AT&T Inc. — First-Quarter 2011 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2011, compared with the same 2010 period. AT&T provides wireless and wireline communications, broadband, video, managed networking, and advertising services. Amounts below are in millions of dollars unless stated otherwise.
Financial and operating performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Operating revenue | $31,247 | $30,530 | +2.3% |
| Operating income | $5,808 | $5,971 | -2.7% |
| Operating margin | 18.6% | 19.6% | -1.0 percentage point |
| Income from continuing operations | $3,468 | $2,538 | +36.6% |
| Net income attributable to AT&T | $3,408 | $2,453 | +38.9% |
| Diluted EPS attributable to AT&T | $0.57 | $0.41 | Up $0.16 |
| Cash from operating activities | $7,732 | $7,238 | +$494 |
| Capital expenditures | $4,133 | $3,148 | +$985 |
- Wireless service revenue rose 8.6% to $13,961; total Wireless segment revenue increased 10.2% to $15,309. Data service revenue grew 23.9%, while equipment revenue increased 28.7%. Wireless segment income fell 5.6% to $3,942 and its operating margin declined to 25.8% from 30.0%, chiefly reflecting smartphone subsidies, commissions, network costs, and Alltel customer migration costs.
- Wireline revenue declined 3.2% to $14,950 and segment income fell 7.4% to $1,726. Data revenue grew 8.0%, including growth in U-verse and strategic business services, but voice revenue fell 12.5%. Switched access lines declined 12.2% year over year.
- Advertising Solutions revenue fell 16.6% to $868 and segment income fell 20.5% to $190, mainly reflecting lower print advertising. Other segment income was $199 versus a $92 loss, helped by higher equity earnings, particularly from América Móvil.
- The effective tax rate was 34.2%, compared with 53.0%. The prior-year quarter included a $995 tax charge related to healthcare legislation; this comparison substantially boosts the reported year-over-year increase in earnings.
- Net cash used in investing activities was $4,075; net cash used in financing was $3,703, including $2,540 of dividends paid and $1,264 of long-term debt repayments. Cash declined $46 to $1,391 during the quarter.
- At March 31, total debt was $65,028: $6,902 maturing within one year and $58,126 long-term. The debt ratio was 36.6%, versus 37.1% at year-end 2010 and 40.5% a year earlier. Total current assets were $19,737 and current liabilities $33,254.
Material changes, outlook, and management commentary
- Management attributed revenue growth mainly to wireless subscriber and data growth and wireline IP data growth. Smartphone sales and upgrades also drove higher operating costs, contributing to lower operating income and margin.
- Wireless customers totaled 97.5 million, up 12.1% year over year. Postpaid net additions were 62,000 versus 512,000; postpaid churn increased to 1.18% from 1.07%. Management cited industry maturation, the end of iPhone exclusivity, and Alltel migration among factors affecting additions and churn. It expected data revenue growth to continue and voice ARPU to remain under pressure.
- AT&T expected 2011 capital expenditures in the low-to-mid $19 billion range, subject to a favorable regulatory environment. Wireless spending supported capacity expansion and an anticipated mid-year LTE commercial launch. The filing gives no full-year earnings or revenue guidance.
- On March 20, AT&T agreed to acquire T-Mobile USA for approximately $39 billion—$25 billion cash and approximately $14 billion in AT&T shares, subject to adjustments. The transaction, expected to close in about a year, required regulatory approvals. AT&T cited spectrum, capacity, and LTE expansion as expected benefits. If it does not close, potential obligations include a $3 billion breakup fee, a roaming agreement, and spectrum transfer.
- AT&T arranged up to $20 billion in unsecured bridge financing for the proposed acquisition, with a debt-to-EBITDA covenant of no more than 3.0 to 1.0. Advances, if drawn, must be repaid within one year. Separately, AT&T agreed to buy Qualcomm spectrum for approximately $1.925 billion, pending FCC approval; closing was anticipated in the second half of 2011.
- Management identified increasing wireless spectrum and capacity constraints, competition and continued wireline-line losses as business risks. Regulatory proceedings could affect broadband, roaming, universal service, intercarrier compensation, and U-verse deployment. The filing also describes U-verse franchise and PEG-programming disputes and pending litigation, including appeals in NSA-related cases and retiree phone-concession litigation; management stated certain adverse outcomes were considered unlikely to have a material effect.
- AT&T changed its accounting for pension and postretirement actuarial gains and losses to recognize them immediately in earnings; such remeasurement generally occurs in the fourth quarter. Prior-period segment data was recast. Combined pension and postretirement cost declined $88 to $280, primarily due to lower interest cost associated with a lower discount rate.
Important facts for investors to verify
- Regulatory progress, financing needs, integration risks, and any breakup obligations related to the proposed T-Mobile acquisition.
- Whether wireless subscriber growth and data monetization can offset higher handset, network, and customer-acquisition costs, while managing churn and capacity constraints.
- The pace of wireline access-line declines and whether U-verse, broadband, and strategic IP services can offset falling voice revenue.
- Execution of the $19 billion-range capital spending outlook, LTE deployment, and the pending Qualcomm spectrum purchase.
- Effects of pension accounting changes and the prior-year $995 healthcare-related tax charge when assessing earnings comparability.
- Liquidity and debt maturities, including the $6,902 due within one year; the filing reports $1,391 of cash at quarter-end and a $20 billion acquisition bridge commitment, not a drawn advance.