01—Abstract
Summary
Summary of the 10-K filed February 20, 2019. Cited figures are marked; the original filing is the authoritative source.
AT&T's FY2018 10-K (filed February 20, 2019) is dominated by the June 14, 2018 acquisition of Time Warner (now WarnerMedia), which transformed the company's scale and balance sheet.
Consolidated operating revenues rose 6.4% to $170.8 billiona and operating income climbed 30.7% to $26.1 billion, but the increase was driven by acquisition accounting and the adoption of ASC 606 rather than organic growth. Net income attributable to AT&T fell 34.2% to $19.4 billion, largely because 2017 benefited from a $20.3 billion one-time tax reform benefit, and diluted EPS dropped to $2.85 from $4.76. Pre-tax income and total assets ($531.9 billion, up from $444.1 billion) reflect the Time Warner deal, and the company issued roughly 1.13 billion shares to Time Warner holders.
Leverage rose sharply. Total debt reached $176.5 billionb, the debt ratio was 47.7% (versus 53.6% in 2017, which was inflated by bridge financing), and the net debt ratio was 46.2%. Management is prioritizing debt reduction, with a February 2019 bond issuance and about $4.1 billion of notes called for redemption, plus repayment of Time Warner acquisition term loans.
Cash from operations increased to $43.6 billionc, supported by acquired businesses and working-capital actions, while capital expenditures were roughly $21.3 billion and 2019 total capital investment is guided to about $23 billion. Dividends were raised to $0.51 per quarter ($2.01 for 2018), and the company used $9.9 billion of asset monetizations in 2018. Segment performance was mixed.
Communications, still about 84% of segment revenue, saw revenue decline 3.8% as legacy voice and data, linear video, and Entertainment Group subscribers fell, partly offset by Mobility growth. WarnerMedia contributed $18.9 billiond of revenue in its partial year and $5.7 billion of segment contribution, while Latin America remained loss-making at $(710) million, driven by Mexico. Management expects continued linear video and legacy wireline pressure in 2019, offset by wireless, broadband, and WarnerMedia growth, and it flagged the pending DOJ appeal of the Time Warner merger, a securities class action over DIRECTV NOW subscriber disclosures, and integration risk as key uncertainties.
02—Key points
Key Highlights
- Revenue grew 6.4% to $170.8B and operating income rose 30.7% to $26.1B, but growth was largely acquisition-driven (Time Warner closed June 14, 2018; ~$18.9B WarnerMedia revenue for the partial year).
- Net income attributable to AT&T fell 34.2% to $19.4B (diluted EPS $2.85 vs. $4.76) because 2017 included a $20.3B one-time tax reform benefit; this is not a like-for-like decline in earnings power.
- Total assets rose to $531.9B (from $444.1B) and total debt to $176.5B; the debt ratio improved to 47.7% from 53.6% as acquisition bridge loans were refinanced and management targets further net-debt reduction.
- Communications segment remained the core at ~84% of segment revenue and 84% of segment contribution, but revenue fell 3.8% due to legacy wireline and linear video declines (Entertainment Group subscriber losses), partly offset by Mobility growth (+0.4%).
- Free cash flow is supported by operating cash flow of $43.6B (up from $38.0B) against capex of about $20.8B, with 2019 total capital investment guided to ~$23B; asset monetizations raised $9.9B in 2018.
- Dividend increased to $0.51 per quarter (declared December 2018), with 2018 dividends totaling $2.01 per share; the Board retains discretion and the company expects its financing focus in 2019 to be debt refinancing and dividends.
- Key risks include the DOJ's appeal of the Time Warner merger approval, a Securities Act class action (Hoffman) tied to DIRECTV NOW subscriber disclosures, Latin America losses (Mexico segment contribution of $(1.1)B), accelerating linear video cord-cutting, and FCC/net-neutrality regulatory uncertainty.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 20, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $170.76B$160.55B | +6.4% |
| SG&A Expenses | $36.77B$35.47B | +3.7% |
| Operating Expenses | $144.66B$140.58B | +2.9% |
| Operating Income | $26.10B$19.97B | +30.7% |
| Interest Expense | $7.96B$6.30B | +26.3% |
| Net Income | $19.37B$29.45B | −34.2% |
| EPS (Basic) | $2.85$4.77 | −40.3% |
| EPS (Diluted) | $2.85$4.76 | −40.1% |
| Shares Outstanding (Basic) | 6.78B6.16B | +10.0% |
| Shares Outstanding (Diluted) | 6.81B6.18B | +10.1% |
05—Questions
Frequently Asked Questions
How did the Time Warner acquisition change AT&T's financial profile?
The June 2018 acquisition added WarnerMedia (Turner, HBO, Warner Bros.) and roughly $79.4B of total consideration, paid as about $42.1B cash and about $36.6B in AT&T stock (about 1.13 billion shares), plus assumed debt. It contributed $18.9B of 2018 revenue and $5.7B of segment contribution for the partial year, and it lifted goodwill to $146.4B and total assets to $531.9B. Investors should note that 2018 results include only about 200 days of WarnerMedia, so full-year 2019 comparisons will show a larger consolidated contribution.
Why did net income fall in 2018 even though operating income increased?
The 2017 result included a $20.3B benefit from remeasuring deferred tax liabilities under the Tax Cuts and Jobs Act, which inflated 2017 net income to $29.4B. In 2018, the effective tax rate normalized to 19.8%, and interest expense rose to $8.0B from $6.3B on acquisition debt. Other income also swung to $6.8B, which included $3.4B of pension actuarial gains that are not recurring in nature. Net income attributable to AT&T therefore fell to $19.4B despite higher operating income.
How leveraged is AT&T after the acquisition, and what is the plan to reduce debt?
Total debt was $176.5B at year-end 2018, with a debt ratio of 47.7% and a net debt ratio of 46.2%. The weighted-average interest rate on long-term debt was about 4.4%. Management plans to use operating cash flow, debt issuance, and asset sales to refinance or repay debt in 2019. It has already issued bonds in February 2019 and will redeem about $4.1B of notes in March 2019, using proceeds and cash to pay down Time Warner term loans. The company's credit agreements include a net debt-to-EBITDA covenant of no more than 3.5x, and AT&T was in compliance at year-end.
What is the outlook for the Communications segment, and what pressures are visible?
Communications revenue declined 3.8% in 2018 to $144.6B. Pressures include continued declines in legacy voice and data (down 19.3% in Entertainment Group and 21.1% in Business Wireline), linear video subscriber losses (down 4.9%), and wireless pricing competition. Growth is expected from Mobility, broadband (13.7 million residential high-speed internet subscribers), and 5G/FirstNet deployment. The segment's operating margin improved to 22.3% in 2018, aided partly by the ASC 606 adoption, which changed revenue and commission accounting and affects year-over-year comparability.
What legal and regulatory risks should investors monitor?
The principal items are the U.S. Department of Justice's appeal of the court decision that allowed the Time Warner merger; a putative securities class action (Hoffman v. Stephenson) alleging misstatements in the S-4 about DIRECTV NOW subscriber trends; the NFL SUNDAY TICKET antitrust class actions and the Ninth Circuit appeal pending decision; and the Mobility MBR class action and FTC suit over throttling of unlimited data plans. On regulation, the FCC's December 2017 repeal of net neutrality is under D.C. Circuit review, and several states, including California and Vermont, have passed or are considering their own rules. Management states that it does not expect the pending legal proceedings to be individually material.
06—Continue