AT&T Wireless 2006 Annual Report Download - page 25

2006 AT&T Annual Report : : 23
elements of our network and payphone operations. Pension
and postretirement costs, net of amounts capitalized as part
of construction labor, are also included to the extent that they
are allocated to our network labor force and other employees
who perform the functions listed in this paragraph.
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 in-region 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.
• Salary and wage merit increases and other bonus accrual
adjustments of $48.
Partially offsetting these increases, cost of sales in 2006
decreased due to:
• Equipment sales and related network integration services
decreased $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 record-
ing both revenue and expenses for AT&T | DISH Network
satellite TV customers, resulting in relatively high initial
customer acquisition costs. Costs associated with
equipment for large-business customers (as well as DSL
and, previously, satellite video) typically are greater than
costs associated with services that are provided over
multiple years.
• Lower employee levels, primarily salary and wages,
decreased expenses $296.
• A change made during 2006 in our policy regarding the
timing for earning vacation days decreased expenses
$225.
• Merger severance expenses in the prior year were higher
than in the current year by $176.
• In-region weather-related repair costs incurred in 2005
decreased expenses $100 in 2006.
• Severance expenses in the prior year were higher than
in the current year by $73.
In addition to the impact of ATTC, cost of sales in 2005
increased due to the following:
• Higher traffic compensation expenses of $330 primarily
due to growth in our long-distance service.
• Higher equipment sales and related network integration
services of $195 reflecting our emphasis on growth in
DSL and sales in the large-business market and video.
• Merger severance accruals in 2005 of $176.
• Salary and wage merit increases and other bonus
accrual adjustments of $170.
• Repair costs related to severe weather increased
expenses $100.
Partially offsetting these increases, cost of sales in 2005
decreased due to:
• Lower employee levels decreased expenses, primarily
salary and wages, by $322.
• In-region benefit expenses (consisting primarily of our
combined net pension and postretirement cost)
decreased $154 due to the one-time accrual in 2004
for a retiree bonus as a result of the settlement of our
labor-contract negotiations, $12 as a result of changes
made in 2005 to medical coverage for most managers
and $20 related to changes in phone concessions for
out-of-region retirees.
• Nonemployee-related expenses such as contract services,
agent commissions and materials and supplies costs
decreased $100.
Selling, general and administrative expenses increased
$4,393, or 44.3%, in 2006 and $1,091, or 12.4%, in 2005. The
2006 increase was primarily related to recording increased
expenses due to the acquisition of ATTC. Selling, general and
administrative expenses consist of our provision for uncollect-
ible 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 employees who perform the functions listed in
this paragraph.
In addition to the impact of the ATTC acquisition, selling,
general and administrative expenses in 2006 also increased
due to the following:
• Other in-region wireline segment costs of $809 primarily
due to advertising costs related to promotion of the AT&T
brand name. In addition, other advertising expenses
increased $117.
• Higher nonemployee-related expenses, such as contract
services, agent commissions and materials and supplies
costs of $103.
• Higher in-region benefit expenses, consisting primarily
of our combined net pension and postretirement cost,
increased expense $73, 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 net losses on plan assets in prior years.
Partially offsetting these increases, selling, general and
administrative expenses in 2006 decreased due to:
• ATTC merger-related asset impairment charges of $349
and merger-related severance expense of $107 in the
prior year resulted in lower expenses in 2006.
• Lower employee levels, primarily salary and wages,
decreased expenses by $239.
• Expenses decreased in 2006 due to a charge of $236 in
2005 to terminate existing agreements with WilTel, which
will continue to provide transitional and out-of-market
long-distance services under a new agreement, which
commenced in November 2005 as a result of our
acquisition of ATTC.
• A change made during 2006 in our policy regarding
the timing for earning vacation days decreased
expenses $96.