AT&T Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Dollar amounts are in millions unless otherwise noted. AT&T provides wireless, wireline, broadband and video services in the U.S. and wireless services in Mexico. The interim statements are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $33,015 | $32,575 | $65,591 | $65,051 |
| Operating income | $5,712 | $5,616 | $11,168 | $11,894 |
| Operating margin | 17.3% | 17.2% | 17.0% | 18.3% |
| Net income attributable to AT&T | $3,044 | $3,547 | $6,244 | $7,199 |
| Diluted EPS | $0.58 | $0.68 | $1.20 | $1.38 |
- Q2 revenue rose 1.4%; service revenue was nearly flat at $29,541, while equipment revenue increased 15.1% to $3,474. For the half year, revenue rose 0.8%, with service revenue down 1.4% and equipment revenue up 23.9%.
- Q2 operating income increased 1.7%, but six-month operating income declined 6.1%. Higher wireless equipment and network costs, including $364 of Leap-related network rationalization charges in the first half, contributed to cost growth; lower selling, general and administrative expenses provided a partial offset.
- Q2 net income attributable to AT&T fell 14.2%. The comparison was affected by $1,245 of investment-sale gains in Q2 2014, mainly from América Móvil shares, versus $17 of net investment-sale gains in Q2 2015. Higher interest expense also weighed on results.
- Six-month operating cash flow was $15,898, down from $16,869. Capital expenditures were $8,328, implying operating cash flow less capital expenditures of approximately $7,570. Investing activities used $27,660, including spectrum purchases and acquisitions; financing activities provided $24,115.
- Cash and equivalents were $20,956 at June 30, 2015, versus $8,603 at year-end 2014. Total debt was approximately $113,670, versus $82,067 at year-end. The reported debt ratio was 56.5% and net debt ratio 46.1%; management noted that debt raised in anticipation of the DIRECTV acquisition affected these measures.
- Current assets were $43,163 and current liabilities $40,527. The quarterly dividend declared was $0.47 per share; dividends paid in the first half totaled $4,873.
Segments and operating trends
- Wireless: Q2 segment revenue was $18,304, up 2.1%, and segment income was $4,680, up 8.9%. Six-month segment income declined 2.2%. Wireless subscribers totaled 123.9 million, up 6.2% year over year; Q2 postpaid net additions declined to 410,000 from 1.026 million, and postpaid churn increased to 1.01% from 0.86%.
- Wireline: Q2 revenue declined 2.9% to $14,214 and segment income fell 4.1% to $1,365. Legacy voice, data and access-line declines and the Connecticut operations sale were partly offset by U-verse and strategic business services. Total switched access lines fell 19.7% year over year.
- International: New Mexico wireless operations generated Q2 revenue of $491 and a segment loss of $163. AT&T reported approximately 9 million subscribers in Mexico.
Material changes, acquisitions and outlook
- AT&T acquired GSF Telecom in January and Nextel Mexico in April 2015, expanding its Mexican wireless operations. It also paid $18,189 for 251 AWS-3 spectrum licenses, with the remaining payment made in the first quarter.
- On July 24, 2015, after quarter-end, AT&T completed the DIRECTV acquisition. Consideration was $47,110, comprising $14,379 cash and $32,731 in AT&T shares; 954.5 million shares were issued, giving DIRECTV shareholders approximately 16% of the combined company. DIRECTV had approximately $15,891 of net debt. These post-quarter figures were not part of the June 30 balance sheet.
- Management expected 2015 capital expenditures of approximately $18,000, excluding DIRECTV. Following the acquisition, management said its priority was to use free cash flow after dividends to reduce debt. Management cited potential bundling and cost synergies from DIRECTV, but cautioned that integration, regulatory commitments and realizing expected benefits present risks.
- FCC conditions on the DIRECTV transaction include broadband build-out and low-income broadband commitments, restrictions on discriminatory usage-based practices, interconnection disclosures and compliance reporting. Conditions generally run for four years from July 24, 2015.
- Material risks include wireless spectrum and network-capacity constraints; competition and continuing legacy wireline declines; increased debt and interest burden; foreign-exchange and Mexico-market exposure; and regulatory change, including the FCC’s broadband reclassification and net-neutrality rules, which AT&T and other parties appealed.
Contingencies and unusual items
- The FCC proposed a $100 penalty against AT&T Mobility related to disclosures for legacy unlimited-data plans; the matter was pending and AT&T disputed the allegations. The FTC separately sued over the same program, seeking injunctive relief and unspecified damages.
- Three putative class actions challenged DIRECTV’s NFL Sunday Ticket arrangement, seeking unspecified treble damages and injunctive relief. The FTC also sued DIRECTV over marketing and disclosure practices. AT&T disputed the allegations.
- AT&T disclosed a California waste-disposal inquiry involving DIRECTV and said potential civil penalties could exceed $100,000 but were not expected to be material. A Southeast-region labor contract covering approximately 24,000 wireline employees was due to expire in August 2015; work stoppages were possible absent an agreement.
- Q2 pension and postretirement benefits generated a combined net credit of $206, versus a $32 credit in Q2 2014. Management attributed the decrease in benefit costs primarily to a change in estimating service and interest components; it said the change would not affect annual benefit obligations or annual net periodic benefit cost.
Key facts for investors to verify
- Whether wireless service revenue, postpaid additions and churn stabilize as customers adopt lower-priced installment and shared-data plans.
- Progress toward the stated $18 billion capital-spending plan and the pace of debt reduction after the DIRECTV transaction.
- DIRECTV integration costs, realized synergies, FCC-condition compliance and the treatment of DIRECTV debt in subsequent reported results.
- Outcomes of the unlimited-data proceedings, DIRECTV-related litigation and the Southeast labor negotiations.
- Cash-flow sustainability, including the contribution from installment-receivable sales and the ability to fund dividends, network investment and debt service.