AT&T Wireless 2007 Annual Report Download - page 36

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share amounts
34
| 2007 AT&T Annual Report
Equipment sales and related network integration and
management services decreased $274 in 2007 and $176
in 2006 primarily due to less emphasis on the sale of
lower-margin equipment. Revenue also decreased by $70
in 2007 due to the recognition of intellectual property
license fees in 2006 that did not recur in 2007.
Cost of sales expenses increased $3,521, or 13.2%, in
2007 and $9,229, or 52.8%, in 2006. The increases were
primarily due to incremental expenses resulting from our
acquisitions of BellSouth in 2007 and ATTC in 2006. Cost
of sales consists of costs we incur in order to provide
our products and services, including costs of operating
and maintaining our networks and personnel costs, such
as salary, wage and bonus accruals. Costs in this category
include our repair technicians and repair services, certain
network planning and engineering expenses, operator
services, information technology and property taxes related
to elements of our network. Pension and postretirement
costs, net of amounts capitalized as part of construction
labor, are also included to the extent that they are associated
with these employees.
In addition to the impact of the BellSouth acquisition, cost
of sales in 2007 increased due to the following:
• Higher nonemployee-related expenses, such as contract
services, agent commissions and materials and supplies
costs, of $605.
• Higher expenses of $225 in 2007 due to a 2006 change
in our policy regarding the timing for earning vacation
days, which reduced expense in 2006.
• Salary and wage merit increases and other bonus accrual
adjustments of $165.
Partially offsetting these increases, cost of sales in 2007
decreased due to:
• Lower traffic compensation expenses (for access to
another carrier’s network) of $831 primarily due to
migration of long-distance calls onto our network and
a lower volume of calls from ATTC’s declining national
mass-market customer base.
• Lower net pension and postretirement cost of $398,
primarily due to changes in our actuarial assumptions,
including the increase of our discount rate from 5.75% to
6.00% (a decrease to expense) and favorable investment
returns on plan assets resulting in a decrease in the
recognition of net losses from prior years.
• Lower cost of equipment sales and related network
integration services of $300, primarily due to less
emphasis on sales of lower-margin equipment. Costs
associated with equipment for large-business customers
(as well as DSL) typically are greater than costs
associated with services that are provided over
multiple years.
• Lower expenses of $163 in 2007 due to the discon-
tinuance of DSL Universal Service Fund fees in the
third quarter of 2006.
In addition to the impact of the ATTC acquisition, cost of
sales in 2006 increased due to the following:
• Higher nonemployee-related expenses, such as contract
services, agent commissions and materials and supplies
costs, of $163.
• Higher benefit expenses, consisting primarily of our
combined net pension and postretirement cost, increased
expense $159, primarily due to changes in our actuarial
assumptions, which included the reduction of our discount
rate from 6.00% to 5.75% (which increases expense), 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.
Partially offsetting these increases, cost of sales in 2006
decreased due to:
• A reduction in equipment sales and related network
integration services of $418, primarily due to lower
demand and as a result of the September 2005
amendment of our agreement for our co-branded
AT&T | DISH Network satellite TV service. Prior to
restructuring our relationship with EchoStar in
September 2005, we had been recording both
revenue and expenses for AT&T | DISH Network
satellite TV customers, resulting in relatively high
initial customer-acquisition costs.
• Lower employee levels, which decreased expenses,
primarily salary and wages, by $296.
• A change made during 2006 in our policy regarding
the timing for earning vacation days decreased
expenses $225.
• Merger severance expenses in 2005 were higher than
in 2006 by $176.
• In-region weather-related repair costs incurred in 2005
that did not recur in 2006, which decreased expenses
$100 in 2006.
• Non-merger-related severance expenses in 2005,
which were higher than in 2006 by $73.
Selling, general and administrative expenses increased
$2,995, or 22.7%, in 2007 and $3,310, or 33.5%, in 2006.
The increases were primarily due to incremental expenses
resulting from our acquisitions of BellSouth in 2007 and
ATTC in 2006. Selling, general and administrative expenses
consist of our provision for uncollectible accounts; advertising
costs; sales and marketing functions, including our retail and
wholesale customer service centers; centrally managed real
estate costs, including maintenance and utilities on all owned
and leased buildings; credit and collection functions; and
corporate overhead costs, such as finance, legal, human
resources and external affairs. Pension and postretirement
costs are also included to the extent that they relate to
those employees.
In addition to the impact of the BellSouth acquisition,
selling, general and administrative expenses in 2007 increased
due to the following:
• Salary and wage merit increases and other bonus accrual
adjustments of $102.
• Higher expenses of $96 in 2007 due to a 2006 change in
our policy regarding the timing for earning vacation days,
which reduced expense in 2006.
• Higher provision for uncollectible accounts of $80.