AT&T Wireless 2006 Annual Report Download - page 21

2006 AT&T Annual Report : : 19
For ease of reading, AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document and the names of the
particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose
subsidiaries and affiliates operate in the communications services industry both domestically and internationally providing wireline
and wireless telecommunications services and equipment as well as directory advertising and publishing services. You should
read this discussion in conjunction with the consolidated financial statements and accompanying notes. A reference to a “Note”
in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section,
percentage increases and decreases that equal or exceed 100% are not considered meaningful and are denoted with a dash.
RESULT S OF O P E R ATIONS
Consolidated Results Our financial results are summarized in the table below. We then discuss factors affecting our overall
results for the past three years. These factors are discussed in more detail in our “Segment Results” section. We also discuss our
expected revenue and expense trends for 2007 in the “Operating Environment and Trends of the Business” section.
We completed our acquisition of BellSouth Corporation (BellSouth) on December 29, 2006. We thereby acquired BellSouth’s
40% economic interest in AT&T Mobility LLC (AT&T Mobility), formerly Cingular Wireless LLC (Cingular), resulting in 100% ownership
of AT&T Mobility. Our consolidated results in 2006 include BellSouth’s and AT&T Mobility’s operational results for the final two
days of the year. (Prior to the acquisition, we reported the income from our 60% share of AT&T Mobility as equity in net income
(see Note 6).) We completed our acquisition of AT&T Corp. (ATTC) on November 18, 2005 and have included ATTC results during
2006 and for the 43-day period ended December 31, 2005. In accordance with U.S. generally accepted accounting principles
(GAAP), operating results from BellSouth, AT&T Mobility and ATTC prior to their respective acquisition dates are excluded. Our
financial statements reflect results from our sold directory advertising business in Illinois and northwest Indiana as discontinued
operations (see Note 15). The operational results and the gain associated with the sale of that business are presented in the
“Income From Discontinued Operations, net of tax” line item below and on the Consolidated Statements of Income.
Percent Change
2006 vs. 2005 vs.
2006 2005 2004 2005 2004
Operating revenues $63,055 $43,764 $40,733 44.1% 7.4%
Operating expenses 52,767 37,596 34,832 40.4 7.9
Operating income 10,288 6,168 5,901 66.8 4.5
Income before income taxes 10,881 5,718 7,165 90.3 (20.2)
Income from continuing operations 7,356 4,786 4,979 53.7 (3.9)
Income from discontinued operations, net of tax — — 908 — —
Net income 7,356 4,786 5,887 53.7 (18.7)
Diluted earnings per share 1.89 1.42 1.77 33.1 (19.8)
Overview
Operating income As noted above, 2006 revenues and
expenses reflect the addition of ATTC’s results while our 2005
results include only 43 days. Accordingly, the following
discussion of changes in our revenues and expenses is
significantly affected by the ATTC acquisition. As we only
include two days of operating results from BellSouth and
AT&T Mobility, those results had little impact on our 2006
consolidated results. Accordingly, except where noted,
when we discuss 2006 results, we will be referring only
to pre-BellSouth merger AT&T operations.
Our operating income increased $4,120, or 66.8%, in 2006
and $267, or 4.5%, in 2005. Our operating income margin
decreased from 14.5% in 2004 to 14.1% in 2005 and increased
to 16.3% in 2006. Operating income increased primarily due
to the acquisition of ATTC and reflected expense reductions
through merger synergies, partially offset by additional
amortization expense on those intangibles identified at the
time of our acquisition of ATTC, merger-related charges for
the BellSouth acquisition and by the negative effects of a
continued decline in access lines. Our operating income
margin decrease in 2005 reflects expense associated with a
charge to terminate an agreement with WilTel Communications
(WilTel) and merger-related charges.
Our operating income was slightly offset by the continued
decline of 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 $19,291, or 44.1%, in 2006
and $3,031, or 7.4%, in 2005. These increases were primarily
due to our acquisition of ATTC and to an increased demand
for data products. The increases were slightly offset by
continued pressure in voice, reflecting access line decreases
and by decreased demand for local wholesale services.
Operating expenses increased $15,171, or 40.4%, in 2006
and $2,764, or 7.9%, in 2005 primarily due to our acquisition
of ATTC. The 2006 increase also includes merger-integration
costs associated with the BellSouth and ATTC acquisitions of
$774 and amortization expense on intangible assets identified
at the time of the ATTC merger of $943. Operating expenses
were $330 lower due to a change in our vacation policy (see
Note 2) and workforce reductions. As of December 31, 2006,
we were ahead of schedule with our targeted workforce
reductions associated with the ATTC acquisition.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share amounts