Verizon Wireless 2007 Annual Report Download - page 23

exchange and related business assets in Maine, New Hampshire and
Vermont. In addition, during 2007 we contributed $100 million of the
proceedsfromthesaleofTELPRItotheVerizonFoundation.
Consolidated operating expenses in 2006 included $56 million related
to pension settlement losses incurred in connection with our benefit
plans and a net pretax charge of $369 million for employee severance
and severance-related activities in connection with the involuntary sepa-
ration of approximately 4,100 employees who were separated in 2006.
Consolidated operating expenses in 2006 also included $207 million of
merger integration costs, primarily for advertising and other costs related
to re-branding initiatives and systems integration activities, and a net
pretax charge of $184 million for Verizon Center relocation costs.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $168 million, or 1.2%
in 2007 compared to 2006. The decrease was primarily due to lower
rates of depreciation as a result of changes in the estimated useful lives
of certain asset classes at Wireline and fully amortized customer lists at
Domestic Wireless, partially offset by growth in depreciable telephone
plant as a result of increased capital expenditures.
2006 Compared to 2005
Cost of Services and Sales
Cost of services and sales increased by $10,900 million, or 44.7% in 2006
compared to 2005. This increase was principally driven by higher costs
attributable to the inclusion of the former MCI operations in the Wireline
segment subsequent to the completion of the merger, and to a lesser
extent higher wireless network costs, increases in wireless equipment
costs and increases in pension and other postretirement benefit costs,
partially offset by the net impact of productivity improvement initiatives.
The higher wireless network costs were caused by increased network
usage relating to both voice and data services in 2006 compared to 2005,
partially offset by decreased roaming, local interconnection and long dis-
tance rates. Cost of wireless equipment sales increased in 2006 compared
to 2005 primarily as a result of an increase in wireless devices sold due to
an increase in gross activations and equipment upgrades as well as an
increase in cost per unit.
Costs in these periods were also impacted by increased pension and other
postretirement benefit costs. The overall impact of the 2006 assumptions,
combined with the impact of lower than expected actual asset returns
over the past several years, resulted in pension and other postretirement
benefit expense of approximately $1,377 million in 2006 compared to net
pension and postretirement benefit expense of $1,231 million in 2005.
Consolidated operating expenses in 2006 included $25 million of merger
integration costs related to the acquisition of MCI.
2007 Compared to 2006
Cost of Services and Sales
Cost of services and sales includes the following costs directly attribut-
able to a service or product: salaries and wages, benefits, materials and
supplies, contracted services, network access and transport costs, cus-
tomer provisioning costs, computer systems support, costs to support
our outsourcing contracts and technical facilities and contributions to
the universal service fund. Aggregate customer care costs, which include
billing and service provisioning, are allocated between cost of services
and sales and selling, general and administrative expense.
Consolidated cost of services and sales in 2007 increased $2,238 million,
or 6.3% compared to 2006, primarily as a result of higher wireless network
costs and wireless equipment costs, as well as higher costs associated
with Wireline’s growth businesses. The increase was partially offset by the
impact of productivity improvement initiatives and decreases in net pen-
sion and other postretirement benefit costs.
The higher wireless network costs were caused by increased network
usage relating to both voice and data services in 2007 compared to
2006, partially offset by decreased local interconnection, long distance
and roaming rates. Cost of wireless equipment sales increased in 2007
compared to 2006, primarily as a result of an increase in wireless devices
sold due to an increase in equipment upgrades.
Consolidated operating expenses in 2007 and 2006 primarily include $32
million and $25 million, respectively, of costs associated with the integra-
tion of MCI into our wireline business.
Selling, General and Administrative Expense
Selling, general and administrative expense includes salaries and wages
and benefits not directly attributable to a service or product, bad debt
charges, taxes other than income, advertising and sales commission
costs, customer billing, call center and information technology costs, pro-
fessional service fees and rent for administrative space.
Consolidated selling, general and administrative expense in 2007
increased $1,012 million, or 4.1% compared to 2006. The increase was
primarily attributable to higher salary and benefits expenses. Also contrib-
uting to the increase was higher sales commission expense at Domestic
Wireless and higher advertising costs at Wireline. Partially offsetting the
increases were lower bad debt expenses and cost reduction initiatives.
Consolidated operating expenses in 2007 included $772 million for sever-
ance and related expenses as a result of workforce reductions that began
in the fourth quarter of 2007 and are expected to occur throughout 2008
as well as adjustments to our actuarial assumptions for severance to
align with future expectations, $146 million for merger integration costs,
primarily comprised of Wireline systems integration activities related
to businesses acquired and $84 million related to the spin-off of local
21
Consolidated Operating Expenses
(dollars in millions)
Years Ended December 31, 2007 2006 % Change 2006 2005 % Change
Cost of services and sales $ 37,547 $ 35,309 6.3 $ 35,309 $ 24,409 44.7
Selling, general and administrative
expense 25,967 24,955 4.1 24,955 19,443 28.3
Depreciation and amortization expense 14,377 14,545 (1.2) 14,545 13,615 6.8
Sales of businesses, net –– – – (530) (100.0)
Consolidated Operating Expenses $ 77,891 $ 74,809 4.1 $ 74,809 $ 56,937 31.4
Management’s Discussion and Analysis
ofFinancialConditionandResultsofOperations continued