01—Abstract
Summary
Summary of the 10-K filed February 18, 2016. Cited figures are marked; the original filing is the authoritative source.
AT&T's fiscal 2015 10-K, filed February 18, 2016, shows a company transformed by its July 2015 acquisition of DIRECTV and its purchase of wireless operations in Mexico.
Consolidated operating revenues rose 10.8% to $146.8 billiona, and operating income more than doubled to $24.8 billion, though this was flattered by a $2.2 billion noncash pension actuarial gain versus a $7.9 billion loss in 2014. Net income attributable to AT&T was $13.3 billion, or $2.37 per diluted share, versus $1.24 in 2014. Excluding the pension swing, the picture is more mixed: operating margin was 16.9% in 2015, and the DIRECTV and Mexico acquisitions added significant integration costs, amortization, and interest expense.
The balance sheet and capital structure changed materially. Total assets grew to $402.7 billionb from $296.8 billion, and total debt rose to $126.2 billion from $81.8 billion. The debt ratio climbed to 50.5% from 47.5%.
Management has said its priority is to use free cash flow after dividends to pay down debt, and the company issued $6 billionc of new long-term debt in February 2016. The dividend was raised 2.1% to $0.48 per quarter, and the company paid $10.2 billion in dividends in 2015, a large cash commitment given the higher leverage. Share count rose sharply to about 6.1 billion shares outstanding at year-end from 5.2 billion, because roughly 954 million shares were issued to DIRECTV shareholders.
Operationally, wireless remains the core earnings engine, though growth is slowing. Postpaid phone ARPU fell 4.0%d, and management expects continued pricing pressure, with the end of subsidized handsets in late December 2015 shifting revenue from service to equipment.
Regulatory risk is elevated: the FCC's February 2015 reclassification of broadband as a Title II service is under appeal, and the FTC and FCC have pending actions over AT&T's unlimited data plan throttling and DIRECTV's marketing. The company also faces spectrum constraints and an upcoming 600 MHz auction scheduled to begin March 29, 2016.
02—Key points
Key Highlights
- Total operating revenues increased 10.8% to $146.8 billion in 2015, driven primarily by the DIRECTV acquisition (closed July 24, 2015) and the new Mexican wireless operations.
- Operating income rose to $24.8 billion from $12.2 billion, but 2015 benefited from a $2.2 billion noncash pension actuarial gain, compared with a $7.9 billion actuarial loss in 2014.
- Net income attributable to AT&T was $13.3 billion, or $2.37 per diluted share, up from $1.24 in 2014.
- Total debt rose to $126.2 billion from $81.8 billion, and the debt ratio increased to 50.5%; management has prioritized paying down debt with free cash flow after dividends.
- Shares outstanding rose to about 6.1 billion from 5.2 billion, largely from the issuance of roughly 954 million shares to DIRECTV shareholders.
- Quarterly dividend was raised 2.1% to $0.48 per share; total dividends paid were $10.2 billion in 2015.
- Wireless postpaid phone ARPU fell 4.0%, and the end of subsidized handsets in late December 2015 is expected to keep pressure on service revenue while boosting equipment revenue.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 18, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $146.80B$132.45B | +10.8% |
| SG&A Expenses | $32.92B$39.70B | −17.1% |
| Operating Expenses | $122.02B$120.23B | +1.5% |
| Operating Income | $24.79B$12.21B | +103.0% |
| Interest Expense | $4.12B$3.61B | +14.0% |
| Net Income | $13.35B$6.44B | +107.2% |
| EPS (Basic) | $2.37$1.24 | +91.1% |
| EPS (Diluted) | $2.37$1.24 | +91.1% |
| Shares Outstanding (Basic) | 5.63B5.21B | +8.1% |
| Shares Outstanding (Diluted) | 5.65B5.22B | +8.1% |
05—Questions
Frequently Asked Questions
How much of the 2015 earnings improvement came from the DIRECTV acquisition versus underlying operations?
The DIRECTV acquisition was the main driver of revenue growth, with Entertainment Group revenue rising 58.7% to $35.3 billion and International adding $4.1 billion. However, operating income also benefited from a $2.2 billion noncash pension gain in 2015 compared with a $7.9 billion loss in 2014. Segment contribution for Business Solutions and Consumer Mobility was broadly stable, and the International segment posted a $488 million contribution loss, so the underlying improvement is smaller than headline figures suggest.
Is AT&T's balance sheet leverage a concern for investors?
Leverage increased meaningfully. Total debt grew to $126.2 billion, and the debt ratio rose to 50.5% from 47.5%. Management reports covenant compliance and a net debt-to-EBITDA covenant of no more than 3.5 to 1, and it plans to use free cash flow after dividends to reduce debt. The company also issued $6 billion of new debt in February 2016, so investors should watch whether deleveraging progresses as planned.
Could the dividend be at risk given the higher debt and share count?
The dividend has grown consistently, rising to $1.89 per share in 2015 from $1.81 in 2013, and the Board raised the quarterly rate to $0.48 in December 2015. However, dividends paid rose to $10.2 billion, and management has said that paying down debt is a priority, which could constrain future increases. The 10-K states that all dividends remain subject to Board declaration.
What are the main regulatory and legal risks disclosed?
The most significant risks include the FCC's February 2015 order reclassifying fixed and mobile broadband as Title II services, which AT&T is challenging in the D.C. Circuit, with a decision expected in the first half of 2016. The FTC has sued AT&T Mobility over its Maximum Bit Rate program on unlimited data plans, and the FCC has proposed a $100 million forfeiture in a related matter. DIRECTV faces an FTC suit over advertising and a class action regarding NFL Sunday Ticket pricing. Spectrum availability, including the 600 MHz Auction set for March 29, 2016, is also a key constraint.
06—Continue