AT&T Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited results; dollar amounts are in millions except per-share data. AT&T provides wireless, wireline, broadband, video and business communications services. Comparisons are year over year unless noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $32,075 | $31,575 | $63,431 | $63,397 |
| Operating income | $6,113 | $6,817 | $12,053 | $12,918 |
| Operating margin | 19.1% | 21.6% | 19.0% | 20.4% |
| Net income attributable to AT&T | $3,822 | $3,902 | $7,522 | $7,486 |
| Diluted EPS | $0.71 | $0.66 | $1.38 | $1.27 |
| Operating cash flow | Not separately stated | Not separately stated | $17,711 | $17,325 |
| Capital expenditures | Not separately stated | Not separately stated | $9,665 | $8,742 |
Q2 revenue rose 1.6%, while six-month revenue was essentially flat. Operating income fell 10.3% in Q2 and 6.7% for the half year; higher wireless equipment and upgrade costs, U-verse growth costs, and declining voice revenues pressured results. Q2 net income attributable to AT&T declined 2.1%, but diluted EPS increased, with fewer weighted-average shares following repurchases. Six-month diluted EPS rose from $1.27 to $1.38.
Wireless Q2 revenue grew 5.7% to $17,291, led by data revenue growth of 19.8%; segment income fell 7.8% to $4,659. Wireline revenue declined 0.9% to $14,773 as data growth was outweighed by lower voice revenue; segment income fell 15.7% to $1,634. AT&T reported 107.9 million wireless subscribers, up 2.5%, while total wireless net additions fell 50.1% in Q2 and total churn increased to 1.36% from 1.18%.
For the first six months, cash flow from operations less capital expenditures was approximately $8,046, compared with $8,583 in 2012. Cash and cash equivalents were $4,548 at June 30, versus $4,868 at year-end 2012. Total debt was $75,173, including $3,256 due within one year; long-term debt was $71,917. The reported debt ratio was 46.6%, versus 43.0% at year-end and 38.4% at June 30, 2012. Current assets of $21,428 were below current liabilities of $31,189. AT&T had no borrowings under its $8 billion revolving credit agreements and reported compliance with their covenants.
Material changes and notable items
- Wireless data revenue increased 19.8% in Q2, but wireless segment income and margin declined as smartphone upgrades increased equipment subsidies, commissions and network costs.
- Wireline data revenue grew 5.9% in Q2, supported by U-verse and strategic business services; wireline voice revenue fell 9.7%. Switched access lines declined 15.0% year over year.
- Q2 other income included a $249 net gain on sales of América Móvil shares and other investments; the six-month gain was $260. Lower effective tax rates—33.0% in Q2 and 31.2% for six months—were primarily attributed to tax audit settlement benefits.
- Cash returned to shareholders in the first half included $9,217 of share repurchases and $4,930 of dividends. The quarterly dividend declared was $0.45 per share. Management said future repurchases would be opportunistic and slower than recent activity.
- Debt increased from year-end, and capital spending increased. Management reported six-month capital expenditures of $9,665, excluding interest during construction.
Outlook, risks and contingencies
- Management expected 2013 capital expenditures to be around $21 billion and 2014 and 2015 spending to be around $20 billion each. It planned to expand U-verse availability to approximately 33 million customer locations, essentially complete by year-end 2015, and expected wireline customers to transition to an all-IP network by 2020.
- Management expected continued growth in data-based revenues and ongoing declines in traditional voice and basic wireline data services. It also anticipated continued pressure on wireless voice, text and other service ARPU.
- AT&T cited spectrum and network-capacity constraints in some wireless markets, with potential effects on service quality and new service launches if additional spectrum is not obtained. Competitive pressure, subscriber churn, legacy voice declines, regulation, technology changes and benefit-plan costs were among the disclosed risks.
- On July 12, 2013, AT&T announced an agreement to acquire Leap Wireless for approximately $1.26 billion plus a contingent value right; Leap had approximately $2.7 billion of debt, net of cash, and about 5 million subscribers. The transaction required shareholder, FCC and DOJ approvals and was expected to close in six to nine months. The filing also described pending agreements to acquire Alltel wireless operations for $780 million and Verizon spectrum for $1.9 billion plus spectrum assignments, each subject to regulatory review and other conditions.
- AT&T was seeking approval to contribute a preferred equity interest in its Mobility business, valued at $9.5 billion when proposed, to a pension trust. A required 2013 pension contribution absent that transaction was approximately $175 million. Approval and final accounting treatment were unresolved.
- U-verse faced legal and regulatory challenges concerning whether certain services and PEG programming requirements should be treated as traditional cable services; adverse outcomes could increase costs or constrain offerings. AT&T said there were no material risk-factor developments in Q2. Management concluded disclosure controls were effective as of June 30, 2013.
Important facts for investors to verify
- Whether wireless data growth and subscriber additions can offset weaker voice revenue, higher upgrade costs, and rising churn.
- Progress on network capacity and spectrum access, and the cost, timing and regulatory outcomes of the announced acquisitions and spectrum transactions.
- Debt growth, upcoming maturities, cash generation after capital spending, and the sustainability of dividends and repurchases.
- Whether reported earnings and tax rates are supported by recurring operations, apart from investment-sale gains and tax audit settlement benefits.
- Approval, valuation and financial-reporting treatment of the proposed pension contribution, along with the outcome of U-verse regulatory and legal matters.