AT&T Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Financial amounts are in millions of dollars unless stated otherwise. Results include DIRECTV and Mexican wireless businesses acquired in 2015, so year-over-year comparisons are materially affected by acquisitions.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $40,535 | $32,576 | +24.4% |
| Operating income | $7,131 | $5,557 | +28.3% |
| Operating margin | 17.6% | 17.1% | +0.5 percentage points |
| Net income attributable to AT&T | $3,803 | $3,263 | +16.5% |
| Diluted EPS | $0.61 | $0.63 | Down $0.02 |
| Cash from operating activities | $7,900 | $6,738 | +17.2% |
| Capital expenditures | $4,451 | $3,848 | +$603 |
| Dividends declared per share | $0.48 | $0.47 | +$0.01 |
Cash from operations less capital expenditures was approximately $3,449 in Q1 2016. Cash and cash equivalents were $10,008 at March 31, up from $5,121 at year-end 2015; approximately $939 was held in foreign jurisdictions, some subject to repatriation restrictions.
Debt maturing within one year was $8,399 and long-term debt was $122,104 at quarter-end. The company reported a 51.2% debt ratio and 47.3% net debt ratio. Interest expense rose 34.3% to $1,207, primarily because of higher average debt, including debt issued or assumed in connection with DIRECTV. The weighted average interest rate on long-term debt was approximately 4.1%.
Material changes and operating performance
- Service revenue increased 28.1%, principally from the DIRECTV and Mexico acquisitions and growth in IP broadband and fixed strategic business services. Equipment revenue fell 5.0%, reflecting fewer handset sales, promotions, and lower customer-premises equipment revenue.
- Depreciation and amortization increased 43.4%, including $1,228 of higher amortization related to acquired intangibles. Operating expenses rose 23.6%.
- Business Solutions revenue was nearly flat at $17,609; segment contribution increased 3.8% to $4,299. Growth in wireless service and fixed strategic services was partly offset by declining legacy voice and data revenue.
- Entertainment Group revenue was $12,658, largely reflecting the inclusion of DIRECTV; segment contribution was $1,595 versus a $270 loss a year earlier. U-verse video connections fell 12.3%, while satellite video subscribers totaled 20.1 million.
- Consumer Mobility revenue fell 5.1% to $8,328, but segment contribution rose 11.6% to $2,494 as operating costs declined. Postpaid churn increased to 1.24% from 1.20%.
- International revenue was $1,667, largely from acquired Latin American video and Mexican wireless operations. The segment reported a $184 contribution loss, compared with a $10 loss a year earlier; foreign exchange is an exposure.
Net income attributable to AT&T grew, but diluted EPS declined as weighted average diluted shares increased to 6,190 million from 5,219 million, principally reflecting the larger share base following the DIRECTV transaction. The effective tax rate increased to 35.3% from 29.4%; the prior-year rate benefited from tax items related to a Business Solutions restructuring.
Outlook, management commentary, risks and unusual items
- Capital investment outlook: AT&T continued to expect 2016 capital investment of about $22 billion for existing businesses, including capital expenditures and Mexico network vendor-financing payments. It expected capital investment at 15% of service revenue or lower in each year from 2016 through 2018. No specific revenue or EPS forecast is provided in the supplied filing text.
- Capital allocation: Management said its 2016 priority was to use free cash flow after dividends to pay down debt. It also stated an intent to preserve flexibility for potential future dividend growth; dividends remain subject to Board declaration.
- Unusual items: Results included a $736 noncash gain on wireless spectrum transactions, $1,351 of amortization of acquired intangibles, and acquisition-related and employee-separation charges. These items affect comparisons of reported and segment results.
- Network and regulatory risks: AT&T reported spectrum and capacity constraints in certain wireless markets and warned these could expand, affecting service quality or new service launches absent additional spectrum. Regulatory uncertainty includes the FCC’s broadband reclassification order and the 600 MHz spectrum auction.
- Legal and contingencies: Pending matters include DIRECTV NFL Sunday Ticket class actions, FTC litigation concerning DIRECTV marketing, and FTC litigation and class actions concerning AT&T’s legacy unlimited-data speed-management practices. The FCC proposed a $100 million forfeiture related to those unlimited plans; AT&T disputes the allegations and the matter remained pending. The filing also describes labor-contract negotiations and the risk of work disruption.
- Other risks: Management identifies competition, integration of DIRECTV, foreign-exchange and Latin American risks, benefit-plan costs, litigation, network or satellite failures, cybersecurity, and changes in regulation, technology, and accounting standards. The filing states there were no material risk-factor developments for Q1 2016.
Most important facts for investors to verify
- How much of reported revenue and profit growth reflects acquired businesses versus organic performance, and how sustainable are the segment trends?
- Whether customer churn, device installment-plan economics, and service-revenue declines affect wireless margins and cash generation.
- Progress against the $22 billion 2016 capital-investment outlook, network capacity needs, and management’s stated debt-reduction priority.
- Debt maturities, borrowing costs, and the planned use of proceeds from the May 2016 debt offering to repay credit-facility borrowings.
- Developments in the disclosed FTC, FCC, and class-action matters, including the proposed $100 million FCC penalty.
- Acquisition integration, foreign-currency exposure, and the effects of DIRECTV and Mexico operations on future results.