AT&T Inc. — 2009 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009; unaudited consolidated results. Dollar amounts are in millions except per-share data. AT&T provides wireless and wireline communications, data and broadband services, U-verse, managed networking, and advertising services.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Operating revenue | $30,734 | $30,866 | $61,305 | $61,610 |
| Operating income | $5,506 | $6,567 | $11,243 | $12,547 |
| Operating margin | 17.9% | 21.3% | 18.3% | 20.4% |
| Net income attributable to AT&T | $3,198 | $3,772 | $6,324 | $7,233 |
| Diluted EPS | $0.54 | $0.63 | $1.07 | $1.21 |
| Dividends declared per share | $0.41 | $0.40 | $0.82 | $0.80 |
- Revenue mix and trends: Q2 wireless service revenue was $11,960, up from $10,894; voice revenue was $8,256, down from $9,519; data revenue was $6,307, up from $6,054; directory revenue was $1,211, down from $1,383.
- Cash flow: First-half operating cash flow was $15,802 versus $13,505. Investing used $7,243, including $7,036 of capital expenditures and $368 of construction-period interest. Financing used $3,003; dividends paid were $4,834. Cash rose to $7,348 from $1,792 at year-end 2008. Management attributed stronger operating cash flow partly to lower tax payments, notwithstanding lower net income.
- Debt and liquidity: June 30 debt comprised $10,155 maturing within one year and $66,565 long-term, or $76,720 total, compared with $74,991 at December 31, 2008. The reported debt ratio was 43.7%, unchanged from year-end and up from 41.6% at June 30, 2008. Current assets were $26,940 and current liabilities $36,219. A $9,465 credit facility was available, with no borrowings outstanding; AT&T reported compliance with its debt covenant.
Material changes and operating trends
- Revenue was nearly flat, while Q2 operating income fell 16.2% and first-half operating income fell 10.4%. AT&T cited declining voice revenue and higher pension and postretirement benefit expense, partly offset by wireless growth. Higher wireless handset costs, particularly associated with iPhone sales and launches, also pressured results.
- Wireless: Q2 segment revenue increased 10.1% to $13,245 and segment income increased 2.7% to $3,151. Customers reached 79.6 million, up 9.2% year over year; Q2 postpaid churn was 1.09%. Data ARPU rose 25.7%, while voice ARPU declined 7.4%. Wireless segment margin fell to 23.8% from 25.5%.
- Wireline: Q2 segment revenue declined 6.1% to $16,526 and segment income fell 36.0% to $2,007. Voice revenue fell 13.4%, while data revenue grew 5.2%, supported by U-verse, broadband and managed data services. Switched access lines declined 11.0% year over year to 52.4 million; U-verse video connections increased to 1.6 million from 0.5 million.
- Other businesses: Advertising Solutions Q2 revenue fell 12.5% and income fell 27.5%, mainly from reduced print advertising. Other segment income increased to $264 from $141, including affiliate income, although first-half affiliate income declined 18.6%, principally from foreign-exchange translation losses.
- Combined pension and postretirement cost increased to $1,120 in the first half from $162 a year earlier. AT&T attributed the increase chiefly to lower expected asset returns and amortization of actuarial losses following 2008 investment losses.
Outlook, commentary and risks
- Management maintained its 2009 capital expenditure outlook of $17,000–$18,000, funded through operating cash flow and, as needed, borrowings. It said it intended to focus on reducing debt during 2009 rather than prioritizing share repurchases. No revenue or EPS guidance is provided in the supplied filing text.
- AT&T expected the Centennial acquisition to close in Q3 2009, subject to regulatory approval. A separate agreement to acquire certain Verizon Wireless assets for $2.35 billion, and a contingent $240 million sale of certain Centennial assets to Verizon, were expected to close in Q4, also subject to approval.
- Management cited continuing pressure on traditional voice and access-line revenues from economic weakness, competition and substitution by wireless, cable and VoIP. Risks also include wireless and wireline margin pressure, benefit-plan costs, regulatory decisions, U-verse deployment and regulation, technology and equipment availability, and labor negotiations.
- Approximately 80,000 wireline employees were covered by contracts that had expired by early April, with another contract covering approximately 11,000 expiring in late June; a further contract covering approximately 32,000 was due to expire August 8. Negotiations continued, and a tentative agreement for approximately 18,500 employees was subject to ratification.
- AT&T made $886 of tax deposits during Q2 in connection with disputed tax issues and expected additional deposits of $150–$250 later in 2009. It disagreed with proposed IRS adjustments. Separately, a court ruled for the Government in a dispute concerning Universal Service Fund receipts on 1998–1999 returns; AT&T appealed.
- U-verse deployment faced potential delays from permitting, litigation, staffing and equipment/software availability. AT&T disclosed ongoing U-verse regulatory and municipal disputes. It reported that the NSA-related cases against AT&T entities had been dismissed, while plaintiffs appealed one dismissal in August 2009. The filing states no material risk-factor developments for the quarter.
- In July 2009, AT&T settled a Philadelphia environmental matter for civil penalties of less than $100,000. The filing also notes accounting standards effective in future periods; FAS 167’s impact was still under evaluation.
Investor verification priorities
- Verify whether wireless service and data growth can offset continuing wireline voice, access-line and directory declines, and whether wireless equipment and benefit costs stabilize.
- Track operating margins, especially wireline and consolidated margins, alongside pension and postretirement expense.
- Reconcile cash generation with capital spending, dividends and debt maturities; monitor total debt, the debt ratio and planned debt reduction.
- Follow the disputed tax assessments, expected deposits, and the appeal concerning Universal Service Fund tax treatment.
- Confirm regulatory approvals, timing and financing for the Centennial and Verizon Wireless transactions, and monitor labor-contract outcomes and U-verse deployment risks.