AT&T Inc. — Q2 2012 Form 10-Q
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2012; financial amounts below are in millions of dollars unless noted. AT&T provides wireless, wireline, broadband, video and related communications services. Results include four segments: Wireless, Wireline, Advertising Solutions and Other. The Advertising Solutions business was sold on May 8, 2012.
Financial and operating metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenues | $31,575 | $31,495 | $63,397 | $62,742 |
| Operating income | $6,817 | $6,165 | $12,918 | $11,973 |
| Operating margin | 21.6% | 19.6% | 20.4% | 19.1% |
| Net income attributable to AT&T | $3,902 | $3,591 | $7,486 | $6,999 |
| Diluted earnings per share | $0.66 | $0.60 | $1.27 | $1.18 |
| Operating cash flow | Not provided by quarter in the supplied filing text | $17,459 | $16,757 | |
| Capital expenditures | Not provided by quarter in the supplied filing text | $8,742 | $9,405 |
First-half net cash used in investing activities was $8,425; financing activities used $10,068. Cash and cash equivalents were $2,151 at June 30, down from $3,185 at December 31, 2011. Total debt was $64,534 ($3,402 current and $61,132 long-term), compared with $64,753 at year-end 2011. The reported debt ratio was 38.4%, versus 38.0% at year-end. Current assets were $19,156 and current liabilities $29,702.
Dividends paid in the first half were $5,187; declared dividends were $0.44 per share in Q2 and $0.88 for the first half. AT&T repurchased approximately 143 million shares for $4,623 in the first half. Wireless subscribers totaled 105.2 million, up 6.7% year over year; total switched access lines declined 12.7%.
Material changes versus prior comparable periods
- Q2 revenue increased 0.3% and first-half revenue increased 1.0%. Wireless service and equipment growth, U-verse and strategic business services gains were partly offset by declining wireline voice and the Advertising Solutions sale, which reduced revenue by $536 in Q2 and $660 in the first half.
- Operating income rose 10.6% in Q2 and 7.9% in the first half. Management attributed the improvement principally to wireless subscriber and data growth, U-verse and strategic business services, and expense reductions.
- Wireless segment revenue rose 4.8% in Q2 and 5.1% in the first half; segment income rose 17.7% and 14.5%, respectively. Wireless data revenue grew strongly, while voice and other service revenue declined.
- Wireline revenue declined 0.8% in both periods. Data revenue grew 7.8% in Q2 and 8.3% in the first half, but voice revenue fell 10.1% in each period. Wireline segment income increased modestly.
- Interest expense increased 11.0% in Q2 and 6.3% in the first half, including call premiums from early debt redemptions. Equity earnings from affiliates declined, mainly because of foreign-exchange-related weakness at América Móvil; YP Holdings contributed earnings after the sale.
Outlook, management commentary, risks and unusual items
- Management expected 2012 capital expenditures of approximately $20,000, assuming a favorable regulatory environment. Wireless investment focused on capacity expansion, network upgrades and LTE deployment.
- AT&T identified wireless spectrum and capacity constraints in certain markets and warned these could expand, potentially affecting service quality and new service launches if additional spectrum is not obtained. It expected to discontinue 2G service by approximately January 1, 2017.
- Management expected continued pressure on wireline access lines and voice revenue, and on wireless voice and other service ARPU; growth in data services was expected to continue. New shared-data plans were announced in July 2012.
- In August 2012, AT&T announced a proposed $600 acquisition of NextWave Wireless, subject to regulatory approval and other closing conditions, with completion anticipated by year-end. The transaction and spectrum-use proposal remained pending.
- About 40,000 wireline employees had contracts that expired in early April, and another contract covering about 22,000 employees was due to expire August 4. Tentative agreements for two groups were reached in July, subject to ratification; other negotiations continued, with work stoppage possible absent agreements.
- Notable contingencies include U-verse regulatory and PEG-programming disputes, a pending petition for Supreme Court review in retiree phone-concession litigation, and a wireless Universal Service Fee class action for which the company considered a material adverse outcome unlikely. Wage-and-hour cases were settled subject to court approval on terms not expected to materially affect the financial statements. Management reported no material risk-factor developments for the quarter.
- The filing reports no significant ERISA-required pension contributions during 2012. It also notes $308 of collateral posted for derivatives and that a one-level downgrade by Moody’s and Fitch before the June collateral exchange would have required an additional $163.
Important facts for investors to verify
- Whether wireless data growth and improved margins can offset declining voice ARPU, slowing subscriber additions and rising network costs.
- Progress on spectrum acquisition, capacity deployment and LTE investment, and the cost and customer effects of the planned 2G transition.
- Underlying revenue and earnings trends excluding the Advertising Solutions sale and related reporting changes.
- Cash generation relative to planned capital spending, dividends, continued share repurchases and debt obligations; the filing does not provide a quarterly cash-flow figure in the supplied text.
- Closing, regulatory and spectrum-use conditions for the proposed NextWave acquisition, as well as labor contract ratifications and material developments in the disclosed litigation and regulatory matters.