revenue increased 13.3%, but operating contribution declined 1.8% as expenses rose, including costs related to AppNexus and platform development.
- The company reported total assets of $548,796, including $146,106 of goodwill. Operating lease adoption added $24,477 of right-of-use assets and $22,288 of operating lease liabilities at quarter-end; the adoption had no material income-statement or cash-flow effect.
Outlook, commentary, risks and unusual items
- No consolidated financial earnings or revenue guidance is stated in the supplied filing text. Management said it expected continued quarterly declines in WarnerMedia intangible amortization. It planned mobile 5G coverage in parts of at least 29 U.S. cities by year-end 2019 and nationwide coverage to more than 200 million people by the first half of 2020.
- Management cited ongoing declines in legacy voice/data and linear video, changing viewing habits, competitive pricing, wireless churn, foreign-exchange exposure and the need for network and spectrum investment. Risks also include regulatory and privacy changes, litigation, pension assumptions, integration of WarnerMedia, network or technology failures, and adverse economic conditions.
- Unusual items included a $740 gain on the Hulu sale, an approximately $100 loss on the Hudson Yards sale-leaseback, and $4,048 of pension and postretirement actuarial losses in the first nine months. Q3 other expense also reflected a $1,917 actuarial loss. In September, a subsidiary issued $1.5 billion of preferred interests with an initial 5.0% annual distribution, subject to declaration.
- After quarter-end, AT&T agreed to sell its Puerto Rico and U.S. Virgin Islands operations for approximately $1.95 billion, expected to close in the first half of 2020, and announced other asset monetization transactions. The filing says these transactions are subject to closing conditions and expected timelines.
- The FTC matter concerning AT&T Mobility’s legacy data-throttling program had a tentative agreement with FTC staff pending approval; AT&T did not expect resolution to have a material adverse financial impact. Related litigation remained ongoing. The company reported no material risk-factor developments for the quarter.
Important facts for investors to verify
- Whether operating cash flow remains strong after working-capital actions and receivables sales, and how vendor financing affects reported capital investment and cash generation.
- Debt maturities, leverage, refinancing needs and covenant headroom, alongside the company’s dividend commitments and further asset-sale proceeds.
- Whether wireless service growth and fiber expansion can offset video, legacy-service and Business Wireline declines, while stabilizing subscriber churn.
- The scale and recurrence of pension remeasurement losses, and the sensitivity of reported earnings to discount-rate and other actuarial assumptions.
- Completion, timing and financial effects of announced dispositions, and the outcome of the FTC matter, remaining litigation and regulatory proceedings.