AT&T Announces First-Quarter 2005 Earnings
- First-quarter earnings per diluted share of $0.66
- Consolidated revenue of $7.0 billion
- Operating income of $1.1 billion
BEDMINSTER, N.J., April 21 -- AT&T (NYSE: T) today reported net income of
$529 million, or earnings per diluted share of $0.66, for the first quarter of
2005. Net income included an after-tax benefit from lower depreciation of $333
million, or $0.41 per share, as a result of the asset impairment charges taken
in the third quarter of 2004. The company's current-quarter net income compares
to net income of $304 million, or earnings per diluted share of $0.38, in the
first quarter of 2004. Net income in 2004 included a tax benefit related to a
prior investment, losses on the early retirement of debt and asset impairment
and net restructuring and other charges, which collectively increased net income
by $71 million, or $0.09 per share.
"AT&T continues to take targeted, strategic actions to elevate our
operational and financial strength in advance of our pending merger with SBC
Communications," said AT&T Chairman and Chief Executive Officer David W.
Dorman. "Our first-quarter results demonstrate the significant progress we're
making in transforming this company for long-term networking and technology
leadership in the face of a very challenging pricing environment for
traditional voice and data services."
AT&T reported first-quarter 2005 consolidated revenue of $7.0 billion,
which included $5.3 billion from AT&T Business and $1.7 billion from AT&T
Consumer. Consolidated revenue declined 12.2 percent versus the first quarter
of 2004, primarily due to continued declines in long distance (LD) voice and
data revenue.
The company reported consolidated EBITDA of $1.7 billion in the first
quarter of 2005 for a margin of 24.3 percent. This compares to consolidated
EBITDA of $1.7 billion and a margin of 21.8 percent in the prior-year first
quarter, excluding asset impairment and net restructuring and other charges of
$0.2 billion. The company reported that success in cutting costs, including
savings from ongoing headcount reduction efforts and strategic reductions in
marketing expenses in AT&T Consumer contributed to strong margin performance
for the quarter.
AT&T's first-quarter 2005 operating income totaled $1.1 billion, yielding
a consolidated operating margin of 15.3 percent. The operating margin was
positively impacted by a benefit from lower depreciation of $540 million,
resulting from the asset impairment charges taken during the third quarter of
2004. The company's current-quarter performance compares to consolidated
operating income of $281 million and a margin of 3.5 percent in the prior-year
first quarter, which included $213 million of asset impairment and net
restructuring and other charges.
AT&T UNIT HIGHLIGHTS
AT&T Business
-- Revenue was $5.3 billion, a decline of 9.4 percent from the prior-year
first quarter, primarily due to ongoing pricing pressure in traditional
voice and data services, and declines in retail volumes. Revenue was
positively impacted by approximately 1.0 percentage point due to a
customer disconnect of prepaid network capacity and higher equipment
sales.
-- Long distance voice revenue decreased 17.0 percent from the prior-year
first quarter, driven by continued pricing pressure and a decline in
overall volumes, primarily reflecting a decline in retail minutes.
-- Local voice revenue declined 4.6 percent from the prior-year first
quarter reflecting declines in reciprocal compensation revenue and our
"All-In-One" bundled offer. As previously announced, AT&T has adjusted
its strategy to be more selective in approaching the small business
market, placing a greater focus on profitability over overall market
share. This quarter, AT&T began to see the impact of this strategic
change as the number of local access lines declined.
-- Data revenue declined 7.6 percent from the prior-year first quarter,
reflecting the impact of pricing pressure. Data revenue was positively
impacted by approximately 2.0 percentage points due to a customer
disconnect of prepaid network capacity.
-- IP&E-services revenue grew 6.6 percent over the prior-year first
quarter, reflecting AT&T's ongoing transformation to next-generation
networking services such as Enhanced Virtual Private Network (E-VPN)
and IP-enabled frame relay services, though declined sequentially.
Approximately half of the sequential decline was attributable to a
contract renewal at current market rates for a significant customer in
one of the more mature products within the IP&E-services portfolio.
-- Outsourcing, professional services and other revenue grew 0.4 percent
from the prior-year first quarter, reflecting continued strength in
government professional services and increased equipment sales. There
was an approximate 2.0 percentage point benefit to the total growth
rate associated with equipment sales.
-- Operating income totaled $588 million in the period, yielding an
operating margin of 11.0 percent, which was positively impacted by a
$509 million net benefit from lower depreciation as a result of the
asset-impairment charges taken during the third quarter of 2004. This
compared with operating income of $83 million and an operating margin
of 1.4 percent in the prior-year first quarter, which was negatively
impacted by $91 million of asset impairment and net restructuring and
other charges.
-- EBITDA was $1.2 billion during the quarter, yielding a margin of
22.3 percent. This compares with EBITDA of $1.4 billion, yielding a
margin of 23.3 percent, excluding asset impairment and net
restructuring and other charges, in the prior-year quarter.
-- Capital expenditures were $332 million as AT&T Business continues to
upgrade its network and integrate its systems to further rationalize
the company's cost structure, improve the customer experience and
support growth in next-generation products and services.
-- In addition to numerous other industry accolades received during the
quarter, AT&T received the "Best Customer Portal" award for its AT&T
BusinessDirect(R) service from Yankee Group; and was also named "#1
U.S. IP VPN Service Provider" by In-Stat/MDR.
-- During the first quarter, a number of sizable customer wins and
contract extensions were signed with such leading companies as Eastman
Kodak, Merrill Lynch, Staples and Circuit City, among many others.
AT&T Consumer
-- Revenue was $1.7 billion, a decline of 20.0 percent versus the prior-
year first quarter, driven by lower standalone LD voice revenue
resulting from the continued impact of competition as well as wireless
and Internet substitution, partially offset by targeted price
increases.
-- Operating income totaled $575 million, yielding an operating margin of
34.1 percent, compared with operating income of $371 million and an
operating margin of 17.6 percent in the prior-year first quarter.
Current-quarter operating income was positively impacted by a $31
million net benefit from lower depreciation as a result of the asset
impairment charges taken during the third quarter of 2004.
-- The year-over-year margin increase reflects a dramatic reduction in
sales and marketing expenses, primarily attributable to our change in
strategic focus, as well as reduced bad debt and customer care
expenses. In addition, targeted pricing actions contributed to the
margin improvement.
-- At the end of the first quarter, AT&T Consumer had approximately 22.7
million standalone LD and bundled customers.
OTHER CONSOLIDATED FINANCIAL HIGHLIGHTS
-- Free cash flow was $479 million for the quarter. Free cash flow is
defined as cash flows provided by operating activities of $805 million
less cash used for capital expenditures and other additions of $326
million.
-- AT&T ended the quarter with net debt of $5.6 billion, a $0.4 billion
decrease from the end of the fourth quarter of 2004 and a $2.8 billion
reduction from the prior year first quarter. Net debt is defined as
total debt of $9.4 billion less cash of $3.7 billion and net foreign
debt fluctuations of $0.1 billion.
-- Consolidated capital expenditures for the quarter were $335 million.
-- AT&T accepted $1.25 billion of bonds tendered in a buyback offer that
the company completed in early April 2005. The buyback will reduce
interest expense by $0.1 billion throughout the remainder of 2005 and
will result in a second quarter pretax loss of $0.2 billion recorded in
other income (expense).
DEFINITIONS and NOTES
AT&T Business
LD Voice - includes all of AT&T's domestic and international LD revenue,
including Intralata toll when purchased as part of an LD calling plan.
Local Voice - includes all local calling and feature revenue, Intralata
toll when purchased as part of a local calling plan, as well as Inter-carrier
local revenue.
Data Services - includes bandwidth services (dedicated private line
services through high-capacity optical transport), frame relay and
asynchronous transfer mode (ATM) revenue for LD and local, as well as revenue
for managed data services.
Internet Protocol & Enhanced Services (IP&E-services) - includes all
services that ride on the IP common backbone or that use IP technology,
including managed IP services, as well as application services (e.g., hosting,
security).
Outsourcing, Professional Services & Other - includes complex bundled
solutions primarily in the wide area/local area network space, AT&T's
professional services revenue associated with the company's federal government
customers, as well as all other Business Services revenue (and eliminations)
not previously defined.
Data, IP&E-Services - Percent Managed - managed services refers to AT&T's
management of a client's network or network and applications including
applications that extend to the customer premise equipment.
Data, IP&E-Services - Percent International - a data service that either
originates or terminates outside of the United States, or an IP&E-service
installed or wholly delivered outside the United States.
AT&T Consumer
Bundled Services - includes any customer with a local relationship as a
starting point, and all other AT&T subscription-based voice products provided
to that customer.
Standalone LD, Transactional & Other Services - includes any customer with
solely a long distance relationship, non-voice products, or a non
subscription-based relationship.
Local Customers - residential customers who subscribe to AT&T local
service.
Other Definitions and Notes
EBITDA - represents operating income plus depreciation and amortization.
Foreign currency fluctuations - represents mark-to-market adjustments, net
of cash collateral collected, that increased the debt balance by approximately
$0.1 billion at March 31, 2005, on non-U.S. denominated debt of about $0.6
billion. AT&T has entered into foreign exchange hedges that substantially
offset the fluctuations in the debt balance. The offsetting mark-to-market
adjustments of the hedges are included in "other current assets" and "other
assets" on the balance sheet.
AT&T Corp. Consolidated Statements of Income (Unaudited)
Dollars in millions (except per share amounts)
Three Months Ended
March 31,
2005 2004
REVENUE
AT&T Business $5,319 $5,872
AT&T Consumer 1,685 2,107
Corporate and Other 11 11
Total Revenue 7,015 7,990
OPERATING EXPENSES
Access and other connection 2,404 2,638
Costs of services and products 1,628 1,864
Selling, general and
administrative 1,277 1,744
Depreciation and amortization 636 1,250
Asset impairment and net
restructuring and other charges - 213
Total operating expenses 5,945 7,709
Operating income 1,070 281
Other income (expense), net 30 (174)
Interest (expense) (203) (228)
Income (loss) before income
taxes and net (losses) related
to equity investments 897 (121)
(Provision) benefit for income taxes (368) 426
Net (losses) related to equity
investments - (1)
Net income $529 $304
Weighted-average common shares
(millions) 800 793
Weighted-average common shares
and potential common shares
(millions) 806 796
Earnings per basic and diluted share $0.66 $0.38
Dividends declared per share $0.2375 $0.2375
AT&T Corp. Consolidated Statements of Operations (Unaudited)
Dollars in millions (except per share amounts)
1Q05 4Q04 3Q04 2Q04 1Q04 2004
REVENUE
AT&T Business $5,319 $5,454 $5,645 $5,611 $5,872 $22,582
AT&T Consumer 1,685 1,806 1,980 2,011 2,107 7,904
Corporate and Other 11 13 13 14 11 51
Total revenue 7,015 7,273 7,638 7,636 7,990 30,537
OPERATING EXPENSES
Access and other
connection 2,404 2,924 2,411 2,481 2,638 10,454
Costs of services
and products 1,628 1,668 1,783 1,759 1,864 7,074
Selling, general
and administrative 1,277 1,397 1,653 1,763 1,744 6,557
Depreciation and
amortization 636 640 647 1,231 1,250 3,768
Asset impairment
and net restructuring
and other charges - 36 12,469 54 213 12,772
Total operating
expenses 5,945 6,665 18,963 7,288 7,709 40,625
Operating income
(loss) 1,070 608 (11,325) 348 281 (10,088)
Other income
(expense), net 30 28 (34) 36 (174) (144)
Interest (expense) (203) (192) (192) (191) (228) (803)
Income (loss)
before income
taxes, minority
interest
income and net
earnings (losses)
related to equity
investments 897 444 (11,551) 193 (121) (11,035)
(Provision) benefit
for income taxes (368) (181) 4,402 (87) 426 4,560
Minority interest
income - - - 1 - 1
Net earnings
(losses) related
to equity
investments - 3 2 1 (1) 5
Net income (loss) $529 $266 $(7,147) $108 $304 $(6,469)
Weighted-average
common shares
(millions) 800 797 795 794 793 795
Weighted-average
common shares and
potential common
shares (millions) 806 803 795 797 796 795
Earnings (loss) per
basic and diluted
share $0.66 $0.33 $(8.99) $0.14 $0.38 $(8.14)
AT&T Corp. Historical Segment Data (Unaudited)
Dollars in millions
1Q05 4Q04 3Q04 2Q04 1Q04 2004
AT&T Business
LD Voice $2,168 $2,163 $2,364 $2,386 $2,613 $9,526
Local Voice 371 490 390 404 389 1,673
Total Voice 2,539 2,653 2,754 2,790 3,002 11,199
Data Services 1,585 1,595 1,693 1,690 1,715 6,693
IP&E-Services 589 625 587 565 553 2,330
Total Data and
IP&E-Services 2,174 2,220 2,280 2,255 2,268 9,023
Outsourcing,
Professional
Services & Other 606 581 611 566 602 2,360
Total revenue 5,319 5,454 5,645 5,611 5,872 22,582
Operating income
(loss) (1) (5) 588 781 (11,095) 152 83 (10,079)
Operating margin 11.0% 14.3% (196.5%) 2.7% 1.4% (44.6%)
Capital
expenditures 332 377 391 463 470 1,701
Depreciation &
amortization (5) 601 607 610 1,176 1,192 3,585
Total Data and
IP&E-Services - %
managed 32% 33% 32% 32% 32% 32%
Total Data and
IP&E-Services - %
international 16% 16% 15% 15% 15% 15%
LD volume growth -
yr/yr -3% -2% -2% 0% 2% 0%
LD volume %
wholesale 57% 57% 56% 54% 54% 55%
AT&T Consumer
Standalone LD,
Transactional and
Other Services $1,025 $1,116 $1,256 $1,327 $1,462 $5,161
Bundled Services 660 690 724 684 645 2,743
Total revenue 1,685 1,806 1,980 2,011 2,107 7,904
Operating income
(loss) (2) (5) (6) 575 (60) 281 240 371 832
Operating margin 34.1% (3.3%) 14.2% 11.9% 17.6% 10.5%
Capital
expenditures - 5 9 15 13 42
Depreciation &
amortization (5) 12 13 15 33 32 93
Local customers
(in thousands) 3,859 4,156 4,477 4,677 4,364 4,156
Corporate and Other
Revenue $11 $13 $13 $14 $11 $51
Operating (loss) (3) (93) (113) (511) (44) (173) (841)
Capital
expenditures 3 14 6 2 2 24
Depreciation &
amortization 23 20 22 22 26 90
Total AT&T
Revenue $7,015 $7,273 $7,638 $7,636 $7,990 $30,537
Operating income
(loss) (4) (6) 1,070 608 (11,325) 348 281 (10,088)
Operating margin 15.3% 8.4% (148.3%) 4.6% 3.5% (33.0%)
Capital
expenditures 335 396 406 480 485 1,767
Depreciation &
amortization (5) 636 640 647 1,231 1,250 3,768
(1) Includes asset impairment and net restructuring and other charges of
$9M in 4Q04, $11,859M in 3Q04, $52M in 2Q04 and $91M in 1Q04,
totaling $12,011M in 2004.
(2) Includes asset impairment and net restructuring and other charges of
$188M in 3Q04 and $1M in 1Q04, totaling $189M in 2004.
(3) Includes asset impairment and net restructuring and other charges of
$27M in 4Q04, $422M in 3Q04, $2M in 2Q04 and $121M in 1Q04, totaling
$572M in 2004.
(4) Includes asset impairment and net restructuring and other charges of
$36M in 4Q04, $12,469M in 3Q04, $54M in 2Q04 and $213M in 1Q04,
totaling $12,772M in 2004.
(5) As a result of the third-quarter 2004 asset impairment charge,
first-quarter 2005, fourth-quarter 2004 and third-quarter 2004
depreciation and amortization expense decreased by $533 million,
$538 million and $527 million, respectively, for AT&T Business and
$7 million, $8 million and $10 million, respectively, for AT&T
Consumer. In addition, as a result of the transport service
arrangement between AT&T Business and AT&T Consumer, network-related
charges from AT&T Business (recorded as contra-expense) to AT&T
Consumer were reduced by $24 million, $30 million and $28 million in
the first-quarter 2005, fourth-quarter 2004 and third-quarter 2004,
respectively, as a result of the lower depreciation and amortization
expense recorded by AT&T Business. This resulted in a reduction in
AT&T Business' operating income and an increase in AT&T Consumer's
operating income.
(6) Includes $553M additional prepaid card accrual in 4Q04.
AT&T Corp. Consolidated Balance Sheets (Unaudited)
Dollars in millions
March 31, December 31,
2005 2004
ASSETS
Cash and cash equivalents $3,705 $3,698
Accounts receivable, less
allowances of $473 and $523 3,112 3,195
Deferred income taxes 1,094 1,111
Other current assets 802 1,383
Total Current Assets 8,713 9,387
Property, plant and equipment, net of
accumulated depreciation of $1,936
and $1,588 11,203 11,509
Goodwill 4,838 4,888
Other purchased intangible
assets, net of accumulated
amortization of $405 and $428 348 375
Prepaid pension costs 4,048 3,991
Other assets 2,546 2,654
TOTAL ASSETS $31,696 $32,804
LIABILITIES
Accounts payable and accrued
expenses $2,626 $2,716
Compensation and benefit-
related liabilities 1,724 2,193
Debt maturing within one year 1,982 1,886
Other current liabilities 2,603 2,293
Total Current Liabilities 8,935 9,088
Long-term debt 7,468 8,779
Long-term compensation and
benefit-related liabilities 3,406 3,322
Deferred income taxes 1,358 1,356
Other long-term liabilities
and deferred credits 3,113 3,240
Total Liabilities 24,280 25,785
SHAREOWNERS' EQUITY
Common Stock, $1 par value,
authorized 2,500,000,000
shares; issued and outstanding
800,823,621 shares (net of
171,983,367 treasury
shares) at March 31, 2005
and 798,570,623 shares
(net of 171,983,367 treasury
shares) at December 31, 2004 801 799
Additional paid-in capital 27,049 27,170
Accumulated deficit (20,651) (21,180)
Accumulated other
comprehensive income 217 230
Total Shareowners' Equity 7,416 7,019
TOTAL LIABILITIES &
SHAREOWNERS' EQUITY $31,696 $32,804
AT&T Corp. Consolidated Statements of Cash Flows (Unaudited)
Dollars in millions
Three Months Ended
March 31,
2005 2004
Operating Activities
Net income $529 $304
Adjustments to reconcile net
income to net cash provided
by operating activities:
Net losses (gains) on sales
of businesses and investments 9 (11)
Loss on early extinguishment of debt - 274
Asset impairment and net
restructuring and other charges - 201
Depreciation and amortization 636 1,250
Provision for uncollectible receivables 48 146
Deferred income taxes 21 (295)
(Increase) decrease in
receivables (126) 18
(Decrease) increase in accounts
payable and accrued expenses (140) 7
Net change in other operating
assets and liabilities (146) (443)
Other adjustments, net (26) (102)
Net Cash Provided by
Operating Activities 805 1,349
Investing Activities
Capital expenditures and other additions (326) (546)
Proceeds from sale or disposal of
property, plant and equipment 5 9
Investment distributions and sales 7 14
Net dispositions of businesses,
net of cash disposed - 8
Decrease (increase) in restricted cash 546 (2)
Other investing activities, net 8 10
Net Cash Provided by (Used in)
Investing Activities 240 (507)
Financing Activities
Retirement of long-term debt,
including redemption
premiums (1,032) (2,781)
(Decrease) increase in short-
term borrowings, net (98) 35
Issuance of AT&T common
shares 32 22
Dividends paid on common
stock (190) (188)
Other financing activities, net 250 295
Net Cash (Used in) Financing
Activities (1,038) (2,617)
Net increase (decrease) in
cash and cash equivalents 7 (1,775)
Cash and cash equivalents at
beginning of year 3,698 4,353
Cash and Cash Equivalents at
End of Period $3,705 $2,578
AT&T Corp. Reconciliation of Non-GAAP Measures
AT&T is providing information on net debt, EBITDA and related margins, and
free cash flows because these measures are commonly used by the investment
community for evaluation purposes. Net debt, EBITDA, and free cash flows
should be considered in addition to, but not in lieu of, other measures of
liquidity, profitability and cash flows reported in accordance with generally
accepted accounting principles. Additionally, they may not be comparable to
similarly captioned measures reported by other companies.
Net Debt
Net debt is defined as total debt, less cash and net foreign
debt fluctuations:
(dollars in millions) March 31, 2005
Total debt $9,450
Less: Cash 3,705
Foreign debt fluctuations 144
Net debt $5,601
AT&T Business EBITDA, Excluding Asset Impairment and Net
Restructuring and Other Charges, to Operating Income
(dollars in millions) For the three months ended
March 31, 2005 March 31, 2004
EBITDA and margin (1) $1,189 22.3% $1,366 23.3%
Depreciation and
amortization (601) (1,192)
Asset impairment and net
restructuring and
other charges - (91)
Operating income and margin $588 11.0% $83 1.4%
(1) Excluding asset impairment and net restructuring and other
charges.
AT&T Corp. Reconciliation of Non-GAAP Measures, continued
EBITDA, Excluding Asset Impairment and Net Restructuring and
Other Charges, to Net Income
(dollars in millions) For the three months ended
March 31, March 31,
2005 2004
EBITDA margin (1) 24.3% 21.8%
EBITDA (1) $1,706 $1,744
Depreciation and amortization (636) (1,250)
Asset impairment and net
restructuring and other charges - (213)
Subtotal operating income $1,070 $281
Other income (expense), net 30 (174)
Interest (expense) (203) (228)
(Provision) benefit for
income taxes (368) 426
Net (losses) related to
equity investments - (1)
Net income $529 $304
(1) Excluding asset impairment and net restructuring and
other charges.
Note to Financial Media: AT&T executives will discuss the company's
performance in a two-way conference call for financial analysts at 8:15 a.m.
ET today. Reporters are invited to listen to the call. U.S. callers should
dial 888-428-4480 to access the call. Callers outside the U.S. should dial
+1-612-332-0630.
In addition, Internet rebroadcasts of the call will be available on the
AT&T Web site beginning later today. The Web site address is www.att.com/ir.
An audio rebroadcast of the conference call will also be available beginning
at 12:30PM on Thursday, April 21 through 12:00AM on Tuesday, April 26. To
access the audio rebroadcast, U.S. callers can dial 800-475-6701, access code
763283. Callers outside the U.S. should dial +1-320-365-3844, access code
763283.
The foregoing contains "forward-looking statements" which are based on
management's beliefs as well as on a number of assumptions concerning future
events made by and information currently available to management. Readers are
cautioned not to put undue reliance on such forward-looking statements, which
are not a guarantee of performance and are subject to a number of
uncertainties and other factors, many of which are outside AT&T's control,
that could cause actual results to differ materially from such statements.
These risk factors include the impact of increasing competition, continued
capacity oversupply, regulatory uncertainty and the effects of technological
substitution, among other risks. For a more detailed description of the
factors that could cause such a difference, please see AT&T's 10-K, 10-Q, 8-K
and other filings with the Securities and Exchange Commission. AT&T disclaims
any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise. This information is presented solely to provide additional
information to further understand the results of AT&T.
(Logo: http://www.newscom.com/cgi-bin/prnh/19991018/ATT /
SOURCE AT&T
-0- 04/21/2005
/CONTACT: media inquiries, Andy Backover, +1-908-234-8632, Jim Byrnes
+1-908-234-8754, or investor inquiries, Investor Relations, +1-908-532-1680,
all of AT&T/
/Photo: http://www.newscom.com/cgi-bin/prnh/19991018/ATT /
/Web site: http://www.att.com/
(T)
END
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