AT&T Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. AT&T operates in telecommunications, media and technology. The results include WarnerMedia from its June 2018 acquisition; year-over-year comparisons are therefore not like-for-like.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $44.827 billion | $38.038 billion | +17.8% |
| Operating income | $7.233 billion | $6.201 billion | +16.6% |
| Operating margin | 16.1% | 16.3% | Down 0.2 percentage points |
| Net income attributable to AT&T | $4.096 billion | $4.662 billion | −12.1% |
| Diluted EPS | $0.56 | $0.75 | −25.3% |
| Operating cash flow | $11.052 billion | $8.947 billion | +$2.105 billion |
| Capital expenditures, including construction interest | $5.182 billion | Not stated here | Company reports $936 million lower |
| Cash and cash equivalents at quarter-end | $6.516 billion | $5.204 billion at Dec. 31, 2018 | +$1.312 billion |
Operating cash flow less reported capital expenditures was approximately $5.870 billion. Total capital investment, including vendor-financing payments, was $6.002 billion. Dividends paid were $3.714 billion; the quarter’s declared dividend was $0.51 per share.
At March 31, current assets were $46.472 billion and current liabilities were $64.652 billion. Debt maturing within one year was $11.538 billion and long-term debt was $163.942 billion. The company reported a 47.4% debt ratio and 45.6% net debt ratio. Its weighted-average interest rate on long-term debt, including derivatives, was approximately 4.4%. AT&T reported compliance with its credit-agreement covenants, including a maximum net debt-to-EBITDA ratio of 3.5-to-1; no borrowings were outstanding under its two revolving credit agreements totaling $15 billion.
Changes versus the prior comparable period
- Revenue growth was primarily attributable to WarnerMedia, which contributed $8.379 billion in segment revenue; it had only limited prior-year segment results because AT&T acquired Time Warner in June 2018.
- Communications revenue was nearly flat (−0.4%) and operating contribution rose 0.3%. Mobility contribution improved 3.7%, while Business Wireline contribution fell 21.6% amid declining legacy services.
- Latin America revenue fell 15.2%, primarily reflecting foreign-exchange pressure; segment operating contribution worsened to a $173 million loss from a $111 million loss.
- Operating income increased, but net income and EPS declined. Management cited higher interest expense and a swing in other income/expense, including a $432 million actuarial loss in 2019 versus a $930 million actuarial gain in 2018. The prior period also included much higher net other income.
- Operating cash flow increased, with WarnerMedia contributions and working-capital initiatives among the drivers. The company also noted that supplier financing reduced operating cash flow by $904 million, versus $344 million a year earlier.
Outlook, management commentary and notable matters
- Network: AT&T said mobile 5G was available in parts of 19 U.S. cities and expected launches in at least 22 major cities by year-end, with nationwide coverage reaching more than 200 million people by early 2020. The company said it was on track to meet its FCC commitment to market fiber to 12.5 million locations by mid-2019.
- Debt and asset sales: Management said proceeds from a $1.430 billion Hulu stake sale completed in April and a planned sale/leaseback of WarnerMedia’s Hudson Yards headquarters for approximately $2.2 billion were intended to reduce debt. The Hudson Yards transaction was expected to close late in Q2 2019.
- Business trends: Wireless service revenue benefited from higher average revenue per subscriber and prepaid growth, but postpaid churn increased amid competitive pricing. Video connections declined 5.9%, and management described continued shifts from premium linear TV to OTT offerings. Legacy voice and data services continued to contract.
- Acquisition and legal: The D.C. Circuit affirmed the ruling permitting the Time Warner merger. At filing, the DOJ’s deadline to seek U.S. Supreme Court review was May 28, 2019.
- Unusual items and accounting: The quarter included $248 million of employee separation charges, $115 million of merger and integration items, and $1.988 billion of acquisition-related amortization of intangibles. AT&T adopted the new lease standard in January, recognizing operating lease right-of-use assets and liabilities; management said it did not expect a material effect on future income statements or notable impact on liquidity.
- Risks: The filing highlights competition and pricing pressure, regulatory and privacy changes, foreign-exchange exposure, pension assumptions and investment returns, network deployment and technology costs, content and advertising trends, litigation, and risks integrating WarnerMedia. It reported no material risk-factor developments for Q1 compared with its latest Form 10-K.
- No specific consolidated full-year revenue, earnings or cash-flow guidance is stated in the provided filing text.
Important facts for investors to verify
- How much of reported growth and future profitability is attributable to WarnerMedia, and how comparable segment results are across periods.
- Whether Communications can offset ongoing video, legacy wireline and subscriber-retention pressures with wireless, broadband and strategic business services.
- Debt-reduction progress, including completion and use of proceeds from the announced asset transactions, and the effect of debt maturities and interest costs.
- The quality and sustainability of operating cash flow, including reliance on receivable sales, supplier financing and working-capital timing.
- Developments in postpaid churn, video subscriber losses, Latin America foreign-exchange effects, and the DOJ’s remaining opportunity to seek Supreme Court review.