01—Abstract
Summary
Summary of the 10-K filed February 17, 2017. Cited figures are marked; the original filing is the authoritative source.
AT&T's 2016 10-K shows a company in transition.
Revenue rose 11.6% to $163.8 billiona, driven mainly by the July 2015 acquisition of DIRECTV (full-year contribution in 2016 versus 160 days in 2015) and the 2015 Mexican wireless acquisitions. Operating income fell 1.8% to $24.3 billion, and operating margin declined to 14.9% from 16.9%, largely because of higher amortization of acquired intangibles ($5.2 billion, up from $2.7 billion), higher content and programming costs, and a pension/postretirement actuarial loss of $1.0 billion versus a gain of $2.2 billion in 2015. Net income attributable to AT&T declined 2.8% to $12.98 billion, and diluted EPS was $2.10 versus $2.37, though the share count rose sharply following the DIRECTV stock issuance (weighted diluted shares of 6.19 billion versus 5.65 billion).
Cash generation remained strong: operating cash flow reached $39.3 billionb, and free cash flow after $21.5 billion of capex was roughly $17.8 billion, which covered dividends of $11.8 billion. Dividends declared were $1.93 per share, and the quarterly rate was raised 2.1% to $0.49. Leverage is elevated: total debt stands at $123.5 billion, the debt ratio is 49.9%, and the company has been downgraded in credit ratings.
The company also committed to acquire Time Warner for roughly $108.7 billionc including net debt, financed with about $40 billion of bridge and term loans. Closing is expected before year-end 2017, subject to DOJ review, and a $1.725 billion termination fee is payable to AT&T under certain circumstances. The operating outlook is mixed.
Management expects wireless equipment revenue pressure as customers hold handsets longer, continued pricing pressure in wireless and video, and ongoing declines in legacy wireline voice and data. It expects margin expansion from lower subsidy costs and network modernization, and it projects 2017 capex of about $22 billiond. Significant legal and regulatory exposure remains, including FTC and DOJ actions involving DIRECTV and the FCC's broadband classification order, and the Time Warner deal introduces substantial integration and financing risk.
02—Key points
Key Highlights
- Total operating revenues rose 11.6% to $163.8B, largely from the full-year inclusion of DIRECTV (acquired July 2015) and Mexican wireless operations; Entertainment Group revenue increased 45.3%.
- Operating income declined 1.8% to $24.3B and operating margin fell to 14.9% (from 16.9%), pressured by a $5.2B amortization charge on acquired intangibles and a $1.0B pension actuarial loss.
- Net income attributable to AT&T fell 2.8% to $12.98B; diluted EPS was $2.10 versus $2.37, with a larger share base after the DIRECTV transaction.
- Operating cash flow of $39.3B and capex of $21.5B produced roughly $17.8B of free cash flow, which covered $11.8B of dividends.
- Total debt is $123.5B with a 49.9% debt ratio; the company was downgraded in credit rating and issued $10.1B of new long-term debt in 2016.
- Pending $108.7B Time Warner acquisition (50% cash, 50% stock) is expected to close before year-end 2017, subject to DOJ review; financing includes a $40B bridge and term loan facility.
- Wireless subscribers reached 146.8M in North America, with postpaid phone-only churn improving to 0.92%; the company ended subsidized smartphone sales in 2016 and shut down its 2G network.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 17, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $163.79B$146.80B | +11.6% |
| SG&A Expenses | $36.84B$32.92B | +11.9% |
| Operating Expenses | $140.24B$122.02B | +14.9% |
| Operating Income | $23.54B$24.79B | −5.0% |
| Interest Expense | $4.91B$4.12B | +19.2% |
| Net Income | $12.98B$13.35B | −2.8% |
| EPS (Basic) | $2.10$2.37 | −11.4% |
| EPS (Diluted) | $2.10$2.37 | −11.4% |
| Shares Outstanding (Basic) | 6.17B5.63B | +9.6% |
| Shares Outstanding (Diluted) | 6.19B5.65B | +9.6% |
05—Questions
Frequently Asked Questions
Why did operating income decline even though revenue grew more than 11%?
Revenue growth was driven by the DIRECTV and Mexico acquisitions, but those businesses carry heavy content costs and large intangible amortization. Amortization of acquired intangibles rose to $5.2B from $2.7B, broadcast and programming costs rose to $19.9B from $12.0B, and pension and postretirement actuarial losses of $1.0B replaced a $2.2B gain in 2015. Together these outweighed cost savings and lower equipment expenses.
Is AT&T's dividend secure given the Time Warner acquisition and high debt?
The 2016 dividend was covered by free cash flow of about $17.8B against $11.8B of dividends paid, and the board raised the quarterly dividend 2.1% to $0.49. However, the Time Warner deal adds substantial debt and will issue new shares, which the 10-K itself flags as potentially pressuring financial flexibility and future dividend capacity. Debt of $123.5B and a credit-rating downgrade add to the risk.
What are the main risks to AT&T's wireless growth outlook?
Management expects intense competition from Verizon, T-Mobile, Sprint and cable providers to keep pressuring service revenue and ARPU. Equipment revenue is expected to decline in 2017 as customers keep handsets longer and bring their own devices. The company also needs continued access to affordable spectrum, and the FCC's broadband regulatory order and the pending 600 MHz auction add uncertainty.
What legal and regulatory matters could materially affect AT&T?
Key matters include an FTC suit alleging DIRECTV failed to adequately disclose subscription terms, a DOJ antitrust complaint over alleged information sharing in SportsNet LA negotiations, class actions over DIRECTV's NFL SUNDAY TICKET pricing, and an FCC Notice of Apparent Liability tied to unlimited data throttling. The FCC's February 2015 order classifying broadband as a telecommunications service remains under challenge. Management says none of the pending environmental matters is expected to have a material effect.
06—Continue