AT&T Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. AT&T provides communications and digital entertainment services in the U.S. and internationally. Amounts below are in millions of dollars except per-share data and where noted.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $39,668 | $40,890 | $118,870 | $121,945 |
| Operating income | $6,403 | $6,408 | $20,590 | $20,099 |
| Net income attributable to AT&T | $3,029 | $3,328 | $10,413 | $10,539 |
| Diluted earnings per share | $0.49 | $0.54 | $1.69 | $1.70 |
| Operating margin | 16.1% | 15.7% | 17.3% | 16.5% |
- Revenue fell 3.0% in the quarter and 2.5% year to date. Operating income was nearly flat in Q3 and rose 2.4% year to date; AT&T-attributable net income declined 9.0% and 1.2%, respectively.
- Nine-month cash from operations was $29,274, versus $29,202. Capital expenditures excluding construction interest were $15,756, implying approximately $13,518 of operating cash flow less capital expenditures.
- Cash and equivalents were $48,499 at September 30, up from $5,788 at year-end 2016, primarily reflecting debt issuance ahead of the proposed Time Warner acquisition. Current assets were $76,357 and current liabilities $47,693.
- Total debt, including current maturities, was $163,279; long-term debt was $154,728 and debt due within one year was $8,551. The reported debt ratio was 56.4%, versus 49.9% at December 31, 2016; the net debt ratio was 39.7%, versus 47.5%. The company reported a 4.4% weighted-average interest rate on its long-term debt portfolio, including derivatives.
- Nine-month dividends paid were $9,030. Dividends declared were $0.49 per share for Q3 and $1.47 year to date.
Material changes and operating trends
- Service revenue declined 2.4% in Q3, mainly from legacy wireline declines and lower wireless service revenue as customers adopted unlimited plans; $89 of service revenue was waived for customers affected by natural disasters. Equipment revenue declined 9.1%, reflecting fewer handset sales and upgrades.
- Operating expenses fell 3.5% in Q3. Cost savings and lower depreciation and amortization were partly offset by broadcast/programming expense growth of 7.6%, including annual content increases and DIRECTV NOW programming costs.
- Interest expense rose 37.7% in Q3 and 18.6% year to date, primarily due to higher debt balances raised in anticipation of the Time Warner transaction, higher average rates, and acquisition-related financing fees.
- By segment, Q3 Business Solutions revenue fell 4.0%, but operating income rose 4.6%; Entertainment Group revenue fell 0.6% and operating income fell 11.6%; Consumer Mobility revenue fell 6.3% and operating income fell 9.8%; International revenue rose 11.7%, while its operating loss widened to $142 from $54.
- Domestic wireless subscribers totaled 138.8 million, up 4.1% year over year, but branded net additions were lower. Domestic video subscribers totaled 25.1 million, down 0.8%; DIRECTV NOW had 787,000 connections, including free trials. AT&T cited continuing linear-video losses, competition, pricing and content-cost pressures.
Outlook, commentary and significant items
- Management expected 2017 capital expenditures of approximately $22 billion and expected capital spending at 15% of service revenues or less in each year from 2017 through 2019. No specific earnings-per-share guidance is provided in the filing text.
- The proposed Time Warner acquisition, valued at approximately $105.8 billion including Time Warner net debt, remained subject to U.S. Department of Justice review. AT&T expected a year-end 2017 closing. Approximately $29.8 billion of notes issued to finance the transaction are subject to mandatory redemption provisions if the deal does not close by the specified deadline or is terminated.
- AT&T was selected to build and manage FirstNet, a nationwide first-responder network. The company estimated about $40 billion of spending over the 25-year contract, partly recoverable from FirstNet, and up to $6.5 billion in success-based payments over five years. Management did not expect a material 2017 earnings impact; the investment and network scope depend on state participation.
- Q3 included $207 of natural-disaster costs and revenue credits; management noted further potential pressure in Q4 while assessing damage and California fires. A second-quarter postretirement-plan change generated a $1.563 billion liability reduction and prior-service credits recognized in other comprehensive income; related amortization reduced benefit expense.
- Risks include the regulatory review and closing of Time Warner, competition and customer trends, content and network costs, foreign-currency exposure, regulatory and tax uncertainty, litigation, natural disasters and labor negotiations. The NFL Sunday Ticket class action was dismissed but appealed; the FTC DIRECTV trial was under advisement, and the en banc appeal in the unlimited-data-plan case remained pending.
Important facts for investors to verify
- Whether Time Warner received regulatory approval and closed on the expected terms, and the resulting financing, debt and share dilution.
- Debt repayment plans and liquidity after the unusually large cash balance is used for the proposed acquisition; confirm mandatory-redemption terms on acquisition-related notes.
- Whether revenue and subscriber declines in wireless service, legacy wireline and linear video continue, and whether unlimited plans and content costs pressure margins.
- Actual capital expenditures, FirstNet state participation and long-term costs, and the financial effect of disaster-related damage and Q4 costs.
- Developments in the disclosed litigation, regulatory proceedings and labor negotiations, including potential financial exposure where the filing does not state a clear estimate.