AT&T Inc. — 2021 Q2 Form 10-Q
Business context and period. This unaudited filing covers the quarter and six months ended June 30, 2021. AT&T reports Communications, WarnerMedia and Latin America; U.S. Video was classified as held for sale. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $44.045bn | $40.950bn | $87.984bn | $83.729bn |
| Operating income | $3.269bn | $3.532bn | $10.930bn | $11.018bn |
| Net income attributable to AT&T | $1.570bn | $1.281bn | $9.120bn | $5.891bn |
| Common diluted EPS | $0.21 | $0.17 | $1.25 | $0.81 |
| Operating cash flow | Not separately presented | Not separately presented | $20.837bn | $20.925bn |
| Capital expenditures | Not separately presented | Not separately presented | $7.992bn | $9.432bn |
Revenue rose 7.6% in Q2 and 5.1% for the first half. Operating margin declined to 7.4% from 8.6% in Q2 and to 12.4% from 13.2% for the half. First-half operating cash flow less capital expenditures was approximately $12.845bn, derived from reported figures; gross capital investment including vendor-financing payments was $10.986bn.
First-half cash used in investing was $30.631bn, principally including $23.169bn of acquisitions, largely C-Band spectrum, and $7.992bn of capital expenditures. Cash provided by financing was $11.900bn. Cash and cash equivalents at June 30 were $11.869bn; approximately $2.559bn was held by foreign entities and may be subject to repatriation restrictions.
Total debt obligations were $179.783bn at June 30, including $24.016bn due within one year and $155.767bn of long-term debt on the balance sheet. The debt ratio was 50.0%, versus 46.7% at December 31, 2020; net debt ratio was 46.7%, versus 43.8%. AT&T reported compliance with credit-facility covenants. The weighted-average interest rate on long-term debt, including derivatives, was approximately 3.8%.
Material changes and segment trends
- Communications: Q2 revenue rose 6.1% to $28.128bn, while operating contribution declined 2.0% to $7.340bn. Mobility revenue growth and subscriber additions were partly offset by lower Business Wireline and Consumer Wireline contribution. Mobility subscribers were 191.646 million, up 11.8% year over year; postpaid phone churn was 0.69%.
- WarnerMedia: Q2 revenue increased 30.7% to $8.791bn, led by subscriptions, advertising and content. Operating contribution fell 9.0% to $1.739bn as programming and marketing costs rose; operating margin decreased to 19.2% from 28.4%.
- Latin America: Q2 revenue rose 16.6% to $1.437bn, while operating contribution remained negative at $152m, improving from a $201m loss. Mexico growth and foreign-exchange effects supported results.
- Video: Q2 revenue declined 5.4% to $6.639bn. Premium TV connections fell 13.0% year over year to 15.412 million.
Reported first-half earnings benefited from a $2.647bn pension actuarial gain. Results also include a $4.555bn noncash, pretax impairment related to the planned sale of Vrio; the impairment included approximately $2.1bn of accumulated foreign-currency translation adjustments. Higher smartphone equipment sales and WarnerMedia revenue increased revenue, while associated equipment, sports programming and HBO Max content and marketing costs pressured expenses. The impairment and pension remeasurement make reported earnings less directly comparable with underlying operating trends.
Outlook, transactions and risks
- AT&T agreed to combine WarnerMedia with a Discovery subsidiary in a proposed Reverse Morris Trust transaction, expected to close in mid-2022 subject to approvals and other conditions. AT&T expects approximately $43bn in cash, debt securities and debt retained by WarnerMedia; AT&T shareholders are expected to own approximately 71% of the combined company. The transaction’s tax-free treatment depends on conditions including an IRS private letter ruling. The filing warns of execution, tax, financing, regulatory and integration risks, and potential termination fees.
- The U.S. Video transaction with TPG closed July 31, 2021, after the reporting date. AT&T received approximately $7.130bn in cash, plus preferred and common equity interests in the new DIRECTV entity, and accepted up to $2.1bn of potential net losses under the NFL SUNDAY TICKET contract. AT&T said the financial effects were still being assessed.
- The proposed sale of Playdemic for approximately $1.4bn was expected to close by year-end 2021, subject to approvals. The proposed sale of Vrio to Grupo Werthein was expected to close in early 2022; AT&T planned to retain its 41.3% interest in SKY Mexico.
- AT&T paid $7.571bn in dividends in the first half and declared $1.04 per common share. Management said it did not expect to change dividend policy before the WarnerMedia/Discovery transaction closes; after closing, and subject to board approval, it anticipated annual dividends of approximately $8bn–$9bn.
- AT&T paid $22.856bn toward C-Band licenses in Q1; licenses were granted in July and remain subject to clearing. Additional estimated incentive payments are $955m for Phase I and $2.112bn for Phase II, plus approximately $1bn of relocation costs over several years.
- Other disclosed risks include COVID-19 effects, competition and customer demand, regulatory and privacy developments, spectrum and network investment needs, litigation, benefit-plan assumptions, and network or supply-chain disruptions. Management stated disclosure controls were effective as of June 30, 2021.
Important facts for investors to verify
- Whether the WarnerMedia/Discovery transaction receives required shareholder, regulatory and tax approvals, closes on schedule, and delivers the expected value and debt reduction.
- The final cash, debt and equity consideration and continuing obligations from the completed Video transaction, including exposure under the NFL SUNDAY TICKET agreement.
- The timing, proceeds and closing conditions for Playdemic and Vrio dispositions, and the ultimate impact of the Vrio impairment.
- Debt maturities and refinancing needs, particularly $24.016bn due within one year, alongside spectrum clearing payments, relocation costs and dividend commitments.
- Whether Communications and WarnerMedia revenue growth can translate into improved operating contribution and margins amid equipment, programming and marketing costs.
- The sustainability of reported earnings and cash generation after separating the effects of the Vrio impairment, pension actuarial gain, asset-sale activity and working-capital timing.