AT&T Inc. — Q2 2010 Form 10-Q
Business context and reporting period. Unaudited quarterly filing for the three and six months ended June 30, 2010, compared with the corresponding 2009 periods. AT&T provides wireless and wireline communications, broadband and video, managed networking, and advertising services. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $30,808 | $30,614 | $61,338 | $61,071 |
| Operating income | $6,114 | $5,500 | $12,121 | $11,240 |
| Operating margin | 19.8% | 18.0% | 19.8% | 18.4% |
| Net income attributable to AT&T | $4,023 | $3,198 | $6,498 | $6,324 |
| Diluted EPS attributable to AT&T | $0.68 | $0.54 | $1.10 | $1.07 |
- Cash flow: Six-month operating cash flow was $15.810 billion, compared with $15.772 billion. Capital expenditures were $7.856 billion; cash used in investing was $11.303 billion and cash used in financing was $6.871 billion. Cash declined $2.364 billion to $1.377 billion.
- Debt and liquidity: Debt was $70.0 billion at June 30 ($9.721 billion due within one year and $60.277 billion long term), versus $72.081 billion at December 31, 2009. The debt ratio was 40.3%, compared with 41.3% at year-end. Current assets were $21.392 billion and current liabilities $36.182 billion. AT&T reported no borrowings under its $9.465 billion credit agreement and compliance with its debt covenant.
- Dividend: $0.42 per share declared in Q2, versus $0.41 a year earlier; $0.84 per share for the first half, versus $0.82.
Material changes and business trends
- Q2 revenue grew 0.6% and first-half revenue 0.4%; operating income rose 11.2% and 7.8%, respectively. Lower expenses, including reduced pension and postemployment benefit costs, and wireless and data growth supported margin expansion.
- Wireless service revenue increased 10.3% in both periods. Total wireless customers reached 90.1 million; Q2 organic net additions were 1.6 million. Data service ARPU rose 14.0% in Q2, while total service ARPU declined 1.1%. Postpaid net additions fell 56% in Q2, although total and postpaid churn improved.
- Wireline revenue declined 3.7% in Q2 and 4.1% for the first half. Voice revenue fell 12.5% and 12.3%; data revenue grew 8.3% and 6.9%, driven largely by IP services and U-verse. Switched access lines declined 11.1% year over year.
- Advertising Solutions revenue fell 16.8% in Q2 and 16.7% for the first half, primarily from lower print advertising; segment income declined 40.4% and 37.8%.
Outlook, unusual items, and risks
- Outlook: Management expected 2010 capital expenditures of $18–$19 billion, subject to a favorable regulatory environment. It anticipated further declines in postpaid net additions, continued growth in wireless data, and ongoing pressure on voice ARPU and wireline voice revenue.
- Unusual items: First-half income tax expense included a $995 million charge from the Medicare Part D subsidy tax change; the six-month effective tax rate was 43.1%, versus 34.6%. Q2 and first-half other income included a $647 million pretax gain from exchanging Telmex Internacional shares for América Móvil shares. These items affected comparability.
- Transactions: AT&T acquired specified Verizon Wireless properties for $2.372 billion in June, adding approximately 1.6 million subscribers; management expected costs to convert the acquired network and handsets to AT&T technology. The planned Sterling sale to IBM for $1.4 billion remained subject to approvals; AT&T anticipated an $800 million pretax disposal gain upon completion and expected closing by September 30, 2010.
- Risks and contingencies: AT&T cited competition, continued wireline access-line losses, wireless network capacity and investment needs, and uncertainty around broadband, net-neutrality, and other regulatory proceedings. U-verse deployment could be delayed by permitting, litigation, or equipment and software availability. The NSA-related cases had been dismissed, but appeals remained pending; management said it considered the appeal without merit. Management said there were no material risk-factor developments in the quarter.
- Subsequent financing: In July AT&T issued $2.25 billion of 2.50% notes due 2015 for approximately $2.235 billion in proceeds. In August it announced a conditional exchange offer for certain long-dated notes.
Important facts for investors to verify
- How much reported earnings growth reflects recurring operations versus the $647 million investment gain and the first-half tax charge.
- Whether wireless data growth and improved churn can offset slower postpaid additions, lower total service ARPU, and network investment and conversion costs.
- Whether wireline IP/data growth and expense reductions can continue to counter declining voice lines and print advertising.
- Completion, timing, and proceeds of the Sterling sale and the related anticipated gain; also track the acquired wireless assets’ integration costs.
- Capital spending versus guidance, cash generation and dividend funding, upcoming debt maturities, and outcomes of material regulatory and litigation matters.