FairPoint Communications 2013 Annual Report Download - page 45

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We expect cost of services and sales to decrease over time as voice access lines decline and we continue to make operational
improvements and align our human resources with the changing telecommunications landscape.
The following table reflects the primary drivers of year-over-year changes in cost of services and sales (in millions):
Year Ended Year Ended
December 31, 2013 December 31, 2012
Increase (Decrease) % Increase (Decrease) %
Access expense (1) $ (7.9) $ (14.0)
Severance expense (2) 3.4 (4.2)
Employee expense (3) 0.2 (13.0)
Other (4) (6.9) (11.9)
Total changes in cost of services and sales $ (11.2) (2)% $ (43.1) (9)%
(1) Access expense continues to decrease primarily due to increased usage of our IP infrastructure, which has enabled us
to significantly reduce the associated costs of utilizing other carriers.
(2) For the years ended December 31, 2013, 2012 and 2011, we recognized $5.9 million, $2.5 million and $6.7 million of
severance expense, respectively, attributed to the reduction in our workforce.
(3) For the years ended December 31, 2013, 2012 and 2011, we recognized $187.3 million, $187.1 million and $200.1
million, respectively, of employee expense as cost of services and sales. Although we reduced our workforce in 2013
by approximately 120 positions, an increase in overtime expenses and a decrease in capitalized labor, associated with
a reduction in labor intensive capital projects in fiscal 2013, have combined to slightly increase employee expense for
fiscal 2013 compared to fiscal 2012. The decrease in employee expense for fiscal year 2012 compared to fiscal year
2011 was due to a reduction in our workforce of approximately 400 positions, many of which impacted cost of services
and sales, beginning in September 2011 and continuing through the end of 2011.
(4) Other cost of services and sales has decreased primarily due to lower network expenses.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense includes salaries and wages and benefits (including stock based
compensation, pension and post-retirement healthcare) 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,
professional service fees and rent for administrative space. We expect our SG&A expense to decrease primarily as a result of lower
discount rates on our qualified pension and post-retirement healthcare obligations.
The following table reflects the primary drivers of year-over-year changes in SG&A expense (in millions):
Year Ended Year Ended
December 31, 2013 December 31, 2012
Increase (Decrease) % Increase (Decrease) %
Pension expense (1) 8.4 5.6
Post-retirement healthcare expense (2) 3.6 11.3
Bad debt expense (3) 2.3 (14.3)
Severance expense (4) (1.7) 2.6
Employee expense (5) 1.4 (11.4)
Other (6) (14.6) (4.6)
Total changes in SG&A expense $ (0.6) — % $ (10.8) (3)%
(1) Increases in 2013 and 2012 net periodic benefit costs for our qualified pension plans are primarily attributable to an
increase in the projected benefit obligation from reductions of approximately 55 and 93 basis points in the weighted
average discount rate used to value the qualified pension obligations at December 31, 2012 and December 31, 2011,
respectively. The larger projected benefit obligation served to increase service cost and interest cost recognized in 2013
and 2012, respectively, when compared to the prior year. In addition, in connection with our adoption of fresh start
accounting on the Effective Date, we recognized all prior unamortized gains and losses. At December 31, 2012 and
2011, we recognized actuarial losses of $49.3 million and $64.8 million, respectively which have resulted in an increase
in the amount of actuarial losses being amortized in 2013 and 2012, respectively, compared to the prior year. The
actuarial losses can be attributed to the decrease in discount rates and the losses incurred on payment of significant lump
sums in each of those years. See note (11) "Employee Benefit Plans" to our consolidated financial statements in "Item