AT&T Inc. — Q1 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012. AT&T provides wireless and wireline communications, broadband, video, and related services. Figures below are in millions of dollars unless stated otherwise.
Financial and operating performance
- Revenue: $31,356, down 1.5% from $31,822. The prior-year period included $744 of Advertising Solutions revenue; continuing voice revenue declines also weighed on results.
- Profit and margins: Operating income was $5,940, down 2.6%; operating margin fell to 18.9% from 19.2%. Net income attributable to AT&T rose 3.2% to $3,700. Diluted EPS increased to $0.67 from $0.60. The effective tax rate declined to 29.2% from 33.8%, primarily because of benefits from tax audit settlements.
- Segment trends: Wireless revenue rose 3.4% to $16,691 and segment income increased 4.0% to $4,658; wireless data revenue increased 21.0%. Wireline revenue fell 1.8% to $14,655 and segment income declined 5.0% to $1,633, as data growth did not offset falling voice revenue. Wireless customers totaled 107.3 million, up 3.2%; net additions fell 59.9% to 291,000, while total churn improved to 1.38% from 1.47%.
- Cash flow and investment: Cash from operations was $8,199, versus $7,845. Capital expenditures were $4,252, excluding $66 of construction interest; operating cash flow less capital expenditures was approximately $3,947. Investing activities used $5,357, including $1,045 for spectrum acquisitions. Cash declined $993 during the quarter to $3,875.
- Debt and liquidity: Debt totaled $74,132, comprising $3,446 due within one year and $70,686 of long-term debt, up from total debt of $69,844 at December 31, 2012. The debt ratio was 45.6%, versus 43.0% at year-end 2012. AT&T had no borrowings under its $8,000 of revolving credit facilities and reported compliance with their covenants.
- Shareholder returns: AT&T repurchased 168 million shares for $5,911 and paid $2,502 in dividends. The declared quarterly dividend was $0.45 per share, compared with $0.44 a year earlier.
Material changes and management commentary
- Wireless data revenue growth and wireline IP/U-verse and strategic business services partly offset declines in wireless voice/text and traditional wireline voice and data. U-verse high-speed Internet subscribers increased 42.2% to 8.447 million and video connections increased 19.5% to 4.768 million. Switched access lines fell 14.4% to 28.043 million.
- Management said the business is shifting from traditional voice and basic data toward IP-based services, and expects continued growth in wireless and wireline IP data alongside continued declines in voice and basic wireline data.
- AT&T sold Advertising Solutions in May 2012; the comparison therefore includes a prior-period business no longer consolidated. AT&T retained a 47% interest in YP Holdings.
- Combined net pension and postretirement cost fell to $130 from $240, reflecting lower interest costs and higher amortization of plan credits, partly offset by lower expected returns on plan assets.
Outlook, risks and contingencies
- Management expected 2013 capital expenditures of approximately $21 billion and approximately $20 billion in each of 2014 and 2015, with no reduction in the planned Project VIP broadband expansion. The company targeted LTE coverage of nearly 90% of its original 300-million-person 2014 coverage goal by year-end 2013 and wireline IP broadband availability to approximately 75% of customer locations in its 22-state service area by year-end 2015.
- Management identified wireless spectrum and network capacity constraints as risks to service quality and deployment of advanced services, and noted that addressing capacity requires network investment and access to additional spectrum.
- Pending transactions included an agreement to acquire Atlantic Tele-Network’s U.S. retail wireless operations for $780, expected to close in the second half of 2013 subject to regulatory review, and an agreement to acquire Verizon spectrum for $1,900 cash plus spectrum assignments, also subject to review. AT&T completed the $600 NextWave acquisition and approximately $450 of other spectrum acquisitions during the quarter.
- AT&T disclosed U-verse regulatory and right-of-way disputes that could raise costs or limit service deployment if resolved adversely. A Missouri Universal Service Fees class settlement was finally approved, with liability capped at approximately $150; implementation was proceeding. Wage-and-hour settlements were approved in April 2013 and were not expected to materially affect the financial statements.
- AT&T anticipated seeking Department of Labor approval for a proposed $9,500 preferred equity contribution to its pension trust before September 15, 2013; the proposal’s final financial-reporting treatment remained subject to its final terms. The company also cited competition, regulatory and tax changes, litigation, benefit costs, technology, spectrum availability, and economic conditions as risks. It reported no material risk-factor developments during Q1.
Important facts for investors to verify
- Whether data and IP service growth can continue to offset voice declines, and whether wireless subscriber additions and churn trends improve.
- Whether the planned Project VIP investment and announced capital spending translate into network capacity, coverage, and profitable revenue growth.
- Debt growth, the pace of future share repurchases, and the sustainability of dividends alongside spectrum purchases and capital investment.
- Regulatory approvals, closing terms, and integration outcomes for pending spectrum and wireless acquisitions; also track the pension contribution approval and final accounting treatment.
- The extent and timing of tax benefits from audit settlements, and the eventual costs or outcomes of U-verse regulation, litigation, and labor negotiations.