01—Abstract
Summary
Summary of the 10-K filed February 20, 2018. Cited figures are marked; the original filing is the authoritative source.
AT&T's 2017 Form 10-K shows a year dominated by a $20.3 billiona one-time non-cash income tax benefit from the Tax Cuts and Jobs Act, which drove reported net income to $29.4 billion (diluted EPS $4.76), versus $13.0 billion ($2.10) in 2016.
Excluding that benefit, the underlying business was under pressure: consolidated revenues fell 2.0% to $160.5 billionb, operating income declined 14.0% to $20.9 billion (operating margin 13.0% vs. 14.9%), largely due to a $2.9 billion non-cash copper asset abandonment charge and higher natural disaster costs. Service revenues dropped 2.2%, with legacy wireline voice and data declines and lower wireless service revenue from unlimited plans only partly offset by growth in video, fixed strategic services and connected devices. Balance sheet leverage rose sharply in anticipation of the pending $85.4 billion Time Warner acquisition.
Total debt reached $164.3 billionc (versus $123.5 billion a year earlier), cash on hand climbed to $50.5 billion, and the debt ratio increased to 53.6%. Operating cash flow was roughly flat at $39.2 billion, while dividends paid rose to $12.0 billion ($1.97 per share declared). Management guided to roughly $25 billion of 2018 capex, a 23% effective tax rate, and continued pressure on legacy and wireless service revenues.
The Department of Justice antitrust lawsuit against the Time Warner deal, with trial set for March 19, 2018, is the most important binary risk for investors. Investors should weigh the reported earnings jump as largely non-recurring, focus on the underlying operating decline and rising leverage, and track the Time Warner litigation outcome, the FirstNet build-out commitments, and the 2018 tax-reform-driven cash tax savings.
02—Key points
Key Highlights
- Reported net income attributable to AT&T of $29.45 billion ($4.76 diluted EPS) was inflated by a $20.3 billion non-cash income tax benefit from U.S. tax reform; 2016 net income was $12.98 billion ($2.10 EPS).
- Total revenues fell 2.0% to $160.5 billion, with service revenues down 2.2% due to legacy wireline declines and wireless service pressure from unlimited plans.
- Operating income dropped 14.0% to $20.9 billion, and operating margin fell to 13.0% from 14.9%, hit by a $2.9 billion copper asset abandonment charge and natural disaster costs.
- Total debt rose to $164.3 billion from $123.5 billion, and the debt ratio increased to 53.6%, reflecting pre-funding of the $85.4 billion Time Warner acquisition.
- Cash and equivalents surged to $50.5 billion at year-end; operating cash flow was steady at $39.2 billion and dividends paid totaled $12.0 billion.
- The U.S. Department of Justice's lawsuit to block the Time Warner merger, with trial set for March 19, 2018 and an outside termination date of June 21, 2018, is the key pending risk.
- Mobility subscriber base reached 157 million wireless customers in North America, with connected devices (notably 6.4 million wholesale connected cars added in 2017) a key growth driver; FirstNet awarded a 25-year contract with $6.5 billion in initial funding and $18 billion in sustainability commitments.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 20, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $160.55B$163.79B | −2.0% |
| SG&A Expenses | $35.47B$36.84B | −3.7% |
| Operating Expenses | $140.58B$140.24B | +0.2% |
| Operating Income | $19.97B$23.54B | −15.2% |
| Interest Expense | $6.30B$4.91B | +28.3% |
| Net Income | $29.45B$12.98B | +127.0% |
| EPS (Basic) | $4.77$2.10 | +127.1% |
| EPS (Diluted) | $4.76$2.10 | +126.7% |
| Shares Outstanding (Basic) | 6.16B6.17B | −0.1% |
| Shares Outstanding (Diluted) | 6.18B6.19B | −0.1% |
05—Questions
Frequently Asked Questions
Why did AT&T's reported net income more than double in 2017?
Net income attributable to AT&T rose to $29.45 billion from $12.98 billion, primarily because of a $20.3 billion one-time non-cash income tax benefit from remeasuring deferred tax liabilities at the lower 21% federal rate under the Tax Cuts and Jobs Act. Excluding this item, earnings would have declined from 2016.
How did AT&T's core operations perform in 2017?
Core operations weakened. Revenues fell 2.0%, operating income fell 14.0%, and operating margin declined to 13.0%. Drivers included legacy voice and data declines, lower wireless service revenue from unlimited plans, a $2.9 billion copper asset abandonment charge, and higher costs from natural disasters, partly offset by cost reductions and growth in video and fixed strategic services.
What are the main financial risks tied to the Time Warner acquisition?
AT&T has significantly increased debt in anticipation of the $85.4 billion deal, with total debt reaching $164.3 billion and $30.2 billion of notes subject to mandatory redemption at 101% if the deal fails. The DOJ antitrust lawsuit could block the merger, and integration would add complexity and expense. Debt-financed growth may also pressure future financial flexibility and dividend capacity.
Is AT&T's dividend secure, and how much is it paying?
AT&T declared $1.97 per share in 2017 and raised the quarterly dividend to $0.50 per share in December 2017. Dividends paid totaled $12.0 billion. Management indicates dividend growth remains a goal, but all dividends are subject to Board approval, and increased debt and share issuance tied to the Time Warner deal could constrain future increases.
What should investors expect for 2018?
Management expects continued consolidated revenue pressure from the shift away from linear video and legacy services, with wireless service revenue improving later in 2018 as the first year of unlimited plans is lapped. Capital expenditures are expected to approach $25 billion ($23 billion net of FirstNet reimbursements), the effective tax rate should fall to about 23%, and the new revenue recognition standard is expected to add $0.10 to $0.15 to diluted EPS.
06—Continue