2008 Annual Report Verizon Communications

2008 Annual Report Verizon Communications
Verizon Communications
2008 Annual Report
Financial Highlights
(as of December 31, 2008)
OPERATING CASH FLOW
FROM CONTINUING
OPERATIONS
CONSOLIDATED
REVENUES
(billions)
DECLARED DIVIDENDS
PER SHARE
REPORTED DILUTED
EARNINGS PER SHARE
ADJUSTED DILUTED
EARNINGS PER SHARE
(non-GAAP)
(billions)
$88.2
06
$93.5 $97.4
07
08
$26.3 $26.6
$23.0
06
07
08
$1.62 $1.67
06
07
$1.78
08
$2.12
06
$2.26
$2.54
08
06
$1.90
07
$2.39
07
$2.54
08
Corporate Highlights
5.1% consolidated revenue growth
>9.2% operating income growth
>7.6% EPS growth
>7% annual dividend increase
>$1.4 billion in share repurchases
>
Note: Prior-period amounts have been reclassified to reflect comparable results.
See www.verizon.com/investor for reconciliations to generally accepted accounting principles (GAAP) for the non-GAAP financial measures included in this annual report. Verizon’s results for the periods
presented have been adjusted to reflect the spinoff of local exchange and related business assets in Maine, New Hampshire and Vermont in March 2008. These reclassifications were determined using
specific information where available and allocations where data is not maintained on a state-specific basis within the Company’s books and records. Verizon’s 2006 reported results include revenues and
expenses from the former MCI, Inc., subsequent to the close of the merger in January 2006. Information provided in this annual report on a pro-forma (non-GAAP) basis presents the combined operating
results of Verizon and the former MCI on a comparable basis. Discontinued operations include Verizon’s former directory publishing unit, which was spun off to shareowners in the fourth quarter 2006, and
the operations of Verizon Dominicana C. por A. (Verizon Dominciana) and Telecomunicaciones de Puerto Rico Inc. (TELPRI) following second quarter 2006 agreements to sell the businesses. The Verizon
Dominicana sale closed in the fourth quarter 2006. The TELPRI sale closed in the first quarter of 2007.
Corporate Highlights shown above are presented on a pro forma and adjusted basis. Intra- and inter-segment transactions have not been eliminated from the business group revenue totals cited in
this document.
In keeping with Verizon’s commitment to protect the environment, this report was printed on paper certified by the Forest Stewardship Council (FSC). By selecting FSC-certified paper, Verizon is helping to
make a difference by supporting responsible forest management practices.
v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 8 a n n ua l r e p o r t
Chairman’s Letter to
Shareowners
Ivan Seidenberg
Chairman and Chief Executive Officer
At Verizon, our business model is based on a few core beliefs.
We believe our superior networks differentiate us and provide great
communications experiences to customers. We believe our focus
on the fundamentals of running a good business – operating
excellence, financial discipline and strong values – gives us the
ability to plan our future and manage through all economic
conditions. We believe that investing for growth is the key
to creating value for our shareowners. And we believe that the
communications products and services we deliver are, and
will continue to be, hugely important in the lives of our customers,
our communities and our world.
By staying focused on this basic business model, Verizon has remained a source of relative
stability in a tumultuous market. Our performance in 2008 bears this out and shows the fundamental strength of our company.
Our main growth engines are wireless voice and data; high-speed consumer broadband and
video services; and Internet Protocol (IP) networks, applications and professional services for
global businesses. Each of these gained market share and attracted new customers in 2008. As a
result of this strong performance in our strategic businesses, Verizon delivered growth in revenues, earnings and cash flow in 2008. Operating revenues for the year were $97.4 billion, an
increase of 4.2 percent or 5.1 percent on an adjusted basis. Adjusted operating income was $18.1
billion, up 9.2 percent for the year. Operating cash flows from continuing operations totaled $26.6
billion, up 1.2 percent from 2007. Adjusted earnings from continuing operations were $2.54 per
share, up 7.6 percent.
1
By way of comparison, only three companies in the Dow Jones 30 generated more cash from
WIRELESS
REVENUE
operations than Verizon. Because of our strong financial position, we were able to invest $17.2
(billions)
$49.3
$43.9
billion in networks, pay $5 billion in dividends and repurchase $1.4 billion of Verizon stock. In
September, we increased our quarterly dividend by 7 percent, to $.46 per share – an expression of
our Board’s confidence in our future and commitment to returning value to shareowners.
$38.0
In 2008, we remained focused on building and creating the premier assets in our industry
and continued to shift our center of gravity toward the growing wireless and broadband markets.
For example, we expanded our wireless footprint by acquiring Rural Cellular and by winning
extremely valuable wireless spectrum in the FCC auction, which positions us strongly for the next
phase of growth in the wireless market. Also, in a transaction that closed in January 2009, we
06
07
08
acquired the nation’s number-five wireless company, Alltel Corporation, making us the U.S. leader
in wireless customers and revenues. At a time when even healthy companies found it difficult to
tap into the credit markets, our ability to finance and execute a transaction of this magnitude
affirms our financial solidity and healthy balance sheet. We also spun off some of our telephone
properties in northern New England and merged them with Fairpoint Communications, a leading
WIRELESS
CUSTOMERS
provider of local exchange services.
We continued to invest in the superior network technologies that are Verizon’s hallmark. Our
(millions)
59.1
65.7
72.1
purchase of spectrum in the FCC auction expanded our inventory by 60 percent, which gives us
additional capacity to accommodate the rapid growth of wireless data services such as text
messaging, e-mail and Internet access. We passed more than 3 million additional homes with our
industry-leading fiber-optic network, FiOS, and are now beginning to expand into big city markets
like New York City, Philadelphia and Washington, D.C. Our fiber network now passes 12.7 million
homes, or about 40 percent of the households in our footprint, putting us two-thirds of the way to
our target of passing 18 million homes by 2010. In the business market, our high-speed networks
provide a sophisticated communications and computing platform for multinationals and govern-
06
07
08
ment customers, and in 2008 we added to the security and robustness of our network
infrastructure in the U.S., Europe and the Asia-Pacific region. We also led a consortium that built a
high-speed submarine fiber link connecting China, South Korea, Taiwan and the United States.
Transforming Verizon to Deliver the Best Wireless and
From
Voice and
Data
To
Content and
Applications
We’ve spent the last decade remaking our wireless, landline and Internet
backbone networks and expanding the range of products, applications and
services we can deliver to our customers. Today our customers do much
more than make phone calls and send e-mail messages. They use our
networks to watch high-definition (HD) TV, surf the Internet, share photos,
watch videos online and conduct videoconferences around the globe.
We’re prepared for the next wave of growth that will come from a new
generation of broadband devices, applications and services that
will use our wireless and fiber networks to deliver advances in entertainment, education, commerce and health care.
2
From
Separate
Platforms
To
Unified
Platforms
One of the biggest challenges for customers is bringing together all their
digital experiences to make their lives more convenient and productive.
We’ll soon be able to provide a technical solution to the challenge of
convergence by designing applications that work across all our networks –
broadband, global IP and wireless. Our customers will no longer be
stranded on separate islands of technology because we’ll be able to build
an application once and have the network deliver it to customers anytime,
anywhere, and on any device. Giving customers new tools to better
manage their digital lives will be one of the great business opportunities in
the coming years.
v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 8 a n n ua l r e p o r t
Our philosophy is that by investing in the best networks, we can offer the best and most
WIRELESS
DATA REVENUE
innovative services and enhance our competitiveness across the board. That proved true in 2008.
(billions)
$10.7
We saw solid revenue growth in all our strategic businesses in 2008: 12.4 percent in wireless, 42
percent in broadband and video, and 16 percent in strategic business services. We added more
than 6 million new wireless customers, 956,000 FiOS Internet customers and 975,000 customers
$7.4
for FiOS TV. Rising monthly average-revenue-per-user for wireless and broadband shows that our
customers are finding these products more and more vital and useful in their daily lives. And in
$4.5
the business market, nearly 70 percent of our customers have or are in the process of transitioning
to private IP networks, making this service the fastest growing in this business.
In wireless, we launched 36 new devices in 2008. More than one-third of them were smart
06
07
08
phones, which reflects the evolution of wireless from a voice-only product to a full-service
platform that allows customers to surf the Internet, check e-mail, watch video, exchange pictures
and more. This growing array of data services now generates nearly 27 percent of wireless service
revenues. Going forward, we believe that wireless growth will increasingly be driven by mobile
connections built into a wide variety of products such as cameras, energy systems, vehicles,
WIRELESS RETAIL
SERVICE ARPU
buildings and appliances. To accommodate these new services, we are preparing to launch our
fourth-generation wireless network, which we believe will make Verizon’s wireless network the
$50.44 $51.57 $51.88
on-ramp for innovation in the next phase of this dynamic industry.
With FiOS, we are redefining the consumer telecom business as a broadband and video
business. FiOS delivers ultra-fast Internet speeds and more high-definition video channels than
any cable provider in the market today. These features have helped us achieve 25 percent market
share for FiOS Internet and 21 percent for FiOS TV in four short years. We are well-positioned for
the next wave of innovation in telecom, which will be driven by high-definition teleconferencing,
three-dimensional video and other advanced services requiring the unique speed and capacity
advantages of our all-fiber network.
06
07
08
In the global enterprise market, customers are looking for communications companies that
can provide them with a full range of strategic capabilities – from security, professional services,
information technology solutions, and private IP services to global networking. Verizon is one of
Broadband Experience
From
Providing
Service
To
Offering
Compelling
Experiences
We’re transforming our networks to provide for the bandwidth-intensive
applications our customers will need in the future. Our all-fiber network
will deliver all the advanced HD and Internet services that are being
developed. You’ll walk through virtual stores, attend classes held thousands
of miles away, or consult with your doctor – all without leaving home.
Wireless smart phones will provide advanced Internet, video and computer
applications to keep customers informed and entertained on the go. And
our global network will support a new wave of productivity-enhancing
applications like secure global transactions, electronic supply chains and
manufacturing processes, and virtual-reality videoconferencing.
From
Connecting
Users
To
Creating
Communities
Verizon is doing much more than simply connecting individuals. We’re
developing innovative network services that create communities where
friends and neighbors, buyers and sellers, or teachers and students around
the world can come together in unique and exciting ways. We’re enabling
these valuable social networks by providing our customers the tools to
share experiences with each other whenever and wherever they happen.
We’re also helping address social issues that are critical to the well-being
of our communities by building advanced broadband networks that are
creating the jobs of the future, making communities more competitive and
driving innovation and growth.
3
the world’s premier providers of all these capabilities. We are also building relationships with
FIOS INTERNET
CUSTOMERS
world-class partners like Accenture to leverage our complementary capabilities and provide
(thousands)
customers with superior solutions for their businesses. Looking ahead, we expect companies to
2,481
look for ways to use communications to run their businesses more efficiently, reduce travel
expenses, save energy costs and connect their increasingly global workforces and supply chains.
With our global reach and networking expertise, we have a great opportunity to be a strategic
1,525
partner in helping our major customers achieve these goals.
Once again in 2008, our products earned Verizon top marks for quality and customer satisfac-
687
tion. Consumer Reports ranked us number-one among wireless companies in customer
satisfaction in 87 percent of the cities it studied. (By the way, Alltel was number-one in the other 13
06
07
percent.) PCMag.com named FiOS Internet the fastest and most satisfying service in the U.S. and
08
listed FiOS as one of its 100 best products of 2008. Industry analysts such as Gartner and Forrester
have recognized Verizon Business as a leader for global networks and services.
What this shows is that the market is responding to Verizon’s record of innovation.
So we feel confident about our long-range growth opportunities. This is not to say we are
FIOS TV
CUSTOMERS
unaffected by the economic slowdown or by the ongoing structural changes in the communications market. The traditional fixed-line telephone business continues to decline as customers
(thousands)
disconnect their wired phones and shift to wireless, cable and other newer technologies. In
1,918
addition, the faltering economy depressed volumes in the large-business market in the fourth
quarter, as businesses began to curtail their spending and unemployment rose.
But all in all, 2008 was another year of operational excellence and strategic gains for our
943
company. As for our stock performance, Verizon’s total return for 2008 was down 18 percent, as
compared with declines of 32 percent for the Dow Jones Industrial Average and 37 percent for the
Standard & Poor’s 500. If there’s a silver lining in these numbers, it’s that, on a relative basis,
207
Verizon’s performance was in the top one-third of both the S&P and the Dow 30, which says that
06
07
the market recognizes our earnings and dividend stability. A longer-term view of our performance
08
over the period from 2006 to 2008 shows Verizon’s total return growing by 35 percent, as compared with a decline of 23 percent for the Standard & Poor’s 500.
In other words, Verizon has outperformed the market on a relative basis over the past year
and has generated attractive returns on an absolute basis over three years. This is cold comfort to
investors suffering through the current market crisis. You can be assured that the leaders of our
company are focused on what we control – productivity, innovation, customer service, and a
3-Year Total Return
Verizon
S&P 500
80%
40%
34.8%
0%
-23.0%
-40%
12/30/05
4
6/30/06
12/30/06
6/30/07
12/30/07
6/30/08
12/30/08
v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 8 a n n ua l r e p o r t
VERIZON BUSINESS
STRATEGIC SERVICES
REVENUE
(billions)
$6.0
$5.2
strong dividend – to translate the strength of our company into excellence for our customers and
value for our investors.
I want to express my appreciation to our employees for their rock-solid dedication to our
customers and sterling record of ethical management, diversity and volunteerism. In 2008, they
volunteered 600,000 hours, contributed tens of millions of dollars to charities and community
organizations, and responded with tremendous skill when ice storms, hurricanes and other
$4.1
emergencies threatened our customers’ vital communications lines. Their adherence to our values
continues in bad times as well as good and is one of the major reasons I’m optimistic about our
future, despite the challenges of the current economic environment.
I also would like to cite our Board of Directors, whose forethought and steadfastness in
06
07
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pursuing our strategic goals has been critical to our success. Special thanks go to longtime board
member Robert Storey, who retired in 2008 with 23 years of service.
Finally, all Verizon shareowners owe a debt of gratitude to two executives who have put their
mark on our company and our industry. William Barr retired at the end of 2008, having served as
CAPITAL EXPENDITURES
(billions)
Verizon’s general counsel since our inception. Bill paved the way for a growing, competitive
communications marketplace by leading the charge to reform the way our industry is regulated.
He set the standard for what it means to be a superior general counsel. Our chief financial officer,
$17.1 $17.5 $17.2
Doreen Toben, will retire this year with decades of service to our company, the last seven as CFO.
Doreen’s contributions to Verizon are profound. You can see her imprint on our culture of financial
discipline, our strong balance sheet, our diversified asset base, and our passion for execution. Her
influence will be visible for many years to come.
For all the challenges in our environment, we approach the future with confidence. In fact, I
believe Verizon will be one of the companies that will help put our economy back on the path to
prosperity and growth. Our products and services are indispensable in the lives of millions of
customers. Our services will be key tools for businesses looking to work smarter and faster. Our
06
07
08
technologies can help solve the big social challenges of our time such as energy efficiency and
health care reform. We have the financial strength to grow and invest in the future. And we have
great people, who want to do right by our customers, our company, our communities and our
country. I couldn’t be more proud of their performance.
Last year in this space, I said Verizon’s goal was to be the best company in the communications sector, period. To achieve that kind of sustained leadership requires several things. You need
the right ideas about where the market is going and what differentiates your company in your
industry. You need the right values to create the relationships on which long-term success is built.
And you need the right culture of accountability to turn those ideas, beliefs and values into action
and results.
That’s how we run our business. Our idea of the future, our values, and our commitment
to accountability will keep us focused on our pursuit of excellence, regardless of how rocky the
road ahead.
Tough times give us the opportunity to lead. I am confident that we will rise to the challenge
of delivering value for our shareowners and customers in 2009.
Ivan Seidenberg
Chairman and Chief Executive Officer
5
Any Time, Anywhere
Broadband Connectivity
At Verizon, we saw early on that wireless customers wanted to do more
than just make phone calls, so we invested in wireless broadband
technology to provide them with the bandwidth, speed and mobility they
desire. Today our customers can check e-mail, get driving directions, take
photos, share videos and explore the Internet, all with their mobile phones.
We have the largest high-speed third-generation (3G) wireless network in
America. With its size, scope and reliability, this advanced network provides
the best wireless broadband experience in the industry and strong growth
opportunities for our company.
But as our customers’ needs continue to evolve, they’ll want new ways
to communicate whenever and wherever they choose – anywhere around
the globe. They’ll need more bandwidth, innovative phones and other
advanced services that enhance their mobile world. In fact, soon we won’t
think only in terms of a wireless “phone.” The next generation of wireless
broadband will be embedded into all kinds of consumer and business
electronics including cameras, cars, credit cards, security systems, shipping
containers, medical monitoring devices and even home appliances.
So in 2010, we’ll roll out our fourth-generation (4G) wireless network
using Long Term Evolution (LTE) technology. This will enable customers to
access data at even faster speeds, and it will provide a common wireless
technology platform with true global scale. LTE will create additional
6
growth opportunities by delivering an unprecedented wireless broadband
experience for high-performance mobile computing, advanced multimedia
applications and sophisticated electronic devices.
We envision a future where a wide variety of wireless products and
services from a growing portfolio of developers will be available for use on
the Verizon Wireless network. To encourage this new round of innovation,
Verizon Wireless is providing network options for using wireless devices,
software and applications provided by third-party developers. Our Open
Development Initiative is part of our strategy to expand the wireless market
and offer our customers more wireless choices. Our goal is to create new
opportunities for businesses, consumers and shareowners by driving
broadband innovation deeper into the wireless marketplace.
To help deliver the broadband future, Verizon purchased valuable
wireless spectrum from the FCC in 2008. This spectrum is a critical piece
of our overall broadband strategy to take advantage of the enormous
opportunity for growth in data services in the future. The spectrum will
allow Verizon to capture the full potential of our 4G LTE network, our Open
Development Initiative and the resulting next wave of wireless innovation.
Our investments will help us continue to maintain our network
superiority, satisfy our customers’ broadband needs and provide additional
value to our shareowners in the years ahead.
v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 8 a n n ua l r e p o r t
The Most Reliable Wireless Network is Now the Biggest
With the acquisition of Alltel in early 2009, Verizon Wireless now
provides service to millions more customers across the United States
on its own network. The merger created an enhanced platform of
network coverage, spectrum and customer care to better serve the
growing needs of both Alltel and Verizon Wireless customers for
basic voice and advanced broadband wireless services. Our wireless
network coverage now reaches approximately 288 million people –
nearly the entire U.S. population – and our wireless customer base
has increased to more than 80 million subscribers, making us the
largest wireless carrier in the country.
Both Alltel and Verizon Wireless have long track records of
delivering a high-quality customer experience in the marketplace,
and the combination of the two companies will continue to improve
on that heritage. Customers of both companies now have access
to the country’s largest mobile to mobile calling community. Alltel
customers also will benefit from an expanded range of products and
services, including a premier lineup of wireless devices and access to
the nation’s largest 3G high-speed wireless broadband network.
The transaction puts the Alltel markets and customers on
a path to advanced 4G services as Verizon Wireless deploys LTE
technology throughout its network over the next several years. In
addition, Alltel’s customers will reap the benefits of Verizon Wireless’
Open Development initiative, which welcomes third-party devices
and services on the Verizon Wireless network.
The acquisition also provides opportunities for enhanced value
for our shareowners. Both companies use a common network technology, which provides advantages of a seamless transition for Alltel
customers, ease in integrating the two companies’ networks, and
scale efficiencies in operating the larger integrated network.
Verizon Wireless and Alltel Combined Networks
Verizon Wireless
former Alltel
Colored areas indicate Verizon Wireless
coverage, excluding roaming
7
FiOS TV – the Future of Television
As the nation’s premier broadband and entertainment provider,
Verizon leads the way in delivering ultra-fast broadband using
fiber-optic technology. Other companies claim to use fiber, but
only Verizon FiOS delivers 100% fiber-optics – providing virtually
unmatched bandwidth – on hair-thin strands of glass directly to
our customers’ homes. Our all-fiber network offers an extraordinary
experience in TV, Internet and phone, and provides immense
capacity that will meet our customers’ bandwidth needs well into
the future.
Cable companies deliver their broadband and TV services
over coaxial cable, which has a fraction of the bandwidth available
on our all-fiber network. In addition, cable customers share
their broadband with other subscribers in their neighborhood,
causing users to compete for available bandwidth during periods
of high usage.
Verizon’s advanced technology and superior services have
made FiOS the top-rated broadband service in America. Thanks
to its unique architecture, Verizon’s all-fiber network has virtually
8
unlimited capacity, which delivers faster two-way speeds and better picture quality than cable companies can offer. Our FiOS TV and
Internet services don’t have to struggle for bandwidth, because
they’re delivered over separate high-capacity wavelengths of light.
With the immense bandwidth of fiber, we can offer more HD channels than any cable provider, and our uncompressed HD signal
guarantees pure HD picture and sound.
But as recent history has shown, the amount of bandwidth that
people use today is far less than they will want tomorrow. This is
good news for Verizon because bandwidth growth is what makes
FiOS so appealing. Our fiber network can be easily expanded to
provide additional capacity by simply upgrading the lasers on the
end points of the fiber cable. We avoid the labor-intensive costs of
replacing our infrastructure, and we can grow as our customers’
broadband needs evolve, providing superior service and an efficient
return on our network investment for years to come.
v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 8 a n n ua l r e p o r t
An All-Fiber Network for the
Ultimate Entertainment Experience
The explosion of entertainment and information services has given
Verizon new opportunities for growth in the broadband market. As
Internet and high-definition video use continues to grow, consumers are
demanding more capacity, speed and interactivity to send and receive
bandwidth-intensive videos, photo albums and music files. Today’s digital
home includes a wide variety of broadband devices, and the growth of
Internet-capable consumer electronics will only increase future bandwidth
demand. Tomorrow’s digital home will include dozens of “smart” devices,
including multiple HDTVs; networked PCs and gaming consoles; appliance
monitoring services; remote lighting and temperature controls; and
interactive security systems.
Because our 100% fiber-optic network delivers a broader, more
vibrant entertainment experience than any other provider, our customers
get the best TV viewing experience possible. The high-capacity of fiber
allows us to deliver more than 100 HD channels in every FiOS TV market. We
offer a vast selection of programming, with more than 245 all-digital channels and 14,000 video-on-demand titles each month, including
more than 1,200 HD titles per month. Our Home Media Digital Video
Recorder (DVR) technology allows customers to record programming on
one DVR that can be watched on up to six TV sets throughout the home.
Fiber also allows Verizon customers to experience the fastest upload
and download connection speeds. FiOS Internet is available with download
speeds up to 50 megabits per second (Mbps) and upload speeds up to
20 Mbps. With these speeds customers no longer have to wait while large
files are downloading, and they can upload 200 photos to their friends in
about 90 seconds. Finally, in anticipation of the day when tomorrow’s digital home requires even more bandwidth, we’re already testing download
speeds of 100 Mbps.
The immense bandwidth and two-way interactivity of Verizon’s
all-fiber network will help make the ultra-fast broadband future a reality
because it’s perfectly suited for our customers’ evolving entertainment
needs. As a result, the market penetration or our FiOS TV and Internet
services continues to grow as more households opt for the superior bandwidth capacity of a direct fiber connection.
We’re uniquely positioned to offer customers superior broadband
and entertainment services that fit today’s digital lifestyle, as well as the
advanced applications our customers will require tomorrow.
9
Delivering
A World of Experience
The global marketplace continues to change, creating communication
challenges for multinational corporations faced with widely dispersed
employees, incompatible systems, limited resources and increasing
competition. These organizations require a communications partner that
can provide end-to-end solutions for the complex business needs of global
enterprise customers.
As one of the leading providers of global communications, IT and
security solutions, Verizon Business owns and maintains the world’s
most-connected public IP network. Our vast experience, global reach and
advanced technologies provide governments and businesses innovative
solutions for a rapidly changing global environment.
Our strategic IP-based services are the essential building blocks for the
integrated communications and IT solutions that Verizon Business offers
worldwide. Strategic services include security and IT solutions as well as a
full spectrum of professional and managed IP services that help customers
make the most of IP communications, infrastructure and technology. The
ongoing strong demand for these advanced services underscores that
multinational customers see superior value in services that can help them
maintain their competitive edge under any market conditions.
10
The growth of strategic services shows that multinational corporations
and government agencies continue to look for ways to communicate and
collaborate more effectively with customers, employees, suppliers and
other key stakeholders around the globe. Verizon Business offers a range
of video-related products, including a telepresence solution. Telepresence
is the next-generation virtual meeting service that goes beyond video
conferencing by creating the impression that everyone is assembled faceto-face in a single conference room. Working with the industry’s leading
equipment manufacturers, Verizon Business provides the ideal telepresence
platform through its Private IP and Ethernet offerings.
In 2008, we expanded and improved what was already one of the
world’s few truly global networks, resulting in enhanced speed, availability,
diversity and resiliency for business and government customers worldwide.
These improvements were part of approximately $17 billion we invested
last year building, operating and integrating our advanced broadband
wireless and wireline networks.
We continue to invest in global network enhancements and
innovative technologies that give our customers a competitive edge,
whether they are across town or around the globe.
v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 8 a n n ua l r e p o r t
Connecting Nations Across the Globe
To meet the needs of businesses that operate around the world,
Verizon has made strategic investments to become a leading provider of global communications, IT and security solutions with the
world’s most connected public IP network. As a founding member of the Trans-Pacific Express (TPE) Cable Consortium, Verizon
Business has played a key role in helping to design, engineer
and build the 18,000 kilometer (11,000 mile) TPE cable network,
which is now in service. The TPE cable connects the United States
to mainland China, South Korea and Taiwan.
As the only U.S.-based founding member of the consortium,
Verizon Business guided the direction of the TPE cable and
provided all U.S. operational needs for the TPE Consortium.
These include responsibility for activities at the cable station in
Oregon, on the U.S. network cable routes and in the TPE network
operations center, all of which allow us to provide a high level
of network management functions for our customers. The next
planned phase of the TPE system, with the addition of NTT
Communications to the consortium, will provide new connections
from Japan to China, Taiwan and South Korea.
Our involvement allows our customers to take full
advantage of the cable system and the Verizon Business network,
providing direct connectivity to our ultra-long haul and global
mesh networks.
11
Making a Difference in Our Communities
At Verizon, we understand our reputation isn’t limited to our performance
in the marketplace. It also includes the quality of our products, our
impact on the environment, the spirit of our employees and our standing
in the community. We strive to make our broadband technologies as widely
available as possible and to use our leadership and resources to create new
solutions to the big problems facing our society. Even in these difficult
economic times, we remain committed to using our signature programs
to help create a better quality of life for the neighborhoods we live in and
serve.
The Verizon Foundation connects our financial, technological and
human resources with critical social issues that affect our employees,
customers and communities. We focus on the issues of education and
literacy, and safety and health. Our work is done through strategic
partnerships with nonprofit organizations, informed grant-making that
represents an investment in results, and the exceptional volunteer spirit of
Verizon’s 223,900 employees. Our goal is to help people achieve the skills
they need to live, learn and work in the 21st Century.
Thinkfinity.org is the Verizon Foundation’s free, comprehensive
Web site containing more than 55,000 educational resources, including
12
standards-based, grade-specific, K-12 lesson plans; online educational
games; videos; and other materials provided in partnership with many of
the nation’s leading educational organizations. Since the Web site’s
launch in March 2007, the Verizon Foundation has committed more than
$34 million to update and expand Thinkfinity.org and provide training
to teachers.
The Verizon Wireless HopeLine® program collects no-longer-used
phones, batteries and accessories from any wireless service provider
at our Communications Stores nationwide. We then put the nation’s most
reliable wireless network to work in our communities by providing these
phones as a vital link to emergency or support services for individuals who
have suffered from abusive relationships. We also provide cash grants to
local shelters and nonprofit organizations that focus on domestic violence
prevention and awareness.
For more information on how Verizon is making a difference in our
communities, please view our corporate responsibility report online at
verizon.com/responsibility.
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Selected Financial Data
(dollars in millions, except per share amounts)
2008
Results of Operations
Operating revenues
Operating income
Income before discontinued operations, extraordinary item
and cumulative effect of accounting change
Per common share – basic
Per common share – diluted
Net income available to common shareowners
Per common share – basic
Per common share – diluted
Cash dividends declared per common share
$ 97,354
16,884
Financial Position
Total assets
Debt maturing within one year
Long-term debt
Employee benefit obligations
Minority interest
Shareowners’ investment
2007
$
2006
93,469
15,578
$
2005
88,182
13,373
$
69,518
12,581
2004
$
65,751
10,870
6,428
2.26
2.26
6,428
2.26
2.26
1.78
5,510
1.90
1.90
5,521
1.91
1.90
1.67
5,480
1.88
1.88
6,197
2.13
2.12
1.62
6,027
2.18
2.16
7,397
2.67
2.65
1.62
5,899
2.13
2.11
7,831
2.83
2.79
1.54
$ 202,352
$ 186,959
2,954
28,203
29,960
32,288
50,581
$ 188,804
7,715
28,646
30,779
28,337
48,535
$ 168,130
6,688
31,569
17,693
26,433
39,680
$ 165,958
3,476
34,970
16,796
24,709
37,560
4,993
46,959
32,512
37,199
41,706
• Significant events affecting our historical earnings trends in 2006 through 2008 are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
• 2005 data includes sales of business, lease impairment, severance, pension and benefit charges and other items.
• 2004 data includes sales of business, severance, pension and benefit charges and other items.
Stock Performance Graph
Comparison of Five-Year Total Return Among Verizon, S&P 500 Telecom Services Index and S&P 500 Stock Index
Verizon
S&P 500 Telecom Services
S&P 500
$200
$180
$160
Dollars
$140
$120
$100
$80
$60
$40
$20
$0
2003
2004
2005
2006
2007
2008
Data Points in Dollars
2003
2004
At December 31,
2005
2006
2007
2008
Verizon
S&P Telecom Services
S&P 500
100.0
100.0
100.0
120.2
119.9
110.9
93.7
113.5
116.3
153.9
173.4
142.1
126.1
120.6
89.5
126.0
155.0
134.7
The graph compares the cumulative total returns of Verizon, the S&P 500 Telecommunications Services Index, and the S&P 500 Stock Index over a five-year period, adjusted for the spin-off of
our local exchange and related business assets in Maine, New Hampshire and Vermont and our domestic print and Internet yellow pages directories business. It assumes $100 was invested on
December 31, 2003, with dividends reinvested.
13
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Overview
Verizon Communications Inc., (Verizon or the Company) is one of the
world’s leading providers of communications services. Our domestic
wireless business, operating as Verizon Wireless, provides wireless voice
and data products and services across the United States (U.S.) using one
of the most extensive and reliable wireless networks. Our wireline business provides communications services, including voice, broadband
data and video services, network access, nationwide long-distance and
other communications products and services, and also owns and operates one of the most expansive end-to-end global Internet Protocol (IP)
networks. Stressing diversity and commitment to the communities in
which we operate, we have a highly diverse workforce of approximately
223,900 employees.
In the sections that follow we provide information about the important
aspects of our operations and investments, both at the consolidated and
segment levels, and discuss our results of operations, financial position
and sources and uses of cash. In addition, we highlight key trends and
uncertainties to the extent practicable. The content and organization of
the financial and non-financial data presented in these sections are consistent with information used by our chief operating decision makers for,
among other purposes, evaluating performance and allocating resources.
We also monitor several key economic indicators as well as the state of
the economy in general, primarily in the United States where the majority
of our operations are located, in evaluating our operating results and
assessing the potential impacts of these trends on our businesses. While
most key economic indicators, including gross domestic product, affect
our operations to some degree, we historically have noted higher correlations to non-farm employment, personal consumption expenditures
and capital spending, as well as more general economic indicators such
as inflationary or recessionary trends and housing starts.
Our results of operations, financial position and sources and uses of cash
in the current and future periods reflect our focus on the following strategic imperatives:
Revenue Growth – To generate revenue growth we are devoting our
resources to higher growth markets such as the wireless voice and data
markets, the broadband and video markets, and the provision of strategic services to business markets, rather than to the traditional wireline
voice market. During 2008, revenues from these higher growth markets
offset continuing declines in the traditional voice mass market, and we
reported consolidated revenue growth of 4.2%. We continue developing
and marketing innovative product bundles to include local, long-distance,
wireless and broadband services for consumer and general business retail
customers. We anticipate that these efforts will help counter the effects of
competition and technology substitution that have resulted in access line
losses, and will enable us to continue to grow consolidated revenues.
Market Share Gains – In our wireless business, our goal is to be the market
leader in providing wireless voice and data communication services in
the United States. To gain market share, we are focused on providing the
highest network reliability and new and innovative products and services
such as Mobile Broadband and our Evolution-Data Optimized (EVDO) service. We also continue to expand our wireless data, messaging
and multi-media offerings for both consumer and business customers.
During 2008,
• our total number of customers increased 9.7% to 72.1 million; and
• average revenue per customer per month (ARPU) from service revenues increased by 1.2% to $51.59 from increased use of our messaging
and other data services.
With our acquisition of Alltel Corporation (Alltel) in January 2009, we
became the largest wireless provider in the U.S. as measured by the total
number of customers.
In our wireline business, our goal is to become the leading broadband
provider in every market in which we operate. During 2008,
• we passed 12.7 million premises with our high-capacity fiber optics
network operated under the FiOS service mark;
• we added 660,000 net wireline broadband connections, for a total of
8,673,000 connections; and
• we added approximately 975,000 net new FiOS TV customers, for a
total of 1,918,000 FiOS TV customers.
With FiOS, we have created the opportunity to increase revenue per
customer as well as improve retention and profitability as the traditional
fixed-line telephone business continues to decline as customers migrate
to wireless, cable and other newer technologies. We are also focused on
gaining market share in the enterprise business by the deployment of
strategic service offerings – including expansion of our VoIP and international Ethernet capabilities, the introduction of video and web-based
conferencing capabilities, and enhancements to our virtual private network portfolio. In 2008, revenues from strategic services grew 16.1%.
Profitability Improvement – Our goal is to increase operating income
and margins. In 2008,
• operating income rose 8.4% compared to 2007;
• income before provision for income taxes, discontinued operations
and extraordinary item rose 2.8% compared to 2007; and
• operating income margin rose 4% to 17.3% compared to 2007.
To position our company for sustainable, long-term profitability, we are
directing our capital spending primarily toward higher growth markets.
High-speed wireless data services, fiber optics to the premises, as well
as expanded services to enterprise customers, are examples of these
growth markets. During 2008, capital expenditures were $17,238 million
compared with capital expenditures of $17,538 million in 2007, excluding
14
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
discontinued operations. We expect 2009 capital expenditures, excluding
amounts related to the acquisition of Alltel, to be lower than 2008
capital expenditures.
Operational Efficiency – While focusing resources on revenue growth
and market share gains, we are continually challenging our management
team to lower expenses, particularly through technology-assisted productivity improvements, including self-service initiatives. The effect of these
and other efforts, such as real estate consolidations, call center routing
improvements, the formation of a centralized shared services organization, and centralizing information technology and marketing efforts, has
led to changes in our cost structure as well as maintaining and improving
operating income margins. With our deployment of the FiOS network, we
expect to realize savings annually in our ongoing operating expenses as
a result of efficiencies gained from fiber network facilities. As the deployment of the FiOS network gains scale and installation and automation
improvements occur, average costs per home connected are expected
to decline.
Customer Service – Our goal is to be the leading company in customer
service in every market we serve. We view superior product offerings and
customer service experiences as a competitive differentiator and a catalyst to growing revenues and gaining market share. We are committed
to providing high-quality customer service and continually monitoring
customer satisfaction in all facets of our business. We believe that we
have the most loyal customer base of any wireless service provider in the
United States, as measured by customer churn.
Consolidated Results of Operations
In this section, we discuss our overall results of operations and highlight
items that are not included in our business segment results. We have
two reportable segments, which we operate and manage as strategic
business units and organize by products and services. Our segments are
Domestic Wireless and Wireline.
This section and the following “Segment Results of Operations” section
also highlight and describe those items of a non-recurring or non-operational nature separately to ensure consistency of presentation. In the
following section, we review the performance of our two reportable segments. We exclude the effects of certain items that management does
not consider in assessing segment performance, primarily because of
their non-recurring and/or non-operational nature as discussed below
and in the “Other Consolidated Results” and “Other Items” sections. We
believe that this presentation will assist readers in better understanding
our results of operations and trends from period to period.
On March 31, 2008, we completed the spin-off of our local exchange
and related business assets in Maine, New Hampshire and Vermont.
Accordingly, Wireline results from divested operations have been reclassified to Corporate and Other and reflect comparable operating results.
Performance-Based Culture – We embrace a culture of accountability,
based on individual and team objectives that are performance-based and
tied to Verizon’s strategic imperatives. Key objectives of our compensation programs are pay-for-performance and the alignment of executives’
and shareowners’ long-term interests. We also employ a highly diverse
workforce, since respect for diversity is an integral part of Verizon’s culture
and a critical element of our competitive success.
We create value for our shareowners by investing the cash flows generated by our business in opportunities and transactions that support
the aforementioned strategic imperatives, thereby increasing customer
satisfaction and usage of our products and services. In addition, we use
our cash flows to repurchase shares and maintain and grow our dividend
payout to shareowners. Reflecting continued strong cash flows and confidence in Verizon’s business model, Verizon’s Board of Directors increased
the Company’s quarterly dividend 6.2% during the third quarter of 2007
and 7.0% during the third quarter of 2008. During 2008, we repurchased
$1,368 million of our common stock as part of our previously announced
share buyback program. Net cash provided by operating activities – continuing operations for the year ended December 31, 2008 of $26,620
million increased by $311 million from $26,309 million for the year ended
December 31, 2007.
15
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Consolidated Revenues
(dollars in millions)
2008
Years Ended December 31,
Domestic Wireless
Wireline
Verizon Telecom
Verizon Business
Intrasegment eliminations
Corporate and Other
Consolidated Revenues
$
49,332
$
29,912
21,126
(2,824)
48,214
(192)
97,354
2007
% Change
$
43,882
12.4
$
30,780
21,109
(2,760)
49,129
458
93,469
(1.9)
nm
4.2
2007
$
43,882
$
30,780
21,109
(2,760)
49,129
458
93,469
2006
% Change
$
38,043
15.3
$
31,759
20,546
(2,801)
49,504
635
88,182
(0.8)
(27.9)
6.0
nm – not meaningful
2008 Compared to 2007
Consolidated revenues in 2008 increased by $3,885 million, or 4.2%, compared to 2007. This increase was primarily the result of continued strong
growth at Domestic Wireless.
2007 Compared to 2006
Consolidated revenues in 2007 increased by $5,287 million, or 6.0%, compared to 2006. This increase was primarily the result of continued strong
growth at Domestic Wireless.
Domestic Wireless’s revenues in 2008 increased by $5,450 million, or
12.4%, compared to 2007 due to increases in service revenues and
equipment and other revenue. Service revenues during 2008 increased
$4,619 million, or 12.2%, compared to 2007 primarily due to increases in
data revenues and customers. Equipment and other revenue increased
principally as a result of increases in the number of existing customers
upgrading their wireless devices. Total data revenues increased by $3,265
million, or 44.2% in 2008 compared to 2007. There were 72.1 million total
Domestic Wireless customers as of December 31, 2008, an increase of
9.7% from December 31, 2007. Domestic Wireless’s retail customer base as
of December 31, 2008 was approximately 70 million, a 9.9% increase from
2007, and represented approximately 97.2% of its total customer base.
Service ARPU increased by 1.2% to $51.59 in 2008 compared to 2007,
primarily attributable to increases in Data ARPU driven by increased use
of our messaging and other data services. Retail Service ARPU increased
by 0.6% to $51.88 in 2008 compared to 2007.
Domestic Wireless’s revenues in 2007 increased by $5,839 million, or
15.3%, compared to 2006 due to increases in service revenues and
equipment and other revenue. Equipment and other revenue increased
principally as a result of increases in the number of existing customers
upgrading their wireless devices. Total data revenues increased by $2,911
million, or 65.0% in 2007 compared to 2006 driven by increased use of our
messaging and other data services. There were approximately 65.7 million
total Domestic Wireless customers as of December 31, 2007, an increase of
11.3% from December 31, 2006. Domestic Wireless’s retail customer base
as of December 31, 2007 was approximately 63.7 million, a 12.2% increase
from 2006, and represented approximately 97% of its total customer base.
Service ARPU increased by 2.3% to $50.96 in 2007 compared to 2006, primarily attributable to increases in data revenue per customer. Retail ARPU
increased by 2.2% to $51.57 in 2007 compared to 2006.
Wireline’s revenues in 2008 decreased $915 million, or 1.9%, compared
to 2007, primarily driven by lower demand and usage of our basic local
exchange and accompanying services, partially offset by continued
growth from broadband and strategic services. During 2008, we added
660,000 net new broadband connections, including 956,000 net new
FiOS data connections, offset by a net decline of 296,000 high speed
Internet connections. As of December 31, 2008 we served 8,673,000
connections, including 2,481,000 for FiOS Internet, representing an 8.2%
increase in total broadband connections from December 31, 2007. In
addition, we added 975,000 net new FiOS TV customers in 2008, for a
total of 1,918,000 at December 31, 2008. The revenue growth at Verizon
Telecom driven by broadband and video services was more than offset by
a 3,722,000 decline in subscriber access lines resulting from competition
and technology substitution, including wireless and VoIP. Revenues at
Verizon Business increased primarily due to higher demand for Internetrelated product offerings, specifically Private IP products and the impact
of foreign currency exchange rates on services billed in local currencies,
partially offset by lower voice revenues.
16
Wireline’s revenues in 2007 decreased $375 million, or 0.8%, compared
to 2006, primarily driven by lower demand and usage of our basic local
exchange and accompanying services, partially offset by continued
growth from broadband and strategic services. During 2007, we added
1,227,000 new broadband connections, an increase of 18.1%, including
847,000 for FiOS, for a total of 8,013,000 lines at December 31, 2007. In
addition, we added 736,000 FiOS TV customers in 2007, for a total of
943,000 at December 31, 2007. Revenues at Verizon Business increased
during 2007 compared to 2006 primarily due to higher demand for
strategic products. These increases were offset by a decline in voice
revenues at Verizon Telecom due to a 3.5 million decline in subscribers
resulting from competition and technology substitution, such as wireless
and VoIP, including those subscribers who have migrated to our other
service offerings.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Consolidated Operating Expenses
(dollars in millions)
2008
Years Ended December 31,
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Consolidated Operating Expenses
$
$
39,007
26,898
14,565
80,470
2008 Compared to 2007
Cost of Services and Sales
Cost of services and sales includes the following costs directly attributable to a service or product: salaries and wages, benefits, materials and
supplies, contracted services, network access and transport costs, wireless equipment costs, customer 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 2008 increased $1,460 million, or 3.9%, compared to 2007, primarily as a result of higher wireless
network costs and wireless equipment costs. The increase was partially
offset by the impact of productivity improvement initiatives and lower
cost of services and sales driven by a decline in switched access lines
in service and wholesale voice connections. The higher wireless network
costs in 2008 were primarily caused by increased network usage for voice
and data services, increased roaming, increased use of data services and
applications and increased payments related to network leases. Cost of
wireless equipment sales increased in 2008 compared to 2007 primarily
as a result of an increase in the number of equipment upgrades by customers, combined with an increase in average cost per unit. The increase
in cost of services and sales was also impacted by unfavorable foreign
exchange rates, higher utility costs and the inclusion of the results of
operations of a security services firm acquired on July 1, 2007.
Consolidated cost of services and sales in 2008 and 2007 include $24 million and $32 million, respectively, of costs primarily associated with the
integration of MCI into our wireline business. Consolidated cost of services and sales in 2008 also included $16 million related to the spin-off of
local exchange and related business assets in Maine, New Hampshire and
Vermont and $65 million for severance, pension and benefits charges.
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 taxes, advertising and sales commission costs, customer billing, call center and information technology costs,
professional service fees and rent for administrative space.
$
$
2007
% Change
37,547
25,967
14,377
77,891
3.9
3.6
1.3
3.3
2007
$
$
37,547
25,967
14,377
77,891
$
$
2006
% Change
35,309
24,955
14,545
74,809
6.3
4.1
(1.2)
4.1
Consolidated selling, general and administrative expense in 2008 included
$885 million for severance, pension and benefits charges (see “Other
Items”), $150 million for merger integration costs, primarily comprised of
Wireline systems integration activities related to businesses acquired and
$87 million related to the spin-off of local exchange and related business
assets in Maine, New Hampshire and Vermont.
Consolidated selling, general and administrative expense in 2007 included
charges of $772 million for severance and related expenses (see “Other
Items”), $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 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 our investment in Telecomunicaciones de Puerto Rico, Inc. (TELPRI) to
the Verizon Foundation.
Depreciation and Amortization Expense
Depreciation and amortization expense in 2008 increased $188 million,
or 1.3%, compared to 2007. The increase was mainly driven by growth in
depreciable telephone plant and non-network software from additional
capital spending.
2007 Compared to 2006
Cost of Services and Sales
Consolidated cost of services and sales expense 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 pension 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 cost of services and sales expense in 2007 and 2006
included $32 million and $25 million, respectively, of costs associated
with the integration of MCI into our wireline business.
Consolidated selling, general and administrative expense in 2008
increased $931 million, or 3.6%, compared to 2007. The increase resulted
from higher sales commission expense, bad debt expense and advertising and promotion costs, partially offset by lower salary and benefits
related expense and the impact of productivity initiatives.
17
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Selling, General and Administrative Expense
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 contributing 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 selling, general and administrative expense in 2007 included
charges of $772 million for severance and related expenses (see “Other
Items”), $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 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 our investment in TELPRI to the Verizon Foundation.
Consolidated selling, general and administrative expense in 2006
included $56 million related to pension settlement losses incurred in
connection with our benefit plans and a pretax charge of $369 million
for employee severance and severance-related activities in connection
with the involuntary separation of approximately 4,100 employees who
were separated in 2006. Consolidated selling, general and administrative
expense 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 pretax charge of $184 million for
Verizon Center relocation costs.
Depreciation and Amortization Expense
Depreciation and amortization expense in 2007 decreased $168 million,
or 1.2%, 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.
Other Consolidated Results
Equity in Earnings of Unconsolidated Businesses
2008
Years Ended December 31,
Vodafone Omnitel
CANTV
Other
Total
$
$
655
–
(88)
567
(dollars in millions)
2007
$
$
597
–
(12)
585
2006
$
$
703
182
(112)
773
Equity in earnings of unconsolidated businesses in 2008 decreased by
$18 million, or 3.1%, compared to 2007. The decrease was primarily
driven by the gain on the sale of an international investment in 2007,
partially offset by higher earnings at Vodafone Omnitel N.V. (Vodafone
Omnitel) in 2008.
Equity in earnings of unconsolidated businesses in 2007 decreased by
$188 million, or 24.3%, compared to 2006. The decrease was primarily
driven by the nationalization of Compañía Anónima Nacional Teléfonos
de Venezuela (CANTV) during 2007, as well as the effect of lower tax benefits at Vodafone Omnitel.
Other Income and (Expense), Net
(dollars in millions)
2008
Years Ended December 31,
Interest income
Foreign exchange gains (losses), net
Other, net
Total
$
$
362
(46)
(34)
282
2007
$
$
168
14
29
211
2006
$
$
201
(3)
197
395
Other Income and (Expense), Net in 2008 increased $71 million, or
33.6%, compared to 2007. The increase was primarily attributable to
higher interest income, primarily from our investment in Alltel’s debt
obligations. Partially offsetting the increase were foreign exchange losses
at our international Wireline operations and an impairment charge of
$48 million recorded during the fourth quarter of 2008 related to an
other-than-temporary decline in fair value of our investments in certain
marketable securities.
Other Income and (Expense), Net in 2007 decreased $184 million, or
46.6%, compared to 2006. The decline was primarily attributable to a gain
on the sale of a Wireline investment in 2006, as well as decreased interest
income as a result of lower average cash balances.
Interest Expense
Years Ended December 31,
(dollars in millions)
2008
2007
Total interest costs on debt balances
Less capitalized interest costs
Interest expense
$ 2,566
747
$ 1,819
$
Weighted average debt outstanding
Effective interest rate
$ 41,064
6.25%
$ 32,964
6.85%
$
2,258
429
1,829
2006
$
$
2,811
462
2,349
$ 41,500
6.78%
Total interest costs in 2008 increased $308 million, compared to 2007, due
to an increase in the weighted average debt level, partially offset by lower
interest rates compared to last year. Interest Expense in 2008 decreased
$10 million compared to 2007 primarily due to higher capitalized interest
costs. Capitalized interest costs include approximately $557 million
related to the development of wireless licenses for commercial service,
primarily as a result of the spectrum acquired in the 700 MHz auction.
The increase in weighted average debt outstanding was primarily driven
by the issuance of $8,000 million of fixed rate notes with varying maturities, in the first half of 2008, and to a lesser extent, the Verizon Wireless
borrowings during the second half of 2008 (see “Consolidated Financial
Condition”). Partially offsetting this increase in the weighted average debt
outstanding were debt reductions.
Total interest costs in 2007 decreased $553 million, compared to 2006, primarily due to a decrease in average debt levels, partially offset by slightly
higher interest rates. Debt levels decreased primarily as a result of the
approximately $7,100 million reduction from the spin-off of our domestic
print and Internet yellow pages directories business in November 2006,
as well as from debt redemptions and retirements funded by proceeds
from the spin-off and the divestiture of our Caribbean and Latin American
investments during 2006 and the first quarter of 2007.
Minority Interest
Years Ended December 31,
Minority interest
(dollars in millions)
2008
$ 6,155
2007
$
5,053
2006
$
4,038
The increase in minority interest in 2008 compared to 2007, and in 2007
compared to 2006, was due to the higher earnings in our Domestic
Wireless segment, which has a significant minority interest attributable
to Vodafone Group Plc (Vodafone).
18
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Provision for Income Taxes
(dollars in millions)
Years Ended December 31,
2008
Provision for income taxes
Effective income tax rate
$ 3,331
34.1%
2007
$
3,982
42.0%
2006
$
2,674
32.8%
The effective income tax rate is the provision for income taxes as a percentage of income from continuing operations before the provision for
income taxes. The effective income tax rate in 2008 was lower than 2007
primarily due to recording $610 million of foreign and domestic taxes and
expenses in 2007 specifically relating to our share of Vodafone Omnitel’s
distributable earnings. Verizon received net distributions from Vodafone
Omnitel in April 2008 and December 2007 of approximately $670 million
and $2,100 million, respectively.
The effective income tax rate in 2007 compared to 2006 was higher
primarily due to taxes recorded in 2007 related to distributions from
Vodafone Omnitel as discussed above. The 2007 rate was also increased
due to higher state taxes in 2007 as compared to 2006, as well as greater
benefits from foreign operations in 2006 compared to 2007. These
increases were partially offset by lower expenses recorded for unrecognized tax benefits in 2007 as compared to 2006.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate for each period is included in Note 16 to the consolidated financial statements.
Discontinued Operations
In accordance with Statement of Financial Accounting Standard (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we
have classified TELPRI, Verizon Dominicana and our former domestic print
and Internet yellow pages directories publishing operations as discontinued operations in the consolidated financial statements for all periods
presented through the date of the divestiture or spin-off.
On March 30, 2007, after receiving Federal Communications Commission
(FCC) approval, we completed the sale of our 52% interest in TELPRI and
received gross proceeds of approximately $980 million. The sale resulted
in a pretax gain of $120 million ($70 million after-tax, or $.02 per diluted
share). Additionally, $100 million of the proceeds were contributed to the
Verizon Foundation.
The sale of Verizon Dominicana closed in December 2006, and primarily
due to taxes on previously unremitted earnings, a pretax gain of $30 million resulted in an after-tax loss of $541 million ($.18 per diluted share).
We completed the spin-off of our domestic print and Internet yellow
pages directories business to our shareowners on November 17, 2006,
which resulted in an $8,695 million increase to contributed capital in
shareowner’s investment. In addition, we recorded pretax charges of
$117 million ($101 million after-tax, or $.03 per diluted share) for costs
related to this spin-off. These costs primarily consisted of debt retirement
costs, costs associated with accumulated vested benefits of employees,
investment banking fees and other transaction costs related to the spinoff, which are included in discontinued operations.
Extraordinary Item
In January 2007, the Bolivarian Republic of Venezuela (the Republic)
declared its intent to nationalize certain companies, including CANTV. On
February 12, 2007, we entered into a Memorandum of Understanding
(MOU) with the Republic, which provided that the Republic offer to purchase all of the equity securities of CANTV, including our 28.5% interest,
through public tender offers in Venezuela and the United States. Under
the terms of the MOU, the prices in the tender offers would be adjusted
downward to reflect any dividends declared and paid subsequent to
February 12, 2007. During 2007, the tender offers were completed and
Verizon received an aggregate amount of approximately $572 million,
which included $476 million from the tender offers as well as $96 million
of dividends declared and paid subsequent to the MOU. During 2007,
based upon our investment balance in CANTV, we recorded an extraordinary loss of $131 million, including taxes of $38 million, or $.05 per
diluted share.
Cumulative Effect of Accounting Change
Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based
Payments, utilizing the modified prospective method. The impact to
Verizon primarily resulted from Domestic Wireless, for which we recorded
a $42 million ($.01 per diluted share) cumulative effect of accounting
change, net of taxes and after minority interest, to recognize the effect of
initially measuring the outstanding liability for awards granted to Domestic
Wireless employees at fair value utilizing a Black-Scholes model.
Segment Results of Operations
We have two reportable segments, Domestic Wireless and Wireline, which
we operate and manage as strategic business units and organize by products and services. We previously measured and evaluated our reportable
segments based on segment income. Beginning in 2008, we measure
and evaluate our reportable segments based on segment operating
income, which is reflected in all periods presented. The use of segment
operating income is consistent with the chief operating decision makers’
assessment of segment performance. You can find additional information
about our segments in Note 17 to the consolidated financial statements.
Corporate, eliminations and other includes unallocated corporate
expenses, intersegment eliminations recorded in consolidation, the results
of other businesses such as our investments in unconsolidated businesses,
lease financing, and other adjustments and gains and losses that are not
allocated in assessing segment performance due to their non-recurring
or non-operational nature. Although such transactions are excluded from
the business segment results, they are included in reported consolidated
earnings. Gains and losses that are not individually significant are included
in all segment results, since these items are included in the chief operating decision makers’ assessment of segment performance.
Income from discontinued operations, net of tax, decreased by $617
million, or 81.3%, in 2007 compared to 2006. The decrease was primarily
driven by the assets disposed of in 2006, partially offset by the after-tax
gain recorded in 2007 on the sale of our investment in TELPRI.
19
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Domestic Wireless
Our Domestic Wireless segment provides wireless voice and data services, other value-added services and equipment sales across the United
States. This segment primarily represents the operations of our joint venture with Vodafone, operating as Verizon Wireless. We own a 55% interest
in the joint venture and Vodafone owns the remaining 45%. All financial
results included in the tables below reflect the consolidated results of
Verizon Wireless.
Operating Revenue
Years Ended December 31,
Service revenue
Equipment and other
Total Domestic Wireless
Operating Revenue
(dollars in millions)
2008
2007
2006
$ 42,635
6,697
$ 38,016
5,866
$ 32,796
5,247
$ 49,332
$ 43,882
$ 38,043
Domestic Wireless’s total operating revenue in 2008 increased by $5,450
million, or 12.4%, compared to 2007. Service revenue increased by $4,619
million, or 12.2%, in 2008 compared to 2007. The increase in service
revenue was primarily driven by an increase in data revenue in 2008
compared to 2007, and to a lesser extent, an increase in customers as
of December 31, 2008 compared to December 31, 2007. Equipment and
other revenue increased by $831 million, or 14.2%, in 2008 compared
to 2007, primarily as a result of an increase in the number of customers
upgrading their wireless devices. Other revenue also increased due to
increases in cost recovery surcharges and regulatory fees.
Total data revenue in 2008 was $10,651 million and accounted for 25.0%
of service revenue, compared to $7,386 million and 19.4% of service
revenue in 2007. Total data ARPU increased by 30.2% to $12.89 in 2008,
compared to $9.90 in 2007, primarily as a result of increased use of our
messaging service, Mobile Broadband and e-mail services, data transport
charges, and newer data services such as VZ Navigator.
Service ARPU increased by 1.2% to $51.59 in 2008, compared to $50.96 in
2007. Retail Service ARPU increased by 0.6% to $51.88 in 2008, compared
to $51.57 in 2007.
Domestic Wireless had approximately 70 million retail customers as of
December 31, 2008, an increase of 6.3 million, or 9.9%, compared to
approximately 63.7 million retail customers as of December 31, 2007.
Retail (non-wholesale) customers are customers who are directly served
and managed by Verizon Wireless and who buy its branded services.
Domestic Wireless had 72.1 million total customers as of December 31,
2008, of which 97.2% were retail customers, compared to approximately
65.7 million total customers as of December 31, 2007, of which 97.0% were
retail customers. Our Domestic Wireless customer base as of December
31, 2008 was 92.9% retail postpaid, unchanged compared to December
31, 2007. Customer acquisitions and adjustments during 2008 included
approximately 650,000 net total customer additions, after conforming
adjustments, acquired from Rural Cellular Corporation (Rural Cellular).
As a result of the exchange with AT&T consummated on December 22,
2008, Domestic Wireless transferred a net of approximately 122,000 total
customers. The total average monthly customer churn rate was 1.25% in
2008, compared to 1.21% in 2007. The average monthly retail postpaid
customer churn rate was 0.96% in 2008, compared to 0.91% in 2007.
Domestic Wireless’s total operating revenue in 2007 increased by $5,839
million, or 15.3%, compared to 2006. Service revenue in 2007 increased by
$5,220 million, or 15.9%, compared to 2006. The service revenue increase
was primarily due to an 11.3% increase in customers as of December 31,
2007 compared to December 31, 2006, and increased average revenue
per customer. Equipment and other revenue in 2007 increased by $619
million, or 11.8%, compared to 2006, principally as a result of increases
20
in the number of customers upgrading their wireless devices. Other revenue in 2007 also increased due to increases in cost recovery surcharges
and regulatory fees.
Total data revenue in 2007 was $7,386 million and accounted for 19.4%
of service revenue, compared to $4,475 million and 13.6% of service
revenue in 2006. Total data ARPU increased by 45.8% to $9.90 in 2007,
compared to $6.79 in 2006, as a result of increased use of messaging service, Broadband Access and e-mail services, and other data services.
Service ARPU increased by 2.3% to $50.96 in 2007 compared to $49.80 in
2006. Retail Service ARPU increased by 2.2% to $51.57 in 2007 compared
to $50.44 in 2006.
Operating Expenses
(dollars in millions)
2008
2007
2006
Cost of services and sales
$ 15,660
Selling, general and administrative expense
14,273
Depreciation and amortization expense
5,405
Total Operating Expenses
$ 35,338
$ 13,456
13,477
5,154
$ 32,087
$ 11,491
12,039
4,913
$ 28,443
Years Ended December 31,
Cost of Services and Sales
Cost of services and sales includes costs to operate the wireless network
as well as the cost of roaming and long distance, the cost of data services
and applications and the cost of equipment sales. Cost of services and
sales in 2008 increased by $2,204 million, or 16.4%, compared to 2007.
The increase in cost of services was driven by higher wireless network
costs on increased network usage for voice and data services, increased
roaming, increased use of data services and applications, as well as
increased payments related to network related leases. Cost of equipment
sales increased by 18.9%, in 2008 compared to 2007. This increase was primarily attributable to an increase in the number of equipment upgrades
by customers combined with an increase in average cost per unit.
Cost of services and sales in 2007 increased by $1,965 million, or 17.1%,
compared to 2006, primarily due to higher wireless network costs in
2007 caused by increased network usage, partially offset by lower rates
for long distance, roaming and local interconnection. Cost of equipment
sales grew by 20.2% in 2007 compared to 2006. The increase was primarily attributed to an increase in equipment upgrades, together with
an increase in cost per unit as a result of increased sales of higher cost
advanced wireless devices.
Selling, General and Administrative Expense
Selling, general and administrative expense in 2008 increased by $796
million, or 5.9%, compared to 2007. This increase was primarily due to
an increase in sales commission expense, primarily from an increase in
equipment upgrades in our indirect channel, as well as higher advertising and promotion expense, bad debt expense and regulatory fees.
The increases in selling, general and administrative expense were partially offset by a decrease in salary and benefits related expense.
Selling, general and administrative expense in 2007 increased by $1,438
million, or 11.9%, compared to 2006. This increase was primarily due to
an increase in salary and benefits expense, resulting from an increase in
employees in the sales and customer care areas, and higher per employee
salary and benefit costs.
Depreciation and Amortization Expense
Depreciation and amortization expense in 2008 increased by $251 million, or 4.9%, compared to 2007 and increased by $241 million, or 4.9%,
in 2007 compared to 2006. These increases were primarily due to an
increase in depreciable assets. Partially offsetting this increase in 2007
was lower amortization expense resulting from customer lists becoming
fully amortized during 2006.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Operating Income
Years Ended December 31,
Operating Income
(dollars in millions)
2008
2007
$ 13,994
$ 11,795
2006
$
9,600
Operating income in 2008 increased by $2,199 million, or 18.6%, compared to 2007 and increased by $2,195 million, or 22.9%, in 2007
compared to 2006, primarily due to the impact of operating revenue and
operating expenses described above.
Wireline
The Wireline segment consists of the operations of Verizon Telecom,
which provides communication services, including voice, broadband
video and data, network access, long distance, and other services to residential and small business customers and carriers, and Verizon Business,
which provides voice, data and Internet communications services as well
as next-generation IP network services to medium and large business customers, multi-national corporations, and state and federal government
customers globally. The results of operations presented below exclude
the local exchange and related businesses in Maine, New Hampshire and
Vermont that were spun-off on March 31, 2008.
Operating Revenues
Years Ended December 31,
Verizon Telecom
Mass Markets
Wholesale
Other
Verizon Business
Enterprise Business
Wholesale
International and Other
Intrasegment eliminations
Total Wireline Operating Revenues
(dollars in millions)
2008
2007
2006
$ 20,974
7,571
1,367
$ 21,289
7,774
1,717
$ 21,542
8,017
2,200
14,411
3,341
3,374
(2,824)
$ 48,214
14,550
3,345
3,214
(2,760)
$ 49,129
14,164
3,281
3,101
(2,801)
$ 49,504
Verizon Telecom
Mass Markets
Verizon Telecom’s Mass Markets revenue includes local exchange (basic
service and end-user access), value-added services, long distance,
broadband services for residential and small business accounts and FiOS
TV services. Long distance includes both regional toll services and long
distance services. Broadband services include high speed Internet and
FiOS Internet.
Our Mass Markets revenue in 2008 decreased by $315 million, or 1.5%,
compared to 2007 and decreased by $253 million, or 1.2% in 2007, compared to 2006. These decreases were primarily driven by lower demand
and usage of our basic local exchange and accompanying services,
attributable to consumer subscriber line losses driven by competition
and technology substitution, including wireless and VoIP. These decreases
were partially offset by growth from broadband and video services.
We added 660,000 net new broadband connections, including 956,000
net new FiOS Internet connections, in 2008. We ended 2008 with
8,673,000 net broadband connections, including 2,481,000 for FiOS
Internet, representing an 8.2% increase in total broadband connections
compared to 8,013,000 connections at December 31, 2007. In addition,
we added approximately 975,000 FiOS TV customers in 2008 and ended
the year with a total of 1,918,000, an increase of approximately 103.4%
compared to 943,000 FiOS TV customers at December 31, 2007. As of
December 31, 2008, for FiOS Internet and FiOS TV, we achieved penetration rates of 24.9% and 20.8%, respectively, across all markets where we
have been selling these services.
Wholesale
Wholesale revenues are earned from long distance and other carriers who
use our local exchange facilities to provide services to their customers.
Switched access revenues are generated from fixed and usage-based
charges paid by carriers for access to our local network. Special access
revenues are generated from carriers that buy dedicated local exchange
capacity to support their private networks. Wholesale services also
include local wholesale revenues from unbundled network elements
(UNEs) and interconnection revenues from competitive local exchange
carriers (CLECs) and wireless carriers.
Wholesale revenues in 2008 decreased by $203 million, or 2.6%,
compared to 2007 and by $243 million, or 3.0% in 2007 compared to
2006, due to declines in switched access revenues and local wholesale
revenues. These declines were partially offset by increases in special
access revenues. Switched minutes of use (MOUs) declined in 2008 and
2007, reflecting the impact of access line loss and wireless substitution.
Wholesale lines decreased by 16.0% in 2008 due to the continued impact
of competitors deemphasizing their local market initiatives coupled with
the impact of technology substitution compared to a 16.1% decline in
2007. Special access revenue growth reflects continuing demand for highcapacity, high-speed digital services, partially offset by lower demand for
older, low-speed data products and services. As of December 31, 2008,
customer demand, as measured in DS1 and DS3 circuits, for high-capacity
and digital data services increased 5.1% compared to an increase of 8.2%
in 2007.
The FCC regulates the rates charged to customers for interstate access
services. See “Other Factors That May Affect Future Results – Regulatory
and Competitive Trends – FCC Regulation” for additional information on
FCC rulemaking concerning federal access rates, universal service and
certain broadband services.
Other Revenues
Other revenues include such services as operator services (including
deaf relay services), public (coin) telephone, card services and supply
sales, as well as dial around services including 10-10-987, 10-10-220,
1-800-COLLECT and Prepaid Cards. Verizon Telecom’s revenues from
other services decreased by $350 million, or 20.4% in 2008, and by $483
million, or 22.0% in 2007, mainly due to the discontinuation of non-strategic product lines and reduced business volumes.
Declines in switched access lines in service of 9.3% in 2008 and 8.1% in
2007 were mainly driven by the effects of competition and technology
substitution. Residential retail access lines declined 11.4% in 2008 and
9.5% in 2007, as customers substituted wireless, VoIP, broadband and
cable services for traditional voice landline services. At the same time,
small business retail access lines declined 5.0% in 2008 and 4.0% in 2007,
primarily reflecting competition and a shift to high-speed access lines.
The resulting total retail access line loss was 9.1% and 7.6% in 2008 and
2007, respectively.
21
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Verizon Business
Enterprise Business
Our Enterprise Business channel offers voice, data and Internet communications services to medium and large business customers, multi-national
corporations, and state and federal government customers. In addition
to traditional voice and data services, Enterprise Business offers managed
and advanced products and solutions through our Strategic Services. This
encompasses our focus areas of growth, including IP services and valueadded solutions that make communications more secure, reliable and
efficient. Enterprise Business also provides managed network services for
customers that outsource all or portions of their communications and
information processing operations and data services such as Private IP,
Private Line, Frame Relay and ATM services, both domestically and internationally. In addition, Enterprise Business offers professional services in
more than 30 countries around the world, supporting a range of solutions including network service, managing a move to IP-based unified
communications and providing application performance support.
Enterprise Business revenues in 2008 decreased by $139 million, or 1.0%,
compared to 2007. The revenue decline is due to certain customers
moving traffic off of our network, partially offset by increases in customer
premise equipment revenue and security solutions revenue. The IP and
services suite of products continues to be Enterprise Business’ fastest
growing and includes Private IP, IP, VPN, Managed Services, Web Hosting
and VoIP. Enterprise Business revenues in 2007 increased by $386 million,
or 2.7%, compared to 2006, primarily reflecting growth in demand for our
strategic products, specifically IP services, Managed Services and security,
as well as the inclusion of the results of operations of the former MCI
business subsequent to the close of the merger on January 6, 2006.
Wholesale
Our Wholesale revenues relate to domestic wholesale services and
include all interexchange wholesale traffic sold in the United States, as
well as internationally destined traffic that originates in the United States.
The Wholesale line of business is comprised of numerous large and small
customers that predominately resell voice services to their own customer
base. A portion of this revenue is generated by a few large telecommunication carriers, many of whom compete directly with Verizon.
Verizon Business Wholesale revenues in 2008 decreased by $4 million,
or 0.1%, compared to 2007, primarily due to continued rate compression due to competition in the marketplace partially offset by increased
MOUs in traditional voice products. Verizon Business Wholesale revenues
in 2007 increased by $64 million, or 2.0% as compared to 2006, primarily
due to increased MOUs in traditional voice products, partially offset by
continued rate compression due to competition in the marketplace, as
well as the inclusion of the results of operations of the former MCI business subsequent to the close of the merger on January 6, 2006.
International and Other
Our International operations serve retail and wholesale customers,
including enterprise businesses, government entities and telecommunication carriers outside of the United States, primarily in Europe, the
Middle East, Africa, the Asia Pacific region, Latin America and Canada.
These operations provide telecommunications services, which include
voice, data services, Internet and managed network services.
International and other revenue in 2008 increased by $160 million, or
5.0%, compared to 2007, reflecting strong growth in our Internet suite
of products, specifically Private IP products, and the impact of favorable
foreign currency exchange rates on services billed in local currencies.
International and other revenue in 2007 increased by $113 million, or
3.6%, compared to 2006 as a result of higher revenue growth in our strategic products, specifically IP services. This increase was partially offset
by competitive rate compression and lower volumes with respect to our
voice products.
22
Operating Expenses
(dollars in millions)
2008
2007
2006
Cost of services and sales
$ 24,274
Selling, general and administrative expense
11,047
Depreciation and amortization expense
9,031
Total Operating Expenses
$ 44,352
$ 24,181
11,527
8,927
$ 44,635
$ 23,806
11,998
9,309
$ 45,113
Years Ended December 31,
Cost of Services and Sales
Cost of services and sales includes costs directly attributable to a service
or product, including salaries and wages, benefits, materials and supplies, contracted services, network access and transport costs, customer
provisioning costs, computer systems support, costs to support our outsourcing contracts and technical facilities, contributions to the universal
service fund, and cost of products sold. Aggregate customer care costs,
which include billing and service provisioning, are allocated between cost
of services and sales and selling, general and administrative expense.
Cost of services and sales in 2008 increased by $93 million, or 0.4%,
compared to 2007. These increases were primarily due to higher costs
associated with our growth businesses, primarily FiOS services, including
TV and Internet services, and IP services, partially offset by productivity
improvement initiatives, headcount reductions and lower switched
access lines in service as well as lower wholesale voice connections.
The increase in cost of services and sales expense was also impacted by
unfavorable foreign exchange rate changes, higher utility costs and the
inclusion of the results of operations of a security services firm acquired
on July 1, 2007.
Cost of services and sales in 2007 increased by $375 million, or 1.6%, compared to 2006. This increase was primarily due to higher costs associated
with our growth businesses, annual wage increases and higher customer
premise equipment costs, partially offset by productivity improvement
initiatives, headcount reductions and lower switched access lines in service, as well as lower wholesale voice connections.
Selling, General and Administrative Expense
Selling, general and administrative expense includes salaries, 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, professional service fees and rent for administrative space.
Selling, general and administrative expenses in 2008 decreased by $480
million or 4.2%, compared to 2007. This decrease was primarily due to
declines in compensation expense, in part driven by headcount reductions, cost reduction initiatives and lower bad debt costs, partially offset
by the inclusion of the results of operations of a security services firm
acquired on July 1, 2007.
Selling, general and administrative expenses in 2007 decreased by $471
million or 3.9%, compared to 2006. The decrease was primarily due to
headcount reductions, cost reduction initiatives, as well as the impact
of gains from real estate sales and lower bad debt costs, partially offset
by higher advertising costs and the inclusion of the results of operations
of the former MCI business subsequent to the close of the merger on
January 6, 2006.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Depreciation and Amortization Expense
Depreciation and amortization expense in 2008 increased $104 million,
or 1.2%, compared to 2007, mainly driven by growth in depreciable telephone plant and non-network software from additional capital spending,
partially offset by lower rates of depreciation as a result of changes in the
estimated useful lives of certain asset classes. Depreciation and amortization expense in 2007 decreased $382 million, or 4.1%, compared to 2006,
mainly driven by lower rates of depreciation as a result of changes in the
estimated useful lives of certain asset classes, partially offset by growth in
depreciable telephone plant from increased capital spending.
Operating Income
Years Ended December 31,
Operating Income
(dollars in millions)
2008
$ 3,862
2007
$
4,494
2006
$
4,391
Segment operating income in 2008 decreased by $632 million, or 14.1%,
compared to 2007 and increased by $103 million, or 2.3% in 2007 compared to 2006, due to the impact of operating revenues and operating
expenses described above. Non-recurring or non-operational items not
included in Verizon Wireline’s segment income totaled $993 million, $726
million and $458 million in 2008, 2007 and 2006, respectively.
Non-recurring or non-operational items in 2008 primarily included severance and severance-related costs, pension settlement losses, costs
associated with continued merger integration initiatives, the results
of operations spun-off during the first quarter of 2008 and the costs
incurred in connection with the spin-off related to network, non-network
software, and other activities (see “Recent Developments”).
Non-recurring or non-operational items in 2007 included costs associated
with severance and other related charges, costs incurred related to network, non-network software, and other activities in connection with the
spin-off of local exchange assets in Maine, New Hampshire and Vermont,
as well as costs associated with merger integration initiatives, principally
related to the acquisition of MCI and other items.
Non-recurring or non-operational items in 2006 included costs associated with severance activity, pension settlement losses, Verizon Center
relocation-related costs and merger integration costs. Merger integration costs primarily included costs related to advertising and re-branding
initiatives, facility exit costs, severance costs, labor and contractor costs
related to information technology integration initiatives and employee
retention expenses.
Other Items
During the fourth quarter of 2007, we recorded charges of $772 million
($477 million after-tax, or $.16 per diluted share) primarily in connection
with workforce reductions of 9,000 employees and related charges, 4,000
of whom were separated in the fourth quarter of 2007 with the remaining
reductions occurring throughout 2008. In addition, we adjusted our actuarial assumptions for severance to align with future expectations.
During 2006, we recorded net pretax severance, pension and benefits
charges of $425 million ($258 million after-tax, or $.09 per diluted share).
These charges included net pretax pension settlement losses of $56 million ($26 million after-tax) related to employees that received lump-sum
distributions primarily resulting from our separation plans. These charges
were recorded in accordance with SFAS No. 88. Also included are pretax
charges of $369 million ($228 million after-tax), for employee severance
and severance-related costs in connection with the involuntary separation of approximately 4,100 employees.
During 2006, we recorded pretax charges of $184 million ($118 million
after-tax, or $.04 per diluted share) in connection with the relocation of
employees and business operations to Verizon Center in Basking Ridge,
New Jersey.
Merger Integration Costs
In 2008, 2007, and 2006, we recorded pretax charges of $172 million ($107
million after-tax, or $.03 per diluted share), $178 million ($112 million aftertax, or $.04 per diluted share) and $232 million ($146 million after-tax, or
$.05 per diluted share), respectively, primarily related to the MCI acquisition that were comprised mainly of systems integration activities.
Telephone Access Lines Spin-off
In 2008 and 2007, we recorded pretax charges of $103 million ($81 million
after-tax, or $.03 per diluted share) and $84 million ($80 million aftertax, or $.03 per diluted share), respectively, for costs incurred related to
network, non-network software, and other activities to enable the operations in Maine, New Hampshire and Vermont to operate on a stand-alone
basis subsequent to the spin-off of our telephone access line operations
in those states, as well as professional advisory and legal fees in connection with this transaction.
Investment Impairment Charges
During 2008, we recorded a pretax charge of $48 million ($31 million aftertax, or $.01 per diluted share) related to an other-than-temporary decline
in the fair value of our investments in certain marketable securities.
Facility and Employee-Related Items
International Taxes
During 2008, we recorded net pretax severance, pension and benefits
charges of $950 million ($588 million after-tax, or $.21 per diluted share).
This charge primarily included $586 million ($363 million after-tax) for
workforce reductions in connection with the separation of approximately
8,600 employees and related charges; 3,500 of whom were separated
in the second half of 2008, with the remaining reductions expected to
occur in 2009, in accordance with SFAS No. 112, Employers’ Accounting
for Postemployment Benefits. Also included are net pretax pension settlement losses of $364 million ($225 million after-tax) related to employees
that received lump-sum distributions primarily resulting from our separation plans. These charges were recorded in accordance with SFAS No. 88,
Employers’ Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits (SFAS No. 88), which requires
that settlement losses be recorded once prescribed payment thresholds
have been reached.
In December 2007, Verizon received a net distribution from Vodafone
Omnitel of approximately $2,100 million and received an additional
$670 million net distribution in April 2008. During 2007, we recorded
$610 million ($.21 per diluted share) of foreign and domestic taxes
and expenses specifically relating to our share of Vodafone Omnitel’s
distributable earnings.
Other
In 2006, we recorded pretax charges of $26 million ($16 million aftertax, or $.01 per diluted share) resulting from the extinguishment of debt
assumed in connection with the MCI merger.
23
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Consolidated Financial Condition
Years Ended December 31,
Cash Flows Provided By (Used In)
Operating Activities:
Continuing operations
Discontinued operations
Investing Activities:
Continuing operations
Discontinued operations
Financing activities:
Continuing operations
Discontinued operations
Increase (Decrease) In Cash and
Cash Equivalents
(dollars in millions)
2008
2007
2006
$ 26,620
–
$ 26,309
(570)
$ 23,030
1,076
(31,579)
–
(16,865)
757
(17,422)
1,806
13,588
–
(11,697)
–
(5,752)
(279)
$ 8,629
$ (2,066)
$
2,459
We use the net cash generated from our operations to fund network
expansion and modernization, repay external financing, pay dividends,
purchase Verizon common stock for treasury and invest in new businesses. Additional external financing is obtained when necessary. While
our current liabilities typically exceed current assets, our sources of funds,
primarily from operations and, to the extent necessary, from readily available external financing arrangements, are sufficient to meet ongoing
operating and investing requirements. We expect that capital spending
requirements will continue to be financed primarily through internally
generated funds. Additional debt or equity financing may be needed to
fund additional development activities or to maintain our capital structure to ensure our financial flexibility.
Although conditions in the credit markets through December 31, 2008
did not have a significant impact on our ability to obtain financing, such
conditions resulted in higher fixed interest rates on borrowings than
those we have paid in recent years. The recent disruption in the global
financial markets has also affected some of the financial institutions with
which we do business. A continuing sustained decline in the stability of
financial institutions could affect our access to financing. We completed
$21.9 billion of new financing in 2008, including the issuance of $9.2 billion of new notes during the fourth quarter of 2008. As of December 31,
2008, more than two-thirds in aggregate principal amount of our total
debt portfolio consisted of fixed rate indebtedness (including the effect
of all interest rate swap agreements on our debt portfolio). Furthermore,
we have had, and continue to have, access to the commercial paper markets, although we were required during a brief period of time in the third
quarter of 2008 to pay interest rates on our commercial paper that were
significantly higher than the rates we have paid in recent years. If the
national or global economy or credit market conditions in general were
to deteriorate further, it is possible that such changes could adversely
affect our cash flows through increased interest costs or our ability to
obtain external financing or to refinance our existing indebtedness.
Cash Flows Provided By (Used In) Operating Activities
Our primary source of funds continues to be cash generated from operations. Net cash provided by operating activities – continuing operations
in 2008 increased $0.3 billion, compared to 2007, primarily due to higher
earnings, partially offset by lower dividends received from Vodafone
Omnitel. The increase in Net cash provided by operating activities – continuing operations in 2007, compared to 2006, was primarily due to the
distributions from Vodafone Omnitel and CANTV, increased operating
cash flows from Domestic Wireless and lower interest payments on outstanding debt, partially offset by changes in working capital.
24
The net changes in cash flow from operating activities – discontinued
operations for the periods presented were primarily due to income taxes
paid in 2007 related to the fourth quarter 2006 disposition of Verizon
Dominicana, as well as the disposal of the discontinued operations in the
fourth quarter of 2006.
Cash Flows Provided By (Used In) Investing Activities
Capital expenditures continue to be our primary use of cash flows from
operations, as they facilitate the introduction of new products and services, enhance responsiveness to competitive challenges and increase
the operating efficiency and productivity of our networks. Capital
spending at Domestic Wireless represents our continuing effort to invest
in this high growth business. We invested $6.5 billion in our Domestic
Wireless business in 2008, compared to $6.5 billion and $6.6 billion in
2007 and 2006, respectively. We invested $9.8 billion in our Wireline business in 2008, compared to $11.0 billion and $10.3 billion in 2007 and
2006, respectively.
In 2008, we invested $15.9 billion in acquisitions and investments in
businesses and wireless licenses. We invested $9.4 billion to acquire
twenty-five 12 MHz licenses in the A block, seventy-seven 12 MHz
licenses in the B Block and seven 22 MHz (nationwide, except Alaska)
licenses in the C block resulting from participation in the FCC’s Auction
73. On August 7, 2008, Verizon Wireless completed its acquisition of Rural
Cellular for cash consideration of $0.9 billion, net of cash acquired after
an exchange transaction with another carrier to complete the required
divestiture of certain markets. In connection with the Alltel transaction,
Verizon Wireless purchased from third parties approximately $5.0 billion
aggregate principal amount of debt obligations of certain subsidiaries
of Alltel for approximately $4.8 billion plus accrued and unpaid interest.
On January 9, 2009, Verizon Wireless paid approximately $5.9 billion for
the equity of Alltel (see “Recent Developments”). In 2007, we paid $0.4
billion, net of cash received, to acquire a network security business and
$0.2 billion to purchase several wireless properties and licenses. In 2006,
we invested $1.4 billion in acquisitions and investments in businesses,
including $2.8 billion to acquire thirteen 20 MHz licenses in connection
with the FCC Advanced Wireless Services auction, as well as the acquisition of other wireless properties. This was offset by MCI’s cash balances of
$2.4 billion we acquired at the date of the merger.
Our short-term investments include cash equivalents held in trust
accounts for payment of employee benefits. In 2008, we decreased
our annual trust funding to $0.1 billion, which is included in Short-term
investments in the consolidated balance sheets. In 2007 and 2006, we
invested $1.7 billion and $1.9 billion, respectively, in short-term investments, primarily to pre-fund active employees’ health and welfare
benefits. Proceeds from the sales of all short-term investments, principally
for the payment of these benefits, were $1.8 billion, $1.9 billion and $2.2
billion in the years 2008, 2007 and 2006, respectively.
Other, net investing activities in 2008 primarily include cash proceeds of
$0.3 billion from the sale of properties and sale of select non-strategic
assets, a cash payment of $0.2 billion in connection with the settlement
of foreign currency forward contracts and $0.1 billion receivable from a
money market fund managed by a third party, which is in the process of
being liquidated and returned to Verizon. Other, net investing activities in
2007 primarily included cash proceeds of $0.8 billion from property sales
and sales of select non-strategic assets, as well as $0.5 billion from the
disposition of our interest in CANTV. Other, net investing activities in 2006
primarily included cash proceeds of $0.3 billion from property sales.
In 2007, investing activities of discontinued operations primarily included
gross proceeds of approximately $1.0 billion in connection with the sale
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
of our investment in TELPRI. In 2006, investing activities of discontinued
operations included net pretax cash proceeds of $2.0 billion in connection with the sale of Verizon Dominicana.
Cash Flows Provided By (Used In) Financing Activities
During 2008, net cash provided by financing activities was $13.6 billion,
compared with the net cash used in financing activities of $11.7 billion in
2007. Proceeds from borrowings during 2008 were approximately $24.0
billion. Cash flow used in financing activities primarily included net debt
repayments of $4.1 billion, dividend payments of $5.0 billion, and purchases of Verizon common stock for treasury of $1.4 billion.
Our total debt increased by $20.8 billion in 2008. Verizon Communications
issued $11.5 billion of fixed rate debt with varying maturities. Domestic
Wireless issued $10.4 billion of debt for the purchase of Alltel’s debt obligations acquired in the second quarter, the purchase of Rural Cellular and
subsequent repayment of Rural Cellular debt, and to raise cash to finance
a portion of the purchase price of the Alltel acquisition which closed on
January 9, 2009. Partially offsetting the increase in total debt, including
an increase in commercial paper outstanding, was the repayment of $4.1
billion of term debt.
In November 2008, Verizon issued $2.0 billion of 8.75% notes due 2018
and $1.3 billion of 8.95% notes due 2039, which resulted in cash proceeds
of $3.2 billion net of discount and issuance costs. In April 2008, Verizon
issued $1.3 billion of 5.25% notes due 2013, $1.5 billion of 6.10% notes
due 2018, and $1.3 billion of 6.90% notes due 2038, resulting in cash
proceeds of $4.0 billion, net of discounts and issuance costs. In February
2008, Verizon issued $0.8 billion of 4.35% notes due 2013, $1.5 billion of
5.50% notes due 2018, and $1.8 billion of 6.40% notes due 2038, resulting
in cash proceeds of $4.0 billion, net of discounts and issuance costs. In
January 2008, Verizon utilized a $0.2 billion fixed rate vendor financing
facility due 2010.
Verizon Wireless’s financing activities included:
• On December 19, 2008, Verizon Wireless and Verizon Wireless Capital
LLC as the borrowers, entered into a $17.0 billion credit facility (Bridge
Facility) in order to complete the acquisition of Alltel and repay certain
of Alltel’s outstanding debt. On December 31, 2008, the Bridge Facility
was reduced to $12.5 billion. On January 9, 2009, Verizon Wireless borrowed $12.4 billion under the Bridge Facility and the unused commitments under the Bridge Facility were terminated. The Bridge Facility
has a maturity date of January 8, 2010. Interest on borrowings under
the Bridge Facility is calculated based on the London Interbank Offered
Rate (LIBOR) for the applicable period, the level of borrowings on specified dates and a margin that is determined by reference to our longterm credit rating issued by Standard and Poor’s Rating Service (S&P). If
the aggregate outstanding principal amount under the Bridge Facility is
greater than $6.0 billion on July 8, 2009 (the 180th day after the closing
date of the Alltel acquisition), we are required to repay $3.0 billion on
that date (less the amount of specified mandatory or optional prepayments that have been made as of that date). The remaining aggregate
outstanding principal amount must be repaid on the maturity date. We
expect to refinance or repay the borrowings under the Bridge Facility
within the next 12 months by utilizing a combination of internally generated free cash flows, net proceeds from the required disposition of
assets in connection with the Alltel acquisition and new borrowings.
• In December 2008, Verizon Wireless obtained net proceeds of $2.4
billion from the issuance of €0.7 billion of 7.625% notes due 2011, €0.5
billion of 8.750% notes due 2015 and £0.6 billion of 8.875% notes due
2018. Concurrent with the borrowings, Verizon Wireless entered into
cross currency swaps primarily to exchange the proceeds from British
Pound Sterling and Euros into U.S. dollars and fix its future interest
and principal payments in U.S. dollars. As a result of these swaps,
Verizon Wireless exchanged the aggregate principal amounts for cash
proceeds of $2.4 billion, which were used to finance a portion of the
purchase price of the Alltel acquisition on January 9, 2009.
• In November 2008, Verizon Wireless obtained proceeds of $3.5 billion,
net of discounts and issuance costs, from the issuance in a private
placement of $1.3 billion of 7.375% notes due November 2013 and
$2.3 billion of 8.500% notes due November 2018.
• On September 30, 2008, Verizon Wireless and Verizon Wireless Capital
LLC entered into a $4.4 billion Three-Year Term Loan Facility Agreement
(Three-Year Term Facility) with Citibank, N.A., as Administrative Agent,
with a maturity date of September 30, 2011. Verizon Wireless borrowed
$4.4 billion under the Three-Year Term Facility in order to repay a portion of the 364-Day Credit Agreement as described below. Of the $4.4
billion, $0.4 billion must be repaid at the end of the first year, $2.0 billion at the end of the second year, and $2.0 billion upon final maturity.
Interest on borrowings under the Three-Year Term Facility is calculated
based on the LIBOR rate for the applicable period and a margin that
is determined by reference to the long-term credit rating of Verizon
Wireless issued by S&P and Moody’s Investors Service (if Moody’s subsequently determines to provide a credit rating for the Three-Year Term
Facility). Borrowings under the Three-Year Term Facility currently bear
interest at a variable rate based on LIBOR plus 100 basis points. The
Three-Year Term Facility includes a requirement to maintain a certain
leverage ratio.
• On June 5, 2008, Verizon Wireless entered into a $7.6 billion 364Day Credit Agreement with Morgan Stanley Senior Funding Inc. as
Administrative Agent, which included a $4.8 billion term facility and
a $2.8 billion delayed draw facility. On June 10, 2008, Verizon Wireless
borrowed $4.8 billion under the 364-Day Credit Agreement in order
to purchase the Alltel debt obligations acquired in the second quarter
and, during the third quarter, borrowed $2.8 billion under the delayed
draw facility to complete the purchase of Rural Cellular and to repay
Rural Cellular’s debt and pay fees and expenses incurred in connection
therewith. During 2008, $4.4 billion of the 364-Day Credit Agreement
was repaid using proceeds from the Three-Year Term Loan Facility;
the remainder of the borrowings under the 364-Day Credit Agreement
was also repaid during 2008.
• On February 4, 2009, Verizon Wireless and Verizon Wireless Capital LLC
co-issued in a private placement $3.5 billion of 5.55% notes due 2014
and $0.8 billion of 5.25% notes due 2012, resulting in cash proceeds of
$4.2 billion, net of discounts and issuance costs. Verizon Wireless will use
the net proceeds from the sale of these notes to repay a portion of the
borrowings outstanding under the Bridge Facility described above.
As of December 31, 2008, we had current assets of $26.1 billion, including
cash and cash equivalents of $9.8 billion and short-term investments of
$0.5 billion. Our current liabilities of $25.9 billion included debt maturing
within one year of $5.0 billion.
Historically, we fund our operations primarily with cash from operations,
cash on hand, and access to the commercial paper markets. However, if
the economic conditions should worsen or we do not maintain our cash
flows from operations, we could see a negative impact on our liquidity in
2009. We believe we can meet our debt service requirements in the next
twelve months as we expect to continue to generate free cash flow and
maintain access to the commercial paper markets.
25
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
As of December 31, 2008, we had approximately $5.6 billion of unused
bank lines of credit consisting of a three-year committed facility that
expires in September 2009. We also entered into a vendor provided credit
facility that provided $0.2 billion of financing capacity. We have a shelf
registration available for the issuance of up to $6.8 billion of additional
unsecured debt or equity securities.
In addition to the repayments of the $7.6 billion 364-Day Credit Agreement,
we made other debt repayments of approximately $4.1 billion in 2008,
including $0.2 billion of 5.55% notes issued by Verizon Northwest Inc.,
$0.1 billion of 6.0% notes issued by Verizon South Inc., $0.3 billion of 6.0%
notes issued by Verizon New York, $0.1 billion of 7.0% notes issued by
Verizon California Inc., $0.3 billion of 6.9% notes issued by Verizon North
Inc., $0.3 billion of 5.65% notes issued by Verizon North Inc., and $3.0
billion of other corporate borrowings, which included the repayment
of Rural Cellular’s debt and $1.0 billion of Verizon Communications Inc.
4.0% notes. As a result of the spin-off of our local exchange business and
related activities in Maine, New Hampshire and Vermont, in March 2008,
our net debt was reduced by approximately $1.4 billion.
Our total debt was reduced by $5.2 billion in 2007. We repaid approximately $1.7 billion of Wireline debt, including the early repayment of
previously guaranteed $0.3 billion 7.0% debentures issued by Verizon
South Inc. and $0.5 billion 7.0% debentures issued by Verizon New
England Inc., as well as approximately $1.6 billion of other borrowings.
Also, we redeemed $1.6 billion principal of our outstanding floating rate
notes, which were called on January 8, 2007, and the $0.5 billion 7.9%
debentures issued by GTE Corporation. Partially offsetting the reduction
in total debt were cash proceeds of $3.4 billion in connection with fixed
and floating rate debt issued during 2007.
Cash of $1.9 billion was used to reduce our debt in 2006. We repaid $6.8
billion of Wireline debt, including premiums associated with the retirement of $5.7 billion of aggregate principal amount of long-term debt
assumed in connection with the MCI merger. The Wireline repayments
also included the early retirement/prepayment of $0.7 billion of longterm debt and $0.2 billion of other long-term debt at maturity. We repaid
approximately $2.5 billion of Domestic Wireless 5.375% fixed rate notes
that matured on December 15, 2006. Also, we redeemed the $1.4 billion accreted principal of our remaining zero-coupon convertible notes
and retired $0.5 billion of other corporate long-term debt at maturity.
These repayments were partially offset by our issuance of long-term debt
resulting in cash proceeds of approximately $4.0 billion, net of discounts,
issuance costs and the receipt of cash proceeds related to hedges on the
interest rate of an anticipated financing. In connection with the spin-off
of our domestic print and Internet yellow pages directories business, we
received net cash proceeds of approximately $2.0 billion and retired debt
in the aggregate principal amount of approximately $7.1 billion.
Our ratio of debt to debt combined with shareowners’ equity was 55.5%
at December 31, 2008 compared to 38.1% at December 31, 2007.
The amount of cash that we need to service our debt substantially
increased with the acquisition of Alltel. Our ability to make payments on
our debt will depend largely upon our cash balances and future operating
performance. While we anticipate the challenging credit environment to
continue in 2009, we do not expect this to have a material impact on our
ability to obtain financing due to our investment grade ratings which we
expect to maintain. The debt securities of Verizon Communications and
its subsidiaries continue to be accorded high ratings by the three primary
rating agencies.
26
S&P assigns an ‘A’ Corporate Credit Rating and an ‘A-1’ short-term debt
rating to Verizon Communications. In early June 2008 S&P revised
its outlook on Verizon’s ratings to negative from stable following the
announcement of the agreement to acquire Alltel. At the same time, S&P
affirmed all Verizon’s ratings, including its ‘A’ Corporate Credit Rating, ‘A-1’
short-term rating and the ‘A’ Corporate Credit Rating on Cellco Partnership
(d/b/a Verizon Wireless). In November 2008 S&P affirmed the ‘A’ Corporate
Credit Rating with a negative outlook on Cellco Partnership and Verizon
Communications.
Moody’s Investors Service (Moody’s) assigns an ‘A3’ long-term debt
rating and a ‘P-2’ short-term debt rating to Verizon Communications. In
June 2008 Moody’s placed Verizon on “Review for Possible Downgrade”
following the announcement of the agreement to acquire Alltel. In
October 2008 Moody’s concluded its review and revised the outlook on
Verizon Communication’s ratings from stable to negative. The ‘P-2’ shortterm rating was affirmed. In November 2008 Moody’s initiated a Cellco
Partnership (d/b/a Verizon Wireless) long-term debt rating of ‘A2’ with a
negative outlook.
Fitch Ratings (Fitch) assigns an ‘A’ long-term Issuer Default Rating and an
‘F1’ short-term rating with stable outlook to Verizon Communications.
In June 2008 Fitch placed Verizon Communications on “Rating Watch
Negative” following the announcement of the Alltel acquisition. In
November 2008 Fitch downgraded the long-term debt rating of Verizon
to ‘A’ from ‘A+’ with a stable outlook, affirmed the ‘F1’ short-term rating
and removed Verizon’s ratings from “Rating Watch Negative”. In that same
action, Fitch initiated a Cellco Partnership (d/b/a Verizon Wireless) rating
at ‘A’ with a stable outlook.
While we do not anticipate a ratings downgrade, the three primary rating
agencies have identified factors which they believe could result in a ratings downgrade for Verizon Communications and/or Cellco Partnership in
the future including sustained leverage levels at Verizon Communications
and/or Cellco Partnership resulting from: (i) diminished wireless operating performance as a result of a weakening economy and competitive
pressures; (ii) failure to achieve significant synergies in the Alltel integration; (iii) accelerated wireline losses; or (iv) a material acquisition or sale
of operations that causes a material deterioration in its credit metrics. A
ratings downgrade would increase the cost of refinancing existing debt
and might constrain Verizon Communications’ access to certain shortterm debt markets.
Both the Verizon Wireless Three-Year Term Credit Facility and $12.5 billion
Bridge Facility contain covenants including a Leverage Ratio of 3.25:1 as
defined in the agreement. Each also contains events of default that are
customary for companies maintaining an investment grade credit rating.
As of December 31, 2008, we and our consolidated subsidiaries were in
compliance with all of our debt covenants.
Common stock has been used from time to time to satisfy some of the
funding requirements of employee and shareowner plans. On February 7,
2008, the Board of Directors replaced the current share buy back program
with a new program for the repurchase of up to 100 million common
shares terminating no later than the close of business on February 28,
2011. The Board also determined that no additional shares were to be
purchased under the prior program. We repurchased $1.4 billion, $2.8 billion and $1.7 billion of our common stock during 2008, 2007 and 2006,
respectively.
As in prior periods, dividend payments were a significant use of cash flows
from operations in 2008. We determine the appropriateness of the level
of our dividend payments on a periodic basis by considering such fac-
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
tors as long-term growth opportunities, internal cash requirements and
the expectations of our shareowners. During the third quarter of 2008,
Verizon’s Board of Directors increased the Company’s quarterly dividend
payments 7.0% to $.460 per share from $.430 per share in 2007, with a
goal of moving to an annual dividend increase model. In the third quarter
of 2007, we increased our dividend payments 6.2% to $.430 per share
from $.405 per share in the first two quarters of 2007.
Increase (Decrease) In Cash and Cash Equivalents
Our Cash and cash equivalents at December 31, 2008 totaled $9.8 billion, an $8.6 billion increase compared to Cash and cash equivalents at
December 31, 2007. Our Cash and cash equivalents at December 31,
2007 totaled $1.2 billion, a $2.1 billion decrease compared to Cash and
cash equivalents at December 31, 2006.
Employee Benefit Plan Funded Status and Contributions
We operate numerous qualified and nonqualified pension plans and other
postretirement benefit plans. These plans primarily relate to our domestic
business units. We contributed $332 million, $612 million and $451 million in 2008, 2007 and 2006, respectively, to our qualified pension plans.
We also contributed $155 million, $125 million and $117 million to our
nonqualified pension plans in 2008, 2007 and 2006, respectively.
Based on the funded status of the plans at December 31, 2008, we anticipate making qualified pension trust contributions of $300 million in 2009.
Our estimate of required qualified pension trust contributions for 2010 is
approximately $800 million. The estimated contribution in 2010 is based
on a range of $600 million to $900 million which depends primarily upon
asset returns and interest rates in 2009. Nonqualified pension contributions are estimated to be approximately $120 million for 2009 and $130
million for 2010, respectively.
Contributions to our other postretirement benefit plans generally relate
to payments for benefits on an as-incurred basis since the other postretirement benefit plans do not have funding requirements similar to the
pension plans. We contributed $1,227 million, $1,048 million and $1,099
million to our other postretirement benefit plans in 2008, 2007 and 2006,
respectively. Contributions to our other postretirement benefit plans are
estimated to be approximately $1,770 million in 2009 and $1,890 million
in 2010.
Refer to Note 1 in the consolidated financial statements for a discussion
of the adoption of SFAS No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements
No. 87, 88, 106, and 132(R), which was effective December 31, 2006.
Leasing Arrangements
We are the lessor in leveraged and direct financing lease agreements for
commercial aircraft and power generating facilities, which comprise the
majority of the portfolio along with telecommunications equipment, real
estate property, and other equipment. These leases have remaining terms
up to 42 years as of December 31, 2008. Minimum lease payments receivable represent unpaid rentals, less principal and interest on third-party
nonrecourse debt relating to leveraged lease transactions. Since we have
no general liability for this debt, which holds a senior security interest
in the leased equipment and rentals, the related principal and interest
have been offset against the minimum lease payments receivable in
accordance with GAAP. All recourse debt is reflected in our consolidated
balance sheets.
Off Balance Sheet Arrangements and Contractual Obligations
Contractual Obligations and Commercial Commitments
The following table provides a summary of our contractual obligations and commercial commitments at December 31, 2008. Additional detail about
these items is included in the notes to the consolidated financial statements.
(dollars in millions)
Contractual Obligations
Long-term debt(1)
Capital lease obligations (see Note 9)
Total long-term debt, including current maturities
Interest on long-term debt(1)
Operating leases (see Note 9)
Purchase obligations (see Note 20)
Income tax audit settlements(2)
Other long-term liabilities(3)
Total contractual obligations
Total
$ 50,075
390
50,465
36,426
7,302
737
97
4,950
$ 99,977
Payments Due By Period
Less than
1 year
1-3 years
3-5 years
More than
5 years
$
$
3,443
63
3,506
3,080
1,620
435
97
2,160
$ 10,898
$ 10,533
132
10,665
5,786
2,378
237
–
2,790
$ 21,856
$
9,854
90
9,944
4,430
1,309
55
–
–
$ 15,738
$
26,245
105
26,350
23,130
1,995
10
–
–
51,485
(1)Long-term debt includes a $4,440 million Three-Year Term Facility Agreement which currently bears interest based on LIBOR plus 100 basis points (see Note 10).
(2)Income tax audit settlements includes gross unrecognized tax benefits of $40 million as determined under Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48) and related gross interest of $57 million. We are not able to make a reliable estimate of when the balance of $2,582 million of unrecognized tax benefits
and related interest and penalties will be settled with the respective taxing authorities until issues or examinations are further developed (see Note 16).
(3)Other long-term liabilities include estimated qualified pension plan contributions of $300 million in 2009 and $800 million in 2010. The estimated contribution in 2010 is based on a range of
$600 million to $900 million which depends primarily upon asset returns and interest rates in 2009 (see Note 15).
27
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Guarantees
In connection with the execution of agreements for the sale of businesses
and investments, Verizon ordinarily provides representations and warranties to the purchasers pertaining to a variety of nonfinancial matters, such
as ownership of the securities being sold, as well as financial losses.
As of December 31, 2008, letters of credit totaling approximately $200
million were executed in the normal course of business, which support
several financing arrangements and payment obligations to third parties.
Market Risk
We are exposed to various types of market risk in the normal course of
business, including the impact of interest rate changes, foreign currency
exchange rate fluctuations, changes in equity investment and commodity
prices and changes in corporate tax rates. We employ risk management
strategies which may include the use of a variety of derivatives, including
cross currency swaps, foreign currency forwards and collars, equity
options, interest rate and commodity swap agreements and interest rate
locks. We do not hold derivatives for trading purposes.
It is our general policy to enter into interest rate, foreign currency and
other derivative transactions only to the extent necessary to achieve our
desired objectives in limiting our exposure to the various market risks. Our
objectives include maintaining a mix of fixed and variable rate debt to
lower borrowing costs within reasonable risk parameters and to protect
against earnings and cash flow volatility resulting from changes in market
conditions. We do not hedge our market risk exposure in a manner that
would completely eliminate the effect of changes in interest rates and
foreign exchange rates on our earnings. We do not expect that our net
income, liquidity and cash flows will be materially affected by these risk
management strategies.
Interest Rate Risk
The table that follows summarizes the fair values of our long-term debt
and interest rate and cross currency swap derivatives as of December 31,
2008 and 2007. The table also provides a sensitivity analysis of the estimated fair values of these financial instruments assuming 100-basis-point
upward and downward shifts in the yield curve. Our sensitivity analysis
does not include the fair values of our commercial paper and bank loans,
if any, because they are not significantly affected by changes in market
interest rates.
(dollars in millions)
At December 31, 2008
Long-term debt and related
derivatives
Fair Value
assuming
+100 basis
point shift
Fair Value
Fair Value
assuming
–100 basis
point shift
$
51,258
$
48,465
$
54,444
$
31,930
$
30,154
$
33,957
At December 31, 2007
Long-term debt and related
derivatives
28
Alltel Interest Rate Swaps
In connection with the Alltel acquisition (see “Recent Developments”),
Verizon Wireless acquired seven interest rate swap agreements with a
notional value of $9.5 billion that pay fixed and receive variable rates
based on three-month and one-month LIBOR with maturities ranging
from 2009 to 2013. Until they are terminated, the swap agreements are
guaranteed by Verizon Wireless. Upon closing of the acquisition, these
swap agreements will be recorded at fair value as of the closing date as
part of the purchase price allocation and subsequent changes in the fair
value will be recorded in earnings. Based on recent trends in the credit
markets, changes in interest rates may have a significant impact on our
earnings as long as the contracts are outstanding. We estimate that a
10-basis point change in rates can result in an approximately $30 million impact on pretax earnings. We anticipate that these contracts will be
settled during the first half of 2009.
Foreign Currency Translation
The functional currency of our foreign operations is generally the local currency. For these foreign entities, we translate income statement amounts
at average exchange rates for the period, and we translate assets and
liabilities at end-of-period exchange rates. We record these translation
adjustments in Accumulated other comprehensive loss, a separate component of Shareowners’ Investment, in our consolidated balance sheets.
We report exchange gains and losses on intercompany foreign currency
transactions of a long-term nature in Accumulated other comprehensive loss. Other exchange gains and losses are reported in income. At
December 31, 2008, our primary translation exposure was to the British
Pound Sterling, the Euro and the Australian Dollar.
During 2008, we entered into cross currency swaps designated as cash
flow hedges to exchange the net proceeds from the December 18, 2008
Verizon Wireless and Verizon Wireless Capital LLC offering from British
Pound Sterling and Euros into U.S. dollars, to fix our future interest and
principal payments in U.S. dollars as well as mitigate the impact of foreign currency transaction gains or losses. We record these contracts at
fair value and any gains or losses on these contracts will, over time, offset
the gains or losses on the underlying debt obligations.
During 2007, we entered into foreign currency forward contracts to
hedge a portion of our net investment in Vodafone Omnitel. Changes
in fair value of these contracts due to Euro exchange rate fluctuations
are recognized in Accumulated other comprehensive loss and partially
offset the impact of foreign currency changes on the value of our net
investment. During 2008, our positions in these foreign currency forward
contracts were settled. As of December 31, 2008, Accumulated other
comprehensive loss includes unrecognized losses of approximately $166
million ($108 million after-tax) related to these hedge contracts, which
along with the unrealized foreign currency translation balance on the
investment hedged, remain in Accumulated other comprehensive loss
until the investment is sold.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Critical Accounting Estimates and Recent
Accounting Pronouncements
Critical Accounting Estimates
A summary of the critical accounting estimates used in preparing our
financial statements is as follows:
• Goodwill and Other intangible assets, net are a significant component of our consolidated assets. At December 31, 2008, goodwill at
Wireline and Domestic Wireless was $4,738 million and $1,297 million,
respectively. As required by SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142), goodwill is periodically evaluated for impairment. The evaluation of goodwill for impairment is primarily based
on a discounted cash flow model that includes estimates of future
cash flows. There is inherent subjectivity involved in estimating future
cash flows, which can have a material impact on the amount of any
potential impairment. Wireless licenses of $61,974 million represent
the largest component of our intangible assets. Our wireless licenses
are indefinite-lived intangible assets, and as required by SFAS No. 142,
are not amortized but are periodically evaluated for impairment. Any
impairment loss would be determined by comparing the aggregated
fair value of the wireless licenses with the aggregated carrying value.
The direct value approach is used to determine fair value by estimating
future cash flows.
• We maintain benefit plans for most of our employees, including pension and other postretirement benefit plans. At December 31, 2008,
in the aggregate, pension plan benefit obligations exceeded the fair
value of pension plan assets which will result in higher future pension
plan expense. Other postretirement benefit plans have larger benefit
obligations than plan assets, resulting in expense. Significant benefit
plan assumptions, including the discount rate used, the long-term rate
of return on plan assets and health care trend rates are periodically
updated and impact the amount of benefit plan income, expense,
assets and obligations. A sensitivity analysis of the impact of changes
in these assumptions on the benefit obligations and expense (income)
recorded as of December 31, 2008 and for the year then ended pertaining to Verizon’s pension and postretirement benefit plans is provided in the table below.
(dollars in millions)
Benefit obligation
Expense increase
Percentage
increase
(decrease) for the
point
(decrease) at
year ended
change December 31, 2008 December 31, 2008
Pension plans
discount rate*
Long-term rate of return
on pension plan assets
Postretirement plans
discount rate*
Long-term rate of return
on postretirement
plan assets
Health care trend rates
+ 0.50
- 0.50
$ (1,281)
1,399
$
(29)
41
+ 1.00
- 1.00
–
–
(375)
375
+ 0.50
- 0.50
(1,401)
1,547
(99)
110
+ 1.00
- 1.00
–
–
(39)
39
+ 1.00
- 1.00
2,891
(2,399)
460
(318)
• Our current and deferred income taxes, and associated valuation
allowances, are impacted by events and transactions arising in the
normal course of business as well as in connection with the adoption of new accounting standards, acquisitions of businesses and
non-recurring items. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including
estimates of the timing and realization of deferred income tax assets
and the timing of income tax payments. We account for tax benefits
taken or expected to be taken in our tax returns in accordance with FIN
48, which requires the use of a two-step approach for recognizing and
measuring tax benefits taken or expected to be taken in a tax return
and disclosures regarding uncertainties in income tax positions. Actual
collections and payments may materially differ from these estimates as
a result of changes in tax laws as well as unanticipated future transactions impacting related income tax balances.
• Verizon’s plant, property and equipment balance represents a significant component of our consolidated assets. Depreciation expense
on Verizon’s local telephone operations is principally based on the
composite group remaining life method and straight-line composite
rates, which provides for the recognition of the cost of the remaining
net investment in telephone plant, less anticipated net salvage value,
over the remaining asset lives. We depreciate other plant, property
and equipment generally on a straight-line basis over the estimated
useful life of the assets. Changes in the remaining useful lives of assets
as a result of technological change or other changes in circumstances,
including competitive factors in the markets where we operate, can
have a significant impact on asset balances and depreciation expense.
Recent Accounting Pronouncements
In December 2008, the FASB issued FSP FAS No. 132 (R)-1, Employers’
Disclosures about Postretirement Benefit Plan Assets (FSP 132 (R)-1). FSP
132 (R)-1 requires Verizon, as plan sponsor, to provide improved disclosures about plan assets, including categories of plan assets, nature and
amount of concentrations of risk and disclosure about fair value measurements of plan assets, similar to those required by SFAS No. 157, Fair
Value Measurements. FAS 132 (R)-1 is effective for fiscal years ending after
December 15, 2009. We do not expect that the adoption of FSP 132 (R)-1
will have a significant impact on our consolidated financial statements.
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the
Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 removes the requirement under SFAS No. 142, Goodwill and Other Intangible Assets to consider
whether an intangible asset can be renewed without substantial cost or
material modifications to the existing terms and conditions, and replaces
it with a requirement that an entity consider its own historical experience
in renewing similar arrangements, or a consideration of market participant assumptions in the absence of historical experience. FSP 142-3 also
requires entities to disclose information that enables users of financial
statements to assess the extent to which the expected future cash flows
associated with the asset are affected by the entity’s intent and/or ability
to renew or extend the arrangement. We were required to adopt FSP
142-3 effective January 1, 2009 on a prospective basis. The adoption of
FSP 142-3 on January 1, 2009 did not have an impact on our consolidated
financial statements.
*The discount rate assumptions at December 31, 2008 were determined from hypothetical
double A yield curves represented by a series of annualized individual discount rates developed using actual bonds available in the market. From the yield curves a single equivalent
discount rate is determined at which the future stream of benefit payments could be settled.
Each bond issue included in developing the yield curves is required to have a rating of double
A or better by a nationally recognized rating agency and be non-callable with at least $150
million par outstanding.
29
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133, (SFAS No. 161). This statement requires additional disclosures for
derivative instruments and hedging activities that include how and why
an entity uses derivatives, how these instruments and the related hedged
items are accounted for under SFAS No. 133 and related interpretations,
and how derivative instruments and related hedged items affect the
entity’s financial position, results of operations and cash flows. SFAS No.
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The adoption of SFAS No.
161 on January 1, 2009 did not have an impact on our consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations,
(SFAS No. 141(R)), to replace SFAS No. 141, Business Combinations. SFAS No.
141(R) requires the use of the acquisition method of accounting, defines
the acquirer, establishes the acquisition date and broadens the scope
to all transactions and other events in which one entity obtains control
over one or more other businesses. This statement is effective for business combinations or transactions entered into for fiscal years beginning
on or after December 15, 2008. Upon the adoption of SFAS No. 141(R)
we will be required to expense certain transaction costs and related fees
associated with business combinations that were previously capitalized.
This will result in additional expenses being recognized relating to the
2009 closing of the Alltel transaction. In addition, with the adoption of
SFAS No. 141(R) changes to valuation allowances for deferred income tax
assets and adjustments to unrecognized tax benefits generally will be
recognized as adjustments to income tax expense rather than goodwill.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements – an amendment of ARB No. 51, (SFAS
No. 160). SFAS No. 160 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the retained interest
and gain or loss when a subsidiary is deconsolidated. This statement is
effective for financial statements issued for fiscal years beginning on or
after December 15, 2008 which will be applied prospectively, except
for the presentation and disclosure requirements which will be applied
retrospectively for all periods presented. Upon the initial adoption of
this statement we will change the classification and presentation of
Noncontrolling Interest in our financial statements, which we currently
refer to as minority interest. Additionally, we conduct certain business
operations in certain markets through non-wholly owned entities. Any
changes in these ownership interests may be required to be measured
at fair value and recognized as a gain or loss, if any, in earnings. SFAS No.
160 will also result in a lower effective income tax rate for the Company
due to the inclusion of income attributable to noncontrolling interest in
income before the provision for income taxes. However, the income tax
provision will not be adjusted as a result of SFAS No. 160.
Refer to Note 1 in the consolidated financial statements for a discussion
of the accounting pronouncements adopted during 2008.
Other Factors That May Affect Future Results
Recent Developments
Alltel Corporation
On June 5, 2008, Verizon Wireless entered into an agreement and plan
of merger with Alltel and its controlling stockholder, Atlantis Holdings
LLC, an affiliate of private investment firms TPG Capital and GS Capital
Partners, to acquire 100% of the equity of Alltel in an all-cash merger.
After satisfying all closing conditions, including receiving the required
regulatory approvals, Verizon Wireless closed the acquisition on January
9, 2009 and paid approximately $5.9 billion for the equity of Alltel.
Immediately prior to the closing, the Alltel debt associated with the
transaction, net of cash, was approximately $22.2 billion. Alltel provides
wireless voice and advanced data services to residential and business
customers in 34 states.
In connection with this transaction, on June 10, 2008, Verizon Wireless
purchased from third parties approximately $5.0 billion aggregate principal amount of debt obligations of certain subsidiaries of Alltel for
approximately $4.8 billion plus accrued and unpaid interest. These debt
obligations are included in the amount of Alltel net debt, referenced
above, immediately prior to the closing referenced above.
Rural Cellular Corporation
On August 7, 2008, Verizon Wireless acquired 100% of the outstanding
common stock and redeemed all of the preferred stock of Rural Cellular in
a cash transaction. Rural Cellular was a wireless communications service
provider operating under the trade name of “Unicel,” focusing primarily
on rural markets in the United States. Verizon Wireless believes that the
acquisition will further enhance its network coverage in markets adjacent
to its existing service areas and will enable Verizon Wireless to achieve
operational benefits through realizing synergies in reduced roaming and
other operating expenses. Under the terms of the acquisition agreement,
Verizon Wireless paid Rural Cellular’s common shareholders $728 million
in cash ($45 per share). Additionally, all classes of Rural Cellular’s preferred
shareholders received cash in the aggregate amount of $571 million.
As part of its approval process for the Rural Cellular acquisition, the FCC
and Department of Justice (DOJ) required the divestiture of six operating markets, including all of Rural Cellular’s operations in Vermont
and New York as well as its operations in Okanogan and Ferry, WA (the
Divestiture Markets). On December 22, 2008, Verizon Wireless completed an exchange transaction with AT&T. Pursuant to the terms of the
exchange agreement, as amended, AT&T received the assets relating to
the Divestiture Markets and a cellular license for part of the Madison, KY
market. In exchange, Verizon Wireless received cellular operating markets
in Madison and Mason, KY and 10 MHz PCS licenses in Las Vegas, NV,
Buffalo, NY, Erie, PA, Sunbury-Shamokin, PA and Youngstown, OH. Verizon
Wireless also received AT&T’s minority interests in three entities in which
Verizon Wireless holds interests plus a cash payment. The preliminary
aggregate value of properties exchanged was approximately $500 million. In addition, subject to FCC approval, Verizon Wireless will acquire
PCS licenses in Franklin, NY (except Franklin county) and the entire state
of Vermont from AT&T in a separate cash transaction that is expected to
close in the first half of 2009.
Telephone Access Lines Spin-off
On January 16, 2007, we announced a definitive agreement with FairPoint
Communications, Inc. (FairPoint) providing for Verizon to establish a separate entity for its local exchange and related business assets in Maine,
New Hampshire and Vermont, spin-off that new entity into a newly
formed company, known as Northern New England Spinco Inc. (Spinco),
to Verizon’s shareowners, and immediately merge it with and into
30
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
FairPoint. On March 31, 2008, we completed the spin-off of the shares of
Spinco to Verizon shareowners and the merger of Spinco with FairPoint,
resulting in Verizon shareowners collectively owning approximately 60
percent of FairPoint common stock. FairPoint issued approximately 53.8
million shares of FairPoint common stock to Verizon shareowners in
the merger, and Verizon shareowners received one share of FairPoint
common stock for every 53.0245 shares of Verizon common stock they
owned as of March 7, 2008. FairPoint paid cash in lieu of any fraction of
a share of FairPoint common stock. As a result of the spin-off, our net
debt was reduced by approximately $1.4 billion. Both the spin-off and
merger qualify as tax-free transactions, except for the cash payments for
fractional shares which are generally taxable.
Environmental Matters
During 2003, under a government-approved plan, remediation commenced at the site of a former Sylvania facility in Hicksville, New York
that processed nuclear fuel rods in the 1950s and 1960s. Remediation
beyond original expectations proved to be necessary and a reassessment
of the anticipated remediation costs was conducted. A reassessment of
costs related to remediation efforts at several other former facilities was
also undertaken. In September 2005, the Army Corps of Engineers (ACE)
accepted the Hicksville site into the Formerly Utilized Sites Remedial
Action Program. This may result in the ACE performing some or all of the
remediation effort for the Hicksville site with a corresponding decrease
in costs to Verizon. To the extent that the ACE assumes responsibility for
remedial work at the Hicksville site, an adjustment to a reserve previously
established for the remediation may be made. Adjustments to the reserve
may also be necessary based upon actual conditions discovered during
the remediation at any of the sites requiring remediation.
New York Recovery Funding
In August 2002, President Bush signed the Supplemental Appropriations
bill that included $5.5 billion in New York recovery funding. Of that
amount, approximately $750 million was allocated to cover utility restoration and infrastructure rebuilding as a result of the September 11th
terrorist attacks on lower Manhattan. These funds will be distributed
through the Lower Manhattan Development Corporation and Empire
State Development Corporation (ESDC) following an application and
audit process. As of September 2004, we had applied for reimbursement
of approximately $266 million under Category One and in 2004 and 2005
we applied for reimbursement of an additional $139 million of Category
Two losses. Category One funding relates to Emergency and Temporary
Service Response while Category Two funding is for permanent restoration and infrastructure improvement. According to the plan, permanent
restoration is reimbursed up to 75% of the loss. On November 3, 2005, we
received the results of preliminary audit findings disallowing all but $49.9
million of our $266 million of Category One application. On December 8,
2005, we provided a detailed rebuttal to the preliminary audit findings.
We received a copy of the final audit report for Verizon’s Category One
applications largely confirming the preliminary audit findings and, on
January 4, 2007, we filed an appeal. That appeal is pending. On November
9, 2007, Verizon submitted an additional Category Two application for
approximately $16 million. ESDC has approved approximately $17 million
in advances to Verizon on its Category Two applications. Based on the
progress of these audits, Verizon recorded a portion of these advances to
income in June 2008. The Category Two audits remain pending.
Regulatory and Competitive Trends
Competition and Regulation
Technological, regulatory and market changes have provided Verizon
both new opportunities and challenges. These changes have allowed
Verizon to offer new types of services in an increasingly competitive
market. At the same time, they have allowed other service providers
to broaden the scope of their own competitive offerings. Current and
potential competitors for network services include other telephone
companies, cable companies, wireless service providers, foreign telecommunications providers, satellite providers, electric utilities, Internet service
providers, providers of VoIP services, and other companies that offer network services using a variety of technologies. Many of these companies
have a strong market presence, brand recognition and existing customer
relationships, all of which contribute to intensifying competition and may
affect our future revenue growth. Many of our competitors also remain
subject to fewer regulatory constraints than Verizon.
We are unable to predict definitively the impact that the ongoing
changes in the telecommunications industry will ultimately have on our
business, results of operations or financial condition. The financial impact
will depend on several factors, including the timing, extent and success
of competition in our markets, the timing and outcome of various regulatory proceedings and any appeals, and the timing, extent and success of
our pursuit of new opportunities.
FCC Regulation
The FCC has jurisdiction over our interstate telecommunications services and other matters for which the FCC has jurisdiction under the
Communications Act of 1934, as amended (Communications Act). The
Communications Act generally provides that we may not charge unjust
or unreasonable rates, or engage in unreasonable discrimination when
we are providing services as a common carrier, and regulates some of the
rates, terms and conditions under which we provide certain services. The
FCC also has adopted regulations governing various aspects of our business including: (i) use and disclosure of customer proprietary network
information; (ii) telemarketing; (iii) assignment of telephone numbers to
customers; (iv) provision to law enforcement agencies of the capability to
obtain call identifying information and call content information from calls
pursuant to lawful process; (v) accessibility of services and equipment to
individuals with disabilities if readily achievable; (vi) interconnection with
the networks of other carriers; and (vii) customers’ ability to keep (or “port”)
their telephone numbers when switching to another carrier. In addition,
we pay various fees to support other FCC programs, such as the universal
service program discussed below. Changes to these mandates, or the
adoption of additional mandates, could require us to make changes to
our operations or otherwise increase our costs of compliance.
Broadband
The FCC has adopted a series of orders that recognize the competitive
nature of the broadband market and impose lesser regulatory requirements on broadband services and facilities than apply to narrowband
or traditional telephone services. With respect to facilities, the FCC has
determined that certain unbundling requirements that apply to narrowband facilities do not apply to broadband facilities such as fiber to the
premise loops and packet switches. With respect to services, the FCC has
concluded that broadband Internet access services offered by telephone
companies and their affiliates qualify as largely deregulated information
services. The same order also concluded that telephone companies may
offer the underlying broadband transmission services that are used as an
input to Internet access services through private carriage arrangements
on negotiated commercial terms. The order was upheld on appeal. In addition, a Verizon petition asking the FCC to forbear from applying common
31
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
carrier regulation to certain broadband services sold primarily to larger
business customers when those services are not used for Internet access
was deemed granted by operation of law when the FCC did not deny the
petition by the statutory deadline. The relief has been upheld on appeal,
but is subject to a continuing challenge before the FCC.
Video
The FCC has a body of rules that apply to cable operators under Title VI
of the Communications Act of 1934, and these rules also generally apply
to telephone companies that provide cable services over their networks.
In addition, companies that provide cable service over a cable system
generally must obtain a local cable franchise. The FCC has interpreted the
Cable Act to limit the franchise fees and other requirements that local
franchise authorities may impose on cable operators and has found that
some prior practices of franchise authorities constituted an unreasonable
refusal to award a competitive local franchise under the requirements of
federal law. This order has been upheld on appeal.
Interstate Access Charges and Intercarrier Compensation
The current framework for interstate access rates was established in the
Coalition for Affordable Local and Long Distance Services (CALLS) plan
which the FCC adopted on May 31, 2000. The CALLS plan has three main
components. First, it establishes portable interstate access universal
service support of $650 million for the industry that replaces implicit support previously embedded in interstate access charges. Second, the plan
simplifies the patchwork of common line charges into one subscriber line
charge (SLC) and provides for de-averaging of the SLC by zones and class
of customers. Third, the plan set into place a mechanism to transition to
a set target of $.0055 per minute for switched access services. Once that
target rate is reached, local exchange carriers are no longer required to
make further annual price cap reductions to their switched access prices.
As a result of tariff adjustments which became effective in July 2003, virtually all of our switched access lines reached the $.0055 benchmark.
The FCC currently is conducting a broad rulemaking proceeding to consider new rules governing intercarrier compensation including, but not
limited to, access charges, compensation for Internet traffic and reciprocal compensation for local traffic. The FCC has sought comments about
intercarrier compensation in general and requested input on a number
of specific reform proposals. On November 5, 2008, the FCC issued
an order on remand relating to intercarrier compensation for dial-up
Internet-bound traffic. In April 2001, the FCC had found that this traffic
is not subject to reciprocal compensation under Section 251(b)(5) of the
Telecommunications Act of 1996. Instead, in that order, the FCC established federal rates per minute for this traffic that declined from $.0015 to
$.0007 over a three-year period, and required incumbent local exchange
carriers to offer to both bill and pay reciprocal compensation for local
traffic at the same rate as they are required to pay on Internet-bound
traffic. The U.S. Court of Appeals for the D.C. Circuit rejected part of the
FCC’s rationale, but declined to vacate the order while it is on remand.
On July 8, 2008, the D.C. Circuit issued an order requiring the FCC to issue
its order on remand by November 5, 2008. The FCC’s November 2008
order provided a new rationale to support the compensation regime
the FCC had announced in April 2001. The November 2008 order is now
on appeal to the U.S. Court of Appeals for the D.C. Circuit. Disputes also
remain pending in a number of forums relating to the appropriate compensation for Internet-bound traffic during previous periods under the
terms of our interconnection agreements with other carriers.
32
The FCC is also conducting a rulemaking proceeding to address the
regulation of services that use Internet protocol. The issues raised in the
rulemaking as well as in several petitions currently pending before the
FCC include whether, and under what circumstances, access charges
should apply to voice or other Internet protocol services and the scope
of federal and state commission authority over these services. The FCC
previously has held that one provider’s peer-to-peer Internet protocol
service that does not use the public switched network is an interstate
information service and is not subject to access charges, while a service
that utilizes Internet protocol for only one intermediate part of a call’s
transmission is a telecommunications service that is subject to access
charges. The FCC also declared the services offered by one provider of
a voice over Internet protocol service to be jurisdictionally interstate and
stated that its conclusion would apply to other services with similar characteristics. This order was affirmed on appeal.
The FCC also has adopted rules for special access services that provide for
pricing flexibility and ultimately the removal of services from price regulation when prescribed competitive thresholds are met. More than half of
special access revenues are now removed from price regulation. The FCC
currently has a rulemaking proceeding underway to update the public
record concerning its pricing flexibility rules and to determine whether
any changes to those rules are warranted.
Universal Service
The FCC also has a body of rules implementing the universal service
provisions of the Telecommunications Act of 1996, including rules governing support to rural and non-rural high-cost areas, support for low
income subscribers and support for schools, libraries and rural health
care. The FCC’s current rules for support to high-cost areas served by
larger “non-rural” local telephone companies were previously remanded
by U.S. Court of Appeals for the Tenth Circuit, which had found that the
FCC had not adequately justified these rules. The FCC has initiated a
rulemaking proceeding in response to the court’s remand, but its rules
remain in effect pending the results of the rulemaking. On April 29, 2008,
the FCC adopted a cap on the amount of support competitive carriers
(including all wireless carriers) may receive. That cap is the subject of a
pending appeal. The FCC is considering additional changes to the highcost portion of the universal service fund but has not to date taken
industry-wide action. However, in its November 4, 2008 order approving
Verizon Wireless’s acquisition of Alltel, the FCC required Verizon Wireless
to phase out the high-cost support the merged company receives from
the universal service fund by 20 percent during the first year following
completion of the acquisition and by an additional 20 percent for each
of the following three years, after which no support will be provided. In
addition, the FCC is considering other changes to the rules governing
contributions to, and disbursements from, the fund. Any change in the
current rules could result in a change in the contribution that local telephone companies, wireless carriers or others must make and that would
have to be collected from customers, or in the amounts that these providers receive from the fund.
Unbundling of Network Elements
Under Section 251 of the Telecommunications Act of 1996, incumbent local exchange carriers are required to provide competing carriers
with access to components of their network on an unbundled basis,
known as UNEs, where certain statutory standards are satisfied. The
Telecommunications Act of 1996 also adopted a cost-based pricing standard for these UNEs, which the FCC interpreted as allowing it to impose
a pricing standard known as “total element long run incremental cost”
or “TELRIC.” The FCC’s rules defining the unbundled network elements
that must be made available at TELRIC prices have been overturned
on multiple occasions by the courts. In its most recent order issued in
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
response to these court decisions, the FCC eliminated the requirement to
unbundle mass market local switching on a nationwide basis, and established criteria for determining whether high-capacity loops, transport or
dark fiber transport must be unbundled in individual wire centers. The
FCC also eliminated the obligation to provide dark fiber loops and found
that there is no obligation to provide UNEs exclusively for wireless or long
distance service. The decision was upheld on appeal.
As noted above, the FCC has concluded that the requirement under
Section 251 of the Telecommunications Act of 1996 to provide unbundled network elements at TELRIC prices generally does not apply with
respect to broadband facilities, such as fiber to the premises loops, the
packet-switched capabilities of hybrid loops and packet switching. The
FCC also has held that any separate unbundling obligations that may be
imposed by Section 271 of the Telecommunications Act of 1996 do not
apply to these same facilities. Those decisions were upheld on appeal.
Wireless Services
The FCC regulates the licensing, construction, operation, acquisition and
transfer of wireless communications systems, including the systems that
Verizon Wireless operates, pursuant to the Communications Act, other
legislation, and the FCC’s rules. The FCC and Congress continuously consider changes to these laws and rules. Adoption of new laws or rules
may raise the cost of providing service or require modification of Verizon
Wireless’s business plans or operations.
To use the radio frequency spectrum, wireless communications systems
must be licensed by the FCC to operate the wireless network and mobile
devices in assigned spectrum segments. Verizon Wireless holds FCC
licenses to operate in several different radio services, including the cellular radiotelephone service, personal communications service, wireless
communications service, and point-to-point radio service. The technical
and service rules, the specific radio frequencies and amounts of spectrum we hold, and the sizes of the geographic areas we are authorized
to operate in, vary for each of these services. However, all of the licenses
Verizon Wireless holds allow it to use spectrum to provide a wide range
of mobile and fixed communications services, including both voice and
data services, and Verizon Wireless operates a seamless network that utilizes those licenses to provide services to customers. Because the FCC
issues licenses for only a fixed time, generally 10 years, Verizon Wireless
must periodically seek renewal of those licenses. Although the FCC has
routinely renewed all of Verizon Wireless’s licenses that have come up for
renewal to date, challenges could be brought against the licenses in the
future. If a wireless license were revoked or not renewed upon expiration, Verizon Wireless would not be permitted to provide services on the
licensed spectrum in the area covered by that license.
The FCC has also imposed specific mandates on carriers that operate
wireless communications systems, which increase Verizon Wireless’s costs.
These mandates include requirements that Verizon Wireless: (i) meet
specific construction and geographic coverage requirements during
the license term; (ii) meet technical operating standards that, among
other things, limit the radio frequency radiation from mobile devices
and antennas; (iii) deploy “Enhanced 911” wireless services that provide
the wireless caller’s number, location and other information to a state or
local public safety agency that handles 911 calls; (iv) provide roaming
services to other wireless service providers; and (v) comply with regulations for the construction of transmitters and towers that, among other
things, restrict siting of towers in environmentally sensitive locations and
in places where the towers would affect a site listed or eligible for listing
on the National Register of Historic Places. Changes to these mandates
could require Verizon Wireless to make changes to operations or increase
its costs of compliance. In its November 4, 2008 order approving Verizon
Wireless’s acquisition of Alltel, the FCC adopted conditions that impose
additional requirements on Verizon Wireless in its provision of Enhanced
911 services and roaming services.
The Communications Act imposes restrictions on foreign ownership of
U.S. wireless systems. The FCC has approved the interest that Vodafone
Group Plc holds, through various of its subsidiaries, in Verizon Wireless.
The FCC may need to approve any increase in Vodafone’s interest or the
acquisition of an ownership interest by other foreign entities. In addition,
as part of the FCC’s approval of Vodafone’s ownership interest, Verizon
Wireless, Verizon and Vodafone entered into an agreement with the
U.S. Department of Defense, Department of Justice and Federal Bureau
of Investigation which imposes national security and law enforcement-related obligations on the ways in which Verizon Wireless stores
information and otherwise conducts its business.
Verizon Wireless anticipates that it will need additional spectrum to meet
future demand. It can meet spectrum needs by purchasing licenses or
leasing spectrum from other licensees, or by acquiring new spectrum
licenses from the FCC. Under the Communications Act, before Verizon
Wireless can acquire a license from another licensee in order to expand
its coverage or its spectrum capacity in a particular area, it must file an
application with the FCC, and the FCC can grant the application only after
a period for public notice and comment. This review process can delay
acquisition of spectrum needed to expand services. The Communications
Act also requires the FCC to award new licenses for most commercial wireless services through a competitive bidding process in which spectrum
is awarded to bidders in an auction. Verizon Wireless has participated in
spectrum auctions to acquire licenses for radio spectrum in various bands.
Most recently, it participated in the FCC’s auction of spectrum in the 700
MHz band. This spectrum is currently used for UHF television operations.
By law those operations were to have ceased no later than February 17,
2009. However, a new law has been enacted that extends this date until
June 12, 2009. We do not believe that this extension will have a material
adverse effect on our testing of LTE technology or our planned deployment of a 4G wireless broadband network using LTE.
On November 26, 2008, the FCC granted Verizon Wireless 109 licenses
in this band for which it was the winning bidder. The FCC also adopted
service rules that will impose costs on licensees that acquire the 700
MHz band spectrum, including minimum coverage mandates by specific
dates during the license terms, and, for approximately one-third of the
spectrum, “open access” requirements, which generally require licensees
of that spectrum to allow customers to use devices and applications of
their choice, subject to certain limits. Seven of the licenses that Verizon
Wireless acquired in the 700 MHz auction, which in the aggregate cover
the United States except for Alaska, are subject to these requirements.
The open access requirements are the subject of a pending appeal in
which Verizon Wireless has intervened. The timing of future auctions may
not match Verizon Wireless’s needs, and the company may not be able
to secure the spectrum in the amounts and/or in the markets it seeks
through any future auction.
The FCC is also conducting several proceedings to explore making
additional spectrum available for licensed and/or unlicensed use. These
proceedings could increase radio interference to Verizon Wireless’s operations from other spectrum users and could impact the ways in which
it uses spectrum, the capacity of that spectrum to carry traffic, and the
value of that spectrum.
33
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
State Regulation and Local Approvals
Telephone Operations
State public utility commissions regulate our telephone operations with
respect to certain telecommunications intrastate rates and services and
other matters. Our competitive local exchange carrier and long distance
operations are generally classified as nondominant and lightly regulated the same as other similarly situated carriers. Our incumbent local
exchange operations are generally classified as dominant. These latter
operations predominantly are subject to alternative forms of regulation
(AFORs) in the various states, although they remain subject to rate of
return regulation in a few states. Arizona, Illinois, Nevada, Oregon and
Washington are rate of return regulated with various levels of pricing
flexibility for competitive services. California, Connecticut, Delaware, the
District of Columbia, Florida, Indiana, Maryland, Michigan, Massachusetts,
New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island,
South Carolina, Texas, Virginia, West Virginia and Wisconsin are under
AFORs with various levels of pricing flexibility, detariffing, and service
quality standards. None of the AFORs include earnings regulation. In
Idaho, Verizon has made the election under a statutory amendment into
a deregulatory regime that phases out all price regulation.
Video
Companies that provide cable service over a cable system are typically
subject to state and/or local cable television rules and regulations. As
noted above, cable operators generally must obtain a local cable franchise from each local unit of government prior to providing cable service
in that local area. Some states have recently enacted legislation that
enables cable operators to apply for, and obtain, a single cable franchise
at the state, rather than local, level. To date, Verizon has applied for and
received state-issued franchises in California, Indiana, Florida, New Jersey,
Texas and the unincorporated areas of Delaware. We also have obtained
authorization from the state commission in Rhode Island to provide cable
service in certain areas in that state, have obtained required state commission approvals for our local franchises in New York, and will need to
obtain additional state commission approvals in these states to provide
cable service in additional areas. Virginia law provides us the option of
entering a given franchise area using state standards if local franchise
negotiations are unsuccessful.
Wireless Services
The rapid growth of the wireless industry has led to an increase in efforts
by some state legislatures and state public utility commissions to regulate the industry in ways that may impose additional costs on Verizon
Wireless. The Communications Act generally preempts regulation by
state and local governments of the entry of, or the rates charged by, wireless carriers. Although a state may petition the FCC to allow it to impose
rate regulation, no state has done so. In addition, the Communications
Act does not prohibit the states from regulating the other “terms and
conditions” of wireless service. While numerous state commissions do
not currently have jurisdiction over wireless services, state legislatures
may decide to grant them such jurisdiction, and those commissions that
already have authority to impose regulations on wireless carriers may
adopt new rules.
State efforts to regulate wireless services have included proposals to
regulate customer billing, termination of service, trial periods for service,
advertising, network outages, the use of handsets while driving, and
reporting requirements for system outages and the availability of broadband wireless services. Over the past several years, only a few states have
imposed regulation in one or more of these areas, and in 2006 a federal
appellate court struck down one such state statute, but Verizon Wireless
expects these efforts to continue. Some states also impose their own universal service support regimes on wireless and other telecommunications
carriers, and other states are considering whether to create such regimes.
34
Verizon Wireless (as well as AT&T and Sprint-Nextel) is a party to an
Assurance of Voluntary Compliance (AVC) with 33 State Attorneys
General. The AVC, which generally reflected Verizon Wireless’s practices at
the time it was entered into in July 2004, obligates the company to disclose certain rates and terms during a sales transaction, to provide maps
depicting coverage, and to comply with various requirements regarding
advertising, billing, and other practices.
At the state and local level, wireless facilities are subject to zoning and
land use regulation. Under the Communications Act, neither state nor
local governments may categorically prohibit the construction of wireless
facilities in any community or take actions, such as indefinite moratoria,
which have the effect of prohibiting service. Nonetheless, securing state
and local government approvals for new tower sites has been and is
likely to continue to be a difficult, lengthy and expensive process. Finally,
state and local governments continue to impose new or higher fees and
taxes on wireless carriers.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Cautionary Statement Concerning
Forward-Looking Statements
In this annual report on Form 10-K we have made forward-looking statements. These statements are based on our estimates and assumptions
and are subject to risks and uncertainties. Forward-looking statements
include the information concerning our possible or assumed future
results of operations. Forward-looking statements also include those preceded or followed by the words “anticipates,”“believes,”“estimates,”“hopes”
or similar expressions. For those statements, we claim the protection of
the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
The following important factors, along with those discussed elsewhere
in this annual report, could affect future results and could cause those
results to differ materially from those expressed in the forward-looking
statements:
• the effects of adverse conditions in the U.S. and international
economies;
• the effects of competition in our markets;
• materially adverse changes in labor matters, including workforce levels
and labor negotiations, and any resulting financial and/or operational
impact, in the markets served by us or by companies in which we have
substantial investments;
• the effects of material changes in available technology;
• any disruption of our suppliers’ provisioning of critical products or
services;
• significant increases in benefit plan costs or lower investment returns
on plan assets;
• the impact of natural or man-made disasters or existing or future litigation and any resulting financial impact not covered by insurance;
• technology substitution;
• an adverse change in the ratings afforded our debt securities by
nationally accredited ratings organizations or adverse conditions in
the credit markets impacting the cost, including interest rates, and/or
availability of financing;
• any changes in the regulatory environments in which we operate,
including any loss of or inability to renew wireless licenses, and the final
results of federal and state regulatory proceedings and judicial review
of those results;
• the timing, scope and financial impact of our deployment of fiber-tothe-premises broadband technology;
• changes in our accounting assumptions that regulatory agencies,
including the SEC, may require or that result from changes in the
accounting rules or their application, which could result in an impact
on earnings;
• our ability to successfully integrate Alltel Corporation into Verizon
Wireless’s business and achieve anticipated benefits of the acquisition;
and
• the inability to implement our business strategies.
35
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Report of Management on Internal Control Over
Financial Reporting
Report of Independent Registered Public Accounting
Firm on Internal Control Over Financial Reporting
To The Board of Directors and Shareowners of Verizon
Communications Inc.:
We, the management of Verizon Communications Inc., are responsible
for establishing and maintaining adequate internal control over financial
reporting of the company. Management has evaluated internal control
over financial reporting of the company using the criteria for effective
internal control established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
Management has assessed the effectiveness of the company’s internal
control over financial reporting as of December 31, 2008. Based on this
assessment, we believe that the internal control over financial reporting
of the company is effective as of December 31, 2008. In connection with
this assessment, there were no material weaknesses in the company’s
internal control over financial reporting identified by management.
The company’s financial statements included in this annual report have
been audited by Ernst & Young LLP, independent registered public
accounting firm. Ernst & Young LLP has also provided an attestation
report on the company’s internal control over financial reporting.
Ivan G. Seidenberg
Chairman and Chief Executive Officer
Doreen A. Toben
Executive Vice President and Chief Financial Officer
Thomas A. Bartlett
Senior Vice President and Controller
36
We have audited Verizon Communications Inc. and subsidiaries’ (Verizon)
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Verizon’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting included
in the accompanying Report of Management on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Report of Independent Registered Public Accounting
Firm on Financial Statements
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, Verizon maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based
on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
balance sheets of Verizon as of December 31, 2008 and 2007, and the
related consolidated statements of income, cash flows and changes in
shareowners’ investment for each of the three years in the period ended
December 31, 2008 of Verizon and our report dated February 20, 2009
expressed an unqualified opinion thereon.
Ernst & Young LLP
New York, New York
February 20, 2009
To The Board of Directors and Shareowners of Verizon
Communications Inc.:
We have audited the accompanying consolidated balance sheets of
Verizon Communications Inc. and subsidiaries (Verizon) as of December
31, 2008 and 2007, and the related consolidated statements of income,
cash flows and changes in shareowners’ investment for each of the three
years in the period ended December 31, 2008. These financial statements
are the responsibility of Verizon’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Verizon
at December 31, 2008 and 2007, and the consolidated results of its
operations and its cash flows for each of the three years in the period
ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, Verizon changed its
methods of accounting for uncertainty in income taxes and for leveraged
lease transactions effective January 1, 2007, stock-based compensation
effective January 1, 2006 and pension and other post-retirement obligations effective December 31, 2006.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), Verizon’s internal
control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control–Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 20, 2009 expressed an
unqualified opinion thereon.
Ernst & Young LLP
New York, New York
February 20, 2009
37
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Consolidated Statements of Income
(dollars in millions, except per share amounts)
2008
Years Ended December 31,
Operating Revenues
$ 97,354
Operating Expenses
Cost of services and sales (exclusive of items shown below)
Selling, general and administrative expense
Depreciation and amortization expense
Total Operating Expenses
Operating Income
Equity in earnings of unconsolidated businesses
Other income and (expense), net
Interest expense
Minority interest
Income Before Provision for Income Taxes, Discontinued Operations,
Extraordinary Item and Cumulative Effect of Accounting Change
Provision for income taxes
Income Before Discontinued Operations, Extraordinary Item
and Cumulative Effect of Accounting Change
Income from discontinued operations, net of tax
Extraordinary item, net of tax
Cumulative effect of accounting change, net of tax
Net Income
Basic Earnings Per Common Share(1)
Income before discontinued operations, extraordinary item
and cumulative effect of accounting change
Income from discontinued operations, net of tax
Extraordinary item, net of tax
Cumulative effect of accounting change, net of tax
Net Income
Weighted-average shares outstanding (in millions)
Diluted Earnings Per Common Share(1)
Income before discontinued operations, extraordinary item
and cumulative effect of accounting change
Income from discontinued operations, net of tax
Extraordinary item, net of tax
Cumulative effect of accounting change, net of tax
Net Income
Weighted-average shares outstanding (in millions)
(1) Total per share amounts may not add due to rounding.
See Notes to Consolidated Financial Statements.
38
$
$
$
$
$
2007
$
93,469
2006
$
88,182
39,007
26,898
14,565
80,470
37,547
25,967
14,377
77,891
35,309
24,955
14,545
74,809
16,884
567
282
(1,819)
(6,155)
15,578
585
211
(1,829)
(5,053)
13,373
773
395
(2,349)
(4,038)
9,759
(3,331)
9,492
(3,982)
8,154
(2,674)
6,428
–
–
–
6,428
5,510
142
(131)
–
5,521
5,480
759
–
(42)
6,197
2.26
–
–
–
2.26
2,849
2.26
–
–
–
2.26
2,850
$
$
$
$
$
1.90
.05
(.05)
–
1.91
2,898
1.90
.05
(.05)
–
1.90
2,902
$
$
$
$
$
1.88
.26
–
(.01)
2.13
2,912
1.88
.26
–
(.01)
2.12
2,938
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Consolidated Balance Sheets
(dollars in millions, except per share amounts)
2008
At December 31,
Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $941 and $1,025
Inventories
Prepaid expenses and other
Total current assets
Plant, property and equipment
Less accumulated depreciation
Investments in unconsolidated businesses
Wireless licenses
Goodwill
Other intangible assets, net
Other investments
Other assets
Total assets
Liabilities and Shareowners’ Investment
Current liabilities
Debt maturing within one year
Accounts payable and accrued liabilities
Other
Total current liabilities
$
9,782
509
11,703
2,092
1,989
26,075
2007
$
215,605
129,059
86,546
3,393
61,974
6,035
5,199
4,781
8,349
$ 202,352
$
$
$
4,993
13,814
7,099
25,906
1,153
2,244
11,736
1,729
1,836
18,698
213,994
128,700
85,294
3,372
50,796
5,245
4,988
–
18,566
186,959
2,954
14,462
7,325
24,741
Long-term debt
Employee benefit obligations
Deferred income taxes
Other liabilities
46,959
32,512
11,769
6,301
28,203
29,960
14,784
6,402
Minority interest
37,199
32,288
–
–
Shareowners’ investment
Series preferred stock ($.10 par value; none issued)
Common stock ($.10 par value; 2,967,610,119 and
2,967,610,119 shares issued)
Contributed capital
Reinvested earnings
Accumulated other comprehensive loss
Common stock in treasury, at cost
Deferred compensation-employee stock ownership plans and other
Total shareowners’ investment
Total liabilities and shareowners’ investment
297
40,291
19,250
(13,372)
(4,839)
79
41,706
$ 202,352
$
297
40,316
17,884
(4,506)
(3,489)
79
50,581
186,959
See Notes to Consolidated Financial Statements.
39
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Consolidated Statements of Cash Flows
(dollars in millions)
2008
Years Ended December 31,
Cash Flows from Operating Activities
Net Income
Adjustments to reconcile net income to net cash provided by operating activities –
continuing operations:
Depreciation and amortization expense
Loss on sale of discontinued operations
Employee retirement benefits
Deferred income taxes
Provision for uncollectible accounts
Equity in earnings of unconsolidated businesses, net of dividends received
Extraordinary item, net of tax
Cumulative effect of accounting change, net of tax
Changes in current assets and liabilities, net of effects from acquisition/disposition
of businesses:
Accounts receivable
Inventories
Other assets
Accounts payable and accrued liabilities
Other, net
Net cash provided by operating activities – continuing operations
Net cash provided by (used in) operating activities – discontinued operations
Net cash provided by operating activities
$
6,428
2007
$
5,521
2006
$
6,197
14,565
–
1,955
2,183
1,085
212
–
–
14,377
–
1,720
408
1,047
1,986
131
–
14,545
541
1,923
(252)
1,034
(731)
–
42
(1,085)
(188)
(59)
(1,701)
3,225
26,620
–
26,620
(1,931)
(255)
(140)
(567)
4,012
26,309
(570)
25,739
(1,312)
8
52
(383)
1,366
23,030
1,076
24,106
Cash Flows from Investing Activities
Capital expenditures (including capitalized software)
Acquisitions of licenses, investments and businesses, net of cash acquired
Net change in short-term investments
Other, net
Net cash used in investing activities – continuing operations
Net cash provided by investing activities – discontinued operations
Net cash used in investing activities
(17,238)
(15,904)
1,677
(114)
(31,579)
–
(31,579)
(17,538)
(763)
169
1,267
(16,865)
757
(16,108)
(17,101)
(1,422)
290
811
(17,422)
1,806
(15,616)
Cash Flows from Financing Activities
Proceeds from long-term borrowings
Repayments of long-term borrowings and capital lease obligations
Increase (decrease) in short-term obligations, excluding current maturities
Dividends paid
Proceeds from sale of common stock
Purchase of common stock for treasury
Other, net
Net cash provided by (used in) financing activities – continuing operations
Net cash used in financing activities – discontinued operations
Net cash provided by (used in) financing activities
21,598
(4,146)
2,389
(4,994)
16
(1,368)
93
13,588
–
13,588
3,402
(5,503)
(3,252)
(4,773)
1,274
(2,843)
(2)
(11,697)
–
(11,697)
3,983
(11,233)
7,944
(4,719)
174
(1,700)
(201)
(5,752)
(279)
(6,031)
8,629
1,153
9,782
(2,066)
3,219
1,153
2,459
760
3,219
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See Notes to Consolidated Financial Statements.
40
$
$
$
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Consolidated Statements of Changes in Shareowners’ Investment
(dollars in millions, except per share amounts, and shares in thousands)
Years Ended December 31,
Shares
Common Stock
Balance at beginning of year
Shares issued–MCI/Price acquisitions
Balance at end of year
2,967,610
–
2,967,610
$
2008
Amount
Shares
297
–
297
2,967,652
(42)
2,967,610
$
2007
Amount
Shares
297
–
297
2,774,865
192,787
2,967,652
2006
Amount
$
277
20
297
Contributed Capital
Balance at beginning of year
Shares issued-employee and shareowner plans
Shares issued-MCI/Price acquisitions
Domestic print and Internet yellow pages directories
business spin-off
Other
Balance at end of year
40,316
–
–
40,124
58
–
25,369
(1)
6,010
–
(25)
40,291
–
134
40,316
8,695
51
40,124
Reinvested Earnings
Balance at beginning of year
Adoption of tax accounting standards (See Note 1)
Adjusted balance at beginning of year
Net income
Dividends declared ($1.78, $1.67 and $1.62 per share)
Other
Balance at end of year
17,884
–
17,884
6,428
(5,062)
–
19,250
17,324
(134)
17,190
5,521
(4,830)
3
17,884
15,905
–
15,905
6,197
(4,781)
3
17,324
(4,506)
(7,530)
(1,783)
44
(4,462)
(231)
(97)
(40)
(8,542)
–
–
(8,910)
–
(7,530)
838
(4)
1
1,948
–
241
3,024
–
(1,783)
1,196
54
14
–
526
(128)
1,662
–
(13,372)
–
(4,506)
(7,409)
(7,530)
Accumulated Other Comprehensive Loss
Balance at beginning of year
Spin-off of local exchange businesses in Maine,
New Hampshire and Vermont (see Note 3)
Adjusted balance at beginning of year
Foreign currency translation adjustments
Unrealized gains (losses) on marketable securities
Unrealized gains (losses) on cash flow hedges
Defined benefit pension and postretirement plans
Minimum pension liability adjustment
Other
Other comprehensive income (loss)
Adoption of pension and postretirement benefit
accounting standard (See Note 1)
Balance at end of year
Treasury Stock
Balance at beginning of year
Shares purchased
Shares distributed
Employee plans
Shareowner plans
Balance at end of year
Deferred Compensation–ESOPs and Other
Balance at beginning of year
Amortization
Other
Balance at end of year
Total Shareowners’ Investment
Comprehensive Income
Net income
Other comprehensive income (loss) per above
Total Comprehensive Income (Loss)
(90,786)
(36,779)
(3,489)
(1,368)
(56,147)
(68,063)
(1,871)
(2,843)
(11,456)
(50,066)
(353)
(1,700)
468
7
(127,090)
18
–
(4,839)
33,411
13
(90,786)
1,224
1
(3,489)
5,355
20
(56,147)
181
1
(1,871)
79
–
–
79
$ 41,706
$
$
$
6,428
(8,910)
$ (2,482)
$
191
(112)
–
79
50,581
5,521
3,024
8,545
$
$
$
265
(74)
–
191
48,535
6,197
1,662
7,859
See Notes to Consolidated Financial Statements.
41
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Notes to Consolidated Financial Statements
Note 1
Description of Business and Summary of Significant
Accounting Policies
Description of Business
Verizon Communications Inc., (Verizon or the Company) is one of the
world’s leading providers of communications services. We have two
reportable segments, Domestic Wireless and Wireline, which we operate
and manage as strategic business units and organize by products and
services. For further information concerning our business segments, see
Note 17.
Verizon’s Domestic Wireless segment, operating as Verizon Wireless, provides wireless voice and data products and other value-added services
and equipment across the United States (U.S.) using one of the most
extensive and reliable wireless networks. Verizon Wireless continues
to expand our wireless data, messaging and multi-media offerings at
broadband speeds for both consumer and business customers.
Our Wireline segment provides communications services, including
voice, broadband video and data, network access, nationwide long-distance and other communications products and services, and also owns
and operates one of the most expansive end-to-end global Internet
Protocol (IP) networks. We continue to deploy advanced broadband
network technology, with our fiber-to-the-premises network, operated
under the FiOS service mark, creating a platform with sufficient bandwidth and capabilities to meet customers’ current and future needs. FiOS
allows us to offer our customers a wide array of broadband services,
including advanced data and video offerings. Our IP network includes
over 485,000 route miles of fiber optic cable and provides access to
over 150 countries across six continents, enabling us to provide nextgeneration IP network products and information technology services to
medium and large businesses and government customers worldwide.
Consolidation
The method of accounting applied to investments, whether consolidated, equity or cost, involves an evaluation of all significant terms of
the investments that explicitly grant or suggest evidence of control or
influence over the operations of the investee. The consolidated financial
statements include our controlled subsidiaries. Investments in businesses
which we do not control, but have the ability to exercise significant
influence over operating and financial policies, are accounted for using
the equity method. Investments in which we do not have the ability to
exercise significant influence over operating and financial policies are
accounted for under the cost method. Equity and cost method investments are included in Investments in unconsolidated businesses in our
consolidated balance sheets. Certain of our cost method investments
are classified as available-for-sale securities and adjusted to fair value
pursuant to the Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS No. 115).
All significant intercompany accounts and transactions have been
eliminated.
We have reclassified prior year amounts to conform to the current year
presentation.
42
Use of Estimates
We prepare our financial statements using U.S. generally accepted
accounting principles (GAAP), which require management to make estimates and assumptions that affect reported amounts and disclosures.
Actual results could differ from those estimates.
Examples of significant estimates include: the allowance for doubtful
accounts, the recoverability of plant, property and equipment, the
recoverability of intangible assets and other long-lived assets, unbilled
revenues, fair values of financial instruments, unrecognized tax benefits,
valuation allowances on tax assets, accrued expenses, equity in income
of unconsolidated entities, pension and postretirement benefit assumptions, contingencies and allocation of purchase prices in connection
with business combinations.
Revenue Recognition
Domestic Wireless
Our Domestic Wireless segment earns revenue by providing access to
and usage of our network, which includes voice and data revenue. In
general, access revenue is billed one month in advance and recognized
when earned. Access revenue and usage revenue are recognized when
service is rendered. Equipment sales revenue associated with the sale
of wireless handsets and accessories is recognized when the products
are delivered to and accepted by the customer, as this is considered
to be a separate earnings process from the sale of wireless services.
Customer activation fees are considered additional consideration, and
to the extent that handsets are sold to customers at a discount, these
fees are recorded as equipment sales revenue at the time of customer
acceptance. For agreements involving the resale of third-party services
in which we are considered the primary obligor in the arrangements, we
record the revenue gross.
Wireline
Our Wireline segment earns revenue based upon usage of our network
and facilities and contract fees. In general, fixed monthly fees for voice,
video, data and certain other services are billed one month in advance
and recognized when earned. Revenue from services that are not fixed
in amount and are based on usage is recognized when such services
are provided.
We recognize equipment revenue for services, in which we bundle the
equipment with maintenance and monitoring services, when the equipment is installed in accordance with contractual specifications and ready
for the customer’s use. The maintenance and monitoring services are
recognized monthly over the term of the contract as we provide the
services. Long-term contracts are accounted for using the percentage
of completion method. We use the completed contract method if we
cannot estimate the costs with a reasonable degree of reliability.
Customer activation fees, along with the related costs up to but not
exceeding the activation fees, are deferred and amortized over the customer relationship period.
We report taxes imposed by governmental authorities on revenueproducing transactions between us and our customers that are within
the scope of EITF No. 06-3, How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income
Statement in the consolidated financial statements on a net basis.
Notes to Consolidated Financial Statements continued
Discontinued Operations, Assets Held for Sale, and Sales of
Businesses and Investments
We classify as discontinued operations for all periods presented any
component of our business that we hold for sale or disposal that has
operations and cash flows that are clearly distinguishable operationally
and for financial reporting purposes from the rest of Verizon. For those
components, Verizon has no significant continuing involvement after disposal and their operations and cash flows are eliminated from Verizon’s
ongoing operations. Sales of significant components of our business
not classified as discontinued operations are reported as either Equity in
earnings of unconsolidated businesses or Other income and (expense),
net in our consolidated statements of income.
local telephone operations, which are stated principally at average
original cost, except that specific costs are used in the case of large individual items.
Maintenance and Repairs
We charge the cost of maintenance and repairs, including the cost of
replacing minor items not constituting substantial betterments, principally to Cost of services and sales as these costs are incurred.
Plant, property and equipment of other wireline and wireless operations
are generally depreciated on a straight-line basis.
Advertising Costs
Advertising costs for advertising products and services as well as other
promotional and sponsorship costs are charged to Selling, general and
administrative expense in the periods in which they are incurred (see
Note 19).
Average Useful Lives (in years)
Earnings Per Common Share
Basic earnings per common share are based on the weighted-average
number of shares outstanding during the period. Diluted earnings per
common share include the dilutive effect of shares issuable under our
stock-based compensation plans, an exchangeable equity interest and
zero-coupon convertible notes (see Note 13). As of December 31, 2006,
the exchangeable equity interest and zero-coupon convertible notes
were no longer outstanding.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of 90 days or
less when purchased to be cash equivalents. Cash equivalents are stated
at cost, which approximates market value and include amounts held
in money market funds. Prior to the close of the acquisition of Alltel
Corporation (Alltel) we redeemed approximately $8.9 billion of these
money market funds (see Note 2).
Short-Term Investments
Our short-term investments, which are stated at fair value, consist primarily of money market funds, a portion of which is held in trust to pay
for certain employee benefits.
Marketable Securities
Marketable securities are included in the accompanying consolidated
balance sheets in Short-term investments, Investments in unconsolidated businesses or Other assets. We continually evaluate our
investments in marketable securities for impairment due to declines
in market value considered to be other-than-temporary. That evaluation includes, in addition to persistent, declining stock prices, general
economic and company-specific evaluations. In the event of a determination that a decline in market value is other-than-temporary, a charge
to earnings is recorded for the loss, and a new cost basis in the investment is established.
Inventories
Inventory consists of wireless and wireline equipment held for sale,
which is carried at the lower of cost (determined principally on either
an average cost or first-in, first-out basis) or market. We also include in
inventory new and reusable supplies and network equipment of our
Plant and Depreciation
We record plant, property and equipment at cost. Our local telephone
operations’ depreciation expense is principally based on the composite
group remaining life method and straight-line composite rates. This
method provides for the recognition of the cost of the remaining net
investment in local telephone plant, less anticipated net salvage value,
over the remaining asset lives. This method requires the periodic revision of depreciation rates.
The asset lives used by our operations are presented in the following
table:
Buildings
Central office equipment
Other network equipment
Outside communications plant
Copper cable
Fiber cable (including undersea cable)
Poles, conduit and other
Furniture, vehicles and other
8 – 45
3 – 11
3 – 15
13 – 18
11 – 25
30 – 50
1 – 20
When we replace, retire or otherwise dispose of depreciable plant used
in our local telephone network, we deduct the carrying amount of such
plant from the respective accounts and charge it to accumulated depreciation. When the depreciable assets of our other wireline and wireless
operations are retired or otherwise disposed of, the related cost and
accumulated depreciation are deducted from the plant accounts, and
any gains or losses on disposition are recognized in income.
We capitalize network software purchased or developed along with
related plant assets. We also capitalize interest associated with the acquisition or construction of network-related assets. Capitalized interest is
reported as part of the cost of the network-related assets and as a reduction in interest expense.
In connection with our ongoing review of the average useful lives of
plant, property and equipment, we determined, effective January 1,
2009 that the average useful lives of fiber cable would be increased to
25 years from 20 to 25 years and the average useful lives of copper cable
would be changed to 15 years from 13 to 18 years. These changes are not
expected to have a significant impact on our depreciation expense for
2009. Effective January 1, 2008 the average useful lives of fiber cable was
increased from 20 years to 20 to 25 years. This change did not result in
a significant impact to depreciation expense for 2008. Effective January
1, 2007, the average useful lives of certain of the circuit equipment was
lengthened from 8 years to 9 years based on subsequent modifications to
our fiber optic cable deployment plan. The average useful lives of certain
buildings at Wireline was also increased from 42 years to 45 years. The
reduction in depreciation resulting from these adjustments in 2007 was
partially offset by increased depreciation resulting from the shortening
of the lives of various types of wireless plant, property and equipment.
While the timing and extent of current deployment plans are subject to
modification, we believe the current estimates of impacted asset lives
are reasonable and subject to ongoing analysis.
43
Notes to Consolidated Financial Statements continued
Computer Software Costs
We capitalize the cost of internal-use network and non-network software
which has a useful life in excess of one year. Subsequent additions, modifications or upgrades to internal-use network and non-network software
are capitalized only to the extent that they allow the software to perform
a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Also, we
capitalize interest associated with the development of internal-use
network and non-network software. Capitalized non-network internaluse software costs are amortized using the straight-line method over
a period of 2 to 7 years and are included in Other intangible assets, net
in our consolidated balance sheets. For a discussion of our impairment
policy for capitalized software costs, see “Goodwill and Other Intangible
Assets” below. Also, see Note 4 for additional detail of internal-use nonnetwork software reflected in our consolidated balance sheets.
Goodwill and Other Intangible Assets
Goodwill
Goodwill is the excess of the acquisition cost of businesses over the
fair value of the identifiable net assets acquired. Impairment testing
for goodwill is performed annually or more frequently if indications
of potential impairment exist under the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS No. 142). The impairment
test for goodwill uses a two-step approach, which is performed at the
reporting unit level. We have determined that in our case, the reporting
units are our operating segments since that is the lowest level at which
discrete, reliable financial and cash flow information is available. Step
one compares the fair value of the reporting unit (calculated using a
market approach and a discounted cash flow method) to its carrying
value. If the carrying value exceeds the fair value, there is a potential
impairment and step two must be performed. Step two compares the
carrying value of the reporting unit’s goodwill to its implied fair value
(i.e., fair value of reporting unit less the fair value of the unit’s assets
and liabilities, including identifiable intangible assets). If the fair value of
goodwill is less than the carrying amount of goodwill, an impairment
is recognized.
Intangible Assets Not Subject to Amortization
A significant portion of our intangible assets are wireless licenses that
provide our wireless operations with the exclusive right to utilize designated radio frequency spectrum to provide cellular communication
services. While licenses are issued for only a fixed time, generally ten years,
such licenses are subject to renewal by the Federal Communications
Commission (FCC). Renewals of licenses have occurred routinely and at
nominal cost. Moreover, we have determined that there are currently
no legal, regulatory, contractual, competitive, economic or other factors
that limit the useful life of our wireless licenses. As a result, we treat the
wireless licenses as an indefinite-lived intangible asset under the provisions of SFAS No. 142. We reevaluate the useful life determination for
wireless licenses each reporting period to determine whether events
and circumstances continue to support an indefinite useful life.
We test our wireless licenses for potential impairment annually or more
frequently if indications of impairment exist. We evaluate our licenses
on an aggregate basis using a direct value approach. The direct value
approach determines fair value using estimates of future cash flows
associated specifically with the licenses. If the fair value of the aggregated wireless licenses is less than the aggregated carrying amount of
the licenses, an impairment is recognized.
44
Interest expense incurred while qualifying wireless licenses are developed
for service is capitalized as part of Wireless licenses. The capitalization
period ends when the development is completed and the licenses are
placed in commercial service.
Intangible Assets Subject to Amortization
Our intangible assets that do not have indefinite lives (primarily customer
lists and non-network internal-use software) are amortized over their
useful lives and reviewed for impairment in accordance with SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
No. 144), whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. If any indications
were present, we would test for recoverability by comparing the carrying
amount of the asset to the net undiscounted cash flows expected to be
generated from the asset. If those net undiscounted cash flows do not
exceed the carrying amount (i.e., the asset is not recoverable), we would
perform the next step, which is to determine the fair value of the asset
and record an impairment, if any. We reevaluate the useful life determinations for these intangible assets each reporting period to determine
whether events and circumstances warrant a revision in their remaining
useful lives.
For information related to the carrying amount of goodwill by segment,
wireless licenses and other intangible assets, as well as the major components and average useful lives of our other acquired intangible assets,
see Note 4.
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and establishes a hierarchy that categorizes and
prioritizes the sources to be used to estimate fair value. SFAS No. 157 also
expands financial statement disclosures about fair value measurements.
Under SFAS No. 157, fair value is defined as an exit price, representing
the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. SFAS No.
157 also establishes a three-tier hierarchy for inputs used in measuring
fair value, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 – Quoted prices in active markets for identical assets
or liabilities
Level 2 – Observable inputs other than quoted prices in active markets
for identical assets and liabilities
Level 3 – No observable pricing inputs in the market
Financial assets and financial liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value
measurements. Our assessment of the significance of a particular input
to the fair value measurements requires judgment, and may affect the
valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
Notes to Consolidated Financial Statements continued
On February 12, 2008, FASB issued FASB Staff Position (FSP) No. FAS
157-2, Effective Date of FASB Statement No. 157 (FSP 157-2), which delays
the effective date of SFAS No. 157 for one year for all nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed
at fair value in the financial statements on a recurring basis. We elected
a partial deferral of SFAS No. 157 under the provisions of FSP 157-2
related to the measurement of fair value used when evaluating goodwill, other intangible assets, wireless licenses and other long-lived assets
for impairment and valuing asset retirement obligations and liabilities
for exit or disposal activities. On October 10, 2008, the FASB issued FSP
157-3, Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active, (FSP 157-3), which clarifies application of SFAS
No. 157 in a market that is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements have not
been issued. The impact of partially adopting SFAS No. 157 on January
1, 2008 and the related FSPs 157-2 and 157-3 was not material to our
financial statements.
SFAS No. 159
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
- Including an Amendment of SFAS No. 115 (SFAS No. 159), permits but does
not require us to measure financial instruments and certain other items
at fair value. Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings. As we did not elect to
fair value any of our financial instruments under the provisions of SFAS No.
159, our adoption of this statement effective January 1, 2008 did not have
an impact on our consolidated financial statements.
Income Taxes
Verizon and its domestic subsidiaries file a consolidated federal income
tax return.
Deferred income taxes are provided for temporary differences in the
bases between financial statement and income tax assets and liabilities.
Deferred income taxes are recalculated annually at rates then in effect.
We record valuation allowances to reduce our deferred tax assets to the
amount that is more likely than not to be realized.
Effective January 1, 2007, we adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48), which requires the
use of a two-step approach for recognizing and measuring tax benefits
taken or expected to be taken in a tax return and disclosures regarding
uncertainties in income tax positions. The first step is recognition: we
determine whether it is more likely than not that a tax position will be
sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. In
evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined by
the appropriate taxing authority that has full knowledge of all relevant
information. The second step is measurement: a tax position that meets
the more-likely-than-not recognition threshold is measured to determine
the amount of benefit to recognize in the financial statements. The tax
position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Differences
between tax positions taken in a tax return and amounts recognized in
the financial statements will generally result in one or more of the following: an increase in a liability for income taxes payable, a reduction of
an income tax refund receivable, a reduction in a deferred tax asset, or
an increase in a deferred tax liability.
As a result of the implementation of FIN 48, we recorded adjustments
to liabilities that resulted in a net $79 million increase in the liability for
unrecognized tax benefits with an offsetting reduction to reinvested
earnings as of January 1, 2007. The implementation of FIN 48 also resulted
in adjustments to prior acquisitions accounted for under purchase
accounting, resulting in a reduction in the liability for tax contingencies
in the amount of $635 million and corresponding reductions to goodwill and wireless licenses of $100 million and $535 million, respectively.
The implementation impact included a reduction in deferred income
taxes of approximately $3 billion, offset with a similar increase in Other
liabilities as of January 1, 2007.
FASB Staff Position (FSP) No. FAS 13-2, Accounting for a Change or Projected
Change in the Timing of Cash Flows Relating to Income Taxes Generated by
a Leveraged Lease Transaction (FSP 13-2), requires that changes in the
projected timing of income tax cash flows generated by a leveraged
lease transaction be recognized as a gain or loss in the year in which
the change occurs. We adopted FSP 13-2 effective January 1, 2007. The
cumulative effect of initially adopting FSP 13-2 was a reduction to reinvested earnings of $55 million, after-tax.
Stock-Based Compensation
Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based
Payment (SFAS No. 123(R)) utilizing the modified prospective method.
SFAS No. 123(R) requires the measurement of stock-based compensation expense based on the fair value of the award on the date of grant.
Under the modified prospective method, the provisions of SFAS No.
123(R) apply to all awards granted or modified after the date of adoption.
The impact to Verizon resulted from the Domestic Wireless segment, for
which we recorded a $42 million cumulative effect of accounting change
as of January 1, 2006, net of taxes and after minority interest, to recognize the effect of initially measuring the outstanding liability for Value
Appreciation Rights (VARs) granted to Domestic Wireless employees at
fair value utilizing a Black-Scholes model.
Foreign Currency Translation
The functional currency of our foreign operations is generally the local
currency. For these foreign entities, we translate income statement
amounts at average exchange rates for the period, and we translate
assets and liabilities at end-of-period exchange rates. We record these
translation adjustments in Accumulated other comprehensive loss, a
separate component of Shareowners’ Investment, in our consolidated
balance sheets. We report exchange gains and losses on intercompany
foreign currency transactions of a long-term nature in Accumulated
other comprehensive loss. Other exchange gains and losses are reported
in income.
45
Notes to Consolidated Financial Statements continued
Employee Benefit Plans
Pension and postretirement health care and life insurance benefits
earned during the year as well as interest on projected benefit obligations are accrued currently. Prior service costs and credits resulting from
changes in plan benefits are amortized over the average remaining service period of the employees expected to receive benefits. Expected
return on plan assets is determined by applying the return on assets
assumption to the market-related value of assets.
As of July 1, 2006, Verizon management employees no longer earn
pension benefits or earn service towards the company retiree medical
subsidy (see Note 15).
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans—an
amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158).
Effective December 31, 2006, SFAS No. 158 requires the recognition of a
defined benefit postretirement plan’s funded status as either an asset or
liability on the balance sheet. SFAS No. 158 also requires the immediate
recognition of the unrecognized actuarial gains and losses and prior
service costs and credits that arise during the period as a component
of Other accumulated comprehensive loss, net of applicable income
taxes. We adopted SFAS No. 158 effective December 31, 2006, which
resulted in a net decrease to shareowners’ investment of $7,409 million.
This included a net increase in pension obligations of $2,007 million, an
increase in Other Postretirement Benefits Obligations of $10,828 million
and an increase in Other Employee Benefit Obligations of $31 million,
offset by an increase in deferred taxes of $5,457 million. Additionally,
plan assets are measured at fair value as of the Company’s year-end.
Derivative Instruments
We have entered into derivative transactions to manage our exposure
to fluctuations in foreign currency exchange rates, interest rates and
commodity prices. We employ risk management strategies which may
include the use of a variety of derivatives including cross currency swaps,
foreign currency forwards and collars, equity options, interest rate and
commodity swap agreements and interest rate locks. We do not hold
derivatives for trading purposes.
In accordance with SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133) and related amendments and interpretations, we measure all derivatives, including derivatives embedded
in other financial instruments, at fair value and recognize them as either
assets or liabilities on our consolidated balance sheets. Changes in the
fair values of derivative instruments not qualifying as hedges or any
ineffective portion of hedges are recognized in earnings in the current period. Changes in the fair values of derivative instruments used
effectively as fair value hedges are recognized in earnings, along with
changes in the fair value of the hedged item. Changes in the fair value
of the effective portions of cash flow hedges are reported in other comprehensive income (loss) and recognized in earnings when the hedged
item is recognized in earnings.
46
Recent Accounting Pronouncements
In December 2008, the FASB issued FSP FAS No. 132 (R)-1, Employers’
Disclosures about Postretirement Benefit Plan Assets (FSP 132 (R)-1). FSP
132 (R)-1 requires Verizon, as plan sponsor, to provide improved disclosures about plan assets, including categories of plan assets, nature and
amount of concentrations of risk and disclosure about fair value measurements of plan assets, similar to those required by SFAS No. 157. FAS
132 (R)-1 is effective for fiscal years ending after December 15, 2009. We
do not expect that the adoption of FSP 132 (R)-1 will have a significant
impact on our consolidated financial statements.
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of
the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 removes the
requirement under SFAS No. 142, Goodwill and Other Intangible Assets to
consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions,
and replaces it with a requirement that an entity consider its own historical experience in renewing similar arrangements, or a consideration of
market participant assumptions in the absence of historical experience.
FSP 142-3 also requires entities to disclose information that enables users
of financial statements to assess the extent to which the expected future
cash flows associated with the asset are affected by the entity’s intent
and/or ability to renew or extend the arrangement. We were required
to adopt FSP 142-3 effective January 1, 2009 on a prospective basis. The
adoption of FSP 142-3 on January 1, 2009 did not have an impact on our
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133, (SFAS No. 161). This statement requires additional disclosures
for derivative instruments and hedging activities that include how and
why an entity uses derivatives, how these instruments and the related
hedged items are accounted for under SFAS No. 133 and related interpretations, and how derivative instruments and related hedged items
affect the entity’s financial position, results of operations and cash flows.
SFAS No. 161 is effective for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008. The adoption
of SFAS No. 161 on January 1, 2009 did not have an impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations,
(SFAS No. 141(R)), to replace SFAS No. 141, Business Combinations. SFAS
No. 141(R) requires the use of the acquisition method of accounting,
defines the acquirer, establishes the acquisition date and broadens the
scope to all transactions and other events in which one entity obtains
control over one or more other businesses. This statement is effective
for business combinations or transactions entered into for fiscal years
beginning on or after December 15, 2008. Upon the adoption of SFAS
No. 141(R) we will be required to expense certain transaction costs and
related fees associated with business combinations that were previously
capitalized. This will result in additional expenses being recognized
relating to the 2009 closing of the Alltel transaction. In addition, with
the adoption of SFAS No. 141(R) changes to valuation allowances for
deferred income tax assets and adjustments to unrecognized tax benefits generally will be recognized as adjustments to income tax expense
rather than goodwill.
Notes to Consolidated Financial Statements continued
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements – an amendment of ARB No. 51, (SFAS
No. 160). SFAS No. 160 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the retained interest
and gain or loss when a subsidiary is deconsolidated. This statement is
effective for financial statements issued for fiscal years beginning on or
after December 15, 2008 which will be applied prospectively, except
for the presentation and disclosure requirements which will be applied
retrospectively for all periods presented. Upon the initial adoption of
this statement, we will change the classification and presentation of
Noncontrolling Interest in our financial statements, which we currently
refer to as minority interest. Additionally, we conduct certain business
operations in certain markets through non-wholly owned entities. Any
changes in these ownership interests may be required to be measured
at fair value and recognized as a gain or loss, if any, in earnings. SFAS No.
160 will also result in a lower effective income tax rate for the Company
due to the inclusion of income attributable to noncontrolling interest in
income before the provision for income taxes. However, the income tax
provision will not be adjusted as a result of SFAS No. 160.
Note 2
Acquisitions
Alltel Corporation
On June 5, 2008, Verizon Wireless entered into an agreement and plan
of merger with Alltel and its controlling stockholder, Atlantis Holdings
LLC, an affiliate of private investment firms TPG Capital and GS Capital
Partners, to acquire 100% of the equity of Alltel in an all-cash merger.
After satisfying all closing conditions, including receiving the required
regulatory approvals, Verizon Wireless closed the acquisition on January
9, 2009 and paid approximately $5.9 billion for the equity of Alltel.
Immediately prior to the closing, the Alltel debt associated with the
transaction, net of cash, was approximately $22.2 billion. Alltel provides
wireless voice and advanced data services to residential and business
customers in 34 states.
We expect to experience substantial operational benefits from the
Alltel acquisition, including additional combined overall cost savings
from reduced roaming costs by moving more traffic to our own network, reduced network-related costs from the elimination of duplicate
facilities, consolidation of platforms, efficient traffic consolidation, and
reduced overall expenses relating to advertising, overhead and headcount. We expect reduced overall combined capital expenditures as a
result of greater economies of scale and the rationalization of network
assets. We also anticipate that the use of the same technology platform
will enable us to rapidly integrate Alltel’s operations with ours while
enabling a seamless transition for customers.
The Alltel acquisition will be accounted for as a business combination
under SFAS No. 141(R). While Verizon Wireless has commenced the
appraisals necessary to assess the fair values of the tangible and intangible assets acquired and liabilities assumed, the amounts of assets and
liabilities arising from contingencies, the fair value of noncontrolling
interests, and the amount of goodwill to be recognized as of the acquisition date, the initial purchase price allocation is not yet available.
On June 10, 2008, in connection with the agreement to acquire Alltel,
Verizon Wireless purchased from third parties $5.0 billion aggregate
principal amount of debt obligations of certain subsidiaries of Alltel for
approximately $4.8 billion, plus accrued and unpaid interest. The maturity dates of these obligations range from 2015 to 2017. Verizon Wireless’s
investment in Alltel debt obligations is classified as available-for-sale and
is included in Other investments in the consolidated balance sheet at
December 31, 2008.
Alltel Divestiture Markets
As a condition of the regulatory approvals by the United States
Department of Justice (DOJ) and the FCC that were required to complete the Alltel acquisition, Verizon Wireless will divest overlapping
properties in 105 operating markets in 24 states (the Alltel Divestiture
Markets). These markets consist primarily of Alltel operations, but also
include the pre-merger operations of Verizon Wireless in four markets as
well as operations in Southern Minnesota and Western Kansas that were
acquired from Rural Cellular Corporation (Rural Cellular). As a result of
these divestiture requirements, Verizon Wireless has placed the licenses
and assets in the Alltel Divestiture Markets in a management trust that
will continue to operate the markets under their current brands until
they are sold.
47
Notes to Consolidated Financial Statements continued
Repayment of Alltel Debt and New Borrowings
On December 19, 2008, Verizon Wireless and Verizon Wireless Capital
LLC, as the borrowers, entered into the $17.0 billion credit facility
(Bridge Facility) with Bank of America, N.A., as Administrative Agent.
On December 31, 2008, the Bridge Facility was reduced to $12.5 billion.
As of December 31, 2008, there were no amounts outstanding under
this facility.
On January 9, 2009, immediately prior to the closing of the Alltel acquisition, we borrowed $12,350 million under the Bridge Facility in order to
complete the acquisition of Alltel and repay certain of Alltel’s outstanding
debt. The remaining commitments under the Bridge Facility were terminated. The Bridge Facility has a maturity date of January 8, 2010.
Interest on borrowings under the Bridge Facility is calculated based on
the London Interbank Offered Rate (LIBOR) for the applicable period, the
level of borrowings on specified dates and a margin that is determined
by reference to our long-term credit rating issued by S&P. If the aggregate outstanding principal amount under the Bridge Facility is greater
than $6.0 billion on July 8th, 2009 (the 180th day after the closing of the
Alltel acquisition), we are required to repay $3.0 billion on that date (less
the amount of specified mandatory or optional prepayments that have
been made as of that date). The Bridge Facility includes a requirement
to maintain a certain leverage ratio. We are required to prepay indebtedness under the Bridge Facility with the net cash proceeds of specified
asset sales, issuances and sales of equity and incurrences of borrowed
money indebtedness, subject to certain exceptions.
On February 4, 2009, Verizon Wireless and Verizon Wireless Capital LLC
co-issued a private placement of $3,500 million of 5.55% notes due 2014
and $750 million of 5.25% notes due 2012, resulting in cash proceeds
of $4,211 million, net of discounts and issuance costs. The net proceeds
from the sale of these notes were used to repay a portion of the borrowings outstanding under the Bridge Facility.
After the completion of the Alltel acquisition and repayments of Alltel
debt, including repayments completed through January 28, 2009,
approximately $2.5 billion of Alltel debt that is owed to third parties
remained outstanding.
Rural Cellular Corporation
On August 7, 2008, Verizon Wireless acquired 100% of the outstanding
common stock and redeemed all of the preferred stock of Rural Cellular
in a cash transaction. Rural Cellular was a wireless communications
service provider operating under the trade name of “Unicel,” focusing
primarily on rural markets in the United States. Verizon Wireless believes
that the acquisition will further enhance its network coverage in markets adjacent to its existing service areas and will enable Verizon
Wireless to achieve operational benefits through realizing synergies in
reduced roaming and other operating expenses. Under the terms of the
acquisition agreement, Verizon Wireless paid Rural Cellular’s common
shareholders $728 million in cash ($45 per share). Additionally, all classes
of Rural Cellular’s preferred shareholders received cash in the aggregate
amount of $571 million.
48
The consolidated financial statements include the results of Rural
Cellular’s operations from the date the acquisition closed. Had this
acquisition been consummated on January 1, 2008 or 2007, the results
of Rural Cellular’s acquired operations would not have had a significant
impact on our consolidated income statement. In connection with the
acquisition, Verizon Wireless assumed $1.5 billion of Rural Cellular’s debt.
This debt was redeemed on September 5, 2008, using proceeds from
new debt borrowings by Verizon Wireless (see Note 10). The aggregate
value of the net assets acquired was $1.3 billion based on the cash consideration, as well as closing and other direct acquisition-related costs of
approximately $12 million.
In accordance with SFAS No. 141, the cost of the acquisition was preliminarily allocated to the assets acquired and liabilities assumed based
on their fair values as of the close of the acquisition, with the amounts
exceeding the fair value being recorded as goodwill. As the values of
certain assets and liabilities are preliminary in nature, they are subject
to adjustment as additional information is obtained. The valuations will
be finalized within 12 months of the close of the acquisition. When the
valuations are finalized, any changes to the preliminary valuation of
assets acquired or liabilities assumed may result in adjustments to the
fair value of the identifiable intangible assets acquired and goodwill.
The following table summarizes the preliminary allocation of the acquisition cost to the assets acquired, including cash acquired of $42 million,
and liabilities assumed as of the acquisition date and adjustments made
thereto during the three months ended December 31, 2008:
(dollars in millions)
As of
August 7, 2008
Assets acquired
Wireless licenses
Goodwill
Intangible assets subject
to amortization
Other acquired assets
Total assets acquired
Liabilities assumed
Long-term debt
Deferred income taxes
and other liabilities
Total liabilities assumed
Net assets acquired
$
$
1,014
935
Adjustments
$
82
(2)
Adjusted as of
August 7, 2008
$
1,096
933
197
1,007
3,153
1
(34)
47
198
973
3,200
1,505
–
1,505
342
1,847
1,306
42
42
5
384
1,889
1,311
$
$
Included in Other acquired assets are $490 million of assets that have
been divested pursuant to the exchange agreement with AT&T, as
described below. Adjustments were primarily related to ongoing revisions to preliminary valuations of wireless licenses and other tangible
and intangible assets acquired that were subsequently divested to AT&T,
and revised estimated tax bases of acquired assets and liabilities.
Wireless licenses acquired have an indefinite life, and accordingly, are
not subject to amortization. The customer relationships are being
amortized using an accelerated method over 6 years, and other
intangibles are being amortized on a straight-line basis over 12 months.
Goodwill of approximately $115 million is expected to be deductible
for tax purposes.
Notes to Consolidated Financial Statements continued
Divestiture Markets and Exchange Agreements with AT&T
As part of its regulatory approval for the Rural Cellular acquisition, the
FCC and DOJ required the divestiture of six operating markets, including
all of Rural Cellular’s operations in Vermont and New York as well as its
operations in Okanogan and Ferry, WA (the Divestiture Markets).
On December 22, 2008, Verizon Wireless completed an exchange with
AT&T. Pursuant to the terms of the exchange agreement, as amended,
AT&T received the assets relating to the Divestiture Markets and a cellular license for part of the Madison, KY market. In exchange, Verizon
Wireless received cellular operating markets in Madison and Mason, KY
and 10 MHz PCS licenses in Las Vegas, NV, Buffalo, NY, Erie, PA, SunburyShamokin, PA and Youngstown, OH. Verizon Wireless also received
AT&T’s minority interests in three entities in which Verizon Wireless holds
interests plus a cash payment. The preliminary aggregate value of properties exchanged was approximately $500 million. There was no gain or
loss recognized on the exchange. In addition, subject to FCC approval,
Verizon Wireless will acquire PCS licenses in Franklin, NY (except Franklin
county) and the entire state of Vermont from AT&T in a separate cash
transaction that is expected to close in the first half of 2009.
Other Acquisitions
In July 2007, Verizon acquired a security-services firm for $435 million,
primarily resulting in goodwill of $343 million and other intangible assets
of $81 million. This acquisition was made to enhance our managed information security services to large business and government customers
worldwide. This acquisition was integrated into the Wireline segment.
In connection with the 2006 acquisition of MCI, Inc. (MCI), we recorded
certain severance and severance-related costs and contract termination
costs associated with the merger, pursuant to Emerging Issues Task Force
Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase
Business Combination. At December 31, 2007, there was approximately
$36 million remaining for these obligations which were substantially
resolved during 2008. During 2008, 2007 and 2006, we recorded pretax
charges of $172 million ($107 million after-tax), $178 million ($112 million after-tax) and $232 million ($146 million after-tax), respectively,
primarily related to the MCI acquisition that were comprised mainly of
systems integration activities.
Note 3
Discontinued Operations, Extraordinary Item and
Other Dispositions
Discontinued Operations
Telecomunicaciones de Puerto Rico, Inc.
On March 30, 2007, we completed the sale of our 52% interest in
Telecomunicaciones de Puerto Rico, Inc. (TELPRI) and received gross
proceeds of approximately $980 million. The sale resulted in a pretax
gain of $120 million ($70 million after-tax). Verizon contributed $100 million ($65 million after-tax) of the proceeds to the Verizon Foundation.
Verizon Dominicana C. por A.
On December 1, 2006, we closed the sale of Verizon Dominicana C. por
A (Verizon Dominicana). The transaction resulted in net pretax cash
proceeds of $2,042 million, net of a purchase price adjustment of $373
million. The U.S. taxes that became payable and were recognized at the
time the transaction closed exceeded the $30 million pretax gain on the
sale resulting in an overall after-tax loss of $541 million.
Verizon Information Services
In October 2006, we announced our intention to spin-off our domestic
print and Internet yellow pages directories publishing operations, which
have been organized into a newly formed company known as Idearc
Inc. On October 18, 2006, the Verizon Board of Directors declared a dividend consisting of 1 share of the newly formed company for each 20
shares of Verizon owned. In making its determination to effect the spinoff, Verizon’s Board of Directors considered, among other things, that the
spin-off may allow each company to separately focus on its core business, which may facilitate the potential expansion and growth of Verizon
and the newly formed company, and allow each company to determine
its own capital structure.
On November 17, 2006, we completed the spin-off of our domestic print
and Internet yellow pages directories business. Cash was paid for fractional shares. The distribution of common stock of the newly formed
company to our shareowners was considered a tax free transaction for
us and for our shareowners, except for the cash payments for fractional
shares which were generally taxable.
At the time of the spin-off, the exercise price and number of shares of
Verizon common stock underlying options to purchase shares of Verizon
common stock, restricted stock units (RSU’s) and performance stock
units (PSU’s) were adjusted pursuant to the terms of the applicable
Verizon equity incentive plans, taking into account the change in the
value of Verizon common stock as a result of the spin-off.
In connection with the spin-off, Verizon received approximately $2 billion in cash from the proceeds of loans under a term loan facility of the
newly formed company and transferred to the newly formed company
debt obligations in the aggregate principal amount of approximately
$7.1 billion thereby reducing Verizon’s outstanding debt at that time.
We incurred pretax charges of approximately $117 million ($101 million
after-tax), including debt retirement costs, costs associated with accumulated vested benefits of employees of the newly formed company,
investment banking fees and other transaction costs related to the spinoff, which are included in discontinued operations.
49
Notes to Consolidated Financial Statements continued
In accordance with SFAS No. 144 we have classified TELPRI, Verizon
Dominicana and our former domestic print and Internet yellow page
directories publishing operations as discontinued operations in the consolidated financial statements for all periods presented through the date
of the divestiture or spin-off.
Income from discontinued operations, net of tax, presented in the consolidated statements of income included the following:
(dollars in millions)
2008
Years Ended December 31,
2007
2006
Operating revenues
$
–
$
306
$
5,077
Income before provision for income taxes
Provision for income taxes
Income from discontinued operations,
net of tax
$
–
–
$
185
(43)
$
2,041
(1,282)
$
–
$
142
$
759
Extraordinary Item
Compañía Anónima Nacional Teléfonos de Venezuela (CANTV)
In January 2007, the Bolivarian Republic of Venezuela (the Republic)
declared its intent to nationalize certain companies, including CANTV.
On February 12, 2007, we entered into a Memorandum of Understanding
(MOU) with the Republic, which provided that the Republic offer to purchase all of the equity securities of CANTV, including our 28.5% interest,
through public tender offers in Venezuela and the United States. Under
the terms of the MOU, the prices in the tender offers would be adjusted
downward to reflect any dividends declared and paid subsequent to
February 12, 2007. During 2007, the tender offers were completed and
Verizon received an aggregate amount of approximately $572 million,
which included $476 million from the tender offers as well as $96 million
of dividends declared and paid subsequent to the MOU. During 2007,
based upon our investment balance in CANTV, we recorded an extraordinary loss of $131 million, including taxes of $38 million.
Other Dispositions
Telephone Access Lines Spin-off
On January 16, 2007, we announced a definitive agreement with
FairPoint Communications, Inc. (FairPoint) providing for Verizon to establish a separate entity for its local exchange and related business assets
in Maine, New Hampshire and Vermont, spin-off that new entity into a
newly formed company, known as Northern New England Spinco Inc.
(Spinco), to Verizon’s shareowners, and immediately merge it with and
into FairPoint.
On March 31, 2008, we completed the spin-off of the shares of Spinco to
Verizon shareowners and the merger of Spinco with FairPoint, resulting
in Verizon shareowners collectively owning approximately 60 percent
of FairPoint common stock. FairPoint issued approximately 53.8 million
shares of FairPoint common stock to Verizon shareowners in the merger,
and Verizon shareowners received one share of FairPoint common stock
for every 53.0245 shares of Verizon common stock they owned as of
March 7, 2008. FairPoint paid cash in lieu of any fraction of a share of
FairPoint common stock.
On April 1, 2008, the number of shares of restricted stock units (RSUs)
and performance stock units (PSUs) previously issued by Verizon were
adjusted pursuant to the terms of the applicable Verizon equity incentive
plans, taking into account the change in the value of Verizon common
stock as a result of the spin-off.
50
We also entered into other agreements that defined responsibility for
obligations arising before or that may arise after the spin-off, including,
among others, obligations relating to Verizon employees whose primary
duties relate to Spinco’s business, certain transition services and taxes.
In general, the agreements governed the exchange of services between
us and FairPoint through January 2009 at specified cost-based or commercial rates.
As a result of the spin-off, our net debt was reduced by approximately $1.4
billion. The consolidated income statements for the periods presented
include the results of operations of the local exchange and related business assets in Maine, New Hampshire and Vermont through March 31,
2008, the date of completion of the spin-off. The consolidated balance
sheet as of December 31, 2008 reflects the spin-off as of March 31, 2008,
which increased shareowners’ investment by approximately $16 million,
and included approximately $79 million ($44 million after-tax) related
to defined benefit pension and postretirement benefit plans, which is
reflected as a reduction to the beginning balance of Accumulated other
comprehensive loss.
During 2008, we recorded pretax charges of $103 million ($81 million
after-tax) for costs incurred related to the separation of the wireline
facilities and operations in Maine, New Hampshire and Vermont from
Verizon at the closing of the transaction, as well as for professional advisory and legal fees in connection with this transaction. During 2007, we
recorded pretax charges of $84 million ($80 million after-tax) for costs
incurred related to the separation of the wireline facilities and operations in Maine, New Hampshire and Vermont.
Note 4
Wireless Licenses, Goodwill and Other Intangible
Assets
Wireless Licenses
Changes in the carrying amount of wireless licenses are as follows:
Balance as of December 31, 2006
Wireless licenses acquired
Capitalized interest on wireless licenses
Other, net
Balance as of December 31, 2007
Wireless licenses acquired
Capitalized interest on wireless licenses
Other, net
Balance as of December 31, 2008
(dollars in millions)
$ 50,959
170
203
(536)
$ 50,796
10,626
557
(5)
$ 61,974
As of December 31, 2008 and 2007, $12.4 billion and $3.0 billion, respectively, of wireless licenses were not in service.
During 2007, Other, net primarily included the impact of adopting FIN
48 (see Note 1) of $535 million.
On March 20, 2008, the FCC announced the results of Auction 73 of
wireless spectrum licenses in the 700 MHz band. We were the successful bidder for twenty-five 12 MHz licenses in the A-Block frequency,
seventy-seven 12 MHz licenses in the B-Block frequency and seven 22
MHz licenses (nationwide with the exception of Alaska) in the C-Block
frequency, with an aggregate bid price of $9,363 million. We have made
all required payments to the FCC for these licenses. The FCC granted us
these licenses on November 26, 2008.
Notes to Consolidated Financial Statements continued
Goodwill
Changes in the carrying amount of goodwill are as follows:
(dollars in millions)
Domestic
Wireless
Balance at December 31, 2006
Acquisitions
Reclassifications and adjustments
Balance at December 31, 2007
Acquisitions
Reclassifications and adjustments
Balance at December 31, 2008
$
$
$
Wireline
345
–
–
345
954
(2)
1,297
$
$
$
Total
5,310
343
(753)
4,900
–
(162)
4,738
$
$
$
5,655
343
(753)
5,245
954
(164)
6,035
Reclassifications and adjustments to goodwill include the impact of
adopting FIN 48 (see Note 1) of $100 million as of January 1, 2007, as
well as to reflect revised estimated tax bases of acquired assets and liabilities during 2008 and 2007.
Other Intangible Assets
The following table displays the details of other intangible assets:
(dollars in millions)
Gross
Amount
Finite-lived intangible assets:
Customer lists (3 to 10 years)
Non-network internal-use software
(2 to 7 years)
Other (1 to 25 years)
Total
$
1,415
$
8,099
465
9,979
At December 31, 2008
Accumulated
Net
Amortization
Amount
$
595
$
4,102
83
4,780
$
820
$
3,997
382
5,199
Gross
Amount
$
1,307
$
8,116
215
9,638
At December 31, 2007
Accumulated
Net
Amortization
Amount
$
459
$
4,147
44
4,650
$
848
$
3,969
171
4,988
Customer lists and Other at December 31, 2008 include $198 million
related to the Rural Cellular acquisition. Amortization expense was $1,383
million, $1,341 million, and $1,423 million for the years ended December
31, 2008, 2007 and 2006, respectively and is estimated to be $1,430 million in 2009, $1,139 million in 2010, $934 million in 2011, $713 million in
2012 and $552 million in 2013.
During 2008, we entered into an agreement to acquire a non-exclusive
license (the IP License) to a portfolio of intellectual property owned by
an entity formed for the purpose of acquiring and licensing intellectual
property. We paid an initial fee of $100 million for the IP License, which
is included in Other intangible assets and is being amortized over the
expected useful lives of the licensed intellectual property. In addition, we
executed a subscription agreement (with a capital commitment of $250
million, of which approximately $214 million is remaining to be funded
at December 31, 2008, as required through 2012) to become a member
in a limited liability company (the LLC) formed by the same entity for
the purpose of acquiring and licensing additional intellectual property.
In connection with this investment, we will receive non-exclusive license
rights to certain intellectual property acquired by the LLC for an annual
license fee.
51
Notes to Consolidated Financial Statements continued
Note 6
Note 5
Marketable Securities and Other Investments
Plant, Property and Equipment
We have investments in marketable securities which are considered
“available-for-sale” under the provisions of SFAS No. 115. These investments have been included in our consolidated balance sheets in
Short-term investments, Other investments, Investments in unconsolidated businesses and Other assets.
The following table displays the details of plant, property and equipment, which is stated at cost:
Investment Impairment Charge
During 2008, we recorded a pretax charge of $48 million ($31 million
after-tax) related to an other-than-temporary decline in the fair value of
our investments in certain marketable securities.
The following table shows certain summarized information related to
our investments in marketable securities:
(dollars in millions)
(dollars in millions)
2008
At December 31,
Land
Buildings and equipment
Network equipment
Furniture, office and data processing equipment
Work in progress
Leasehold improvements
Other
Less accumulated depreciation
Total
$
815
20,440
175,757
10,477
1,279
4,155
2,682
215,605
129,059
$ 86,546
2007
$
839
19,734
173,654
11,912
1,988
3,612
2,255
213,994
128,700
$ 85,294
Gross Unrealized
Cost
At December 31, 2008
Short-term investments
Investments in
unconsolidated
businesses (Note 7)
Other investments (Notes 2
and 12)
Other assets
At December 31, 2007
Short-term investments
Investments in
unconsolidated
businesses (Note 7)
Other assets
$
362
Gains
$
2
Fair
Value
Losses
$
(5)
$
359
342
–
(52)
290
4,781
684
$ 6,169
$
–
4
6
$
–
(9)
(66)
4,781
679
$ 6,109
$
497
$
21
$
–
$
286
661
1,444
$
42
31
94
$
–
–
–
$
518
$
328
692
1,538
Our short-term investments are primarily bonds and mutual funds.
Certain other investments in securities that we hold are not adjusted to
market values because those values are not readily determinable and/
or the securities are not marketable. We do, however, adjust the carrying values of these securities in situations where we believe declines
in value below cost were other–than-temporary. The carrying values for
investments not adjusted to market value were $28 million at December
31, 2008 and $15 million at December 31, 2007.
52
Verizon Center Relocation, Net
During 2006, we recorded pretax charges of $184 million ($118 million
after-tax) in connection with the relocation of employees and business
operations to Verizon Center located in Basking Ridge, New Jersey.
Notes to Consolidated Financial Statements continued
Note 7
Note 8
Investments in Unconsolidated Businesses
Minority Interest
Our investments in unconsolidated businesses are comprised of the
following:
Minority interests in equity of subsidiaries were as follows:
At December 31,
At December 31,
Equity Investees
Vodafone Omnitel
Other
Total equity investees
Cost Investees
Total investments
in unconsolidated
businesses
Ownership
23.1%
Various
Various
2008
Investment
$ 2,182
877
3,059
334
$ 3,393
(dollars in millions)
2007
Ownership
Investment
23.1%
Various
$
Various
2,313
744
3,057
315
$
3,372
Dividends and repatriations of foreign earnings received from these
investees amounted to $779 million in 2008, $2,571 million in 2007 and
$42 million in 2006.
Equity Method Investments
Vodafone Omnitel
Vodafone Omnitel is the second largest wireless communications
company in Italy. At December 31, 2008 and 2007, our investment in
Vodafone Omnitel included goodwill of $1,105 million and $1,154
million, respectively. During 2008 and 2007, Verizon received a net distribution from Vodafone Omnitel of approximately $670 million and
$2,100 million, respectively. As a result, in 2007 we recorded $610 million
of foreign and domestic taxes and expenses specifically relating to our
share of Vodafone Omnitel’s distributable earnings.
Other Equity Investees
Verizon has limited partnership investments in entities that invest in
affordable housing projects, for which Verizon provides funding as a
limited partner and receives tax deductions and tax credits based on
its partnership interests. At December 31, 2008 and 2007, Verizon had
equity investments in these partnerships of $761 million and $637
million, respectively. Verizon currently adjusts the carrying value of
these investments for any losses incurred by the limited partnerships
through earnings.
The remaining investments include wireless partnerships in the U.S. and
other smaller domestic and international investments.
Minority interests in consolidated subsidiaries:
Wireless joint venture
Cellular partnerships and other
(dollars in millions)
2008
2007
$ 36,683
516
$ 37,199
$ 31,782
506
$ 32,288
Wireless Joint Venture
The wireless joint venture was formed in April 2000 in connection with
the combination of the U.S. wireless operations and interests of Verizon
and Vodafone. The wireless joint venture operates as Verizon Wireless.
Verizon owns a controlling 55% interest in Verizon Wireless and Vodafone
owns the remaining 45%.
Under the terms of an investment agreement, Vodafone had the right
to require Verizon Wireless to purchase up to an aggregate of $20 billion
worth of Vodafone’s interest in Verizon Wireless at designated times (put
windows) at its then fair market value, not to exceed $10 billion in any
one put window. The last of these put windows opened on June 10 and
closed on August 9 in 2007. Vodafone did not exercise its right during
this period and no longer has any right to require the purchase of any of
its interest in Verizon Wireless.
Cellular Partnerships and Other
In August 2002, Verizon Wireless and Price Communications Corp. (Price)
combined Price’s wireless business with a portion of Verizon Wireless.
The resulting limited partnership, Verizon Wireless of the East LP (VZ
East), is controlled and managed by Verizon Wireless. In exchange for
its contributed assets, Price received a limited partnership interest in
VZ East which was exchangeable into the common stock of Verizon
Wireless if an initial public offering of that stock occurred, or into the
common stock of Verizon on the fourth anniversary of the asset contribution date. On August 15, 2006, Verizon delivered 29.5 million shares of
newly-issued Verizon common stock to Price valued at $1,007 million in
exchange for Price’s limited partnership interest in VZ East.
Noncontrolling Interests in Consolidated Financial Statements
See Note 1 for a discussion of the pending implementation of SFAS
No. 160.
Cost Method Investments
Some of our cost investments are carried at their current market value.
Other cost investments are carried at their original cost, except in cases
where we have determined that a decline in the estimated market value
of an investment is other-than-temporary.
53
Notes to Consolidated Financial Statements continued
Note 9
Leasing Arrangements
As Lessor
We are the lessor in leveraged and direct financing lease agreements for commercial aircraft and power generating facilities, which comprise the
majority of the portfolio along with telecommunications equipment, real estate property, and other equipment. These leases have remaining terms
up to 42 years as of December 31, 2008. Minimum lease payments receivable represent unpaid rentals, less principal and interest on third-party
nonrecourse debt relating to leveraged lease transactions. Since we have no general liability for this debt, which holds a senior security interest in
the leased equipment and rentals, the related principal and interest have been offset against the minimum lease payments receivable in accordance
with GAAP. All recourse debt is reflected in our consolidated balance sheets.
Finance lease receivables, which are included in Prepaid expenses and other and Other assets in our consolidated balance sheets are comprised of
the following:
(dollars in millions)
2008
At December 31,
Direct
Finance
Leases
Leveraged
Leases
$ 2,734
1,501
–
(1,400)
$ 2,835
Minimum lease payments receivable
Estimated residual value
Unamortized initial direct costs
Unearned income
$
133
12
1
(24)
122
$
Allowance for doubtful accounts
Finance lease receivables, net
Current
Noncurrent
Total
$ 2,867
1,513
1
(1,424)
2,957
(159)
$ 2,798
$
46
$ 2,752
2007
Direct
Finance
Leases
Leveraged
Leases
$
2,834
1,559
–
(1,483)
$ 2,910
$
$
Total
131
16
1
(25)
123
$
2,965
1,575
1
(1,508)
3,033
(168)
$ 2,865
$
36
$ 2,829
Accumulated deferred taxes arising from leveraged leases, which are
included in Deferred Income Taxes, amounted to $2,218 million at
December 31, 2008 and $2,307 million at December 31, 2007.
Amortization of capital leases is included in depreciation and amortization expense in the consolidated statements of income. Capital lease
amounts included in plant, property and equipment are as follows:
The following table is a summary of the components of income from
leveraged leases:
(dollars in millions)
2008
Years Ended December 31,
Pretax lease income
Income tax expense
Investment tax credits
$
74
30
4
2007
$
78
30
4
2006
$
96
57
4
The future minimum lease payments to be received from noncancelable
leases, net of nonrecourse loan payments related to leveraged leases,
along with payments relating to direct financing leases for the periods
shown at December 31, 2008, are as follows:
(dollars in millions)
Capital
Leases
Years
2009
2010
2011
2012
2013
Thereafter
Total
$
240
148
114
124
124
2,117
$ 2,867
Operating
Leases
$
$
26
19
14
7
5
12
83
As Lessee
We lease certain facilities and equipment for use in our operations under
both capital and operating leases. Total rent expense from continuing
operations under operating leases amounted to $1,835 million in 2008,
$1,712 million in 2007 and $1,608 million in 2006.
54
(dollars in millions)
2008
At December 31,
Capital leases
Accumulated amortization
Total
$
$
298
(97)
201
2007
$
$
329
(153)
176
The aggregate minimum rental commitments under noncancelable
leases for the periods shown at December 31, 2008, are as follows:
(dollars in millions)
Capital
Leases
Years
2009
2010
2011
2012
2013
Thereafter
Total minimum rental commitments
Less interest and executory costs
Present value of minimum lease payments
Less current installments
Long-term obligation at December 31, 2008
$
$
90
81
76
56
51
126
480
(90)
390
(63)
327
Operating
Leases
$
$
1,620
1,339
1,039
770
539
1,995
7,302
As of December 31, 2008, the total minimum sublease rentals to be
received in the future under noncancelable operating subleases was
approximately $57 million.
Notes to Consolidated Financial Statements continued
Note 10
Debt
Debt Maturing Within One Year
Debt maturing within one year is as follows:
(dollars in millions)
2008
At December 31,
Long-term debt maturing within one year
Commercial paper
Total debt maturing within one year
$ 3,506
1,487
$ 4,993
2007
$
$
2,564
390
2,954
The weighted average interest rate for our commercial paper at December
31, 2008 and December 31, 2007 was 2.9% and 4.6%, respectively.
Capital expenditures (primarily acquisition and construction of network
assets) are partially financed pending long-term financing through
bank loans and the issuance of commercial paper payable within
12 months.
At December 31, 2008, we had approximately $5,600 million of unused
bank lines of credit which consisted of a three-year committed facility
that expires in September 2009. In addition, at December 31, 2008, we
had entered into a vendor provided credit facility that provided $150
million of financing capacity. Certain of these lines of credit contain
requirements for the payment of commitment fees.
Long-Term Debt
Outstanding long-term debt obligations are as follows:
(dollars in millions)
Interest Rates %
Maturities
4.35 – 5.50
5.55 – 6.90
7.25 – 8.95
2009 – 2018
2012 – 2038
2009 – 2039
7.38 – 8.88
LIBOR plus 1.00%
2011 – 2018
2009 – 2011
5,983
4,440
–
–
Telephone subsidiaries – debentures
4.63 – 7.00
7.15 – 7.88
8.00 – 8.75
2009 – 2033
2012 – 2032
2010 – 2031
9,654
1,449
1,080
10,580
1,449
1,080
Other subsidiaries – debentures and other
6.84 – 8.75
2009 – 2028
2,200
2,450
9.55
2010
47
70
390
312
At December 31,
Notes payable
Verizon Wireless – notes payable and other
Employee stock ownership plan loans – NYNEX debentures
2008
$
Capital lease obligations (average rate 6.2% and 6.8%)
Unamortized discount, net of premium
Total long-term debt, including current maturities
Less debt maturing within one year
Total long-term debt
Notes Payable
In November 2008, Verizon issued $2,000 million of 8.75% notes due
2018 and $1,250 million of 8.95% notes due 2039, which resulted in cash
proceeds of $3,189 million net of discount and issuance costs. In April
2008, Verizon issued $1,250 million of 5.25% notes due 2013, $1,500 million of 6.10% notes due 2018, and $1,250 million of 6.90% notes due
2038, resulting in cash proceeds of $3,950 million, net of discounts and
$
7,878
8,741
8,822
(219)
50,465
(3,506)
46,959
2007
$
$
5,872
3,550
5,501
(97)
30,767
(2,564)
28,203
issuance costs. In February 2008, Verizon issued $750 million of 4.35%
notes due 2013, $1,500 million of 5.50% notes due 2018, and $1,750
million of 6.40% notes due 2038, resulting in cash proceeds of $3,953
million, net of discounts and issuance costs. In January 2008, Verizon utilized a $239 million fixed rate vendor financing facility due 2010. During
the first quarter of 2008, $1,000 million of Verizon Communications Inc.
4.0% notes matured and were repaid.
55
Notes to Consolidated Financial Statements continued
In April 2007, Verizon issued $750 million of 5.50% notes due 2017, $750
million of 6.25% notes due 2037, and $500 million of floating rate notes
due 2009 resulting in cash proceeds of $1,977 million, net of discounts
and issuance costs. In March 2007, Verizon issued $1,000 million of
13-month floating rate exchangeable notes with an original maturity of
2008. These notes were exchangeable periodically at the option of the
note holder into similar notes until 2017. The exchangeable notes were
not exchanged and are now due April 2009. In February 2007, Verizon
utilized a $425 million floating rate vendor financing facility due 2013.
In January 2007, we redeemed $1,580 million principal of the remaining
outstanding floating rate notes due August 15, 2007, at a redemption
price equal to 100% of the principal amount of the notes being redeemed
plus accrued and unpaid interest through the date of redemption. The
total payment on the date of redemption was approximately $1,593 million. Approximately $1,600 million of other borrowings were redeemed
during 2007.
We recorded pretax charges of $26 million ($16 million after-tax) during
the first quarter of 2006 resulting from the extinguishment of $5,665
million aggregate principal amount of long-term debt assumed in connection with the MCI merger.
Verizon Wireless – Notes Payable and Other
Unless indicated, the following notes were co-issued or co-borrowed
by Verizon Wireless and Verizon Wireless Capital LLC. Verizon Wireless
Capital LLC is a wholly owned subsidiary of Verizon Wireless. It is a limited liability company formed under the laws of Delaware on December
7, 2001 as a special purpose finance subsidiary to facilitate the offering
of debt securities of Verizon Wireless by acting as co-issuer. Other than
the financing activities as a co-issuer of Verizon Wireless indebtedness,
Verizon Wireless Capital LLC has no material assets, operations or revenues. Verizon Wireless is jointly and severally liable with Verizon Wireless
Capital LLC for these notes.
On December 18, 2008, Verizon Wireless and Verizon Wireless Capital
LLC, co-issued €650 million of 7.625% notes due 2011, €500 million of
8.750% notes due 2015 and £600 million of 8.875% notes due 2018.
Concurrent with these offerings, we entered into cross currency swaps
to fix our future interest and principal payments in U.S. dollars as well
as to exchange the proceeds from British Pound Sterling and Euros into
U.S. dollars (see Note 11). The cash proceeds of $2,410 million, net of
discounts and issuance costs were used in connection with the Alltel
acquisition on January 9, 2009 (see Note 2).
On November 21, 2008, Verizon Wireless and Verizon Wireless Capital
LLC co-issued a private placement of $1,250 million of 7.375% notes
due 2013 and $2,250 million of 8.500% notes due 2018 resulting in cash
proceeds of $3,451 million net of discounts and issuance costs. The net
proceeds from the sale of these notes were used in connection with
the Alltel acquisition on January 9, 2009 (see Note 2). The co-issuers
are required to file a registration statement with respect to an offer to
exchange these notes for a new issue of notes registered under the
Securities Act of 1933 and use their reasonable best efforts to cause the
registration statement to be declared effective within 330 days after the
closing of the offering of these notes.
56
On September 30, 2008, Verizon Wireless and Verizon Wireless Capital LLC
entered into a $4,440 million Three-Year Term Loan Facility Agreement
(Three-Year Term Facility) with Citibank, N.A., as Administrative Agent,
with a maturity date of September 30, 2011. Verizon Wireless borrowed
$4,440 million under the Three-Year Term Facility in order to repay
a portion of the 364-Day Credit Agreement as described below. Of
the $4,440 million, $444 million must be repaid at the end of the first
year, $1,998 million at the end of the second year, and $1,998 million
upon final maturity. Interest on borrowings under the Three-Year Term
Facility is calculated based on the LIBOR rate for the applicable period
and a margin that is determined by reference to the long-term credit
rating of Verizon Wireless issued by Standard & Poor’s Rating Services
and Moody’s Investors Service (if Moody’s subsequently determines
to provide a credit rating for the Three-Year Term Facility). Borrowings
under the Three-Year Term Facility currently bear interest at a variable
rate based on LIBOR plus 100 basis points. The Three-Year Term Facility
includes a requirement to maintain a certain leverage ratio.
On June 5, 2008, Verizon Wireless entered into a $7,550 million 364Day Credit Agreement with Morgan Stanley Senior Funding Inc. as
Administrative Agent. During 2008, Verizon Wireless utilized this facility
primarily to purchase the Alltel debt obligations acquired in the second
quarter and pay fees and expenses incurred in connection therewith,
finance the acquisition of Rural Cellular and repay the outstanding Rural
Cellular debt and pay fees and expenses incurred in connection therewith. During 2008, the borrowings under the 364-Day Credit Agreement
were repaid.
See Note 2 regarding the recent repayment of Alltel debt and related
borrowings subsequent to December 31, 2008.
Telephone and Other Subsidiary Debt
During the fourth quarter of 2008, $200 million of Verizon Northwest
5.55% notes, $250 million 6.9% notes and $250 million 5.65% notes of
Verizon North Inc. matured and were repaid. During the second quarter
of 2008, $100 million of Verizon California Inc. 7.0% notes and $250
million of Verizon New York Inc. 6.0% notes matured and were repaid.
Additionally, during first half of 2008, $250 million of GTE Corporation
6.46% notes and $125 million of Verizon South Inc. 6.0% notes matured
and were repaid.
During the fourth quarter of 2007, Verizon New England Inc. redeemed
previously guaranteed $480 million 7.0% debentures, Series B, issued
by Verizon New England Inc. due 2042 at par plus accrued and unpaid
interest to the redemption dates. During the third quarter of 2007, $150
million Verizon Pennsylvania Inc. 7.375% notes matured and were repaid.
During the second quarter of 2007, $125 million Verizon New England
Inc. 7.65% notes and the $225 million Verizon South Inc. 6.125% notes
matured and were repaid. During the first quarter of 2007, $150 million
GTE Southwest Inc. 6.23% notes and the $275 million Verizon California
Inc. 7.65% notes matured and were repaid. In addition, we redeemed
$500 million of GTE Corporation 7.9% debentures due February 1, 2027
and $300 million Verizon South Inc. 7.0% debentures, Series F, due 2041
at par plus accrued and unpaid interest to the redemption dates. During
the first quarter of 2007, we recorded pretax charges of $28 million ($18
million after-tax) in connection with the early extinguishments of debt.
Notes to Consolidated Financial Statements continued
Guarantees
We guarantee the debt obligations of GTE Corporation (but not the
debt of its subsidiary or affiliate companies) that were issued and outstanding prior to July 1, 2003. As of December 31, 2008, $2,200 million
principal amount of these obligations remained outstanding. Verizon
Communications Inc. and NYNEX Corporation are the joint and several
co-obligors of the 20-Year 9.55% Debentures due 2010 previously issued
by NYNEX on March 26, 1990. As of December 31, 2008, $47 million principal amount of this obligation remained outstanding. NYNEX and GTE
no longer issue public debt or file SEC reports.
Debt Covenants
We and our consolidated subsidiaries are in compliance with all of our
debt covenants.
Maturities of Long-Term Debt
Maturities of long-term debt outstanding at December 31, 2008 are as
follows:
Years
2009
2010
2011
2012
2013
Thereafter
(dollars in million)
$
3,506
5,018
5,647
4,306
5,638
26,350
Note 11
Financial Instruments
Derivatives
The ongoing effect of SFAS No. 133 and related amendments and interpretations on our consolidated financial statements will be determined
each period by several factors, including the specific hedging instruments in place and their relationships to hedged items, as well as market
conditions at the end of each period.
Interest Rate Risk Management
We have entered into domestic interest rate swaps to achieve a targeted
mix of fixed and variable rate debt, where we principally receive fixed
rates and pay variable rates based on LIBOR. These swaps are designated
as fair value hedges and hedge against changes in the fair value of our
debt portfolio. We record the interest rate swaps at fair value in our balance sheet as assets and liabilities and adjust debt for the change in
its fair value due to changes in interest rates. During 2008, we entered
into domestic interest rate swaps, designated as fair value hedges, with a
notional principal value of approximately $2 billion. The fair value of our
entire portfolio of interest rate swaps at December 31, 2008 included in
Other assets and Long-term debt was $415 million.
Foreign Exchange Risk Management
During 2008, we entered into cross currency swaps designated as cash
flow hedges to exchange the net proceeds from the December 18, 2008
Verizon Wireless and Verizon Wireless Capital LLC offering (see Note 10)
from British Pound Sterling and Euros into U.S. dollars, to fix our future
interest and principal payments in U.S. dollars as well as mitigate the
impact of foreign currency transaction gains or losses. We record these
contracts at fair value and any gains or losses on the contract will, over
time, offset the gains or losses on the underlying debt obligations.
Net Investment Hedges
During 2007, we entered into foreign currency forward contracts to
hedge a portion of our net investment in Vodafone Omnitel. Changes
in fair value of these contracts due to Euro exchange rate fluctuations
are recognized in Accumulated other comprehensive loss and partially
offset the impact of foreign currency changes on the value of our net
investment. During 2008, our positions in these foreign currency forward
contracts were settled. As of December 31, 2008, Accumulated other
comprehensive loss includes unrecognized losses of approximately
$166 million ($108 million after-tax) related to these hedge contracts,
which along with the unrealized foreign currency translation balance on
the investment hedged, remain in Accumulated other comprehensive
loss until the investment is sold.
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk consist primarily of temporary cash investments, short-term and long-term
investments, trade receivables, certain notes receivable, including lease
receivables, and derivative contracts. Our policy is to deposit our temporary cash investments with major financial institutions. Counterparties
to our derivative contracts are also major financial institutions. The financial institutions have all been accorded high ratings by primary rating
agencies. We limit the dollar amount of contracts entered into with any
one financial institution and monitor our counterparties’ credit ratings.
We generally do not give or receive collateral on swap agreements due
to our credit rating and those of our counterparties. While we may be
exposed to credit losses due to the nonperformance of our counterpar57
Notes to Consolidated Financial Statements continued
ties, we consider the risk remote and do not expect the settlement of
these transactions to have a material effect on our results of operations
or financial condition.
Note 12
Fair Value Measurements
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2008:
Level 1(1)
(dollars in millions)
Assets:
Short-term investments
Investments in
unconsolidated
businesses
Other investments
Other assets
Liabilities:
Other liabilities
$
180
Level 2(2)
$
329
Level 3(3)
$
–
Total
$
509
290
–
–
–
–
1,158
–
4,781
–
290
4,781
1,158
–
59
–
59
(1)quoted prices in active markets for identical assets or liabilities
(2)observable inputs other than quoted prices in active markets for identical assets
and liabilities
(3)no observable pricing inputs in the market
Balance at January 1, 2008
Total gains (losses) (realized/unrealized):
Included in earnings
Included in other comprehensive loss
Purchases, issuances and settlements
Discount amortization included in earnings
Transfers in (out) of Level 3
Balance at December 31, 2008
–
–
–
4,767
14
–
$ 4,781
Short-term investments include a fund comprised of cash equivalents
held in trust for the payment of certain employee benefits and are classified as Level 2. These temporary cash investments are stated at fair value
using matrix pricing as they are not actively traded in an established
market. Short-term investments and Investments in unconsolidated
businesses also include equity securities, mutual funds, U.S. Treasuries,
and obligations of the U.S. government, which are generally measured
using quoted prices in active markets and are classified as Level 1.
Other investments are comprised of our investment in Alltel debt, which
was acquired in June 2008, and is classified as Level 3. The fair value of
the investment in Alltel debt is based upon internally developed valuation techniques since the underlying obligations are not registered or
traded in an active market. Upon closing of the Alltel acquisition (see
Note 2), the investment in Alltel debt became an intercompany loan
that will be eliminated in consolidation.
Other assets are primarily comprised of domestic and foreign corporate
and government bonds. While quoted prices in active markets for certain
of these debt securities are available, for some they are not. As permitted
under SFAS No. 157, we use alternative matrix pricing as a practical
expedient resulting in our debt securities being classified as Level 2.
58
Note 13
Earnings Per Share and Shareowners’ Investment
Earnings Per Share
The following table is a reconciliation of the numerators and denominators used in computing earnings per common share:
(dollars and shares in millions, except per share amounts)
2008
Years Ended December 31,
Level 3
$
The fair value of our short-term and long-term debt, excluding capital
leases, is determined based on market quotes for similar terms and
maturities or future cash flows discounted at current rates. The fair value
of our long-term and short-term debt, excluding capital leases, was
$53,174 million and $32,380 million at December 31, 2008 and 2007,
respectively, as compared to the carrying value of $51,562 million and
$30,845 million, respectively at December 31, 2008 and 2007.
A reconciliation of the beginning and ending balance of items measured at fair value using significant unobservable inputs as of December
31, 2008 is as follows:
(dollars in millions)
Our derivative contracts, included in Other assets or Other liabilities,
are primarily comprised of interest rate swaps, are valued using models
based on readily observable market parameters for all substantial terms
of our derivative contracts and thus are classified within Level 2. As
permitted by SFAS No. 157, we use mid-market pricing for fair value
measurements of our derivative instruments.
Income Before Discontinued
Operations, Extraordinary Item and
Cumulative Effect of Accounting
Change
After-tax minority interest expense related
to exchangeable equity interest
After-tax interest expense related to zerocoupon convertible notes
Income Before Discontinued
Operations, Extraordinary Item and
Cumulative Effect of Accounting
Change – after assumed conversion
of dilutive securities
$ 6,428
Earnings Per Common Share from
Income Before Discontinued
Operations, Extraordinary Item and
Cumulative Effect of Accounting
Change
Basic
Diluted
$
$
$
5,510
2006
$
5,480
–
–
20
–
–
11
$ 6,428
Weighted-average shares
outstanding – basic
Effect of dilutive securities:
Stock options
Exchangeable equity interest
Zero-coupon convertible notes
Weighted-average shares
outstanding – diluted
2007
$
5,510
$
5,511
2,849
2,898
2,912
1
–
–
4
–
–
1
18
7
2,850
2,902
2,938
2.26
2.26
$
$
1.90
1.90
$
$
1.88
1.88
Certain outstanding options to purchase shares were not included in
the computation of diluted earnings per common share because they
were not dilutive, including approximately 158 million weighted-average
shares during 2008, 170 million weighted-average shares during 2007
and 228 million weighted-average shares during 2006.
The zero-coupon convertible notes were retired on May 15, 2006 and
the exchangeable equity interest was converted on August 15, 2006 by
issuing 29.5 million Verizon shares (see Note 8).
Notes to Consolidated Financial Statements continued
Shareowners’ Investment
Our certificate of incorporation provides authority for the issuance of up
to 250 million shares of Series Preferred Stock, $.10 par value, in one or
more series, with such designations, preferences, rights, qualifications,
limitations and restrictions as the Board of Directors may determine.
The following table summarizes Verizon’s Restricted Stock Unit activity:
We are authorized to issue up to 4.25 billion shares of common stock.
Outstanding, January 1, 2006
Granted
Cancelled/forfeited
Outstanding, December 31, 2006
Granted
Payments
Cancelled/forfeited
Outstanding, December 31, 2007
Granted
Payments
Cancelled/forfeited
Outstanding, December 31, 2008
On February 7, 2008, the Board of Directors approved a share buy back
program which authorized the repurchase of up to 100 million shares
of Verizon common stock terminating no later than the close of business on February 28, 2011. During 2008, 2007 and 2006, we repurchased
approximately 37 million, 68 million and 50 million common shares
under programs previously authorized by the Board of Directors.
Note 14
Stock-Based Compensation
Refer to Note 1 for a discussion of the adoption of SFAS No. 123(R), which
was effective January 1, 2006.
Verizon Communications Long Term Incentive Plan
The Verizon Communications Long Term Incentive Plan (the Plan), permits the granting of nonqualified stock options, incentive stock options,
restricted stock, restricted stock units, performance shares, performance
share units and other awards. The maximum number of shares for awards
is 207 million.
Restricted Stock Units
The Plan provides for grants of RSUs that generally vest at the end of
the third year after the grant. The RSUs are classified as liability awards
because they will be paid in cash upon vesting. The RSU award liability is
measured at its fair value at the end of each reporting period and, therefore, will fluctuate based on the performance of Verizon’s stock. Dividend
equivalent units are also paid to participants at the time the RSU award
is paid.
(shares in thousands)
Restricted
Stock Units
6,869
9,116
(392)
15,593
6,779
(602)
(197)
21,573
7,277
(6,869)
(161)
21,820
WeightedAverage
Grant-Date
Fair Value
$
36.12
31.88
35.01
33.67
37.59
36.75
34.81
34.80
36.64
36.06
35.45
35.01
Performance Share Units
The Plan also provides for grants of PSUs that generally vest at the end
of the third year after the grant. As defined by the Plan, the Human
Resources Committee of the Board of Directors determines the number
of PSUs a participant earns based on the extent to which the corresponding goals have been achieved over the three-year performance
cycle. All payments are subject to approval by the Human Resources
Committee. The PSUs are classified as liability awards because the PSU
awards are paid in cash upon vesting. The PSU award liability is measured
at its fair value at the end of each reporting period and, therefore, will
fluctuate based on the price of Verizon’s stock as well as performance
relative to the targets. Dividend equivalent units are also paid to participants at the time that the PSU award is determined and paid, and in the
same proportion as the PSU award.
The following table summarizes Verizon’s Performance Share Unit
activity:
(shares in thousands)
Outstanding, January 1, 2006
Granted
Payments
Cancelled/forfeited
Outstanding, December 31, 2006
Granted
Payments
Cancelled/forfeited
Outstanding, December 31, 2007
Granted
Payments
Cancelled/forfeited
Outstanding, December 31, 2008
Performance
Share Units
19,091
14,166
(3,607)
(1,227)
28,423
10,371
(5,759)
(900)
32,135
11,194
(7,597)
(2,518)
33,214
WeightedAverage
Grant-Date
Fair Value
$
36.84
32.05
38.54
37.25
34.22
37.59
36.75
36.18
34.80
36.64
36.06
36.00
35.04
As of December 31, 2008, unrecognized compensation expense related
to the unvested portion of Verizon’s RSUs and PSUs was approximately
$308 million and is expected to be recognized over a weighted-average
period of approximately two years.
59
Notes to Consolidated Financial Statements continued
Verizon Wireless’s Long-Term Incentive Plan
The 2000 Verizon Wireless Long-Term Incentive Plan (the Wireless Plan)
provides compensation opportunities to eligible employees and other
participating affiliates of Verizon Wireless (the Partnership). The Wireless
Plan provides rewards that are tied to the long-term performance of
the Partnership. Under the Wireless Plan, VARs were granted to eligible
employees. As of December 31, 2008, all VARs were fully vested.
Stock Options
The Verizon Long Term Incentive Plan provides for grants of stock options
to employees at an option price per share of 100% of the fair market
value of Verizon Stock on the date of grant. Each grant has a 10 year life,
vesting equally over a three year period, starting at the date of the grant.
We have not granted new stock options since 2004.
VARs reflect the change in the value of the Partnership, as defined in
the Wireless Plan, similar to stock options. Once VARs become vested,
employees can exercise their VARs and receive a payment that is equal
to the difference between the VAR price on the date of grant and the
VAR price on the date of exercise, less applicable taxes. VARs are fully
exercisable three years from the date of grant with a maximum term
of 10 years. All VARs are granted at a price equal to the estimated fair
value of the Partnership, as defined in the Wireless Plan, at the date of
the grant.
WeightedAverage
Exercise
Price
With the adoption of SFAS No. 123(R), the Partnership began estimating
the fair value of VARs granted using a Black-Scholes option valuation
model. The following table summarizes the assumptions used in the
model during 2008:
Ranges
Risk-free rate
Expected term (in years)
Expected volatility
0.6% – 3.3%
1.2 – 3.0
33.9% – 58.5%
The risk-free rate is based on the U.S. Treasury yield curve in effect at the
time of the measurement date. The expected term of the VARs granted
was estimated using a combination of the simplified method historical
experience, and management judgment. Expected volatility was based
on a blend of the historical and implied volatility of publicly traded peer
companies for a period equal to the VARs expected life, ending on the
measurement date, and calculated on a monthly basis.
The following table summarizes the Value Appreciation Rights activity:
(shares in thousands)
Outstanding rights, January 1, 2006
Exercised
Cancelled/forfeited
Outstanding rights, December 31, 2006
Exercised
Cancelled/forfeited
Outstanding rights, December 31, 2007
Exercised
Cancelled/forfeited
Outstanding rights, December 31, 2008
VARs
108,923
(7,448)
(7,008)
94,467
(30,848)
(3,207)
60,412
(31,817)
(351)
28,244
WeightedAverage
Grant-Date
Fair Value
$
17.12
13.00
23.25
16.99
15.07
24.55
17.58
18.47
19.01
16.54
Stock-Based Compensation Expense
After-tax compensation expense for stock-based compensation related
to RSUs, PSUs, and VARs described above included in net income as
reported was $375 million, $750 million and $535 million for 2008, 2007
and 2006, respectively.
60
The following table summarizes Verizon’s stock option activity:
(shares in thousands)
Stock
Options
Outstanding, January 1, 2006
Exercised
Cancelled/forfeited
Outstanding, December 31, 2006
Exercised
Cancelled/forfeited
Outstanding, December 31, 2007
Exercised
Cancelled/forfeited
Options outstanding, December 31, 2008
259,760
(3,371)
(27,025)
229,364
(33,079)
(21,422)
174,863
(218)
(39,878)
134,767
Options exercisable, December 31,
2006
2007
2008
225,067
174,838
134,767
$
46.01
32.12
43.72
46.48
38.50
48.26
47.78
38.00
48.13
47.69
46.69
47.78
47.69
The following table summarizes information about Verizon’s stock options
outstanding as of December 31, 2008:
Range of
Exercise Prices
$
20.00
30.00
40.00
50.00
60.00
–
–
–
–
-
29.99
39.99
49.99
59.99
69.99
Total
WeightedShares
Average
(in thousands) Remaining Life
24
19,327
54,190
60,884
342
134,767
3.7 years
4.6
2.2
1.1
0.8
2.1
WeightedAverage
Exercise Price
$
27.86
36.41
44.03
54.46
60.48
47.69
The total intrinsic value for stock options outstanding was not significant as of December 31, 2008. The total intrinsic value for stock options
exercised was $147 million in 2007 and not significant in 2008 and 2006.
The amount of cash received from the exercise of stock options was
not significant in 2008, $1,274 million in 2007 and $101 million in 2006,
respectively. The related tax benefits were not significant. The after-tax
compensation expense for stock options was not significant for 2007
and 2006. There was no stock option expense for 2008.
Notes to Consolidated Financial Statements continued
Note 15
Employee Benefits
We maintain non-contributory defined benefit pension plans for many
of our employees. In addition, we maintain postretirement health care
and life insurance plans for our retirees and their dependents, which
are both contributory and non-contributory and include a limit on the
Company’s share of cost for certain recent and future retirees. We also
sponsor defined contribution savings plans to provide opportunities for
eligible employees to save for retirement on a tax-deferred basis. We use
a measurement date of December 31 for our pension and postretirement health care and life insurance plans.
Refer to Note 1 for a discussion of the adoption of SFAS No. 158, which
was effective December 31, 2006.
Pension and Other Postretirement Benefits
Pension and other postretirement benefits for many of our employees
are subject to collective bargaining agreements. Modifications in benefits have been bargained from time to time, and we may also periodically
amend the benefits in the management plans.
As of June 30, 2006, Verizon management employees no longer earned
pension benefits or earned service towards the company retiree medical
subsidy. In addition, new management employees hired after December
31, 2005 are not eligible for pension benefits and managers with less
than 13.5 years of service as of June 30, 2006 are not eligible for company-subsidized retiree healthcare or retiree life insurance benefits.
Beginning July 1, 2006, management employees receive an increased
company match on their savings plan contributions.
The following tables summarize benefit costs, as well as the benefit obligations, plan assets, funded status and rate assumptions associated with
pension and postretirement health care and life insurance benefit plans:
Obligations and Funded Status
At December 31,
Change in Benefit
Obligations
Beginning of year
Service cost
Interest cost
Plan amendments
Actuarial (gain) loss, net
Benefits paid
Termination benefits
Curtailment gain
Acquisitions and
divestitures, net
Settlements
End of year
(dollars in millions)
Pension
2007
2008
Health Care and Life
2008
2007
$ 32,495
382
1,966
300
(154)
(2,577)
32
–
$ 34,159
442
1,975
–
123
(4,204)
–
–
$ 27,306
306
1,663
24
(483)
(1,529)
7
(29)
$ 27,330
354
1,592
–
(409)
(1,561)
–
–
(183)
(1,867)
$ 30,394
–
–
$ 32,495
(169)
–
$ 27,096
–
–
$ 27,306
$
Change in Plan Assets
Beginning of year
Actual return on plan assets
Company contributions
Benefits paid
Settlements
Acquisitions and
divestitures, net
End of year
$ 42,659
(10,680)
487
(2,577)
(1,867)
$ 41,509
4,591
737
(4,204)
–
$ 4,142
(1,285)
1,227
(1,529)
–
(231)
$ 27,791
26
$ 42,659
–
$ 2,555
$
Funded Status
End of year
$ (2,603)
$ 10,164
$ (24,541)
$ (23,164)
Amounts recognized on
the balance sheet
Noncurrent assets
Current liabilities
Noncurrent liabilities
Total
$ 3,132
(122)
(5,613)
$ (2,603)
$ 13,745
(130)
(3,451)
$ 10,164
$
–
(496)
(24,045)
$ (24,541)
$
Amounts recognized in
Accumulated Other
Comprehensive Loss
(Pretax)
Actuarial loss, net
Prior service cost
Total
$ 13,296
1,162
$ 14,458
$
$ 6,848
3,235
$ 10,083
$
$
13
932
945
4,303
352
1,048
(1,561)
–
–
4,142
–
(360)
(22,804)
$ (23,164)
$
6,040
3,636
9,676
Changes in benefit obligations were caused by factors including changes
in actuarial assumptions and settlements.
The accumulated benefit obligation for all defined benefit pension plans
was $29,405 million and $31,343 million at December 31, 2008 and 2007,
respectively.
Information for pension plans with an accumulated benefit obligation in
excess of plan assets follows:
At December 31,
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
(dollars in millions)
2008
2007
$ 27,171
26,641
21,436
$ 11,001
10,606
8,868
During 2008, the decline in the fair value of pension assets increased the
number of plans having accumulated benefit obligations in excess of
plan assets as of December 31, 2008 compared to December 31, 2007.
61
Notes to Consolidated Financial Statements continued
Net Periodic Cost
The following table displays the details of net periodic pension and other postretirement costs:
2008
Years Ended December 31,
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Actuarial loss, net
Net periodic benefit (income) cost
Termination benefits
Settlement loss
Curtailment loss and other, net
Subtotal
Total (income) cost
$
382
1,966
(3,187)
62
40
(737)
32
364
–
396
$ (341)
(dollars in millions)
Pension
2006
2007
$
442
1,975
(3,175)
43
98
(617)
–
–
–
–
$
(617)
$
581
1,995
(3,173)
44
182
(371)
47
56
–
103
$
(268)
Health Care and Life
2007
2006
2008
$
306
1,663
(321)
395
222
2,265
7
–
24
31
$ 2,296
$
$
354
1,592
(317)
392
316
2,337
–
–
–
–
2,337
Other pretax changes in plan assets and benefit obligations recognized in other comprehensive (income) loss are as follows:
At December 31,
Other changes in plan assets and benefit obligations recognized
in other comprehensive (income) loss (pretax)
Actuarial (gain) loss, net
Prior service cost
Reversal of amortization items:
Prior service cost
Actuarial loss, net
Total recognized in other comprehensive (income) loss (pretax)
$
$
$
$
356
1,499
(328)
360
290
2,177
14
–
–
14
2,191
(dollars in millions)
2008
Pension
2007
Health Care and Life
2008
2007
13,686
293
$ (1,317)
–
$ 1,030
(6)
(62)
(404)
13,513
(43)
(98)
$ (1,458)
(395)
(222)
407
$
$
(444)
–
(392)
(316)
$ (1,152)
The estimated net loss and prior service cost for the defined benefit
pension plans that will be amortized from Accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year
are $114 million and $112 million, respectively. The estimated net loss
and prior service cost for the defined benefit postretirement plans that
will be amortized from Accumulated other comprehensive loss into net
periodic benefit cost over the next fiscal year are $238 million and $401
million, respectively.
Additional Information
As a result of the adoption of SFAS No. 158 in 2006, we no longer record
an additional minimum pension liability. In prior years, as a result of
changes in interest rates and changes in investment returns, an adjustment to the additional minimum pension liability was required for a
number of plans, as indicated below. The adjustment in the liability was
recorded as a charge or (credit) to Accumulated other comprehensive
loss, net of tax, in shareowners’ investment in the consolidated balance
sheets. The Additional Minimum Pension Liability at December 31, 2006,
was reduced by $809 million, ($526 million after-tax) based on the final
measurement just prior to the adoption of SFAS No. 158. The remaining
$396 million, ($262 million after-tax), was reversed as a result of the
adoption of SFAS No. 158.
(dollars in millions)
2008
Years Ended December 31,
Decrease in minimum liability included in other comprehensive income, net of tax
62
$
–
2007
$
–
2006
$
(526)
Notes to Consolidated Financial Statements continued
Assumptions
The weighted-average assumptions used in determining benefit obligations follow:
At December 31,
2008
Discount rate
Rate of compensation increases
6.75%
4.00
Pension
2007
6.50%
4.00
Health Care and Life
2008
2007
6.75%
N/A
6.50%
4.00
The weighted-average assumptions used in determining net periodic cost follow:
Years Ended December 31,
2008
Discount rate
Expected return on plan assets
Rate of compensation increase
6.50%
8.50
4.00
2007
6.00%
8.50
4.00
In order to project the long-term target investment return for the total
portfolio, estimates are prepared for the total return of each major asset
class over the subsequent 10-year period, or longer. Those estimates are
based on a combination of factors including the current market interest
rates and valuation levels, consensus earnings expectations, historical
long-term risk premiums and value-added. To determine the aggregate
return for the pension trust, the projected return of each individual asset
class is then weighted according to the allocation to that investment
area in the trust’s long-term asset allocation policy.
The assumed Health Care Cost Trend Rates follow:
At December 31,
Health care cost trend rate assumed
for next year
Rate to which cost trend rate
gradually declines
Year the rate reaches level it is assumed
to remain thereafter
2008
Health Care and Life
2007
2006
9.00%
10.00%
10.00%
5.00
5.00
5.00
2014
2013
2011
A one-percentage-point change in the assumed health care cost trend
rate would have the following effects:
(dollars in millions)
One-Percentage-Point
Effect on 2008 service and interest cost
Effect on postretirement benefit obligation as of
December 31, 2008
Increase
$
279
2,891
Decrease
$
( 224)
(2,399)
Pension
2006
5.75%
8.50
4.00
2008
6.50%
8.25
4.00
Health Care and Life
2007
2006
6.00%
8.25
4.00
5.75%
8.25
4.00
Plan Assets
Pension Plans
The weighted-average asset allocations for the pension plans by asset
category follow:
At December 31,
Asset Category
Equity securities
Debt securities
Real estate
Other
Total
2008
46%
20
9
25
100%
2007
59%
18
6
17
100%
Equity securities include Verizon common stock of $87 million and
$127 million at December 31, 2008 and 2007, respectively. Other assets
include cash and cash equivalents (primarily held for the payment of
benefits), private equity and investments in absolute return strategies.
Health Care and Life Plans
The weighted-average asset allocations for the other postretirement
benefit plans by asset category follow:
At December 31,
Asset Category
Equity securities
Debt securities
Other
Total
2008
67%
26
7
100%
2007
74%
21
5
100%
In our health care and life plans, there was not a significant amount of
Verizon common stock held at the end of 2008 and none in 2007.
Our portfolio strategy emphasizes a long-term equity orientation,
significant global diversification, the use of both public and private
investments and professional financial and operational risk controls.
Assets are allocated according to long-term risk and return estimates.
Both active and passive management approaches are used depending
on perceived market efficiencies and various other factors.
63
Notes to Consolidated Financial Statements continued
Cash Flows
In 2008, we contributed $332 million to our qualified pension plans,
$155 million to our nonqualified pension plans and $1,227 million to
our other postretirement benefit plans. We estimate required qualified
pension plan contributions for 2009 to be approximately $300 million.
We also anticipate approximately $120 million in contributions to our
non-qualified pension plans and $1,770 million to our other postretirement benefit plans in 2009.
Estimated Future Benefit Payments
The benefit payments to retirees, which reflect expected future service,
are expected to be paid as follows:
(dollars in millions)
Pension
Benefits
2009
2010
2011
2012
2013
2014 – 2018
$
Health Care and Life
Prior to Medicare
Prescription
Drug Subsidy
4,101
3,110
2,769
2,324
2,338
11,292
$
Expected
Medicare Prescription
Drug Subsidy
1,979
2,085
2,174
2,195
2,221
10,928
$
89
99
109
122
134
837
Savings Plan and Employee Stock Ownership Plans
We maintain four leveraged employee stock ownership plans (ESOP).
Only one plan currently has unallocated shares. We match a certain percentage of eligible employee contributions to the savings plans with
shares of our common stock from this ESOP. At December 31, 2008, the
number of unallocated and allocated shares of common stock in this
ESOP were 3 million and 68 million, respectively. All leveraged ESOP
shares are included in earnings per share computations.
Total savings plan costs were $683 million, $712 million, and $669 million in 2008, 2007 and 2006, respectively.
Severance Benefits
The following table provides an analysis of our severance liability
recorded in accordance with SFAS No. 112, Employers’ Accounting for
Postemployment Benefits (SFAS No. 112):
Year
2006
2007
2008
(dollars in millions)
Beginning Charged to
of Year
Expense
Payments
$
$
596
644
1,024
$
343
743
570
(383)
(363)
(509)
Other End of Year
$
88
–
19
$
644
1,024
1,104
The remaining severance liability is actuarially determined and includes
the impact of the activities described in “Severance, Pension and Benefit
Related Charges” below. The 2008 expense includes charges for the
involuntary separation of approximately 8,600 employees, including
approximately 800 during the fourth quarter of 2008 and 5,100 expected
during 2009. The 2007 expense includes charges for the involuntary separation of 9,000 employees as described below.
64
Severance, Pension and Benefit Related Charges
During 2008, we recorded net pretax severance, pension and benefits
charges of $950 million ($588 million after-tax). This charge primarily
included $586 million ($363 million after-tax) for workforce reductions
in connection with the separation of approximately 8,600 employees
and related charges; 3,500 of whom were separated in the second half
of 2008, with the remaining reductions expected to occur in 2009, in
accordance with SFAS No. 112. Also included are net pretax pension
settlement losses of $364 million ($225 million after-tax) related to
employees that received lump-sum distributions primarily resulting
from our separation plans. These charges were recorded in accordance
with SFAS No. 88, Employers’ Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits (SFAS No. 88),
which requires that settlement losses be recorded once prescribed payment thresholds have been reached.
During the fourth quarter of 2007, we recorded charges of $772 million
($477 million after-tax) primarily in connection with workforce reductions
of 9,000 employees and related charges, 4,000 of whom were separated
in the fourth quarter of 2007 with the remaining reductions occurring
throughout 2008. In addition, we adjusted our actuarial assumptions for
severance to align with future expectations.
During 2006, we recorded net pretax severance, pension and benefits
charges of $425 million ($258 million after-tax). These charges included
net pretax pension settlement losses of $56 million ($26 million aftertax) related to employees that received lump-sum distributions primarily
resulting from our separation plans. These charges were recorded
in accordance with SFAS No. 88. Also included are pretax charges of
$369 million ($228 million after-tax) for employee severance and severance-related costs in connection with the involuntary separation of
approximately 4,100 employees.
Notes to Consolidated Financial Statements continued
Note 16
Deferred taxes arise because of differences in the book and tax bases of
certain assets and liabilities. Significant components of deferred tax are
shown in the following table:
Income Taxes
The components of Income Before Provision for Income Taxes,
Discontinued Operations, Extraordinary Item and Cumulative Effect of
Accounting Change are as follows:
(dollars in millions)
2008
Years Ended December 31,
Domestic
Foreign
$ 8,838
921
$ 9,759
2007
$
$
8,508
984
9,492
2006
$
$
7,000
1,154
8,154
The components of the provision for income taxes from continuing
operations are as follows:
(dollars in millions)
2008
Years Ended December 31,
Current
Federal
Foreign
State and local
Deferred
Federal
Foreign
State and local
Investment tax credits
Total income tax expense
$
365
240
543
1,148
2,214
(91)
66
2,189
(6)
$ 3,331
2007
$
$
2,568
461
545
3,574
397
66
(48)
415
(7)
3,982
2006
$
$
2,364
141
421
2,926
(9)
(45)
(191)
(245)
(7)
2,674
The following table shows the principal reasons for the difference
between the effective income tax rate and the statutory federal income
tax rate:
Years Ended December 31,
Statutory federal income tax rate
State and local income tax, net of federal tax
benefits
Distributions from foreign investments
Equity in earnings from unconsolidated
businesses
Other, net
Effective income tax rate
2008
35.0 %
4.1
(0.8)
(2.4)
(1.8)
34.1 %
2007
35.0 %
3.4
5.9
(2.3)
–
42.0 %
2006
35.0 %
1.8
–
(3.8)
(0.2)
32.8 %
The effective income tax rate is the provision for income taxes as a percentage of income from continuing operations before the provision
for income taxes. The effective income tax rate in 2008 was lower than
2007 primarily due to recording $610 million of foreign and domestic
taxes and expenses in 2007 specifically relating to our share of Vodafone
Omnitel’s distributable earnings. Verizon received net distributions from
Vodafone Omnitel in April 2008 and December 2007 of approximately
$670 million and $2,100 million, respectively.
At December 31,
(dollars in millions)
2008
2007
$
Valuation allowance
Deferred tax assets
$ 13,174
2,634
341
953
17,102
(2,995)
14,107
Former MCI intercompany accounts receivable
basis difference
Depreciation
Leasing activity
Wireless joint venture including wireless licenses
Other – liabilities
Deferred tax liabilities
Net deferred tax liability
1,818
8,157
2,218
12,957
823
25,973
$ 11,866
1,977
7,045
2,307
11,634
349
23,312
$ 15,226
Employee benefits
Tax loss and credit carry forwards
Uncollectible accounts receivable
Other – assets
7,067
2,711
400
852
11,030
(2,944)
8,086
Employee benefits deferred tax assets include $10,344 million and
$4,929 million at December 31, 2008 and 2007, respectively, recognized
in accordance with SFAS No. 158 (see Notes 1 and 15).
At December 31, 2008, undistributed earnings of our foreign subsidiaries indefinitely invested outside of the United States amounted to
approximately $800 million. We have not provided deferred taxes on
these earnings because we intend that they will remain indefinitely
invested outside of the United States. Determination of the amount of
unrecognized deferred taxes related to these undistributed earnings is
not practical.
At December 31, 2008, we had tax loss and credit carry forwards for
income tax purposes of approximately $3,000 million. Of these tax
loss and credit carry forwards, approximately $2,420 million will expire
between 2009 and 2028 and approximately $580 million may be carried
forward indefinitely. The amount of tax loss and credit carry forwards
reflected as a deferred tax asset above has been reduced by approximately $614 million and $661 million at December 31, 2008 and 2007,
respectively, due to federal and state tax law limitations on utilization of
net operating losses.
During 2008, the valuation allowance increased $51 million. Beginning
January 1, 2009, due to the issuance of SFAS No. 141(R), the valuation
allowance as of December 31, 2008, if recognized, will be reflected in
income tax expense.
The effective income tax rate in 2007 compared to 2006 was higher
primarily due to taxes recorded in 2007 related to distributions from
Vodafone Omnitel as discussed above. The 2007 rate was also increased
due to higher state taxes in 2007 as compared to 2006, as well as greater
benefits from foreign operations in 2006 compared to 2007. These
increases were partially offset by lower expenses recorded for unrecognized tax benefits in 2007 as compared to 2006.
65
Notes to Consolidated Financial Statements continued
FASB Interpretation No. 48
FIN 48 prescribes the recognition, measurement and disclosure
standards for uncertainties in income tax positions. A reconciliation
of the beginning and ending balance of unrecognized tax benefits is
as follows:
(dollars in millions)
2008
Balance at January 1,
Additions based on tax positions related
to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Lapses of statutes of limitations
Balance at December 31,
$ 2,883
251
344
(651)
(126)
(79)
$ 2,622
2007
$
2,958
$
141
291
(420)
(11)
(76)
2,883
Included in the total unrecognized tax benefits at December 31, 2008
and 2007 is $1,631 million and $1,245 million, respectively, that if recognized, would favorably affect the effective income tax rate. Of the $1,631
million at December 31, 2008, $383 million of unrecognized tax benefits
are from a prior acquisition and pursuant to SFAS No. 141(R), if recognized, would favorably affect the effective income tax rate.
We recognize any interest and penalties accrued related to unrecognized tax benefits in income tax expense. During 2008 we recognized
a net after tax benefit in the income statement related to interest and
penalties of approximately $55 million. We had approximately $538 million (after-tax) and $598 million (after-tax) for the payment of interest
and penalties accrued in the balance sheets at December 31, 2008 and
December 31, 2007, respectively.
During the year ended December 31, 2007, we recognized approximately
$175 million (after-tax) in the income statement for the payment of
interest and penalties. We had approximately $598 million (after-tax)
and $444 million (after-tax) for the payment of interest and penalties
accrued in the balance sheet at December 31, 2007 and January 1,
2007, respectively.
Verizon or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state, local and foreign jurisdictions. The
Company is generally no longer subject to U.S. federal, state and local,
or non-U.S. income tax examinations by tax authorities for years before
2004. The Internal Revenue Service (IRS) will begin its examination of the
Company’s U.S. income tax returns for years 2004 through 2006 in the
first quarter of 2009. As a result of the anticipated resolution of various
income tax audits within the next twelve months, we believe that it is
reasonably possible that the amount of unrecognized tax benefits will
decrease. An estimate of the range of the possible change cannot be
made until issues are further developed.
66
Note 17
Segment Information
Reportable Segments
We have two reportable segments, which we operate and manage
as strategic business units and organize by products and services. We
previously measured and evaluated our reportable segments based
on segment income. Beginning in 2008, we measure and evaluate our
reportable segments based on segment operating income, which is
reflected in all periods presented. The use of segment operating income
is consistent with the chief operating decision makers’ assessment of
segment performance.
Corporate, eliminations and other includes unallocated corporate
expenses, intersegment eliminations recorded in consolidation, the
results of other businesses such as our investments in unconsolidated
businesses, lease financing, and other adjustments and gains and losses
that are not allocated in assessing segment performance due to their
non-recurring or non-operational nature. Although such transactions
are excluded from the business segment results, they are included
in reported consolidated earnings. Gains and losses that are not
individually significant are included in all segment results, since these
items are included in the chief operating decision makers’ assessment
of segment performance.
The below reconciliation of segment operating revenues and expenses
to consolidated operating revenues and expenses also include those
items of a non-recurring or non-operational nature. We exclude from
segment results the effects of certain items that management does not
consider in assessing segment performance, primarily because of their
non-recurring or non-operational nature.
In 2008, we completed the spin-off of our local exchange and related
business assets in Maine, New Hampshire and Vermont. Accordingly,
Wireline results from divested operations, including the impact of the
non strategic assets sold during the first quarter of 2007, have been
reclassified to Corporate and Other and reflect comparable operating
results. In 2007, we completed the sale of our 52% interest in TELPRI and
our interest in CANTV. In 2006, we closed the sale of Verizon Dominicana.
Consequently, with these three transactions, we completed the disposition of our International segment. Also in 2006, we completed the spin-off
of our Information Services segment which included our domestic print
and Internet yellow pages directories business. For further information
concerning the disposition of the International and Information Services
segments, see Note 3.
Our segments and their principal activities consist of the following:
Segment
Description
Domestic Wireless
Domestic Wireless’s products and services include wireless voice, data services and other value-added services
and equipment sales across the United States.
Wireline
Wireline’s communications services include voice,
Internet access, broadband video and data, next generation Internet Protocol network services, network access,
long distance and other services. We provide these services to consumers, carriers, businesses and government
customers both in the United States and internationally
in 150 countries.
Notes to Consolidated Financial Statements continued
The following table provides operating financial information for our two reportable segments:
2008
(dollars in millions)
Domestic Wireless
$
49,226
106
49,332
15,660
14,273
5,405
35,338
13,994
External revenues
Intersegment revenues
Total operating revenues
Cost of services and sales
Selling, general & administrative expense
Depreciation & amortization expense
Total operating expenses
Operating income
$
Assets
Plant, property and equipment, net
Capital expenditures
$ 111,979
27,136
6,510
$
Wireline
$
Total Segments
46,978
1,236
48,214
24,274
11,047
9,031
44,352
3,862
$
$
90,386
58,287
9,797
$ 202,365
85,423
16,307
$
47,889
1,240
49,129
24,181
11,527
8,927
44,635
4,494
$
$
96,204
1,342
97,546
39,934
25,320
14,436
79,690
17,856
2007
External revenues
Intersegment revenues
Total operating revenues
Cost of services and sales
Selling, general & administrative expense
Depreciation & amortization expense
Total operating expenses
Operating income
Assets
Plant, property and equipment, net
Capital expenditures
$
43,777
105
43,882
13,456
13,477
5,154
32,087
11,795
$
$
$
91,666
1,345
93,011
37,637
25,004
14,081
76,722
16,289
$
83,755
25,971
6,503
$
92,264
58,702
10,956
$
176,019
84,673
17,459
$
37,930
113
38,043
11,491
12,039
4,913
28,443
9,600
$
48,352
1,152
49,504
23,806
11,998
9,309
45,113
4,391
$
86,282
1,265
87,547
35,297
24,037
14,222
73,556
13,991
2006
External revenues
Intersegment revenues
Total operating revenues
Cost of services and sales
Selling, general & administrative expense
Depreciation & amortization expense
Total operating expenses
Operating income
Assets
Plant, property and equipment, net
Capital expenditures
$
$
81,989
24,659
6,618
$
$
92,274
57,031
10,259
$
$
174,263
81,690
16,877
67
Notes to Consolidated Financial Statements continued
Reconciliation To Consolidated Financial Information
A reconciliation of the segment operating revenues and expenses to the consolidated operating revenues and expenses is as follows:
(dollars in millions)
2008
Operating Revenues
Total reportable segments
Reconciling items:
Impact of dispositions and operations sold
Corporate, eliminations and other
Consolidated operating revenues – reported
Operating Expenses
Total reportable segments
Reconciling items:
Merger integration costs (see Note 2)
Access line spin-off related charges (see Note 3)
Taxes on foreign distributions (see Note 7)
Verizon Center relocation (see Note 6)
Severance, pension and benefit charges, net (see Note 15)
Impact of disposition and operations sold (see Note 3)
Verizon Foundation contribution (see Note 3)
Corporate, eliminations and other
Consolidated operating expenses – reported
$
97,546
2007
$
93,011
$
258
(450)
97,354
$
79,690
$
174
103
–
–
950
214
–
(661)
80,470
2006
$
87,547
$
1,094
(636)
93,469
$
1,191
(556)
88,182
$
76,722
$
73,556
$
178
84
15
–
772
912
100
(892)
77,891
$
232
–
–
184
425
1,016
–
(604)
74,809
A reconciliation of the total of the reportable segments’ operating income to consolidated Income Before Provision for Income Taxes, Discontinued
Operations, Extraordinary Item and Cumulative Effect of Accounting Change is as follows:
(dollars in millions)
2008
Operating Income
Total segment operating income
Total reconciling items
Corporate, eliminations and other
Consolidated operating income – reported
$
$
17,856
(1,183)
211
16,884
2007
$
$
567
282
(1,819)
(6,155)
Equity in earnings of unconsolidated businesses
Other income and (expense), net
Interest expense
Minority interest
Income Before Provision for Income Taxes, Discontinued Operations,
Extraordinary item and Cumulative Effect of Accounting Change
$
Assets
Total reportable segments
Corporate, eliminations and other
Total consolidated – reported
$ 202,365
(13)
$ 202,352
9,759
16,289
(967)
256
15,578
2006
$
$
585
211
(1,829)
(5,053)
13,991
(666)
48
13,373
773
395
(2,349)
(4,038)
$
9,492
$
8,154
$
176,019
10,940
186,959
$
174,263
14,541
188,804
$
$
We generally account for intersegment sales of products and services and asset transfers at current market prices. We are not dependent on any
single customer. International operating revenues and long-lived assets are not significant.
68
Notes to Consolidated Financial Statements continued
Note 18
Accumulated Other Comprehensive Loss
The components of Accumulated Other Comprehensive Loss are as
follows:
Comprehensive Income
Comprehensive income (loss) consists of net income and other gains
and losses affecting shareowners’ investment that, under GAAP, are
excluded from net income. Significant changes in the components of
Other comprehensive income (loss), net of income tax expense (benefit), are described below.
Foreign Currency Translation
2008
2007
2006
Foreign Currency Translation
Adjustments:
$
$
(119)
–
–
(112)
(231)
$
$
397
412
–
29
838
$
$
330
–
786
80
1,196
Net Unrealized Gains (Losses) on Cash Flow Hedges
The changes in Unrealized Gains (Losses) on Cash Flow Hedges were
as follows:
(dollars in millions)
2008
Years Ended December 31,
Unrealized Gains (Losses) on
Cash Flow Hedges
Unrealized gains (losses), net of taxes
Less reclassification adjustments
for losses realized in net income, net of taxes
Net unrealized gains (losses) on
cash flow hedges
(dollars in millions)
2008
At December 31,
Foreign currency translation adjustments
Net unrealized losses on hedging
Unrealized gains (losses) on marketable securities
Defined benefit pension and postretirement plans
Accumulated Other Comprehensive Loss
$
936
(50)
(37)
(14,221)
$ (13,372)
2007
$
$
1,167
(10)
60
(5,723)
(4,506)
(dollars in millions)
Years Ended December 31,
Vodafone Omnitel
CANTV
Verizon Dominicana
Other international operations
$
(43)
2007
$
(3)
$
(40)
(2)
2006
$
(3)
$
1
11
(3)
$
Foreign Currency Translation Adjustments
The change in foreign currency translation adjustments at December
31, 2008 was primarily driven by the settlement of the foreign currency
forward contracts which hedged a portion of our net investment in
Vodafone Omnitel (see Note 11) and the devaluation of the Euro. During
2007 we sold our interest in CANTV. During 2006 we sold our interest in
Verizon Dominicana. See Note 3 for information on CANTV and Verizon
Dominicana.
Defined Benefit Pension and Postretirement Plans
The change in defined benefit pension and postretirement plans of
$8.5 billion, net of taxes of $5.4 billion, at December 31, 2008 was attributable to the change in the funded status of the plans in connection
with the annual pension and postretirement valuation in accordance
with SFAS No. 158. The funded status was impacted by changes in asset
performance, actuarial assumptions, and plan experience. In addition
to the pension and postretirement items, we recorded a reduction to
the beginning balance of Accumulated other comprehensive loss of
$79 million ($44 million after-tax) in connection with the spin-off of our
local exchange and related business assets in Maine, New Hampshire
and Vermont.
14
Unrealized Gains (Losses) on Marketable Securities
The changes in Unrealized Gains (Losses) on Marketable Securities were
as follows:
(dollars in millions)
2008
Years Ended December 31,
Unrealized Gains (Losses) on
Marketable Securities
Unrealized gains (losses), net of taxes
Less reclassification adjustments
for gains (losses) realized in
net income, net of taxes
Net unrealized gains (losses) on
marketable securities
$
(142)
2007
$
(45)
$
(97)
13
2006
$
17
$
(4)
79
25
$
54
69
Notes to Consolidated Financial Statements continued
Note 19
Note 20
Additional Financial Information
Commitments and Contingencies
The tables that follow provide additional financial information related to
our consolidated financial statements:
Several state and federal regulatory proceedings may require our telephone operations to pay penalties or to refund to customers a portion
of the revenues collected in the current and prior periods. There are also
various legal actions pending to which we are a party and claims which,
if asserted, may lead to other legal actions. We have established reserves
for specific liabilities in connection with regulatory and legal actions,
including environmental matters that we currently deem to be probable
and estimable. We do not expect that the ultimate resolution of pending
regulatory and legal matters in future periods, including the Hicksville
matter described below, will have a material effect on our financial condition, but it could have a material effect on our results of operations for
a given reporting period.
Income Statement Information
Years Ended December 31,
Depreciation expense
Interest cost incurred
Capitalized interest
Advertising costs
(dollars in millions)
2008
$ 13,182
2,566
(747)
2,754
2007
2006
$ 13,036
2,258
(429)
2,463
$ 13,122
2,811
(462)
2,271
Balance Sheet Information
(dollars in millions)
2008
At December 31,
Accounts Payable and Accrued Liabilities
Accounts payable
Accrued expenses
Accrued vacation, salaries and wages
Interest payable
Accrued taxes
Other Current Liabilities
Advance billings and customer deposits
Dividends payable
Other
2007
$ 3,856
2,299
4,871
652
2,136
$ 13,814
4,491
2,400
4,828
473
2,270
$ 14,462
$ 2,651
1,584
2,864
$ 7,099
$
$
$
2,476
1,266
3,583
7,325
Cash Flow Information
Years Ended December 31,
Cash Paid
Income taxes, net of amounts refunded
Interest, net of amounts capitalized
Supplemental Investing and Financing
Transactions
Cash acquired in business combinations
Assets acquired in business combinations
Liabilities assumed in business
combinations
Debt assumed in business combinations
Shares issued to Price to acquire limited
partnership interest in VZ East (Note 8)
(dollars in millions)
2008
$ 1,206
1,664
2007
$
2,491
1,682
2006
$
3,299
2,103
397
2,803
17
589
2,361
18,511
384
1,505
154
–
7,813
6,169
–
–
1,007
Other, net cash provided by operating activities – continuing operations
primarily included the add back of the minority interest’s share of Verizon
Wireless earnings, net of dividends paid to minority partners, of $5,218
million in 2008, $3,953 million in 2007 and $3,232 million in 2006.
During 2003, under a government-approved plan, remediation commenced at the site of a former Sylvania facility in Hicksville, New York
that processed nuclear fuel rods in the 1950s and 1960s. Remediation
beyond original expectations proved to be necessary and a reassessment
of the anticipated remediation costs was conducted. A reassessment of
costs related to remediation efforts at several other former facilities was
also undertaken. In September 2005, the Army Corps of Engineers (ACE)
accepted the Hicksville site into the Formerly Utilized Sites Remedial
Action Program. This may result in the ACE performing some or all of the
remediation effort for the Hicksville site with a corresponding decrease
in costs to Verizon. To the extent that the ACE assumes responsibility for
remedial work at the Hicksville site, an adjustment to a reserve previously
established for the remediation may be necessary. Adjustments to the
reserve may also be necessary based upon actual conditions discovered
during the remediation at any of the sites requiring remediation.
In connection with the execution of agreements for the sales of businesses and investments, Verizon ordinarily provides representations and
warranties to the purchasers pertaining to a variety of nonfinancial matters, such as ownership of the securities being sold, as well as indemnity
from certain financial losses.
Subsequent to the sale of Verizon Information Services Canada in 2004,
we continue to provide a guarantee to publish directories, which was
issued when the directory business was purchased in 2001 and had a
30-year term (before extensions). The preexisting guarantee continues,
without modification, despite the subsequent sale of Verizon Information
Services Canada and the spin-off of our domestic print and Internet
yellow pages directories business. The possible financial impact of the
guarantee, which is not expected to be adverse, cannot be reasonably
estimated since a variety of the potential outcomes available under the
guarantee result in costs and revenues or benefits that may offset each
other. In addition, performance under the guarantee is not likely.
As of December 31, 2008, letters of credit totaling approximately $200
million were executed in the normal course of business, which support
several financing arrangements and payment obligations to third parties.
We have several commitments primarily to purchase network services,
equipment and software from a variety of suppliers totaling $737 million.
Of this total amount, $435 million, $162 million, $75 million, $29 million,
$26 million and $10 million are expected to be purchased in 2009, 2010,
2011, 2012, 2013 and thereafter, respectively.
70
Notes to Consolidated Financial Statements continued
Note 21
Quarterly Financial Information (Unaudited)
(dollars in millions, except per share amounts)
Income Before Discontinued Operations, Extraordinary Item
and Cumulative Effect of Accounting Change
Quarter Ended
Operating
Revenues
Operating
Income
Amount
2008
March 31
June 30
September 30
December 31
$ 23,833
24,124
24,752
24,645
$ 4,333
4,546
4,173
3,832
2007
March 31
June 30
September 30
December 31
$ 22,584
23,273
23,772
23,840
$
•
•
•
•
•
•
•
•
3,796
4,149
4,210
3,423
Per ShareBasic
Per ShareDiluted
$ 1,642
1,882
1,669
1,235
$
.57
.66
.59
.43
$
.57
.66
.59
.43
$ 1,642
1,882
1,669
1,235
$
$
.51
.58
.44
.37
$
.51
.58
.44
.37
$
1,484
1,683
1,271
1,072
Net Income
1,495
1,683
1,271
1,072
Results of operations for the first quarter of 2008 include after-tax charges of $18 million for merger integration costs and $81 million related to access line spin-off charges.
Results of operations for the second quarter of 2008 include after-tax charges of $22 million for merger integration costs.
Results of operations for the third quarter of 2008 include after-tax charges of $32 million for merger integration costs and $164 million for severance, pension and benefit charges.
Results of operations for the fourth quarter of 2008 include after-tax charges of $35 million for merger integration costs, $31 million investment related charges attributable to an other-thantemporary decline in the fair value of our investments in marketable securities, and $424 million for severance, pension and other charges.
Results of operations for the first quarter of 2007 include after-tax charges of $9 million for merger integration costs, $131 million for an extraordinary charge related to the nationalization of
CANTV, a $70 million after-tax gain on the sale of our interest in TELPRI and a $65 million after tax contribution to the Verizon Foundation.
Results of operations for the second quarter of 2007 include after-tax charges of $17 million for merger integration costs.
Results of operations for the third quarter of 2007 include after-tax charges of $28 million for merger integration costs, $44 million related to access line spin-off charges and $471 million associated with taxes on foreign distributions.
Results of operations for the fourth quarter of 2007 include after-tax charges of $58 million for merger integration costs, $36 million related to access line spin-off charges, $139 million associated with taxes on foreign distributions, and $477 million for severance, pension and other charges.
Income before discontinued operations per common share is computed independently for each quarter and the sum of the quarters may not equal the annual amount.
71
Board of Directors
Richard L. Carrión
Chairman, President and
Chief Executive Officer
Popular, Inc.
and Chairman and Chief Executive Officer
Banco Popular de Puerto Rico
M. Frances Keeth
Retired Executive Vice President
Royal Dutch Shell plc
Robert W. Lane
Chairman and Chief Executive Officer
Deere & Company
Sandra O. Moose
President
Strategic Advisory Services LLC
Joseph Neubauer
Chairman and Chief Executive Officer
ARAMARK Holdings Corporation
Donald T. Nicolaisen
Former Chief Accountant
United States Securities and
Exchange Commission
Thomas H. O’Brien
Retired Chairman and Chief Executive Officer
The PNC Financial Services Group, Inc.
and PNC Bank, N.A.
Clarence Otis, Jr.
Chairman and Chief Executive Officer
Darden Restaurants, Inc.
Hugh B. Price
Visiting Professor and Lecturer
Woodrow Wilson School of Public and
International Affairs, Princeton University
and Non-Resident Senior Fellow
The Brookings Institution
Ivan G. Seidenberg
Chairman and Chief Executive Officer
Verizon Communications Inc.
John W. Snow
President
JWS Associates, LLC
John R. Stafford
Retired Chairman and Chief Executive Officer
Wyeth
Retired in 2008:
Robert D. Storey
Retired Partner
Thompson Hine LLP
Corporate Officers and
Executive Leadership
Ivan G. Seidenberg
Chairman and Chief Executive Officer
Dennis F. Strigl
President and Chief Operating Officer
Doreen A. Toben*
Executive Vice President and
Chief Financial Officer
Thomas A. Bartlett
Senior Vice President and Controller
John W. Diercksen
Executive Vice President –
Strategy, Development and Planning
Marianne Drost
Senior Vice President, Deputy General
Counsel and Corporate Secretary
Patrick R. Gaston
President – Verizon Foundation
Shaygan Kheradpir
Executive Vice President and
Chief Information Officer
John F. Killian*
President – Verizon Business
Ronald H. Lataille
Senior Vice President – Investor Relations
Kathleen H. Leidheiser
Senior Vice President – Internal Auditing
Richard J. Lynch
Executive Vice President and
Chief Technology Officer
Lowell C. McAdam
Executive Vice President and
President and Chief Executive Officer –
Verizon Wireless
Daniel S. Mead
President – Verizon Telecom
Randal S. Milch
Executive Vice President and
General Counsel
Marc C. Reed
Executive Vice President –
Human Resources
Virginia P. Ruesterholz
President – Verizon Services Operations
John G. Stratton
Executive Vice President and
Chief Marketing Officer
Thomas J. Tauke
Executive Vice President –
Public Affairs, Policy and Communications
Catherine T. Webster
Senior Vice President and Treasurer
* Doreen Toben will serve as Executive Vice President
until her retirement in mid-2009. Effective March 1,
2009, John Killian became Executive Vice President
and Chief Financial Officer and Francis J. Shammo
became President – Verizon Business.
72
v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 8 a n n ua l r e p o r t
Investor Information
Registered Shareowner Services
Questions or requests for assistance regarding changes to or transfers
of your registered stock ownership should be directed to our transfer
agent, Computershare Trust Company, N.A. at:
Verizon Communications Shareowner Services
c/o Computershare
P.O. Box 43078
Providence, RI 02940-3078
Phone: 800 631-2355
Website: www.computershare.com/verizon
Email: [email protected]
Persons outside the U.S. may call: 781 575-3994
Persons using a telecommunications device for the deaf (TDD) may call:
800 524-9955
Investor Services
Investor Website – Get company information and news on our
website – www.verizon.com/investor
VZ Mail – Get the latest investor information delivered directly to your
computer desktop. Subscribe to VzMail at our investor information
website.
Stock Market Information
Shareowners of record at December 31, 2008: 798,938
Verizon is listed on the New York Stock Exchange
(ticker symbol: VZ)
Also listed on the Chicago, London, Swiss, Amsterdam and Frankfurt
exchanges.
Common Stock Price and Dividend Information
Market Price
High
Low
Cash
Dividend
Declared
$ 34.90 $ 23.07
36.34
30.25
39.94
33.84
44.12
33.00
$ 0.460
0.460
0.430
0.430
$
$
On-line Account Access – Registered shareowners can view account
information on-line at: www.computershare.com/verizon
Click on “Create login” to register. For more information, contact
Computershare.
Direct Dividend Deposit Service – Verizon offers an electronic funds
transfer service to registered shareowners wishing to deposit dividends
directly into savings or checking accounts on dividend payment dates.
For more information, contact Computershare.
Direct Invest Stock Purchase and Ownership Plan – Verizon offers a
direct stock purchase and share ownership plan. The plan allows current and new investors to purchase common stock and to reinvest the
dividends toward the purchase of additional shares. To receive a Plan
Prospectus and enrollment form, contact Computershare or visit their
website.
eTree® Program – Worldwide, Verizon is acting to conserve natural
resources in a variety of ways. Now we are proud to offer shareowners
an opportunity to be environmentally responsible. By receiving links
to proxy, annual report and shareowner materials online, you can help
Verizon reduce the amount of materials we print and mail. As a thank
you for choosing electronic delivery, Verizon will plant a tree on your
behalf. It’s fast and easy and you can change your electronic delivery
options at any time. Sign up at www.eTree.com/verizon or call
800 631-2355 or 781 575-3994.
Corporate Governance
Verizon’s Corporate Governance Guidelines are available on our
website – www.verizon.com/investor
If you would prefer to receive a printed copy in the mail, please contact
the Assistant Corporate Secretary:
Verizon Communications Inc.
Assistant Corporate Secretary
140 West Street, 29th Floor
New York, NY 10007
2008
Fourth Quarter
Third Quarter
Second Quarter
First Quarter*
2007*
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
46.03
44.55
43.79
38.60
$
40.59
39.09
36.59
35.44
0.430
0.430
0.405
0.405
*Prices have been adjusted for the spin-off of our local exchange and related
business assets in Maine, New Hampshire and Vermont.
Form 10–K
To receive a copy of the 2008 Annual Report on Form 10-K, which is
filed with the Securities and Exchange Commission, contact Investor
Relations:
Verizon Communications Inc.
Investor Relations
One Verizon Way
Basking Ridge, NJ 07920
Phone: 212 395-1525
Certifications Regarding Public Disclosures & Listing Standards
The 2008 Annual Report on Form 10-K filed with the Securities and
Exchange Commission includes the certifications required by Section
302 of the Sarbanes-Oxley Act regarding the quality of Verizon’s
public disclosure. In addition, the annual certification of the chief
executive officer regarding compliance by Verizon with the corporate
governance listing standards of the New York Stock Exchange was
submitted without qualification following the 2008 annual meeting of
shareholders.
Equal Opportunity Policy
Verizon maintains a long-standing commitment to equal opportunity
and valuing the diversity of its employees, suppliers and customers.
Verizon is fully committed to a workplace free from discrimination and
harassment for all persons, without regard to race, color, religion, age,
gender, national origin, sexual orientation, marital status, citizenship
status, veteran status, disability or other protected classifications.
Verizon Communications Inc.
140 West Street
New York, New York 10007
212 395-1000
verizon.com
©2009. Verizon. All Rights Reserved.
c4 002CS18035
Cert no. SCS-COC-00648
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