Why did operating income jump 41% in 2012 when revenue barely grew?

The 2011 base was depressed by a $4.2 billion T-Mobile termination charge and $2.9 billion in directory intangible impairments. In 2012, those one-time items did not recur, which lifted operating income even though revenue grew only 0.6%. The 2012 result still included a $10.0 billion pension and retiree benefit actuarial loss, so the reported comparison overstates underlying improvement.

How healthy is the core wireless business?

Wireless is AT&T's strongest segment, with 107 million subscribers, data revenue growth of 17.8%, and segment income up 6.1% to $16.5 billion. Growth is slowing, though: gross additions fell 13%, net additions dropped 51%, and voice revenue continues to decline. Management also flagged spectrum and capacity constraints in certain markets, which it is addressing through spectrum purchases and the LTE rollout.

What is the outlook for wireline and the cost of the network build-out?

Wireline revenue is shrinking as customers leave traditional voice service, with segment revenue down 1.0%. Growth depends on U-verse and IP-based business services. Project VIP calls for capex of about $21 billion in 2013 and roughly $22 billion in each of 2014 and 2015, which will weigh on free cash flow and push debt higher. Management expects a stable consolidated operating margin in 2013, with wireless margin gains offsetting wireline pressure.

Is the pension obligation a concern for investors?

The pension plans were underfunded by about $13.9 billion at year-end 2012, and the discount-rate decline added roughly $7.0 billion to pension obligations. Future actuarial losses flow directly through operating income, creating earnings volatility. AT&T has proposed contributing a $9.5 billion preferred equity interest in its Mobility business to the pension trust, pending Department of Labor approval, which would substantially reduce the funding gap.

How is AT&T balancing shareholder returns with rising leverage?

In 2012 AT&T returned about $23 billion to shareholders through buybacks and dividends, funded partly by $13.5 billion of new debt issuance at a low average rate of 2.54%. The debt ratio rose to 43.0% from 38.0%. The company stated it will fund 2013 through operating cash flow and debt issuance, prioritizing dividends, debt repayment, and remaining buybacks, with the July 2012 authorization expected to be completed by mid-2013.

AT&T INC. 10-K FY2012 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 22, 2013. Cited figures are marked; the original filing is the authoritative source.

AT&T's 2012 10-K shows a company with growing wireless and IP data businesses offsetting steep declines in traditional voice revenue.

Consolidated operating revenues rose 0.6% to $127.4 billion^a, despite a $2.2 billion revenue reduction from the May 2012 sale of the Advertising Solutions (directory) segment. Operating income rose 41% to $13.0 billion, but that figure absorbed a $9.99 billion non-cash actuarial loss on pension and retiree benefit plans. Net income attributable to AT&T was $7.26 billion, or $1.25 per diluted share, versus $0.66 in 2011, which was depressed by goodwill impairment and T-Mobile termination charges.

Excluding these items, the underlying trend is more modest: wireless segment income grew 6.1% and wireline segment income grew 1.0%. Wireless is the growth engine, with 107 million subscribers (up 3.6%) and data service revenue up 17.8% to $26 billion^b. Voice and other wireless service revenue fell 4.2%.

Wireline voice revenue dropped 10.0% as switched access lines fell 13.2%, while data revenue rose 7.6% on U-verse and strategic business services. Management expects 2013 revenue growth driven by wireless, and it guided to roughly $21 billion^c in capital expenditures for 2013, rising to about $22 billion annually in 2014 and 2015 under Project VIP, a broadband network build-out. Capital allocation was shareholder-friendly.

AT&T repurchased 371 million shares for $12.75 billion^d in 2012 and raised its quarterly dividend 2.3% to $0.45. Total debt rose to $69.8 billion and the debt ratio climbed to 43.0% from 38.0%. Key risks include spectrum constraints, intensifying competition, labor contract renewals in 2013, and a $13.9 billion pension funding gap that management plans to address with a proposed $9.5 billion preferred equity contribution.

02—Key points

Key Highlights

Revenue of $127.4B (+0.6%); underlying growth held back by the $2.2B revenue loss from selling the directory business in May 2012
Operating income of $13.0B (+41%), but reduced by a $9.99B non-cash pension and retiree benefit actuarial loss
Diluted EPS of $1.25 vs. $0.66 in 2011, which was depressed by goodwill impairment and T-Mobile merger termination charges
Wireless: 107M subscribers, data service revenue +17.8% to about $26B, segment income +6.1%; voice revenue continues to decline
Wireline: data revenue +7.6% (U-verse and business services) offsets a 10.0% drop in voice revenue and 13.2% decline in access lines
Capital returns of $12.75B in buybacks (371M shares) plus $10.2B in dividends; quarterly dividend raised to $0.45
Debt rose to $69.8B and the debt ratio increased to 43.0%; 2013 capex guided to about $21B under Project VIP

03—One dollar

Follow one dollar

Of each $1.00 of revenue in FY2012, AT&T Inc. kept $0.06.

Revenue$127.43B100.0%100.0%
Cost of revenue−$55.23B43.3%43.3%
Gross profit$72.21B56.7%56.7%
Operating costs−$59.21B46.5%46.5%
Operating income$13.00B10.2%10.2%
Interest, other & tax−$5.73B4.5%4.5%
Net income$7.26B5.7%5.7%

10-KFY2012filed February 22, 2013Computed from this filing’s revenue, gross profit, operating income and net income · right columngrey figure: share of revenue

Where FY2012 revenue went

$127.43B

Cost of revenue: $55.23B, 43% of revenue
SG&A: $41.07B, 32% of revenue
Other operating costs: $18.14B, 14% of revenue
Net income: $7.26B, 5.7% of revenue
Interest, other & tax: $5.73B, 4.5% of revenue

Kept 5.7% as net income

Full revenue history →

04—Financials

Financial Highlights

10-KFY2012filed February 22, 2013

Revenue$127.43B56.7% Gross Margin Net Income$7.26B5.7% Net Margin EPS (Diluted)$1.25 Total Assets$272.31B Cash & Equivalents$4.87B Free Cash Flow$19.71B

Financial Statements

FY2012 against FY2011

Line item	FY2012FY2011	FY2011	Change
Revenue	$127.43B$126.72B	$126.72B	+0.6%
Cost of Revenue	$55.23B$54.90B	$54.90B	+0.6%
Gross Profit	$72.21B$71.82B	$71.82B	+0.5%
SG&A Expenses	$41.07B$41.31B	$41.31B	−0.6%
Operating Expenses	$114.44B$117.50B	$117.50B	−2.6%
Operating Income	$13.00B$9.22B	$9.22B	+41.0%
Interest Expense	$3.44B$3.54B	$3.54B	−2.6%
Net Income	$7.26B$3.94B	$3.94B	+84.2%
EPS (Basic)	$1.25$0.66	$0.66	+89.4%
EPS (Diluted)	$1.25$0.66	$0.66	+89.4%
Shares Outstanding (Basic)	5.80B5.93B	5.93B	−2.1%
Shares Outstanding (Diluted)	5.82B5.95B	5.95B	−2.2%

05—Questions

Frequently Asked Questions

Why did operating income jump 41% in 2012 when revenue barely grew?
The 2011 base was depressed by a $4.2 billion T-Mobile termination charge and $2.9 billion in directory intangible impairments. In 2012, those one-time items did not recur, which lifted operating income even though revenue grew only 0.6%. The 2012 result still included a $10.0 billion pension and retiree benefit actuarial loss, so the reported comparison overstates underlying improvement.
How healthy is the core wireless business?
Wireless is AT&T's strongest segment, with 107 million subscribers, data revenue growth of 17.8%, and segment income up 6.1% to $16.5 billion. Growth is slowing, though: gross additions fell 13%, net additions dropped 51%, and voice revenue continues to decline. Management also flagged spectrum and capacity constraints in certain markets, which it is addressing through spectrum purchases and the LTE rollout.
What is the outlook for wireline and the cost of the network build-out?
Wireline revenue is shrinking as customers leave traditional voice service, with segment revenue down 1.0%. Growth depends on U-verse and IP-based business services. Project VIP calls for capex of about $21 billion in 2013 and roughly $22 billion in each of 2014 and 2015, which will weigh on free cash flow and push debt higher. Management expects a stable consolidated operating margin in 2013, with wireless margin gains offsetting wireline pressure.
Is the pension obligation a concern for investors?
The pension plans were underfunded by about $13.9 billion at year-end 2012, and the discount-rate decline added roughly $7.0 billion to pension obligations. Future actuarial losses flow directly through operating income, creating earnings volatility. AT&T has proposed contributing a $9.5 billion preferred equity interest in its Mobility business to the pension trust, pending Department of Labor approval, which would substantially reduce the funding gap.
How is AT&T balancing shareholder returns with rising leverage?
In 2012 AT&T returned about $23 billion to shareholders through buybacks and dividends, funded partly by $13.5 billion of new debt issuance at a low average rate of 2.54%. The debt ratio rose to 43.0% from 38.0%. The company stated it will fund 2013 through operating cash flow and debt issuance, prioritizing dividends, debt repayment, and remaining buybacks, with the July 2012 authorization expected to be completed by mid-2013.

06—Continue

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