AT&T Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results; financial amounts are in millions of dollars except per-share data. AT&T provides wireless, wireline, broadband, video, business communications and advertising services.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $31,478 | $31,581 | $94,220 | $92,919 |
| Operating income | $6,235 | $5,431 | $18,208 | $17,485 |
| Operating margin | 19.8% | 17.2% | 19.3% | 18.8% |
| Income from continuing operations | $3,686 | $11,616 | $10,812 | $18,241 |
| Net income attributable to AT&T | $3,623 | $12,319 | $10,622 | $18,775 |
| Diluted EPS attributable to AT&T | $0.61 | $2.07 | $1.79 | $3.16 |
Operating income rose 14.8% in Q3 and 4.1% year to date. Revenue was nearly flat in Q3 (-0.3%) and rose 1.4% year to date. Higher wireless service and data revenue and wireline IP/U-verse growth were offset by declining traditional voice and print-directory sales. Cash provided by operations was $27,150 for the first nine months, versus $25,350 a year earlier; capital expenditures were $14,625. Operating cash flow less capital expenditures was approximately $12,525. Dividends paid were $7,627.
At September 30, cash and equivalents were $10,762, compared with $1,437 at December 31, 2010. Debt was $71,226, including $8,900 maturing within one year and $62,326 long-term. The reported debt ratio was 38.5%, versus 37.1% at year-end 2010. Total assets were $277,653 and stockholders’ equity was $113,882. The board-declared dividend was $0.43 per share for Q3.
Material changes and operating trends
- Wireless: Q3 segment revenue rose 2.8% to $15,606 and segment income increased 31.7% to $4,613. Wireless service revenue grew 4.3%; data service revenue rose 18.0% in the quarter. Total subscribers reached 100.7 million, up 8.6% year over year. However, Q3 net additions fell 19.3% to 2.123 million, and postpaid net additions fell 57.2% to 319,000. Management cited slower industry growth, greater competition, Alltel integration and the delayed iPhone launch.
- Wireline: Q3 revenue declined 2.2% to $14,961 and segment income declined 8.9% to $1,810. Data revenue grew 7.6%, including IP growth, while voice revenue fell 10.5%. Switched access lines declined 12.3% year over year. U-verse video connections grew 30.7% to 3.583 million.
- Advertising Solutions: Q3 revenue fell 16.4% to $803 and segment income fell 24.6% to $156, primarily from the continued migration from print advertising to online search.
- Lower Q3 operating expenses, including wireless handset costs, employee-related charges and customer-list amortization, helped lift consolidated operating margin. Year-to-date cost of services and sales rose 3.8%, reflecting smartphone sales and upgrades, network costs and Alltel integration expenses.
Outlook, risks, contingencies and unusual items
- Management expected 2011 capital expenditures to be approximately $20 billion, subject to a favorable regulatory environment. The filing provides no clear full-year earnings or revenue guidance.
- The proposed T-Mobile acquisition was valued at approximately $39 billion ($25 billion cash and $14 billion stock), subject to approvals. The DOJ sued to block it; Sprint and Cellular South also brought challenges. AT&T intended to contest the allegations and anticipated a first-half 2012 closing. If the deal did not close, AT&T could owe a $3 billion breakup fee, enter a broadband roaming agreement and transfer spectrum. A bridge facility of up to $20 billion was arranged; a debt-to-EBITDA covenant of no more than 3.0-to-1.0 applies after closing.
- AT&T cited spectrum and wireless network-capacity constraints that could affect service quality and future offerings. It was awaiting FCC approval for a roughly $1.925 billion Qualcomm spectrum purchase and expected completion by the end of Q1 2012.
- 2010 comparisons are distorted by an $8.3 billion IRS tax benefit recorded in Q3 2010 and a $767 million after-tax gain on the Sterling Commerce sale. Accordingly, 2010 effective tax rates were unusually negative; AT&T’s 2011 effective tax rates were 34.0% for Q3 and 34.1% year to date. The filing also notes a $995 million 2010 tax charge related to healthcare legislation.
- AT&T changed its pension and postretirement accounting in 2011 to recognize actuarial gains and losses immediately; annual remeasurement gains or losses generally would be recorded in Q4. Combined net pension and postretirement cost declined $265 year to date, primarily due to lower interest costs following a discount-rate reduction. No significant ERISA contributions were required for 2011.
- Other disclosed uncertainties include ongoing wireline and directory declines, regulatory changes, U-verse franchise and PEG-programming disputes, litigation, benefit-plan assumptions, foreign exchange exposure, and execution and integration risks. Management said the October 2011 FCC reforms were expected to have a positive long-term financial impact, but its analysis was preliminary.
Key facts for investors to verify
- Track wireless postpaid net additions, churn, data-revenue growth and capacity investments alongside handset-related costs and margins.
- Assess whether U-verse and IP-based business revenue can offset continuing access-line, voice and print-advertising declines.
- Monitor the T-Mobile litigation, regulatory approvals, potential breakup obligations, financing terms and post-acquisition leverage covenant.
- Review cash generation against capital spending, dividends and debt maturities; $3.25 billion of Q4 2011 debt repayments were paid in October, and AT&T called $1 billion of notes for redemption in November.
- Evaluate Q4 pension remeasurement effects and distinguish recurring earnings from the unusually favorable 2010 tax settlement and Sterling sale gain.