01—Abstract
Summary
Summary of the 10-K filed February 21, 2014. Cited figures are marked; the original filing is the authoritative source.
AT&T's 2013 10-K shows a sharp rebound in reported profitability, driven largely by non-cash items.
Operating income rose to $30,479 milliona from $12,997 million in 2012, and net income attributable to AT&T climbed to $18,249 million ($3.39 per diluted share) from $7,264 million ($1.25). Roughly $7,584 million of the operating income improvement came from a non-cash actuarial gain on pension and postretirement plans, versus a $9,994 million actuarial loss in 2012. Excluding these pension swings, the underlying business grew more modestly: revenues increased 1.0% to $128,752 million, driven by wireless data (up 18.7%) and U-verse/strategic business services, while voice revenues continued to decline (down 10.1% in wireline voice).
Segment trends diverged. Wireless remained the profit engine, delivering 76%b of 2013 segment income with segment operating income up 8.0%, and the company ended the year with 110.4 million wireless subscribers. Wireline segment operating income fell 13.4% as legacy voice erosion outpaced U-verse growth, and management expects continued wireline margin pressure in 2014.
Capital allocation was active: AT&T repurchased 366 million shares for $13,028 millionc, paid $9,696 million in dividends, and raised the quarterly dividend 2.2% to $0.46. Free cash flow is tightening, however, as operating cash flow fell to $34,796 million from $39,176 million and capital expenditures rose to roughly $21 billion, with management guiding to lower operating cash flow in 2014. Balance sheet and portfolio moves matter for investors.
Total debt rose to $74,788 milliond and the debt ratio climbed to 45.0% from 43.0%, reflecting borrowings and share buybacks. Management also monetized assets, including a $4,827 million tower transaction with Crown Castle and a $2,000 million agreed sale of Connecticut wireline operations, and pursued spectrum and wireless acquisitions (including the pending Leap Wireless deal for about $1,260 million plus debt). A $2.7 billion pension-related lump sum payout and a preferred equity contribution of $9,104 million to the pension trust also shape future cash obligations.
02—Key points
Key Highlights
- Operating income of $30,479M (margin 23.7%) vs. $12,997M in 2012, but about $7.6B of the swing reflects a non-cash pension actuarial gain rather than operating improvement
- Diluted EPS of $3.39 vs. $1.25 in 2012, again heavily influenced by pension actuarial gains and losses recognized in operating results
- Wireless segment: revenue up 4.7% to $69.9B, data revenue up 18.7%, and 76% of 2013 total segment income; 110.4M subscribers (+3.2%)
- Wireline segment: revenue down 1.3% and segment operating income down 13.4%, as voice revenue fell 10.1% and wireline access lines declined 15.8%
- Operating cash flow declined to $34.8B from $39.2B, and 2014 capex is guided to about $21B, pressuring free cash flow
- Shareholder returns: $13.0B in buybacks (366M shares) and $9.7B in dividends; quarterly dividend raised to $0.46
- Debt ratio rose to 45.0% from 43.0%, with total debt of $74.8B; $1.9B of 700 MHz spectrum purchased and pending Leap Wireless acquisition
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, AT&T Inc. kept $0.14.
- Revenue$128.75B100.0%
- Cost of revenue−$51.46B40.0%
- Gross profit$77.29B60.0%
- Operating costs−$46.54B36.1%
- Operating income$30.75B23.9%
- Interest, other & tax−$12.33B9.6%
- Net income$18.42B14.3%
Where FY2013 revenue went
$128.75B- Cost of revenue: $51.46B, 40% of revenue
- SG&A: $28.41B, 22% of revenue
- Net income: $18.42B, 14% of revenue
- Other operating costs: $18.12B, 14% of revenue
- Interest, other & tax: $12.33B, 9.6% of revenue
Kept 14% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 21, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $128.75B$127.43B | +1.0% |
| Cost of Revenue | $51.46B$55.23B | −6.8% |
| Gross Profit | $77.29B$72.21B | +7.0% |
| SG&A Expenses | $28.41B$41.07B | −30.8% |
| Operating Expenses | $98.27B$114.44B | −14.1% |
| Operating Income | $30.75B$13.00B | +136.6% |
| Interest Expense | $3.94B$3.44B | +14.4% |
| Net Income | $18.42B$7.26B | +153.6% |
| EPS (Basic) | $3.42$1.25 | +173.6% |
| EPS (Diluted) | $3.42$1.25 | +173.6% |
| Shares Outstanding (Basic) | 5.37B5.80B | −7.5% |
| Shares Outstanding (Diluted) | 5.38B5.82B | −7.5% |
05—Questions
Frequently Asked Questions
How much of AT&T's 2013 earnings improvement came from operations versus pension accounting?
A large share came from pension accounting. AT&T recorded a non-cash actuarial gain of $7,584M in 2013 versus an actuarial loss of $9,994M in 2012, a swing of roughly $17.6B in operating income. Because AT&T recognizes these gains and losses immediately in operating results, reported earnings are volatile and do not reflect underlying operating performance alone. Investors should evaluate segment income and cash flow trends alongside reported figures.
Is AT&T's growth coming from wireless or wireline?
Wireless is the growth engine. Wireless revenue rose 4.7% to $69.9B, with data revenue up 18.7% to $21.7B, offsetting a 2.6% decline in voice, text and other service revenue. Wireline revenue fell 1.3%, with voice down 10.1% and traditional data declining, while U-verse and IP/strategic business services grew. Wireless delivered 76% of 2013 segment income.
Is AT&T's dividend and buyback program sustainable given rising capital needs?
The company returned $22.7B to shareholders in 2013 ($13.0B buybacks plus $9.7B dividends), funded partly by borrowing. Operating cash flow of $34.8B covered dividends but not the combined spending on capex, buybacks and spectrum. Management expects lower operating cash flow in 2014 and plans to fund distributions through operations, debt issuance and asset sales (such as the Crown Castle tower transaction). Dividend coverage and leverage (debt ratio 45.0%) are key metrics to monitor.
What are the main risks to AT&T's wireline business?
Wireline faces continued access line losses (down 15.8% in 2013) as customers shift to wireless, cable and VoIP providers, along with pricing pressure and high legacy regulatory costs. Management is transitioning to IP-based networks by 2020 and expects wireline margin pressure in 2014 from U-verse and IP expansion. Regulatory outcomes, including net neutrality and the FCC's intercarrier compensation overhaul, also carry uncertainty.
What major transactions did AT&T complete or announce that could change its future profile?
Key transactions include the $4,827M sale of 627 towers with a lease of 9,048 towers to Crown Castle (accounted for as a financing obligation), a $2,000M agreement to sell Connecticut wireline operations to Frontier, the pending roughly $1,260M acquisition of prepaid carrier Leap Wireless (plus about $3.1B of Leap net debt), $1.9B of 700 MHz spectrum from Verizon, and a 49-license AWS purchase announced in January 2014. Together these reshape wireless spectrum holdings and shift wireline assets.
06—Continue