Financial Engineering Helped AT&T's First Quarter Earnings

May.25.14 | About: AT&T Inc. (T)

Summary

Net income decreased by 1% but share repurchases helped increase earnings.

Revenue increased 4% from the last year.

The stock is inexpensively valued based on 2015 earnings estimates.

The last time I wrote about AT&T Inc. (NYSE:T) I stated:

"Due to the low earnings growth expectations, bearish technicals, and earnings contraction expectations I will not be pulling the trigger on this name right now." Since that article was published, the stock is up 0.71% while the S&P 500 (NYSEARCA:SPY) is up 1.51%. AT&T is a provider of telecommunications services in the U.S. and worldwide.

The company reported earnings after the market closed on 22Apr14 and on the surface the results were okay with the company reporting earnings of $0.71 per share (beating estimates by $0.01) on revenue of $32.47 billion (in-line with estimates). The stock decreased 3.78% the day after earnings and what I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenues

Segment Income (millions)

1Q14

4Q13

1Q13

Q/Q

Y/Y

Wireless

$ 17,866

$ 18,437

$ 16,691

-3%

7%

Wireline

$ 14,601

$ 14,716

$ 14,655

-1%

0%

Other

$ 9

$ 10

$ 10

-10%

-10%

Total Income

$ 32,476

$ 33,163

$ 31,356

-2%

4%

Click to enlarge

Compared to last year, total revenue has increased by 4% for the first quarter. The only real notable thing about this portion of the earnings report is that Wireless increased revenues by 7% and accounts for roughly 55% of the company's revenues. The 10% decrease in Other revenue is immaterial as it only accounts for 0.02% of revenues.

Income Statement

Income Statement

1Q14

4Q13

1Q13

Q/Q

Y/Y

Operating Revenues

$ 32,476

$ 33,163

$ 31,356

-2%

4%

Cost of services and sales (exclusive of depreciation and amortization shown separately below)

$ 13,321

$ 12,237

$ 12,554

9%

6%

Selling, general and administrative

$ 8,260

$ 4,008

$ 8,333

106%

-1%

Depreciation and amortization

$ 4,617

$ 4,680

$ 4,529

-1%

2%

Total Operating Expenses

$ 26,198

$ 20,925

$ 25,416

25%

3%

Operating Income (Loss)

$ 6,278

$ 12,238

$ 5,940

-49%

6%

Interest Expense

$ 860

$ 1,459

$ 827

-41%

4%

Equity in Net Income of Affiliates

$ 88

$ 148

$ 185

-41%

-52%

Other Income (Expense) - Net

$ 145

$ 226

$ 32

-36%

353%

Income (Loss) Before Income Taxes

$ 5,651

$ 11,153

$ 5,330

-49%

6%

Income Tax Expense (Benefit)

$ 1,917

$ 4,158

$ 1,557

-54%

23%

Net Income (Loss)

$ 3,734

$ 6,995

$ 3,773

-47%

-1%

Less: Net Income Attributable to Noncontrolling Interest

$ (82)

$ (82)

$ (73)

0%

12%

Net Income (Loss) Attributable to AT&T

$ 3,652

$ 6,913

$ 3,700

-47%

-1%

Diluted Shares Outstanding

5,238

5,283

5,530

-1%

-5%

Diluted earnings per share

$ 0.70

$ 1.31

$ 0.67

-47%

4%

Click to enlarge

With the 4% increase on the top-line I'd expect the bottom line to exhibit the same characteristics and it did. However, I'd like to see if financial engineering was involved to keep it afloat or if the 4% increase on the bottom line occurred naturally. We immediately see a 3% increase in operating expenses but operating income increased 6%. Equity in net income of affiliates decreased 52% and other income increased 353% helping income before taxes increase 6% from the prior year. Income taxes increased 23% though, which made net income decrease 1% from the prior year. After subtracting the 12% increase in net income attributable to noncontrolling assets we received a 1% reduction in company specific attributable income. Just above the bottom line we see that there was a 5% reduction to the share count from last year and that's what kept earnings per share at a 4% increase.

Balance Sheet

Balance Sheet

1Q14

4Q13

Q/Q

Cash and cash equivalents

$ 3,611

$ 3,339

8%

Accounts receivable - net of allowances for doubtful accounts of $483 and $547

$ 13,120

$ 12,918

2%

Prepaid expenses

$ 1,000

$ 960

4%

Deferred income taxes

$ 1,171

$ 1,199

-2%

Other current assets

$ 5,187

$ 4,780

9%

Total current assets

$ 24,089

$ 23,196

4%

Property, Plant and Equipment - Net

$ 112,809

$ 110,968

2%

Goodwill

$ 69,720

$ 69,273

1%

Licenses

$ 59,584

$ 56,433

6%

Customer Lists and Relationships - Net

$ 763

-100%

Other Intangible Assets - Net

$ 6,515

$ 5,016

30%

Investments in and Advances to Equity Affiliates

$ 3,613

$ 3,860

-6%

Other Assets

$ 9,010

$ 8,278

9%

Total Assets

$ 285,340

$ 277,787

3%

Debt maturing within one year

$ 8,301

$ 5,498

51%

Accounts payable and accrued liabilities

$ 22,234

$ 21,107

5%

Advanced billing and customer deposits

$ 4,121

$ 4,212

-2%

Accrued taxes

$ 2,784

$ 1,774

57%

Dividends payable

$ 2,390

$ 2,404

-1%

Total current liabilities

$ 39,830

$ 34,995

14%

Long-term debt

$ 71,575

$ 69,290

3%

Deferred income taxes

$ 36,448

$ 36,308

0%

Postemployment benefit obligation

$ 30,029

$ 29,946

0%

Other noncurrent liabilities

$ 16,089

$ 15,766

2%

Total deferred credits and other noncurrent liabilities

$ 82,566

$ 82,020

1%

Click to enlarge

From a balance sheet perspective, on the short-term asset side of the equation we saw a 4% increase from last quarter. On the longer-term portion of assets, there was a 30% increase in other intangible assets, which helped total assets increase 3% from last quarter.

On the liability side of the equation we see that debt maturing within the coming year has increased 51% and accrued taxes has increased 57% to bring a 14% increase to short-term liabilities. Overall though, liabilities increased just 1%.

Conclusion

The company reported earnings, which were 4% higher than a year ago on 4% more revenue while the share price was up 3.31% since the last earnings call. These were only okay results to me because of the quality of the earnings increase was through financial engineering and make me want to buy shares of the company only when the right opportunity comes along. The stock is one of the average-sized positions in my dividend portfolio. The company saw a 10% increase in postpaid net adds during the quarter and saw wireless service revenue jump 2.2%. $1.2 billion was spent on share purchases and reiterated free cash flow guidance of $11 billion. That being said, I think the stock is inexpensively valued and I'll be buying it on any dips. With these results the stock is on my team but on the bench.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long T, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.