AT&T Wireless 2006 Annual Report Download

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2006 Annual Report : : AT&T Inc.
Delivering on our promise

Table of contents

  • Page 1
    2006 Annual Report :: AT&T Inc. Delivering on our promise

  • Page 2
    ... largest international coverage of any U.S. wireless carrier. AT&T offers unlimited calling to one of the nation's largest mobile-to-mobile and mobile-to-wireline communities and the nation's only Rollover® Minutes program. : : One of the world's most advanced and powerful global backbone networks...

  • Page 3
    ... Jr. Chairman Chief Executive Officer AT&T Inc. AT&T is a company with a tradition of delivering on our promises. I'm pleased to report that in 2006, we continued that tradition. We promised to increase stockholder value, and we did. We promised to position our company for long-term growth, and...

  • Page 4
    ... lowers costs and allows for integrated platforms and service offerings that transform the way customers use their PCs, wireless devices and wired phones - even televisions. Our network is the most robust in the world. It carries more than 9.59 petabytes of data traffic on an average business day...

  • Page 5
    ... the value of the BellSouth acquisition. Strengthen our ability to compete in the video market as we scale our new video services. Grow our enterprise business. Continue to build AT&T as the brand that our current and future customers rely on to meet all of their communications and entertainment...

  • Page 6
    ..., and we believe that we have the industry's premier assets. Our advantage in wireless benefits our enterprise customers and supports our three-screen strategy for consumers - to integrate the wireless phone, TV and PC under a single, unified service. RIGHT: The iPhone from Apple and AT&T will...

  • Page 7
    ... ever-increasing popularity of downloadable games, ringtones, instant messaging and video. Nearly all of our wireless minutes are now carried on our newly integrated GSM network. With GSM technology, our wireless customers can make and receive voice calls in 190 countries and access data services in...

  • Page 8
    ...phone numbers, including homes and businesses. AT&T continues to demonstrate leadership in wireless entertainment. We have expanded our offerings to include the most comprehensive mobile music subscription service offered by a U.S. carrier. With content available from online retailers, such as Yahoo...

  • Page 9
    ... Megastores to transfer point-of-sale data between locations and allows Virgin's customers to listen to music before making a purchase. ABOVE RIGHT: In 2006, we expanded the availability of enterprise-level solutions to small and midsized businesses. n n Business : : 2006 AT&T Annual Report : : 7

  • Page 10
    ...We also acquired USinternetworking, a leading applications services provider. This acquisition strengthened our position in application management services - a worldwide market estimated at $20 billion and growing. For small and midsized businesses, we introduced several new services. These services...

  • Page 11
    ... security. AT&T is a global leader in the transport and termination of wholesale traffic, providing local-to-global solutions for carriers, wireless operators, cable providers, ISPs, systems integrators and content providers. Innovation is Vital to AT&T's Continued Success With Business Customers...

  • Page 12
    ... speed Internet access to more than 80 percent of our local service customers through our network. We reach even more customers through our alliance with satellite broadband provider WildBlue. Increased Broadband Penetration. Today, AT&T has more than 12 million broadband lines in service, making us...

  • Page 13
    ... one set-top box. U-verse TV often offers access to more HD channels than local cable providers. U-verse subscribers now have access to more than 300 television channels, and in 2007, we plan to expand AT&T U-verse availability and add new features. We also continue to offer video service through...

  • Page 14
    ...Sullivan recently called AT&T Homezone service "a home run for consumers and AT&T." AT&T is Innovating to Drive Demand for Broadband Products and Services In fall 2006, we introduced a simplified pricing structure for AT&T Yahoo! High Speed Internet service that offers greater value and flexibility...

  • Page 15
    ... coverage and fewer dropped and blocked calls. A newly redesigned Web site makes buying wireless service easier than ever. Customers can also establish a personal online account that enables them to review and pay bills, check voice minutes or data usage, access tutorials and upgrade their phones...

  • Page 16
    ... Broadband Customers During 2006, we simplified pricing and service options for AT&T Yahoo! High Speed Internet service and for our local and long distance voice packages. We also introduced DSL plans without contract requirements or early termination fees. And we now install service during evenings...

  • Page 17
    ... "America's Most Admired Telecommunications Company" in nine out of the past 10 years and as the "World's Most Admired Telecommunications Company" eight times in the past decade. Community n Funding. In 2006, AT&T contributed more than $101 million through corporate-, employee- and AT&T Foundation...

  • Page 18
    ... to our commitment to hiring veterans, since 2000 AT&T has given U.S. troops more than $6 million in prepaid calling cards and installed approximately 70 air-conditioned call centers for members of the military stationed in Iraq, Kuwait and Afghanistan. 16 : : 2006 AT&T Annual Report : : Community

  • Page 19
    ...Inc. Financial Review 2006 Selected Financial and Operating Data Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Financial Statements Notes to Consolidated Financial Statements Report of Management Report of Independent Registered Public Accounting...

  • Page 20
    ... operations Income before extraordinary item and cumulative effect of accounting changes Net income5 Total assets Long-term debt Construction and capital expenditures Dividends declared per common share6 Book value per common share Ratio of earnings to fixed charges Debt ratio Weighted-average...

  • Page 21
    ...retail access lines due to increased competition, as customers continue to disconnect both primary and additional lines and began using wireless and Voice over Internet Protocol (VoIP) technology offered by competitors and cable instead of phone lines for voice and data. Operating revenues increased...

  • Page 22
    ...This segment provides both retail and wholesale landline telecommunications services, including local and long-distance voice, switched access, Internet Protocol (IP) and Internet access data, messaging services, managed networking to business customers, our U-verseSM 20 : : 2006 AT&T Annual Report

  • Page 23
    ... in long distance and DSL. Additionally, our co-branded AT&T | DISH Network satellite TV service, sales in the large-business market and higher repair costs caused by severe weather in our traditional regions also put pressure on our operating income margin. 2006 AT&T Annual Report : : 21

  • Page 24
    ... of Financial Condition and Results of Operations (continued) Dollars in millions except per share amounts Voice revenues increased $9,424, or 38.5%, in 2006 and $931, or 4.0%, in 2005 primarily due to the acquisition of ATTC. Included in voice revenues are revenues from long distance, local voice...

  • Page 25
    ...and amortization of net losses on plan assets in prior years. • Higher traffic compensation expenses (for access to another carrier's network) of $109 primarily due to increased volume of local traffic (telephone calls) terminating on competitor networks and wireless customers. • Salary and wage...

  • Page 26
    ...Wireline In-Region1 Switched Access Lines contract negotiations, $66 as a result of changes made to management medical coverage in 2005 and $73 related to changes in phone concessions for out-ofregion retirees. • Lower nonemployee-related expenses, such as contract services, agent commissions and...

  • Page 27
    ...to increasing competition, resulting in pricing reductions. Additionally, the increase in prepaid and reseller customers over the past year has contributed to the decline in ARPU. We expect continued pressure on ARPU, despite our increasing revenue from data services. 2006 AT&T Annual Report : : 25

  • Page 28
    ... other revenue per customer mostly offset by a 44.8% increase in average data revenue per customer and increased long-distance revenue per customer. The continued increase in data revenue was related to increased use of text messaging, Internet access, e-mail and other data services, which we expect...

  • Page 29
    ... customers to AT&T Mobility service offerings, which required new handsets. Total equipment costs continue to be higher than equipment revenues due to the sale of handsets below cost to customers who committed to one-year or twoyear contracts or in connection with other promotions. Selling, general...

  • Page 30
    ... and Analysis of Financial Condition and Results of Operations (continued) Dollars in millions except per share amounts Directory Segment Results Percent Change 2006 2005 2004 2006 vs. 2005 2005 vs. 2004 Total Segment Operating Revenues Segment operating expenses Cost of sales Selling, general and...

  • Page 31
    ... Voice Lines and 57 Business Lines sold to ATTC at December 31, 2006. 2 Using AT&T methodology for calculating switched access lines, BellSouth's Total Switched Access Lines at December 31, 2006 was 20,163. 3 DSL and DirecTV customers include DSL lines of 3,632 in 2006 and 2,882 in 2005. 2006...

  • Page 32
    .... While wireless communications providers' prices and service offerings are generally not subject to state regulation, an increasing number of states are attempting to regulate or legislate various aspects of wireless services, such as in the area of consumer protection. The term "net neutrality...

  • Page 33
    ...% of our total usage, based on minutes of use, is on our GSM network. We will decommission our TDMA network in early 2008. Our GSM networks also contain General Packet Radio Service (GPRS) and Enhanced Data Rates for Global Evolution (EDGE) technology to provide high-speed wireless data services. In...

  • Page 34
    ...months, to comply with the FCC's four net neutrality principles, which essentially ensure that end-users can access their content of choice and reach their application or service provider of choice over the Internet. Other commitments relate to, among other things, expanded availability of broadband...

  • Page 35
    ... and services, including wireless and video, largebusiness data services, broadband and long-distance service. In some markets, we compete with large cable companies, such as Comcast Corporation, Cox Communications, Inc. and Time Warner Inc., for local and high-speed Internet services customers and...

  • Page 36
    ... local, domestic intrastate and interstate, international wholesale networking capacity and switched services to other service providers, primarily large ISPs using the largest class of nationwide Internet networks (Internet backbone), wireless carriers, CLECs, regional phone ILECs, cable companies...

  • Page 37
    ... pension and postretirement cost to increase $802 over 2006. The 10-year returns on our pension plan were 10.2% through 2006, including returns in excess of our assumed rate of return for 2006. Under GAAP, the expected long-term rate of return is calculated on the market-related value of assets...

  • Page 38
    ...of 3,000 jobs to the U.S. In particular, we agreed not to offer to provide service, for a period of two years or until federal net neutrality legislation is enacted if sooner, that charges a premium for transporting data from websites. We also agreed to offer broadband Internet access service to all...

  • Page 39
    ... and are currently disclosing to the U.S. Government records concerning communications to which Plaintiffs and class members were a party, including providing access to stored telephone and Internet records databases and permitting interception of telephone and Internet communications. Plaintiffs...

  • Page 40
    ... in cash received upon closing our acquisition of BellSouth, net of merger acquisition costs. • $567 of proceeds from real estate sale-leaseback transactions. • $189 related to the sale of securities and other assets. To provide high-quality communications services to our customers, we must make...

  • Page 41
    ... 2006, our Board of Directors approved a 6.8% increase in the regular quarterly dividend to $0.355 per share. Our dividend policy considers both the expectations and requirements of stockholders, internal requirements of AT&T and long-term growth opportunities. It is our intent to provide the...

  • Page 42
    ... 2). For 2006, our common stock outstanding and capital in excess of par value increased by $60,850 and our current and long-term debt increased by $29,226. The increase in total debt was primarily due to acquired debt from BellSouth and AT&T Mobility of $28,321, an increase in commercial paper and...

  • Page 43
    ... in market interest rates can lead to significant fluctuations in the fair value of these notes and debentures. It is our policy to manage our debt structure and foreign exchange exposure in order to manage capital costs, control financial risks and maintain financial flexibility over the long term...

  • Page 44
    ...paid dividends and receive proceeds from sales or borrow funds in foreign currency. Before making an investment, or in anticipation of a foreign currency receipt, we often will enter into forward foreign exchange contracts. The contracts are used to provide currency at a fixed rate. Our policy is to...

  • Page 45
    ... the Securities Exchange Act of 1934. We will fund our share repurchases through a combination of cash from operations, borrowings, dependent upon market conditions, and cash from the disposition of certain non-strategic investments. Purchase Period Total Number of Shares Purchased Average Price...

  • Page 46
    ...rates are worse than those previously assumed, our annual costs will increase. The FASB required companies to recognize the funded status of defined benefit pension and postretirement plans as an asset or liability in our statement of financial position and to recognize changes in that funded status...

  • Page 47
    ... affect our relationships with customers, employees, suppliers and other parties. We acquired ATTC in November 2005 in order to combine ATTC's global systems capabilities, business and government customers and IP-based business with our local exchange, broadband and wireless services and to create...

  • Page 48
    ... deployment costs. • Increases in our benefit plans' costs including increases due to adverse changes in the U.S. and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates, and adverse medical cost trends. • The final outcome of Federal Communications...

  • Page 49
    Consolidated Statements of Income Dollars in millions except per share amounts 2006 2005 2004 Operating Revenues Voice Data Wireless service Directory Other Total operating revenues Operating Expenses Cost of sales (exclusive of depreciation and amortization shown separately below) Selling, general...

  • Page 50
    ...and Advances to AT&T Mobility Postemployment Benefit Other Assets Total Assets Liabilities and Stockholders' Equity Current Liabilities Debt maturing within one year Accounts payable and accrued liabilities Accrued taxes Dividends payable Total current liabilities Long-Term Debt Deferred Credits and...

  • Page 51
    ... months or less Repayment of other short-term borrowings Issuance of long-term debt Repayment of long-term debt Purchase of treasury shares Issuance of treasury shares Repurchase of preferred shares of subsidiaries Dividends paid Stock-based compensation tax benefit Other Net Cash (Used in) Provided...

  • Page 52
    ... Statements of Stockholders' Equity Dollars and shares in millions except per share amounts 2006 Shares Amount 2005 Shares Amount 2004 Shares Amount Common Stock Balance at beginning of year Issuance of shares Balance at end of year Capital in Excess of Par Value Balance at beginning of year...

  • Page 53
    ... us to recognize the funded status of defined benefit pension, including supplemental retirement and savings plans, and postemployment plans as an asset or liability in our statement of financial position and to recognize changes in that funded status in the year in which the changes occur through...

  • Page 54
    ... local telephone, long-distance and data services are recognized when services are provided. This is based upon either usage (e.g., minutes of traffic processed), period of time (e.g., monthly service fees) or other established fee schedules. Service revenues also include billings to our customers...

  • Page 55
    ... cost, except for assets acquired using purchase accounting, which are recorded at fair value (see Note 2). The cost of additions and substantial improvements to property, plant and equipment is capitalized. The cost of maintenance and repairs of property, plant and equipment is charged to operating...

  • Page 56
    ... 2006, we acquired BellSouth in a transaction accounted for under FAS 141. BellSouth was the leading communications service provider in the southeastern U.S., providing wireline communications services, including local exchange, network access, intraLATA long-distance services and Internet services...

  • Page 57
    ... service areas and to increase the number of potential customers for our IPTV product. The application of purchase accounting under FAS 141, requires that the total purchase price be allocated to the fair value of assets acquired and liabilities assumed based on their fair values at the acquisition...

  • Page 58
    ... current portion of long-term debt Long-term debt Deferred income taxes Postemployment benefit obligation Other noncurrent liabilities Total liabilities assumed Net assets acquired $ 4,875 18,498 330 214 9,230 100 211 32,759 2,446 11,211 26,467 106,341 customers, 9.6 years for business customers...

  • Page 59
    ...a variety of global communications services, including large domestic and multinational businesses, small and medium-sized businesses and government agencies, and operated one of the largest telecommunications networks in the U.S. ATTC also provided domestic and international long-distance and usage...

  • Page 60
    ...of the accrual recorded at December 31, 2005, cash payments made during 2006 and the purchase accounting adjustments thereto. Cash Payments for the Year Ended 2006 Balance at 12/31/05 Adjustments Balance at 12/31/06 Paid out of: Company funds Pension and Postemployment benefit plans Total $ 870...

  • Page 61
    ...including local and long-distance voice, switched access, IP and Internet access data, messaging services, managed networking to business customers, our U-verseSM video service and satellite television services through our agreement with EchoStar Communications Corp. (EchoStar). The wireless segment...

  • Page 62
    ...AT&T Mobility using the equity method of accounting prior to the December 29, 2006 acquisition, these revenues were not eliminated upon consolidation and as such, remain in consolidated revenue. The Consolidation and Elimination column includes those line items that we manage on a consolidated basis...

  • Page 63
    ... to current market value and write-offs of $45 of collocation assets and $43 of software. The impairments are reflected as an operating expense in the "Selling, general and administrative" line on our Consolidated Statements of Income. Beginning of year Equity in net income Other adjustments End of...

  • Page 64
    ...) Dollars in millions except per share amounts The following table presents summarized financial information for AT&T Mobility at December 31 or for the year then ended: 2006 2005 2004 Income Statements Operating revenues Operating income Net income Balance Sheets Current assets Noncurrent assets...

  • Page 65
    ... stock of subsidiaries 43 43 $30,027 320 108 4,108 648 465 43 $30,735 320 108 4,108 648 447 43 The fair values of our notes and debentures were estimated based on quoted market prices, where available, or on the net present value method of expected future cash flows using 2006 AT&T Annual Report...

  • Page 66
    ... on the fees paid to obtain the obligations, for both periods were $1. Derivatives We use interest rate swaps, interest rate forward contracts and foreign currency exchange contracts to manage our market risk changes in interest rates and foreign exchange rates. We do not use financial instruments...

  • Page 67
    ...the stock price of AT&T common shares will rise to levels sufficient to realize the entire tax benefit currently reflected in our balance sheet. Taxes computed at federal statutory rate $3,809 Increases (decreases) in income taxes resulting from: State and local income taxes - net of federal income...

  • Page 68
    ... value of plan assets 18,510 18,917 Funded (unfunded) benefit obligation 2,332 1,975 Unrecognized net loss 949 - Unrecognized prior service cost 356 - Net amount recorded $ 3,637 $ 1,975 $(5,813) 2,313 (3,500) 1,298 53 $(2,149) $(9,129) 2,429 (6,700) - - $(6,700) 66 : : 2006 AT&T Annual Report

  • Page 69
    ...value exceeds a stated monthly amount. ATTC, BellSouth and AT&T Mobility management employees participate in cash balance pension plans. Nonmanagement employees' pension benefits are generally calculated using one of two formulas; benefits are based on a flat dollar amount per year according to job...

  • Page 70
    ... Financial Statements (continued) Dollars in millions except per share amounts The following table presents the change in the value of plan assets for the years ended December 31 and the plans' funded status at December 31: Pension Benefits 2006 2005 Postretirement Benefits 2006 2005 Fair value...

  • Page 71
    ... value of plan assets used in pension and postretirement calculations, which under GAAP we will recognize over the next several years. Should the securities markets decline or medical and prescription drug costs increase at a rate greater than assumed, we would expect increasing annual combined net...

  • Page 72
    ... Financial Statements (continued) Dollars in millions except per share amounts Composite Rate of Compensation Increase Our expected composite rate of compensation increase of 4% for 2006 and 2005 reflects the long-term average rate of salary increases. Health Care Cost Trend Our health care cost...

  • Page 73
    ... significant assumptions for the discount rate and composite rate of compensation increase used in determining the projected benefit obligation and the net pension and postemployment benefit cost. The following tables provide the plans' benefit obligations and fair value of assets at December 31 and...

  • Page 74
    ... expected return on plan assets of 6.09%. The December 31, 2005, benefit obligations were determined using a weighted-average discount rate of 4.55% and a weighted-average rate of compensation increase of 4.25%. Net periodic pension cost was $4 for the 43 days ended 72 : : 2006 AT&T Annual Report

  • Page 75
    ... for the years ended December 31, 2006, 2005 and 2004 was $113, $54 and $58. Under our various plans, senior and other management and nonmanagement employees and nonemployee directors have received stock options, performance stock units and other nonvested stock units. Stock options issued through...

  • Page 76
    ... Financial Statements (continued) Dollars in millions except per share amounts The weighted-average fair value of each option granted during the year ended December 31 was $4.78 in 2006, $3.39 in 2005 and $4.06 in 2004. The total intrinsic value of options exercised during the year was $134 in 2006...

  • Page 77
    ... Intangible Assets Changes in the carrying amounts of goodwill for the years ended December 31, 2006 and 2005 are as follows: Wireline Segment Wireless Segment Directory Segment Other Segment Total Balance as of January 1, 2005 Goodwill acquired Goodwill written off related to sale of business unit...

  • Page 78
    ..." line on our Consolidated Statements of Income when we reported our 60% proportionate share of AT&T Mobility's results. Summarized financial information for the Illinois and northwest Indiana directory advertising business is as follows: Year ended December 31, 2006 2005 2004 Operating revenues...

  • Page 79
    ...financial information. The Parent column presents investments in all subsidiaries under the equity method of accounting. We have listed BellSouth separately because we have guaranteed securities that are legal Condensed Consolidating Statements of Income For the Twelve Months Ended December 31, 2006...

  • Page 80
    ... Financial Statements (continued) Dollars in millions except per share amounts Condensed Consolidating Balance Sheets December 31, 2006 Parent BellSouth Other Adjs. Total Cash and cash equivalents Accounts receivable - net Other current assets Total current assets Property, plant and equipment...

  • Page 81
    Condensed Consolidating Statements of Cash Flows Twelve Months Ended December 31, 2006 Parent BellSouth Other Adjs. Total Net Net Net Net cash from operating activities cash from investing activities cash from financing activities Increase in Cash $ 5,017 (1,435) (3,577) $ 5 $ 22 386 - $408 $ ...

  • Page 82
    ... provide reasonable assurance to the company's management and Board of Directors regarding the preparation and fair presentation of published financial statements. AT&T management assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2006. In making...

  • Page 83
    ... of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 2006 the Company changed its method of accounting for pension and other...

  • Page 84
    ... and for the year ended December 31, 2006, and total assets and total revenues subject to AT&T Mobility LLC's internal control over financial reporting represented 36% and 0.3% of the Company's consolidated total assets and total revenues as of and for the year ended December 31, 2006. Our audit of...

  • Page 85
    ...-2006 Background: Financial services August A. Busch III, 69 (2,3,4) President and Chief Executive Officer Aromatique, Inc. Director since June 1993 Background: Manufacturing and marketing of decorative fragrances Committees of the Board: (1) Audit (2) Corporate Development (3) Corporate Governance...

  • Page 86
    ...Senior Executive Vice President and General Counsel Karen E. Jennings, 56 Senior Executive Vice PresidentAdvertising and Corporate Communications James S. Kahan, 59 Senior Executive Vice PresidentCorporate Development Richard G. Lindner, 52 Senior Executive Vice President and Chief Financial Officer...

  • Page 87
    ... may call the Investor Relations staff as listed on our Web site at www.att.com/investor.relations. Written Requests Please mail all account inquiries and other requests for assistance regarding your stock ownership to: AT&T Inc. c/o Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI...

  • Page 88
    AT&T Inc. 175 E. Houston St. P.O. Box 2933 San Antonio, TX 78299-2933 www.att.com