W O R L D ’ S B... DESERVE EVEN BIGGER SOLUTIONS. T H E

W O R L D ’ S   B... DESERVE EVEN BIGGER SOLUTIONS. T H E
THE
WORLD’S BIGGEST CHALLENGES
DESERVE EVEN BIGGER SOLUTIONS.
{ P O W E RFUL ANSWER S }
2013 ANNUAL REPORT
Financial Highlights
AS OF DECEMBER 31, 2013
Consolidated
Revenues
Cash Flows
from Operating
Activities
(billions)
Reported
Diluted Earnings
per Share
(billions)
$110.9
$115.8
Dividends
Declared
per Share
(non-gaap)
$38.8
$120.6
$29.8
Adjusted
Diluted Earnings
per Share
$2.84
$4.00
$31.5
$2.15
$2.090
$1.975 $2.030
$2.24
$0.85
$0.31
11
12
13
11
12
13
11
12
13
11
12
13
11
12
13
Corporate Highlights
•$22.2billioninfreecashflow(non-GAAP)
•49.5%wirelesssegmentEBITDAservicemargin(non-GAAP)
•4.1%growthinoperatingrevenues
•8.0%growthinwirelessretailservicerevenues
•18.6%totalshareholderreturn
•648,000FiOSInternetsubscribernetadditions
•2.9%annualdividendincrease
•536,000FiOSVideosubscribernetadditions
•4.5millionwirelessretailnetadditions*
•14.7%growthinFiOSrevenues
•0.97%wirelessretailpostpaidchurn
•4.9%growthinwirelineconsumerretailrevenues
* Excludes acquisitions and adjustments
See www.verizon.com/investor for reconciliations to U.S. generally accepted accounting principles (GAAP) for the non-GAAP financial measures included in this annual report.
Forward-Looking Statements
In this report 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 in our filings with the Securities and Exchange Commission (the “SEC”), could affect future results and could cause those results to differ materially
from those expressed in the forward-looking statements: the ability to realize the expected benefits of our transaction with Vodafone in the timeframe expected or at all; an adverse change in the ratings
afforded our debt securities by nationally accredited ratings organizations or adverse conditions in the credit markets affecting the cost, including interest rates, and/or availability of further financing;
significantly increased levels of indebtedness as a result of the Vodafone transaction; changes in tax laws or treaties, or in their interpretation; adverse conditions in the U.S. and international economies;
material adverse changes in labor matters, including labor negotiations, and any resulting financial and/or operational impact; material changes in technology or technology substitution; disruption of
our key suppliers’ provisioning of products or services; changes in the regulatory environment in which we operate, including any increase in restrictions on our ability to operate our networks; breaches of
network or information technology security, natural disasters, terrorist attacks or acts of war or significant litigation and any resulting financial impact not covered by insurance; the effects of competition
in the markets in which we operate; changes in 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; significant increases in benefit plan costs or lower investment returns on plan assets; and the inability to implement our business strategies.
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.
Chairman’s Letter
Dear Shareowner,
Thirty years ago, the first commercial cell phone call was made on a Motorola DynaTAC
phone that weighed almost two pounds and cost around $4,000. Today we’re very close to
having as many cell phones as there are people on earth. Almost 40 percent of the world’s
population is connected to the Internet.
An increasing number of mobile Internet connections are being
embedded in electronics, cars, buildings and energy systems to
create an Internet of Things, which together with cloud computing
is transforming the physical world into a giant, programmable
information system.
In three decades, the mobile broadband revolution has become
the most powerful innovation engine on earth, transforming
every industry and society it touches—and, frankly, we’re just
getting warmed up. Verizon sits at the convergence of all these
great, disruptive technologies and, thanks to the momentum we
generated during a successful 2013, we are in a better position
than ever to take advantage of the growth opportunities in this
dynamic business.
The big strategic milestone for us in 2013 was our agreement
to purchase the portion of Verizon Wireless owned by Vodafone,
which gives us 100 percent ownership of the crown jewel of the
global wireless industry. We also strengthened our portfolio of
enterprise strategic services with a reinvented cloud product
suite, the launch of a mobile health platform and acquisitions in the
fast-growing market of mobile video delivery.
Throughout it all, we kept our focus on consistent execution,
excellent customer service and the network quality that has
become a Verizon trademark. As a result, we delivered excellent
operating and financial results in 2013 and positioned our
company for continued leadership in 2014 and beyond.
DELIVERING STRONG OPERATIONAL AND
FINANCIAL PERFORMANCE
As always, Verizon’s fundamental strength is rooted in our network
superiority and focus on customers.
In 2013, we extended the reach and capacity of our wireless,
fiber and global Internet Protocol (IP) networks. We substantially
finished the build-out of our 4G LTE wireless network, which
now reaches more than 500 markets and 97 percent of the U.S.
population. We continue to enhance the vital trade routes of
the digital economy by deploying 100 gigabit Ethernet speeds
1
business and government customers. These services now account
for nearly 60 percent of enterprise revenues.
The loyalty of Verizon’s customer base gives us a resilient and
stable business model in a highly competitive marketplace.
Verizon Wireless has the lowest customer churn of all major
providers; FiOS was the only provider in the east region to receive
J.D. Power awards for customer satisfaction with television, phone
and Internet in 2013; Frost & Sullivan recognized the quality
of our enterprise managed security services; and for the third year
in a row, Fortune magazine has ranked Verizon No. 1 in the
telecommunications sector of the publication’s list of the World’s
Most Admired Companies.
The Verizon Innovative Learning Schools program provides
grants to train teachers on the most effective way to use
technology in the classroom to engage students. For more
information on Verizon’s commitment to K-12 education,
visit responsibility.verizon.com
in our enterprise networks in Europe and the U.S., and we have
successfully trialed 200 gigabit speeds on our long-haul route
between New York City and Boston. In our all-fiber residential
network, which now passes 18.6 million households, our faster
FiOS Quantum service has proven to be a real growth driver, with
more than 1 million customers signing up for its broadband speeds
of up to 500 megabits per second. In addition, we accelerated our
transition to a more efficient technology platform by converting
330,000 copper lines to fiber. Our commitment to network quality
earned us numerous third-party accolades in 2013, including J.D.
Power’s top rating for wireless quality.
These networks are a powerful distribution platform for the
innovative products and services that are fueling our growth. We
ended the year with 102.8 million wireless connections, 6.1 million
FiOS Internet subscribers and 5.3 million FiOS Video subscribers.
Wireless service revenues grew by 8.3 percent in 2013. We
continue to introduce a steady stream of smartphones and tablets
by a range of leading manufacturers, including a new family of
Motorola DROIDs, the iPhone 5C and 5S, the first-ever Windows
tablet and a 4G LTE version of Amazon’s Kindle. About 70 percent
of our postpaid customers now have smartphones, helping
us reach the strongest wireless EBITDA service margins in our
history. (EBITDA means “earnings before interest, taxes,
depreciation and amortization.”)
Total FiOS revenues were up 14.7 percent for the year. Consumer
wireline revenues grew at a very healthy 4.9 percent a year, largely
driven by FiOS. On the enterprise side, sales of strategic services
such as security, cloud and telematics increased by 4.6 percent
despite a challenging macroeconomic environment faced by our
2
We’re also delivering value to customers and investors by
streamlining our operations, simplifying our processes and
listening to our customers. The Verizon Lean Six Sigma process
improvement model has put new tools in our toolbox for fixing
inefficient systems, yielding billions in operating and capital
efficiencies in 2013. Our enterprise business made excellent
progress in integrating its systems and implementing a rapid
delivery model to lower costs and improve service. We also took
steps to reinvent the retail environment in our Verizon Wireless
stores by opening the first Destination Store at the Mall of
America in Minneapolis, featuring lifestyle zones that reflect the
breadth of ways in which customers are incorporating wireless
products into their daily lives.
This disciplined focus on customer service, growth and
profitability resulted in strong financial performance in 2013. We
generated $120.6 billion in operating revenues, up 4.1 percent
from 2012, with growth coming from all our strategic areas
of wireless, FiOS and strategic enterprise services. Adjusted
operating income (non-GAAP) grew more than 21 percent
compared with 2012. We generated $38.8 billion in cash flow from
operating activities, up 23.3 percent year over year, and posted
our highest full-year adjusted consolidated EBITDA margin in
eight years.
On an adjusted basis (non-GAAP), earnings per share were $2.84,
up 26.8 percent from 2012. Reported earnings per share were
$4.00 for 2013, compared with 31 cents per share in 2012. For
shareowners, this translated to a total annual return of 18.6
percent, including our seventh consecutive dividend increase.
To sum up, we ended 2013 stronger and more competitive than
ever, with great momentum in our growth businesses. Our job in
2014 and beyond is to take full advantage of these opportunities.
TAKING MOBILE TO THE NEXT LEVEL
We took the first step down that road early in 2014 by completing
our acquisition of Vodafone’s share of Verizon Wireless. We have
operated Verizon Wireless in partnership with Vodafone Group Plc
since 2000. Over that time, we’ve built it into the largest and most
profitable company in the U.S. wireless industry. By owning 100
V E R I ZO N CO M M U N I C AT I O N S I N C . 2 0 1 3 A N N UA L R E P O R T
percent of Verizon Wireless, we will retain all of its cash flows,
giving us the ability to invest in new technologies and address
customer demands while having an immediate accretive impact to
earnings of about 10 percent excluding non-operational items.
Having greater financial flexibility will enable us to respond
quickly to the significant growth opportunities within our current
wireless business. About one-third of our customers still
don’t have smartphones, giving us plenty of headroom to benefit
from this profitable trend. Our “More Everything” data plans—now
almost half of our base—encourage customers to add tablets
and other devices, which we expect will drive penetration levels
beyond 100 percent.
More broadly, mobile networks are becoming the platform for
most of the world’s digital cargo—including voice, data and,
increasingly, video—giving rise to whole new industries such as
mobile commerce, mobile video delivery, telemedicine and
distance learning that represent the next growth wave in our
industry. This is where the new, post-transaction Verizon will have
the biggest value-creating opportunity of all—not just in wireless,
but across our entire company.
GROWING THROUGH CONVERGED SOLUTIONS
We have spent several years transforming Verizon into a
company that can serve the needs of the digital economy.
Thanks to our steady investment in technology, few if any
companies can match the reach and power of Verizon’s worldclass wireless and broadband networks. In addition, we have
built or acquired the capabilities we need to provide integrated
solutions that meet the increasingly complex requirements of
our customers. Through Verizon Terremark, we operate some
of the world's most advanced data centers and provide stateof-the-art cloud services for enterprise customers. We provide
the vital security services that are so critical to the future of
mobile commerce and cloud computing. Verizon Telematics is a
leader in the connected-car business and is on the forefront of
the emerging machine-to-machine marketplace. We have built a
substantial presence in the delivery of digital video across fiber,
mobile and cloud platforms, and we are creating new businesses in
vertical markets such as healthcare and energy management.
In 2013, we leveraged these assets to make important additions
to our portfolio of connected solutions.
CLOUD
Much like their counterparts in the consumer marketplace,
enterprise customers want unprecedented control over
their technology. As businesses move more and more data
storage, customer information and information technology
functions to the cloud, they increasingly expect those services
V E RIZ ON WIRELES S
V E RI ZO N E N T E RP RI S E S O L U T I O N S
The Nation’s Largest 4G LTE Network
A Global Footprint Serving 99%
of the Fortune 500
• Verizon4GLTEcovers97percentoftheU.S.population.
• Verizon’smeshnetworkprovidesindustry-leadingavailabilityrates
exceeding 99.9999 percent.
• OnlyVerizon's4Gnetworkis100percent4GLTE.Othernetworksusea
blend of wireless technologies, but 4G LTE is the gold standard.
• MorecustomersrecommendVerizontofriendsandfamilyoverany
other wireless network.*
• MorepeoplestaywithVerizonthananyotherwirelessnetwork.**
*
• VerizoncarriesIP,data,andvoicetrafficonmorethan80submarine
cable networks worldwide.
• Verizonoperatessatellitelinkstomorethan200teleportsin
approximately 90 countries.
• WeofferPrivateIPservicein130countries/territories.
Based on Russell Research “Wireless Service Provider Recommendation Study” - Among
respondents who had an opinion.
** Based on Q4 2013 wireless industry churn results.
3
to be available for delivery on demand over any platform, at a time
and place of their choosing, tailored to their unique requirements.
At Verizon, we are innovating to stay ahead of this trend and to
put greater choice and control in the customer’s hands.
In 2013, we unveiled a transformational cloud platform and
portfolio of services, backed by our global IP network, global
data centers and managed security services. We designed our
next-generation enterprise cloud around the needs of the “ondemand” data customer, on an innovative pay-as-you-go model
that combines the economy and flexibility of the public cloud
with the security and reliability of the private cloud. With the
new Verizon Cloud, customers can configure their own storage,
applications and virtual machines with the click of a mouse and
change their systems in a matter of seconds as their business
requires—a radically new approach that allows us to deliver
secure, enterprise-level cloud services to companies of any size.
We launched a trial of the new Verizon cloud in 2013 and expect to
launch commercial service in the second half of 2014.
movie studios, cable systems and broadcasters, and online
video publishers—face complex technical challenges in moving
their content over broadband and wireless networks to a rapidly
proliferating number of screens and end users.
At Verizon, we are building a one-stop shop to solve this problem
for content providers—including our own FiOS Video service—
who want to mobilize video across all platforms and devices. The
core of this business is Verizon Digital Media Services, a content
delivery network that takes in digital content to our cloud, then
packages and distributes it over our global IP and 4G LTE wireless
networks in the proper format to users on any device or screen.
In 2013, we acquired two specialized companies—EdgeCast and
upLynk—that will enhance our capabilities in digital video delivery
as we integrate them into our media services company.
VIDEO
Experts predict that video will comprise almost 70 percent of
all consumer Internet traffic by 2017, with much of that carried
by wireless networks. Providers of digital content—including
We also strengthened our position in next-generation video
with the February 2014 purchase of the Internet video platform
OnCue from Intel. We expect the OnCue platform to improve our
FiOS Video service by simplifying the installation process and
integrating live TV, video-on-demand and linear programming
into a more seamless viewing experience. We also expect the
platform’s all-IP capabilities to make it easier to deliver FiOS
content across wireless networks and set the stage for us to be a
true nationwide video provider.
VE RIZ ON FiOS
V E RI ZO N I N N OVAT I O N P RO G RA M
The Power of Fiber Optics
An Ecosystem of Innovators
Today:
Verizon’s 100% fiber-optic FiOS network enables Internet speeds
up to 500 Mbps, provides more than 485 TV channels and offers digital
phone quality with 99.9% network reliability. Whether you’re watching
HD movies, streaming music or gaming with friends, FiOS powers
the multiple devices we use in our everyday lives.
New Solutions
Service Providers
Application Providers
Technology
Providers
Technology
Standards
Tomorrow:
FiOS will deliver the power and vast capacity of a 100% fiber-optic
broadband connection—essential for our smart homes and connected
lives in the days to come. The all-fiber connectivity of Verizon’s FiOS
network will help future–proof our world.
4
Non-Traditional
Products and Services
Verizon Wireless
Platform
Device Software
Chipsets/Components
Infrastructure
Equipment, Devices
4G LTE
Located in the Boston and San Francisco areas, the Verizon Innovation
Centers were created to help a wide range of entrepreneurs and inventors
connect their new devices and software to the Verizon Wireless 4G LTE
network. Each company brings their unique expertise and commitment to
creating innovative, market-driving products, services, and applications.
With 4G LTE at its core, our ecosystem helps non-traditional wireless
products, services and applications navigate the development and testing
process, so they can reach the market faster.
V E R I ZO N CO M M U N I C AT I O N S I N C . 2 0 1 3 A N N UA L R E P O R T
By combining these capabilities with the power of our FiOS
customer base and more than 100 million wireless connections,
Verizon has the potential to be a formidable force in the video
marketplace of the future.
CONNECTED CARS
The number of connected cars worldwide is predicted to grow
sixfold by 2020, to more than 150 million worldwide. And
with more and more app development focused on the driving
experience, the smart car is becoming a platform for innovation,
much as the smartphone is today.
Verizon is a big player in this growing marketplace. Through
our wireless and telematics businesses, we provide wireless
connectivity and services like navigation, search and streaming
video to major car companies such as Mercedes-Benz,
Volkswagen, Toyota and, most recently, Hyundai, which will
embed Verizon’s wireless capabilities in all its U.S. cars and
trucks starting with its 2015 models. We also expanded our fleet
business in 2013, which uses sensors, remote diagnostics and
cloud computing in combination with wireless connectivity to
provide new tools for managing large vehicle fleets efficiently.
We have deployed 18,000 such devices in our own fleet and field
operations, generating substantial savings in time and fuel costs.
The connected car platform gives us lots of headroom for growth
as we connect vehicles, first to one another and then to the
transportation infrastructure itself—eventually linking to a smart
platform that will be able to regulate traffic, connect autonomous
driving cars, facilitate car and bike sharing and optimize public
transportation. These connected transportation systems have the
potential to reduce congestion, lower emissions and improve fuel
efficiency on a big scale.
HEALTHCARE
Another major strategic imperative for us is to provide integrated
solutions that help companies in a number of vertical markets
transition successfully to the digital and mobile era. Chief among
these is healthcare, which now makes up about one-sixth of
the U.S. economy. Like everything else in the digital economy,
medicine is going mobile—and with that shift come enormous
challenges about how to share sensitive, confidential medical
information quickly, reliably and securely.
Verizon is deploying our expertise in security, mobility and data
storage to address this challenge. In 2012, we launched a cloud
and data service infrastructure to help the healthcare industry
meet the requirements of the Health Insurance Portability and
Accountability Act (HIPAA) for safeguarding patient information.
This HIPAA-compliant cloud offers medical providers a secure
environment in which to share electronic medical records, consult
with providers and patients, and transmit radiology images and
the like among hospitals, payers and physician networks.
In 2013, we launched our Converged Health Management solution,
a patient-monitoring service that provides doctors with up-todate data from connected biometric devices. With this service,
patients receive an FDA-cleared remote monitoring system with
which they can record vital data such as blood pressure,
glucose levels and weight. The system sends the information
wirelessly to secure servers in our HIPAA-compliant cloud,
where it can be analyzed by healthcare providers who then give
personalized feedback to their patients. Our objective is that
this service will engage and empower patients to make healthier
choices—creating better outcomes for consumers and
reducing demands on healthcare systems.
Verizon is equipping Children’s
Health Fund vehicles with 4G LTE
wireless technology to improve
access to care for children. For more
information on Verizon’s commitment
to improving healthcare, visit
responsibility.verizon.com
5
Wireless Revenues
(billions)
Wireless
Retail Connections
Wireless Retail
Postpaid ARPA
FiOS Internet
Subscribers
(millions)
$70.2
11
$75.9
12
$81.0
92.2
13
11
(millions)
98.2
102.8
$134.51
12
13
11
$144.04
6.1
$153.93
4.8
12
13
11
5.4
12
13
PROVIDING POWERFUL ANSWERS TO BIG CHALLENGES
We believe that these and other converged services provide a path
to sustainable growth and competitive advantage for Verizon—
opening new markets and taking us where others can’t go.
Even more broadly, we’re committed to using these innovative
solutions to provide powerful answers to the most challenging
issues facing our planet such as education, energy and
healthcare—and to doing everything we can to mobilize the tech
industry to help.
For example, we’re stimulating innovation by growing the
ecosystem of applications and devices that ride on our networks.
We have two Innovation Centers—one in San Francisco and one
in Waltham, Mass.—where we work with entrepreneurs, app
developers and device manufacturers to interface with our 4G LTE
network and bring next-generation connected solutions to market.
Verizon Powerful Answers Sustainability Award winner Dan Rosen
(L) and Verizon Chairman and CEO Lowell McAdam appear on
stage during the Verizon Powerful Answers Award winners unveiling
at the 2014 Consumer Electronics Show.
We also sponsor the Verizon Powerful Answers Award, a
competition that gives $10 million in prizes for apps and devices
that leverage our assets in the areas of healthcare, education
and energy.
We announced the award winners at the 2014 Consumer
Electronics Show, where it was apparent that we had tapped
into a rich vein of creativity. We received more than a thousand
ideas for using technology to make the world a better place:
education products tailored to the special needs of kids with
autism, mobility impairments and hearing loss; apps that diagnose
vision problems with a smartphone and help people with chronic
conditions manage their medication; crowd-sourcing and social
networking solutions to mobilize communities and fund clean
energy projects. We look forward to working with the winners as
they bring their products to market.
We have also focused the Verizon Foundation on becoming an
incubator for innovative technology solutions that improve
outcomes in healthcare, education and energy management,
6
V E R I ZO N CO M M U N I C AT I O N S I N C . 2 0 1 3 A N N UA L R E P O R T
FiOS Video
Subscribers
Wireline Consumer
Retail Revenues
(millions)
(billions)
5.3
4.2
11
4.7
12
13
$13.6
$14.0
11
12
Capital Expenditures
(billions)
$14.7
$16.2
$16.2
$16.6
13
11
12
13
particularly in underserved communities. In the area of education,
for example, we are focused on how to incorporate mobile
and broadband technologies into classrooms in a way that
improves how students learn and teachers teach. In February
2014, Verizon appeared with President Obama and several tech
companies to announce an investment in education of up to
$100 million in cash and in-kind services over the next three years.
We will extend the success of some of our existing programs
on technology training for teachers and our app development
program, while also leveraging the work of our employees
and partners in education.
The “Powerful Answers” business model is also reflected in our
approach to managing our employees. We invested more than
$275 million in training, development and tuition assistance
in 2013 to hone our employees’ skills, earning us a spot in Training
magazine’s “Hall of Fame” for development. In turn, we encourage
our employees to invest in the communities we serve through
matching contributions and volunteer incentives. In 2013, our
people donated 428,000 hours of volunteer service and $25.3
million in donations, including the Verizon match, to nearly 15,000
nonprofits around the world.
a transformational year for Verizon in our drive to be a globally
connected solutions provider. But to succeed as a market leader
in 2014, we need to do what we did in 2013: deliver consistent
results and great service … every day, every month, every quarter.
In the end, building an enduring company all comes back to
customers, which is why—no matter how lofty our ambitions—we
continually remind ourselves of the opening line of the Verizon
Credo: “We have work because our customers value our highquality communications services.”
Our employees are dedicated to translating that commitment
into actions that earn our customers’ loyalty every time we
come to work.
I’m grateful to our Board of Directors for guiding and supporting
our drive to be one of the world’s essential companies. I know I
speak for thousands of Verizon employees when I say how excited
we are to be part of a company with such enormous capacity to
make a difference in the world. And when we combine Verizon’s
technology with the passion and ingenuity of our people to deliver
powerful answers to the challenges of our customers and our
society, I am confident that no one in the world can beat us.
You can read more about our Powerful Answers initiatives
on our 2014 Annual Review web portal at verizon.com/investor/
annualreports and in our Corporate Responsibility Supplement
at responsibility.verizon.com.
CUSTOMER-FOCUSED CULTURE
So we begin 2014 with great momentum, with the networks,
platforms and solutions to spread innovation on a massive scale.
Our challenge now is to leverage the power of these tools to make
customers’ lives better, help businesses be more productive and
transform society in ways we never thought possible.
Lowell McAdam
Chairman and Chief Executive Officer
Verizon Communications Inc.
With full ownership of Verizon Wireless and an explosion of
innovation across our business, 2014 has the potential to be
7
Corporate Responsibility Highlights
At Verizon, we believe there are tremendous opportunities to grow and innovate
by applying our technologies to important social issues. In doing so, we create value
for our shareowners, our employees and our communities.
IMPROVING EDUCATION
VERIZON INNOVATIVE LEARNING SCHOOLS
VERIZON INNOVATIVE APP CHALLENGE
The Verizon Innovative Learning Schools (VILS) program increases the effective use of mobile technology in today’s
classrooms in order to improve student performance and drive student interest in science, technology, engineering
and math (STEM) subject areas. The program partners with administrators and teachers in underserved schools
across the nation and provides them with a comprehensive, two year sequence of onsite and online professional
development around leveraging mobile technology for teaching and learning.
Over 1,000 teams and 5,000 students from schools
in every state and the District of Columbia
registered for the inaugural 2012-2013 Verizon
Innovative App Challenge.
According to the International Society for Technology in Education, students at VILS schools showed stronger
gains in mathematics and science than did students from comparison schools. On average VILS students showed a
4.63% increase in standardized test scores, while students at comparison schools’ test scores decreased 4.18%.
24 underserved schools in the U.S.
¬
200+ math and science teachers
¬
11,500+ students
¬
¬
63% of VILS students on free or
reduced lunch programs
59% of VILS teachers are
individualizing instruction more
App Challenge winners are:
Female
VILS DEMOGRAPHICS
¬
¬ 90% of the winning teams’ apps are available
via Google Play
¬
¬
¬
52% of students exhibited
increased proficiency
with mobile technology
40% of students increased their
problem solving ability
59%
Likely to pursue a STEM career
60%
More interested in taking future
computer programming classes
37% of students showed
increased academic achievement
86%
ENGAGING EMPLOYEES
¬
$25.3 million has been donated
to nonprofits through
employee gifts and the Verizon
Foundation match
TRANSFORMING HEALTHCARE
+4,000
Hours Saved Annually
Medical personnel at several Children’s Health
Fund locations are using Verizon’s 4G LTE mobile
technology to support the comprehensive care they
provide to disadvantaged youth. Children’s Health
Fund estimates that using the technology at these
locations will save approximately 4,000 hours in
administrative tasks annually, freeing up significantly
more time to spend with patients.
¬
428,000 hours of volunteer
service given by employees
MANAGING ENERGY
$100M
For Green Energy
Construction began on a $100 million initiative
to install solar power and fuel cells at 17 Verizon
facilities in six states around the country by the
end of 2014. This commitment to green energy is
an important new element of our broader strategy
to cut the carbon intensity of our business in
half by 2020. By year end, 12.4MW of fuel cells
and solar power were implemented with another
2.6MW near completion.
¬
Nearly 15,000 community
nonprofits benefitted
from employee support
SUPPLIER DIVERSITY
+20%
Purchased from MWSDVBE
In 2013, Verizon purchased $6.3 billion in
goods and services with minority, women,
and service-disabled veteran business
enterprises (MWSDVBE)—the highest total
in company history and nearly a 20% increase
compared to 2012.
To view our complete set of Corporate Responsibility Key Performance Indicators online, go to responsibility.verizon.com
8
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)
2013
2012
2011
2010
2009
Results of Operations
Operating revenues
Operating income
Net income attributable to Verizon
Per common share – basic
Per common share – diluted
Cash dividends declared per common share
Net income attributable to noncontrolling interests
$ 120,550
31,968
11,497
4.01
4.00
2.090
12,050
$ 115,846
13,160
875
.31
.31
2.030
9,682
$ 110,875
12,880
2,404
.85
.85
1.975
7,794
$ 106,565
14,645
2,549
.90
.90
1.925
7,668
$ 107,808
15,978
4,894
1.72
1.72
1.870
6,707
Financial Position
Total assets
Debt maturing within one year
Long-term debt
Employee benefit obligations
Noncontrolling interests
Equity attributable to Verizon
$ 274,098
3,933
89,658
27,682
56,580
38,836
$ 225,222
4,369
47,618
34,346
52,376
33,157
$ 230,461
4,849
50,303
32,957
49,938
35,970
$ 220,005
7,542
45,252
28,164
48,343
38,569
$ 226,907
7,205
55,051
32,622
42,761
41,382
• Significanteventsaffectingourhistoricalearningstrendsin2011through2013aredescribedin“OtherItems”inthe“Management’sDiscussionandAnalysisofFinancialConditionandResults
ofOperations”section.
• 2010 and 2009 data includes severance, pension and benefit charges, merger integration and acquisition costs, dispositions and other items. 2010 data also includes Medicare Part D
Subsidy charges.
Stock Performance Graph
Comparison of Five-Year Total Return Among Verizon, S&P 500 Telecommunications Services Index and S&P 500 Stock Index
Verizon
S&P 500 Telecom Services
S&P 500
$240
$220
$200
Dollars
$180
$160
$140
$120
$100
$80
$60
2008
2009
2010
2011
2012
2013
Data Points in Dollars
2008
2009
At December 31,
2010
2011
2012
2013
Verizon
S&P 500 Telecom Services
S&P 500
100.0
100.0
100.0
103.8
108.9
126.5
127.9
129.6
145.5
171.2
163.0
172.3
202.8
181.4
228.0
151.3
137.8
148.6
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. It assumes $100 was invested
on December 31, 2008 with dividends (including the value of each respective spin-off ) being reinvested.
9
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Verizon Communications Inc. (Verizon or the Company) is a holding companythat,actingthroughitssubsidiariesisoneoftheworld’sleading
providers of communications, information and entertainment products
and services to consumers, businesses and governmental agencies
with a presence in over 150 countries around the world. Our offerings,
designedtomeetcustomers’ demandforspeed,mobility,securityand
control, include voice, data and video services on our wireless and wireline networks. We have two reportable segments, Wireless and Wireline.
Our wireless business, operating as Verizon Wireless, provides voice and
data services and equipment sales across the United States using one of
the most extensive and reliable wireless networks. Our wireline business
provides consumer, business and government customers with communications products and services, including broadband data and video
services, network access, voice, 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 have a
highly skilled, diverse and dedicated workforce of approximately 176,800
employees as of December 31, 2013.
In recent years, Verizon has embarked upon a strategic transformation
as advances in technology have changed the ways that our customers
interact in their personal and professional lives and that businesses
operate. To meet the changing needs of our customers and address the
changing technological landscape, we are focusing our efforts around
higher margin and growing areas of our business: wireless data, wireline
data and Strategic services, including cloud computing services.
Our strategy requires significant capital investments primarily to acquire
wireless spectrum, put the spectrum into service, invest in the fiber optic
network that supports our wireless and wireline businesses, maintain
our wireless and wireline networks and develop and maintain significant
advanced database capacity.
In our Wireless business, in 2013 compared to 2012, revenue growth
of 6.8% was driven by connection growth and the demand for smartphones, tablets and other Internet devices. During 2013, we experienced
a 4.6% increase in retail postpaid connections compared to 2012, with
smartphones representing 70% of our retail postpaid phone base at
December 31, 2013 compared to 58% at December 31, 2012. Also, during
2013, postpaid smartphone activations represented 86% of phones activated compared to 77% in 2012.
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
receivediscountedmonthlyaccessfeesonMoreEverythingplans.As
of December 31, 2013, Share Everything accounts represented approximately 46% of our retail postpaid accounts, compared to approximately
23% as of December 31, 2012. Verizon Wireless offers shared data plans
for business, with the More Everything plans for Small Business and
theNationwideBusinessDataPackagesandPlans.InAugust2013,we
launched the new Verizon Edge device payment plan option which now
allows customers to trade in their phone for a new phone after a minimum of thirty days, subject to certain conditions.
On September 2, 2013, Verizon entered into a stock purchase agreement
(the Stock Purchase Agreement) with Vodafone Group Plc (Vodafone) and
Vodafone 4 Limited (Seller), pursuant to which Verizon agreed to acquire
Vodafone’s indirect 45% interest in Cellco Partnership d/b/a Verizon
Wireless (the Partnership, and such interest, the Vodafone Interest) for
aggregateconsiderationofapproximately$130billion.OnFebruary21,
2014, pursuant to the terms and subject to the conditions set forth in the
Stock Purchase Agreement, Verizon acquired (the Wireless Transaction)
from Seller all of the issued and outstanding capital stock (the Transferred
Shares)ofVodafoneAmericasFinance1Inc.,asubsidiaryofSeller(VF1
Inc.),whichindirectlythroughcertainsubsidiaries(togetherwithVF1Inc.,
the Purchased Entities) owned the Vodafone Interest. The consideration
paid was primarily comprised of cash of approximately $58.89 billion and
Verizon common stock with a value of approximately $60.15 billion. See
“AcquisitionsandDivestitures”foradditionalinformation.
In Wireline, during 2013 compared to 2012, revenues were positively
impactedbyhigherrevenuesinConsumerretaildrivenbyFiOSservices.
FiOSrepresentedapproximately71%ofConsumerretailrevenueduring
2013, compared to approximately 65% during 2012. As the penetration
ofFiOSproductsincreases,wecontinuetoseekwaystoincreaserevenue
and further realize operating and capital efficiencies as well as maximize
profitability. As more applications are developed for this high-speed service,weexpectthatFiOSwillbecomeahubformanagingmultiplehome
services that will eventually be part of the digital grid, including not just
entertainment and communications, but also machine-to-machine
communications, such as home monitoring, health monitoring, energy
management and utilities management.
We have substantially completed the deployment of our fourth-generation (4G) Long-Term Evolution (LTE) network. Our 4G LTE network is
available to 97% of the U.S. population in more than 500 markets covering approximately 305 million people, including those in areas served
byourLTEinRuralAmericapartners.Our4GLTEnetworkprovideshigher
data throughput performance for data services at lower cost compared
to those provided via third-generation (3G) networks. In December 2013,
69% of our total data traffic was carried on our 4G LTE network.
Also positively impactingWireline’s revenues during 2013 was a 4.6%
increase in Strategic services revenues, which represented 57% of total
Global Enterprise revenues during 2013. However, total Global Enterprise
and Global Wholesale revenues declined due to declines in Core customer premise equipment revenues and traditional voice revenues. The
decline in Core customer premise equipment revenues is a result of our
focus on improving our margins by continuing to de-emphasize sales of
equipment that are not part of an overall enterprise solutions bundle.
To compensate for the shrinking market for traditional voice service, we
continue to build our Wireline segment around data, video and advanced
business services—areas where demand for reliable high-speed connections is growing.
OnFebruary13,2014,weintroducedourMoreEverything®planswhich
replaced our Share Everything® plans and provide more value to our
customers. These plans, which are available to both new and existing
postpaid customers, feature domestic unlimited voice minutes, unlimited domestic and international text, video and picture messaging, cloud
storage and a single data allowance that can be shared among up to
10 devices connected to the Verizon Wireless network. Customers with
Verizon Edge, which provides a device payment plan option, also will
We are investing in innovative technology like wireless networks, highspeed fiber and cloud services to position ourselves at the center of the
growth trends of the future. In addition to the Wireless Transaction, since
the beginning of 2012 these investments have included acquisitions
of wireless licenses of $4.9 billion. We also have invested $1.4 billion in
acquisitions of investments and businesses, which we expect will permit
us to offer enhanced machine-to-machine, video and cloud-based products and services.
10
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
Byinvestinginourowncapabilities,wearealsoinvestinginthemarkets we serve by providing our communities with an efficient, reliable
infrastructure for competing in the information economy. We are committed to putting our customers first and being a responsible member of
our communities. Guided by this commitment and by our core values of
integrity, respect, performance excellence and accountability, we believe
we are well-positioned to produce a long-term return for our shareowners, create meaningful work for ourselves and provide something of
lasting value for society.
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.
Trends
We expect that competition will continue to intensify with traditional,
non-traditional and emerging service providers seeking increased market
share. We believe that our networks differentiate us from our competitors, enabling us to provide enhanced communications experiences to
our customers. We believe our focus on the fundamentals of running a
good business, including operating excellence and financial discipline,
gives us the ability to plan and manage through changing economic
conditions. We will continue to invest for growth, which we believe is the
key to creating value for our shareowners.
Connection and Operating Trends
In our Wireless segment, we expect to continue to attract and maintain the loyalty of high-quality retail postpaid customers, capitalizing
on demand for data services and bringing our customers new ways of
using wireless services in their daily lives. We expect that future connection growth will continue as we introduce new smartphones, Internet
devices such as tablets and our suite of 4G LTE devices. We believe these
devices will attract and retain higher value retail postpaid connections,
contribute to continued increases in the penetration of data services and
keep our device line-up competitive versus other wireless carriers. We
expect future growth opportunities will be dependent on expanding the
penetration of our network services, offering innovative wireless devices
for both consumer and business customers and increasing the number
of ways that our customers can connect with our network and services.
Service and equipment pricing play an important role in the wireless
competitive landscape. As the demand for wireless services continues to
grow, wireless service providers are offering service plans that include
unlimited voice minutes and text messages and a specific amount of
data access in varying megabyte or gigabyte sizes or, in some cases,
unlimited data usage. Wireless service providers are also offering price
plans that decouple service pricing from equipment pricing and blur the
traditional boundary between prepaid and postpaid plans. In addition,
some wireless providers are offering a credit to new customers to reimburse early termination fees paid to their former wireless service provider,
subject to certain limitations. We seek to compete in this area by offering
our customers services and equipment that they will regard as the best
available value for the price, as well as service plans that meet their wireless service needs.
In our Wireline segment, we have experienced continuing access line
losses as customers have disconnected both primary and secondary lines
and switched to alternative technologies such as wireless, voice over
Internet protocol (VoIP) and cable for voice and data services. We expect
to continue to experience access line losses as customers continue to
switch to alternate technologies.
Despite this challenging environment, we expect that we will continue
to grow key aspects of our Wireline segment by providing network reliability, offering innovative product bundles that include broadband
Internet access, digital television and local and long distance voice services, offering more robust IP products and service, and accelerating our
cloud computing and machine-to-machine strategies. We will also continue to focus on cost efficiencies to attempt to offset adverse impacts
from unfavorable economic conditions and competitive pressures.
Operating Revenue
We expect to experience service revenue growth in our Wireless segment
in 2014, primarily as a result of continued growth in postpaid connections driven by increased sales of smartphones, tablets and other Internet
devices. We expect that retail postpaid average revenue per account
(ARPA) will continue to increase as connections migrate from basic
phones to smartphones and from our 3G network to our 4G LTE network, and as the average number of connections per account increases,
whichweexpecttobedrivenbyourMoreEverythingplansthatallow
for the sharing of data among up to 10 devices. We expect that our future
service revenue growth will be substantially derived from an increase in
the usage of innovative wireless smartphones, tablets and other Internet
devices in addition to our pricing structure that will encourage customers to continue adding data-enabled devices onto existing accounts.
We expect that continued emphasis on increasing smartphone penetration, including continuing to migrate customers from basic phones
to smartphones and from 3G devices to 4G LTE devices, will positively
impact our revenue.
WeexpectFiOSbroadbandandvideopenetrationtopositivelyimpact
ourMassMarketsrevenueandsubscriberbase.WealsoexpectStrategic
services revenues to continue to grow as we derive additional enterprise
revenues from cloud, security and other solutions-based services and
customers continue to migrate their services to Private IP and other strategic networking services, although we have experienced decelerating
revenue growth within our Strategic services business. We believe the
trend in these growth areas as well as our offerings in telematics and
video streaming will help offset the continuing decline in revenues in
our Wireline segment related to retail voice connection losses as a result
of wireless substitution as well as the continued decline in our legacy
wholesale and enterprise markets.
Operating Costs and Expenses
We anticipate our overall wireless operating costs will increase as a result
of the expected increase in the volume of smartphone sales, which will
result in higher equipment and sales commission costs. In addition, we
expectcontentcostsforourFiOSvideoservicestocontinuetoincrease.
However, we expect to achieve certain cost efficiencies in 2014 and
beyond as data traffic continues to migrate to our lower-cost 4G LTE network and as we continue to streamline our business processes with a
focus on improving productivity and increasing profitability.
11
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
Capital Expenditures
Our 2014 capital program includes capital to fund advanced networks
and services, including 4G LTE and FiOS, the continued expansion of
our core networks, including our IP and data center enhancements,
maintenance and support for our legacy voice networks and other
expenditures to drive operating efficiencies. The level and the timing of
theCompany’scapitalexpenditureswithinthesebroadcategoriescan
vary significantly as a result of a variety of factors outside our control,
including, for example, material weather events. We are replacing copper
wire with fiber-optic cable which will not alter our capital program but
should result in lower maintenance costs in the future. Capital expenditures were $16.6 billion in 2013 and $16.2 billion in 2012, respectively. We
believe that we have significant discretion over the amount and timing of
our capital expenditures on a Company-wide basis as we are not subject
to any agreement that would require significant capital expenditures on
a designated schedule or upon the occurrence of designated events. We
expect capital expenditures in 2014 to be in the range of approximately
$16.5 billion to $17.0 billion and we also expect our capital expenditures
as a percentage of revenue to decline in 2014 from 2013 levels.
Cash Flow from Operations
We create value for our shareowners by investing the cash flows generated by our business in opportunities and transactions that support
continued profitable growth, thereby increasing customer satisfaction
and usage of our products and services. In addition, we have used our
cash flows to maintain and grow our dividend payout to shareowners.
Verizon’sBoardofDirectorsincreasedtheCompany’squarterlydividend
by 2.9% during 2013, making this the seventh consecutive year in which
we have raised our dividend. After the closing of the Wireless Transaction,
our Provision for income taxes is expected to increase due to our 100%
ownership of Verizon Wireless. We also expect our cash taxes paid to
increase due to our 100% ownership of Verizon Wireless, and to a much
lesser degree, due to bonus depreciation not being extended beyond
December 31, 2013. Additionally, our Interest expense is expected to
increase as a result of the debt issued to finance the Wireless Transaction.
Asaresultofthesefactors,weexpectCashFlowsfromOperationstobe
negatively impacted in 2014. Partially offsetting these negative impacts
toCashFlowsfromOperationswillbethediscontinuationofcashdistributions from Verizon Wireless to Vodafone, which have historically
reducedourCashFlowsfromFinancingActivities.
Our goal is to use our cash to create long-term value for our shareholders. We will continue to look for investment opportunities that will
help us to grow the business. We expect to use our cash to reduce our
debt levels, pay dividends to our shareholders and, when appropriate,
buybacksharesofouroutstandingcommonstock(see“CashFlowsfrom
FinancingActivities”)andinvestinspectrumlicenses(see“CashFlows
fromInvestingActivities”).During2013,wepurchased3.50millionshares
under our share buyback authorization. There were no repurchases of
common stock during 2012 or 2011.
CONSOLIDATED RESULTS OF OPERATIONS
In this section, we discuss our overall results of operations and highlight items of a non-operational nature that are not included in our segment
results. We have two reportable segments, Wireless and Wireline, which we operate and manage as strategic business units and organize by products
andservices.In“SegmentResultsofOperations,”wereviewtheperformanceofourtworeportablesegments.
Corporate, eliminations and other includes unallocated corporate expenses such as certain pension and other employee benefit related costs, 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-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
individuallysignificantareincludedinallsegmentresultsastheseitemsareincludedinthechiefoperatingdecisionmaker’sassessmentofsegment
performance. We believe that this presentation assists users of our financial statements in better understanding our results of operations and trends
from period to period.
Consolidated Revenues
(dollars in millions)
2013
Years Ended December 31,
Wireless
Service revenue
Equipment and other
Total
Wireline
MassMarkets
Global Enterprise
Global Wholesale
Other
Total
Corporate, eliminations and other
Consolidated Revenues
nm - not meaningful
12
$
$
69,033
11,990
81,023
17,328
14,703
6,714
478
39,223
304
120,550
2012
$
$
63,733
12,135
75,868
16,702
15,299
7,240
539
39,780
198
115,846
2013 vs. 2012
2011
$
$
59,157
10,997
70,154
16,337
15,622
7,973
750
40,682
39
110,875
Increase/(Decrease)
2012 vs. 2011
$
$
5,300
(145)
5,155
626
(596)
(526)
(61)
(557)
106
4,704
8.3 %
(1.2)
6.8
3.7
(3.9)
(7.3)
(11.3)
(1.4)
53.5
4.1
$
$
4,576
1,138
5,714
7.7 %
10.3
8.1
365
(323)
(733)
(211)
(902)
159
4,971
2.2
(2.1)
(9.2)
(28.1)
(2.2)
nm
4.5
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
2013 Compared to 2012
The increase in consolidated revenues during 2013 compared to 2012
wasprimarilyduetohigherrevenuesatWireless,aswellashigherMass
MarketsrevenuesdrivenbyFiOSservicesandincreasedStrategicservices revenues within Global Enterprise at our Wireline segment. Partially
offsetting these increases were lower Global Enterprise Core and Global
Wholesale revenues at our Wireline segment.
2012 Compared to 2011
The increase in consolidated revenues during 2012 compared to 2011
wasprimarilyduetohigherrevenuesatWireless,aswellashigherMass
MarketsrevenuesdrivenbyFiOSservicesandincreasedStrategicservices
revenues within Global Enterprise at our Wireline segment. Partially offsetting these increases were lower Global Wholesale and Global Enterprise
Core revenues at our Wireline segment.
Wireless’ revenuesincreased$5.2billion,or6.8%,during2013compared
to 2012 due to growth in service revenue. Service revenue increased
during 2013 compared to 2012 primarily driven by higher retail postpaid
service revenue, which increased largely as a result of an increase in retail
postpaid connections as well as the continued increase in penetration
of smartphones, tablets and other Internet devices through our Share
Everythingplans.Retailpostpaidconnectionnetadditionsdecreased
during 2013 compared to 2012 primarily due to an increase in our retail
postpaid connection churn rate, partially offset by an increase in retail
postpaidconnectiongrossadditions. Retailpostpaidconnections per
account increased as of December 31, 2013 compared to December
31, 2012 primarily due to the increased penetration of tablets and other
Internet devices.
Wireless’ revenues increased during 2012 compared to 2011 due to
growth in both service and equipment and other revenue. Service revenue increased during 2012 compared to 2011 primarily driven by higher
retail postpaid service revenue, which increased largely as a result of an
increase in retail postpaid connections of 5.1 million in 2012, as well as
thecontinuedincreaseinpenetrationofsmartphones.Retailpostpaid
connections per account increased during 2012 compared to 2011 primarily due to the increased use of tablets and other Internet devices. In
2012, the increase in retail postpaid connection net additions was primarily due to an increase in retail postpaid and prepaid connection gross
additions and improvements in our retail connections churn rate. Higher
retail postpaid connection gross additions during 2012 primarily reflect
the launch of our Share Everything plans coupled with new device introductions during the second half of 2012.
Wireline’s revenues decreased $0.6 billion, or 1.4%, during 2013 compared to 2012 primarily driven by declines in Global Enterprise Core
andGlobalWholesale,partiallyoffsetbyhigherMassMarketsrevenues
drivenbyFiOSservicesandincreasedStrategicservicesrevenueswithin
Global Enterprise.
MassMarketsrevenuesincreased$0.6billion,or3.7%,during2013comparedto2012duetotheexpansionofFiOSservices(Voice,Internetand
Video) as well as changes in our pricing strategies, partially offset by the
continued decline of local exchange revenues.
Global Enterprise revenues decreased $0.6 billion, or 3.9%, during 2013
compared to 2012 primarily due to a decline in Core customer premise
equipment revenues and lower voice services and data networking revenues. This decrease was partially offset by growth in Strategic services
revenues, primarily due to an increase in advanced services, such as contact center solutions, IP communications, and our cloud and data center
offerings as well as revenue from a telematics services business that we
acquired in the third quarter of 2012.
Global Wholesale revenues decreased $0.5 billion, or 7.3%, during 2013
compared to 2012 primarily due to a decline in traditional voice revenues
asaresultofdecreasedminutesofuse(MOUs)andadeclineindomestic
wholesale connections, partially offset by continuing demand for highspeed digital data services from fiber-to-the-cell customers upgrading
their core data circuits to Ethernet facilities as well as Ethernet migrations
from other core customers.
Other revenues decreased during 2013 compared to 2012 primarily due
to reduced volumes outside of our network footprint.
Equipment and other revenue increased during 2012 compared to 2011
primarily due to an increase in device upgrade fees, regulatory fees and
equipment sales.
Wireline’srevenuesdecreasedduring2012comparedto2011primarily
driven by declines in Global Wholesale, Global Enterprise Core and Other
revenues,partiallyoffsetbyhigherrevenuesinMassMarketsdrivenby
FiOSservicesandhigherrevenuesfromStrategicservices.
MassMarketsrevenuesincreasedduring2012comparedto2011dueto
theexpansionofFiOSservicesaswellaschangesinourpricingstrategy
adopted in 2012, partially offset by the continued decline of local
exchange revenues.
Global Enterprise revenues decreased during 2012 compared to 2011 primarily due to lower local services and traditional circuit-based revenues,
a decline in customer premise equipment revenues and the unfavorable impact of foreign currency translation. This decrease was partially
offset by higher Strategic services revenues, primarily due to growth in
advanced services, such as managed network solutions, contact center
solutions, IP communications and our cloud and data center offerings.
Global Wholesale revenues decreased during 2012 compared to 2011
primarily due to a decline in traditional voice revenues as a result of
decreased MOUs and a decline in domestic wholesale connections,
partially offset by continuing demand for high-speed digital data
services from fiber-to-the-cell customers upgrading their core data circuits to Ethernet facilities as well as Ethernet migrations from other
core customers.
Other revenues decreased during 2012 compared to 2011 primarily due
to reduced volumes outside of our network footprint.
13
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
Consolidated Operating Expenses
(dollars in millions)
2013
Years Ended December 31,
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Consolidated Operating Expenses
$
$
44,887
27,089
16,606
88,582
2012
$
$
46,275
39,951
16,460
102,686
$
Consolidated operating expenses decreased during 2013 primarily due
to non-operational credits recorded in 2013 as well as non-operational
charges recorded in 2012 (see“Other Items”). Consolidated operating
expenses increased during 2012 primarily due to higher non-operational
charges (see“Other Items”) as well as increased operating expenses
at Wireless.
2013 Compared to 2012
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, content costs, contracted services, network access and
transport costs, wireless equipment costs, customer provisioning costs,
computer systems support, costs to support our outsourcing contracts
andtechnicalfacilitiesandcontributionstotheUniversalServiceFund.
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 decreased during 2013 compared to 2012
primarily due to a decrease in cost of equipment sales, decreased data
roaming, a decline in cost of data services and a decrease in network
connection costs at our Wireless segment, as well as a decrease in costs
related to customer premise equipment, a decline in access costs and the
net effect of storm-related insurance recoveries at our Wireline segment.
Partially offsetting these decreases were higher content costs associated
withcontinuedFiOSsubscribergrowthandvendorrateincreasesatour
Wireline segment, as well as increases in cost of network services at our
Wireless segment.
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;
regulatory fees; professional service fees; and rent and utilities for administrative space. Also included are a portion of the aggregate customer
carecostsasdiscussedin“CostofServicesandSales”above.
Selling, general and administrative expense decreased during 2013 compared to 2012 primarily due to the non-operational credits recorded in
2013 and declines in employee costs at our Wireline segment as well as
thenon-operationalchargesrecordedin2012(see“OtherItems”).This
decrease was partially offset by higher sales commission expense at our
Wireless segment.
Depreciation and Amortization Expense
Depreciation and amortization expense increased during 2013 compared to 2012 primarily due to an increase in net depreciable assets at
our Wireless segment and an increase in amortization expense at our
Wireline segment. These increases were partially offset by a decline in net
depreciable assets at our Wireline segment.
14
2013 vs. 2012
2011
$
45,875
35,624
16,496
97,995
Increase/(Decrease)
2012 vs. 2011
$
$
(1,388)
(12,862)
146
(14,104)
(3.0)%
(32.2)
0.9
(13.7)
$
400
4,327
(36)
4,691
$
0.9 %
12.1
(0.2)
4.8
2012 Compared to 2011
Cost of Services and Sales
Cost of services and sales increased during 2012 compared to 2011 primarily due to higher cost of equipment sales, increased cost of network
services and increased data roaming, partially offset by a decrease in cost
for data services, a decrease in network connection costs and a decrease
in the cost of long distance at our Wireless segment. Also contributing
to the increase were higher content costs associated with continued
FiOSsubscribergrowthandvendorrateincreases,increasedexpenses
relatedtoourcloudanddatacenteroffering,highercostsrelatedtoFiOS
installation as well as higher repair and maintenance expenses caused by
storm-related events in 2012, partially offset by declines in access costs
and customer premise equipment costs at our Wireline segment.
Selling, General and Administrative Expense
Selling, general and administrative expense increased during 2012 compared to 2011 primarily due to higher non-operational charges (see
“Other Items”) as well as higher sales commission expense and costs
associated with regulatory fees at our Wireless segment.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased during 2012 compared to 2011 primarily due to a decrease in depreciable assets at our
Wireline segment, partially offset by an increase in amortization expense
related to non-network software.
Non-operational (Credits) Charges
Non-operational (credits) charges included in operating expenses (see
"Other Items") were as follows:
(dollars in millions)
Years Ended December 31,
2013
Gain on Spectrum License Transaction
Selling, general and administrative expense $
(278)
Severance, Pension and Benefit
(Credits) Charges
Selling, general and administrative expense
Litigation Settlements
Selling, general and administrative expense
Other Costs
Cost of services and sales
Selling, general and administrative expense
Total non-operating (credits) charges
included in operating expenses
2012
$
(6,232)
–
2011
$
–
7,186
5,954
–
384
–
–
–
–
40
236
276
–
–
–
$ (6,510)
$
7,846
$
See“OtherItems”foradescriptionofothernon-operationalitems.
5,954
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
Consolidated Operating Income and EBITDA
Consolidated earnings before interest, taxes, depreciation and amortizationexpenses(ConsolidatedEBITDA)andConsolidatedAdjustedEBITDA,
which are presented below, are non-GAAP measures and do not purport
to be alternatives to operating income as a measure of operating performance.Managementbelievesthatthesemeasuresareusefultoinvestors
and other users of our financial information in evaluating operating profitability on a more variable cost basis as they exclude the depreciation
and amortization expense related primarily to capital expenditures and
acquisitions that occurred in prior years, as well as in evaluating operatingperformanceinrelationtoourcompetitors.ConsolidatedEBITDA
is calculated by adding back interest, taxes, depreciation and amortization expense, equity in earnings of unconsolidated businesses and other
income and (expense), net to net income.
updated actuarial assumptions. The adjustment has been recognized in
the income statement during the fourth quarter or upon a remeasurement event pursuant to our accounting policy for the recognition of
actuarialgains/losses.
Itismanagement’sintenttoprovidenon-GAAPfinancialinformationto
enhancetheunderstandingofVerizon’sGAAPfinancialinformation,and
it should be considered by the reader in addition to, but not instead of,
the financial statements prepared in accordance with GAAP. Each nonGAAP financial measure is presented along with the corresponding GAAP
measure so as not to imply that more emphasis should be placed on the
non-GAAP measure. The non-GAAP financial information presented may
be determined or calculated differently by other companies.
(dollars in millions)
2013
2012
2011
$ 31,968
$ 13,160
$ 12,880
16,606
48,574
16,460
29,620
16,496
29,376
7,846
$ 37,466
5,954
$ 35,330
ConsolidatedAdjustedEBITDAiscalculatedbyexcludingtheeffectof
non-operational items from the calculation of Consolidated EBITDA.
Managementbelievesthatthismeasureprovidesadditionalrelevantand
useful information to investors and other users of our financial data in
evaluating the effectiveness of our operations and underlying business
trendsinamannerthatisconsistentwithmanagement’sevaluationof
businessperformance.See“OtherItems”foradditionaldetailsregarding
these non-operational items.
Years Ended December 31,
Operating expenses include pension and benefit related credits and/
or charges based on actuarial assumptions, including projected discount rates and an estimated return on plan assets. These estimates are
updated in the fourth quarter to reflect actual return on plan assets and
ThechangesinConsolidatedOperatingIncome,ConsolidatedEBITDA
andConsolidatedAdjustedEBITDAinthetableabovewereprimarilya
result of the factors described in connection with operating revenues
and operating expenses.
Consolidated Operating Income
Add Depreciation and amortization
expense
Consolidated EBITDA
Add (Less) Non-operating (credits) charges
included in operating expenses
Consolidated Adjusted EBITDA
(6,510)
$ 42,064
Other Consolidated Results
Equity in Earnings of Unconsolidated Businesses
Equity in earnings of unconsolidated businesses decreased $182 million, or 56.2% in 2013 compared to 2012 primarily due to lower earnings from
operations at Vodafone Omnitel N.V. (Vodafone Omnitel). The decrease during 2013 was partially offset by an immaterial gain recorded by Verizon
Wireless upon obtaining control of previously unconsolidated wireless partnerships, which were previously accounted for under the equity method
and are now consolidated.
Equity in earnings of unconsolidated businesses decreased $120 million, or 27.0%, in 2012 compared to 2011 primarily due to lower earnings from
operations at Vodafone Omnitel and, to a lesser extent, the devaluation of the Euro against the U.S. dollar.
As part of the consideration of the Wireless Transaction, a subsidiary of Verizon sold its entire ownership interest in Vodafone Omnitel to a subsidiary
ofVodafoneonFebruary21,2014.
Other Income and (Expense), Net
Additional information relating to Other income and (expense), net is as follows:
2013
Years Ended December 31,
Interest income
Other, net
Total
$
$
64
(230)
(166)
2012
$
57
(1,073)
$ (1,016)
(dollars in millions)
2013 vs. 2012
2011
$
$
68
(82)
(14)
Increase/(Decrease)
2012 vs. 2011
$
$
7
843
850
12.3 %
(78.6)
(83.7)
$
(11)
(991)
$ (1,002)
(16.2) %
nm
nm
nm - not meaningful
Other income and (expense), net decreased during 2013 compared to
2012 primarily due to fees of $1.1 billion incurred in 2012 related to the
early redemption of debt, partially offset by $0.2 billion of fees incurred
during the fourth quarter of 2013 as a result of the termination of a bridge
credit agreement upon the effectiveness of a term loan agreement (see
“OtherItems”).
Other income and (expense), net increased during 2012 compared to
2011 primarily driven by higher fees of $1.1 billion related to the early
redemptionofdebt(see“OtherItems”).
15
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
Interest Expense
(dollars in millions)
2013
Years Ended December 31,
2012
Total interest costs on debt balances
Less Capitalized interest costs
Total
$ 3,421
754
$ 2,667
$
Average debt outstanding
Effective interest rate
$ 65,959
5.2%
$ 52,949
5.6%
$
Total interest costs on debt balances increased during 2013 compared to
2012 primarily due to the issuance of $49.0 billion of fixed and floating
rate notes to finance the Wireless Transaction (see“Acquisitions and
Divestitures”)resultinginanincreaseinaveragedebtaswellasanincremental increase in interest expense of $0.7 billion, partially offset by a
lower effective interest rate (see“Consolidated Financial Condition”).
Capitalized interest costs were higher in 2013 primarily due to increases
in wireless licenses that are currently under development.
2013 vs. 2012
2011
2,977
406
2,571
$
$
3,269
442
2,827
Increase/(Decrease)
2012 vs. 2011
$
$
444
348
96
14.9 %
85.7
3.7
$
$
(8.9) %
(8.1)
(9.1)
$ 55,629
5.9%
Total interest costs on debt balances decreased during 2012 compared to 2011 primarily due to a $2.7 billion decrease in average debt
(see“ConsolidatedFinancialCondition”)andalowereffectiveinterest
rate. Capitalized interest costs were lower in 2012 primarily due to our
ongoing deployment of the 4G LTE network.
Provision (Benefit) for Income Taxes
(dollars in millions)
2013
Years Ended December 31,
Provision (Benefit) for income taxes
Effective income tax rate
(292)
(36)
(256)
$ 5,730
19.6 %
2012
$
(660)
(6.7) %
2011
$
285
2.7 %
Increase/(Decrease)
2012 vs. 2011
2013 vs. 2012
$ 6,390
nm
$
(945)
nm
nm - not meaningful
The effective income tax rate is calculated by dividing the provision
for income taxes by income before the provision for income taxes. Our
effective income tax rate is significantly lower than the statutory federal
income tax rate for all years presented due to the inclusion of income
attributabletoVodafone’snoncontrollinginterestintheVerizonWireless
partnership within our income before the provision for income taxes. In
2013 and 2011, we recorded a tax provision on income before the provision for income taxes and when we included the income attributable to
Vodafone’snoncontrollinginterestintheVerizonWirelesspartnershipin
our income before the provision for income taxes it resulted in our effective income tax rate being 13.7 percentage points lower during 2013 and
7.9 percentage points lower during 2011. In 2012, we recorded a tax benefit on income before the provision for income taxes, which resulted in
a negative effective income tax rate. In this circumstance, including the
incomeattributabletoVodafone’snoncontrollinginterestintheVerizon
Wireless partnership in our income before the provision for income taxes
resulted in our negative effective tax rate being 300.3 percentage points
higher during 2012.
willreflectthechangeinVerizon’sownershipinterestinVerizonWireless.
Our provision for income taxes and effective income tax rate will increase
subsequent to the closing due to the inclusion of the provision for
incometaxespreviouslyattributabletoVodafone’sownershipinterest.
Verizon completed the acquisitionofVodafone’s 45% indirect ownershipinterestinVerizonWirelessonFebruary21,2014.Ourprovisionfor
income taxes and effective income tax rate subsequent to the closing
A reconciliation of the statutory federal income tax rate to the effective
income tax rate for each period is included in Note 12 to the consolidated financial statements.
The effective income tax rate for 2013 was 19.6% compared to (6.7)%
for 2012. The increase in the effective income tax rate and provision for
income taxes was primarily due to higher income before income taxes
as a result of severance, pension and benefit credits recorded during
2013 compared to lower income before income taxes as a result of severance, pension and benefit charges as well as early debt redemption costs
recorded during 2012.
The effective income tax rate for 2012 was (6.7)% compared to 2.7% for
2011. The negative effective income tax rate for 2012 and the decrease
in the provision for income taxes during 2012 compared to 2011 was
primarily due to lower income before income taxes as a result of higher
severance, pension, and benefit charges as well as early debt redemption
costs recorded during 2012.
Net Income Attributable to Noncontrolling Interests
Years Ended December 31,
Net income attributable to noncontrolling
interests
(dollars in millions)
2013
$ 12,050
2012
$
9,682
The increases in Net income attributable to noncontrolling interests during
2013 compared to 2012 and 2012 compared to 2011 were due to higher
earnings in our Verizon Wireless segment, which had a 45% noncontrolling
partnership interest attributable to Vodafone as of December 31, 2013.
16
2011
$
7,794
Increase/(Decrease)
2012 vs. 2011
2013 vs. 2012
$ 2,368
24.5 %
$
1,888
24.2 %
We expect Net income attributable to noncontrolling interests to
decline substantially in 2014 as a result of the Wireless Transaction
(see“Acquisitions and Divestitures”).The noncontrolling interests that
remained after the completion of the Wireless Transaction primarily relate
to wireless partnerships.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
SEGMENT RESULTS OF OPERATIONS
We have two reportable segments, Wireless and Wireline, which we operate and manage as strategic business units and organize by products and
services. We measure and evaluate our reportable segments based on segment operating income. The use of segment operating income is consistent
withthechiefoperatingdecisionmaker’sassessmentofsegmentperformance.
Segmentearningsbeforeinterest,taxes,depreciationandamortization(SegmentEBITDA),whichispresentedbelow,isanon-GAAPmeasureand
doesnotpurporttobeanalternativetooperatingincomeasameasureofoperatingperformance.Managementbelievesthatthismeasureisuseful
to investors and other users of our financial information in evaluating operating profitability on a more variable cost basis as it excludes the depreciation and amortization expenses related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating
operatingperformanceinrelationtoourcompetitors.SegmentEBITDAiscalculatedbyaddingbackdepreciationandamortizationexpensetosegment operating income.
WirelessSegmentEBITDAservicemargin,alsopresentedbelow,iscalculatedbydividingWirelessSegmentEBITDAbyWirelessservicerevenues.
WirelessSegmentEBITDAservicemarginutilizesservicerevenuesratherthantotalrevenues.Servicerevenuesprimarilyexcludeequipmentrevenues
inordertoreflecttheimpactofprovidingservicetothewirelesscustomerbaseonanongoingbasis.WirelineEBITDAmarginiscalculatedbydividing
WirelineEBITDAbytotalWirelinerevenues.YoucanfindadditionalinformationaboutoursegmentsinNote13totheconsolidatedfinancialstatements.
Wireless
Our Wireless segment is primarily comprised of Cellco Partnership doing business as Verizon Wireless. Cellco Partnership is a joint venture formed in
April 2000 by the combination of the U.S. wireless operations and interests of Verizon and Vodafone. Verizon Wireless provides wireless communications services across one of the most extensive wireless networks in the United States. As of December 31, 2013, Verizon owned a controlling 55%
interestinVerizonWirelessandVodafoneownedtheremaining45%.OnFebruary21,2014,theWirelessTransactionwascompleted,andVerizon
acquired 100% ownership of Verizon Wireless.
We provide these services and equipment sales to consumer, business and government customers in the United States on a postpaid and prepaid
basis. Postpaid connections represent individual lines of service for which a customer is billed in advance a monthly access charge in return for a
monthly network service allowance, and usage beyond the allowance is billed monthly in arrears. Our prepaid service enables individuals to obtain
wireless services without a long-term contract or credit verification by paying for all services in advance.
All financial results included in the tables below reflect the consolidated results of Verizon Wireless.
Operating Revenues and Selected Operating Statistics
(dollarsinmillions,exceptARPA)
Increase/(Decrease)
2012 vs. 2011
2013
2012
2011
Retailservice
Other service
Service revenue
Equipment and other
Total Operating Revenues
$ 66,334
2,699
69,033
11,990
$ 81,023
$ 61,440
2,293
63,733
12,135
$ 75,868
$ 56,660
2,497
59,157
10,997
$ 70,154
Connections ('000):(1)
Retailconnections
Retailpostpaidconnections
102,799
96,752
98,230
92,530
92,167
87,382
4,569
4,222
4.7
4.6
6,063
5,148
6.6
5.9
4,472
4,118
5,917
5,024
4,624
4,252
(1,445)
(906)
(24.4)
(18.0)
1,293
772
28.0
18.2
1.27%
0.97%
1.19%
0.91%
1.26%
0.95%
$ 153.93
35,083
2.76
$ 144.04
35,057
2.64
$ 134.51
34,561
2.53
9.89
26
0.12
6.9
0.1
4.5
9.53
496
0.11
7.1
1.4
4.3
Years Ended December 31,
Net additions in period ('000):(2)
Retailconnections
Retailpostpaidconnections
ChurnRate:
Retailconnections
Retailpostpaidconnections
Account Statistics:
RetailpostpaidARPA
Retailpostpaidaccounts('000):(1)
Retailpostpaidconnectionsperaccount(1)
2013 vs. 2012
$ 4,894
406
5,300
(145)
$ 5,155
$
8.0 %
17.7
8.3
(1.2)
6.8
$
$
$
4,780
(204)
4,576
1,138
5,714
8.4 %
(8.2)
7.7
10.3
8.1
(1) As of end of period
(2) Excluding acquisitions and adjustments
17
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
2013 Compared to 2012
TheincreaseinWireless’ totaloperatingrevenuesof$5.2billion,or6.8%,
during 2013 compared to 2012 was primarily the result of growth in service revenue.
2012 Compared to 2011
TheincreaseinWireless’totaloperatingrevenuesduring2012compared
to 2011 was the result of growth in both service and equipment and
other revenue.
Accounts and Connections
Retail (non-wholesale) postpaid accounts represent retail customers
under contract with Verizon Wireless that are directly served and managed by Verizon Wireless and use its branded services. Accounts include
Share Everything plans and corporate accounts, as well as legacy single
connection plans and family plans. A single account may receive monthly
wirelessservicesforavarietyofconnecteddevices.Retailconnections
represent our retail customer device connections. Churn is the rate at
which service to connections is terminated.
Accounts and Connections
Retailconnectionnetadditionsincreasedduring2012comparedto2011
primarily due to an increase in retail postpaid and prepaid connection
gross additions and improvements in our retail connections churn rate.
Higher retail postpaid connection gross additions during 2012 primarily
reflected the launch of our Share Everything plans coupled with new
device introductions during the second half of 2012.
Retailconnectionsunderanaccountmayincludesmartphones,basic
phones, tablets and other Internet devices, as well as Home Phone
ConnectandHomeFusion.Weexpecttocontinuetoexperienceretail
connection growth based on the strength of our product offerings
andnetworkservicequality.Retailpostpaidconnectionnetadditions
decreased during 2013 compared to 2012 primarily due to an increase in
our retail postpaid connection churn rate, partially offset by an increase
in retail postpaid connection gross additions.
Retail Postpaid Connections per Account
Retailpostpaidconnectionsperaccountiscalculatedbydividingthe
total number of retail postpaid connections by the number of retail
postpaidaccountsasoftheendoftheperiod.Retailpostpaidconnections per account increased 4.5% as of December 31, 2013 compared to
December 31, 2012 primarily due to the increased penetration of tablets
and other Internet devices.
Service Revenue
Service revenue increased $5.3 billion, or 8.3%, during 2013 compared
to 2012 primarily driven by higher retail postpaid service revenue, which
increased largely as a result of an increase in retail postpaid connections
as well as the continued increase in penetration of smartphones, tablets and other Internet devices through our Share Everything plans. The
penetration of smartphones was driven by the activation of smartphones
by new customers as well as existing customers migrating from basic
phones to smartphones.
TheincreaseinretailpostpaidARPA(theaveragerevenueperaccount
from retail postpaid accounts) during 2013 compared to 2012 was primarily driven by increases in smartphone penetration and retail postpaid
connections per account. As of December 31, 2013, we experienced a
4.5% increase in retail postpaid connections per account compared to
2012, with smartphones representing 70% of our retail postpaid phone
base as of December 31, 2013 compared to 58% as of December 31, 2012.
The increased penetration in retail postpaid connections per account is
primarily due to increases in Internet data devices, which represented
10.7% of our retail postpaid connection base as of December 31, 2013
compared to 9.3% as of December 31, 2012, primarily due to activations
of tablets and other Internet devices. Additionally, during 2013, postpaid
smartphone activations represented 86% of phones activated compared
to 77% during 2012.
Other service revenue increased during 2013 compared to 2012 due to
growth in wholesale connections, partially offset by a decrease in revenue related to third party roaming.
Equipment and Other Revenue
Equipment and other revenue decreased during 2013 compared to 2012
as a decline in regulatory fees was partially offset by an increase in revenue related to upgrade fees.
18
Retail Postpaid Connections per Account
Retailpostpaidconnectionsperaccountincreasedduring2012compared to 2011 primarily due to the increased use of tablets and other
Internet devices.
Service Revenue
Service revenue increased during 2012 compared to 2011 primarily
driven by higher retail postpaid service revenue, which increased largely
as a result of an increase in retail postpaid connections of 5.1 million in
2012, as well as the continued increase in penetration of smartphones.
This increased penetration also contributed to the increase in our retail
postpaidARPA.
The increase in retail postpaid ARPA during 2012 compared to 2011
was primarily driven by increases in smartphone penetration and retail
postpaid connections per account. During 2012, we experienced a 4.3%
increase in retail postpaid connections per account compared to 2011,
with smartphones representing 58% of our retail postpaid phone base
as of December 31, 2012 compared to 43.5% as of December 31, 2011.
The increase in retail postpaid connections per account was primarily
due to increases in Internet data devices, which represented 9.3% of our
retail postpaid connection base as of December 31, 2012 compared to
8.1% as of December 31, 2011 primarily due to strong sales of tablets
and Jetpacks™.
Other service revenue decreased during 2012 compared to 2011 primarily as a result of a decrease in third party roaming revenue.
Equipment and Other Revenue
Equipment and other revenue increased during 2012 compared to 2011
primarily due to increases in device upgrade fees, regulatory fees and
equipment sales.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
Operating Expenses
Years Ended December 31,
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total Operating Expenses
(dollars in millions)
2013
2012
2011
$ 23,648
23,176
8,202
$ 55,026
$ 24,490
21,650
7,960
$ 54,100
$ 24,086
19,579
7,962
$ 51,627
Increase/(Decrease)
2012 vs. 2011
2013 vs. 2012
$
(842)
1,526
242
$
926
(3.4)%
7.0
3.0
1.7
$
$
404
2,071
(2)
2,473
1.7 %
10.6
–
4.8
Cost of Services and Sales
Cost of services and sales decreased during 2013 compared to 2012 primarily due to a decrease in cost of equipment sales of $0.4 billion, which
was partially due to a decline in postpaid upgrades, decreased data
roaming, a decline in cost of data services and a decrease in network
connection costs due to the deployment of Ethernet backhaul facilities primarily targeted at sites upgrading to 4G LTE, partially offset by an
increase in cost of network services.
Selling, General and Administrative Expense
Selling, general and administrative expense increased during 2013 compared to 2012 primarily due to higher sales commission expense in our
indirect channel. Indirect sales commission expense increased $1.1 billion during 2013 compared to 2012 primarily as a result of increases in
indirect gross additions and upgrades, as well as the average commission
per unit, as the mix of units continues to shift toward smartphones and
more customers activate data services.
Cost of services and sales increased during 2012 compared to 2011 primarily due to $0.7 billion in higher cost of equipment sales, which was
driven by increased sales of higher cost smartphones, increased cost of
network services and increased data roaming, partially offset by a decrease
in cost for data services, a decrease in network connection costs due to
the ongoing deployment of Ethernet backhaul facilities primarily targeted
at sites upgrading to 4G LTE and a decrease in the cost of long distance.
Selling, general and administrative expense increased during 2012 compared to 2011 primarily due to higher sales commission expense in our
indirect channel as well as costs associated with regulatory fees. Indirect
sales commission expense increased $1.3 billion during 2012 compared
to 2011 primarily as a result of increases in the average commission per
unit, as the mix of units continued to shift toward smartphones and more
customers activated data services.
Depreciation and Amortization Expense
The increase in depreciation and amortization expense during 2013
compared to 2012 was primarily driven by an increase in net depreciable assets. Depreciation and amortization expense was essentially
unchanged during 2012 compared to 2011.
Segment Operating Income and EBITDA
Years Ended December 31,
Segment Operating Income
Add Depreciation and amortization expense
Segment EBITDA
Segment operating income margin
Segment EBITDA service margin
(dollars in millions)
2013
2012
2011
$ 25,997
8,202
$ 34,199
$ 21,768
7,960
$ 29,728
$ 18,527
7,962
$ 26,489
32.1%
49.5%
28.7%
46.6%
26.4%
44.8%
The changes in the table above during the periods presented were primarily a result of the factors described in connection with operating
revenues and operating expenses.
Increase/(Decrease)
2012 vs. 2011
2013 vs. 2012
$ 4,229
242
$ 4,471
19.4 %
3.0
15.0
$
$
3,241
(2)
3,239
17.5 %
–
12.2
Non-recurring or non-operational items excluded from Wireless’
Operating income were as follows:
(dollars in millions)
2013
Years Ended December 31,
Gain on spectrum license transaction
Severance, pension and benefit (credits)
charges
2012
2011
$
(278)
$
–
$
–
$
(61)
(339)
$
37
37
$
76
76
19
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
Wireline
Our Wireline segment provides voice, data and video communications products and enhanced services including broadband video and data, corporate networking solutions, data center and cloud services, security and managed network services and local and long distance voice services. We
provide these products and services to consumers in the United States, as well as to carriers, businesses and government customers both in the
United States and in over 150 other countries around the world.
Operating Revenues and Selected Operating Statistics
Years Ended December 31,
Consumer retail
Small business
MassMarkets
Strategic services
Core
Global Enterprise
Global Wholesale
Other
Total Operating Revenues
Connections ('000):(1)
Total voice connections
TotalBroadbandconnections
FiOSInternetsubscribers
FiOSVideosubscribers
(dollars in millions)
2013
2012
2011
$ 14,737
2,591
17,328
8,420
6,283
14,703
6,714
478
$ 39,223
$ 14,043
2,659
16,702
8,052
7,247
15,299
7,240
539
$ 39,780
$ 13,606
2,731
16,337
7,575
8,047
15,622
7,973
750
$ 40,682
21,085
22,503
24,137
9,015
6,072
5,262
8,795
5,424
4,726
8,670
4,817
4,173
Increase/(Decrease)
2012 vs. 2011
2013 vs. 2012
$
$
694
(68)
626
368
(964)
(596)
(526)
(61)
(557)
(1,418)
220
648
536
4.9 %
(2.6)
3.7
4.6
(13.3)
(3.9)
(7.3)
(11.3)
(1.4)
(6.3)
2.5
11.9
11.3
$
$
437
(72)
365
477
(800)
(323)
(733)
(211)
(902)
3.2 %
(2.6)
2.2
6.3
(9.9)
(2.1)
(9.2)
(28.1)
(2.2)
(1,634)
(6.8)
125
607
553
1.4
12.6
13.3
(1) As of end of period
Wireline’s revenues decreased $0.6 billion, or 1.4%, during 2013 compared to 2012 primarily driven by declines in Global Enterprise Core and
Global Wholesale, partially offset by higher Consumer retail revenues
drivenbyFiOSservicesandincreasedStrategicservicesrevenueswithin
Global Enterprise.
2012 Compared to 2011
MassMarketsrevenuesincreasedduring2012comparedto2011primarilyduetotheexpansionofFiOSservices(Voice,InternetandVideo)
as well as changes in our pricing strategy adopted in 2012, partially offset
by the continued decline of local exchange revenues.
Mass Markets
MassMarketsoperationsprovidebroadbandservices(includinghighspeedInternet,FiOSInternetandFiOSVideoservices),localexchange
(basic service and end-user access) and long distance (including regional
toll) voice services to residential and small business subscribers.
We continued to grow our subscriber base and improved penetration
rates within our FiOS service areas during 2012. Also contributing to
theincreaseinrevenuefromFiOSserviceswerechangesinourpricing
strategy adopted in 2012. As of December 31, 2012, we achieved penetration rates of 37.3% and 33.3% for FiOS Internet and FiOS Video,
respectively,comparedtopenetrationratesof35.5%and31.5%forFiOS
InternetandFiOSVideo,respectively,atDecember31,2011.
2013 Compared to 2012
MassMarketsrevenuesincreased$0.6billion,or3.7%,during2013comparedto2012primarilyduetotheexpansionofFiOSservices(Voice,
Internet and Video) as well as changes in our pricing strategies, partially
offset by the continued decline of local exchange revenues.
During2013,wegrewoursubscriberbaseby0.6millionFiOSInternet
subscribersandby0.5millionFiOSVideosubscribers,whilealsoconsistentlyimprovingpenetrationrateswithinourFiOSserviceareas.Asof
December 31, 2013, we achieved penetration rates of 39.5% and 35.0%
forFiOSInternetandFiOSVideo,respectively,comparedtopenetration
ratesof37.3%and33.3%forFiOSInternetandFiOSVideo,respectively,at
December 31, 2012.
TheincreaseinMassMarketsrevenues,drivenbyFiOSservices,waspartially offset by the decline of local exchange revenues primarily due to a
5.2% decline in Consumer retail voice connections resulting primarily from
competition and technology substitution with wireless, VoIP, broadband
and cable services. Total voice connections include traditional switched
access lines in service as well as FiOS digital voice connections.There
was also a decline in Small business retail voice connections, primarily
reflecting competition and a shift to both IP and high-speed circuits.
20
MassMarketsrevenueswerenegativelyimpactedbythedeclineoflocal
exchange revenues primarily due to a 6.1% decline in Consumer retail
voice connections resulting primarily from competition and technology
substitution with wireless, VoIP, broadband and cable services. Total voice
connections include traditional switched access lines in service as well
asFiOSdigitalvoiceconnections.TherewasalsoadeclineinSmallbusiness retail voice connections, primarily reflecting challenging economic
conditions, competition and a shift to both IP and high-speed circuits.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
Global Enterprise
Global Enterprise offers Strategic services including network products
and solutions, advanced communications services, and other core
communications services to medium and large business customers, multinational corporations and state and federal government customers.
Global Wholesale
Global Wholesale provides communications services including data,
voice and local dial tone and broadband services primarily to local, long
distance and other carriers that use our facilities to provide services to
their customers.
2013 Compared to 2012
Global Enterprise revenues decreased $0.6 billion, or 3.9%, during 2013
compared to 2012 primarily due to a $0.5 billion, or 27.1%, decline in Core
customer premise equipment revenues as well as lower voice services
and data networking revenues, which consist of traditional circuit-based
servicessuchasframerelay,privatelineandAsynchronousTransferMode
(ATM)services.Thesecoreservicesdeclinedin2013comparedto2012
as our customer base continued to migrate to next generation IP services. The decline in customer premise equipment revenues reflected
our focus on improving margins by continuing to de-emphasize sales of
equipment that are not part of an overall enterprise solutions bundle. The
decline is also due to lower revenue from public sector customers. This
decrease was partially offset by growth in Strategic services revenues,
which increased $0.4 billion, or 4.6%, during 2013 compared to 2012
primarily due to growth in advanced services, such as contact center
solutions, IP communications and our cloud and data center offerings, as
well as revenue from a telematics services business that we acquired in
the third quarter of 2012.
2013 Compared to 2012
Global Wholesale revenues decreased $0.5 billion, or 7.3%, during 2013
compared to 2012 primarily due to a decline in traditional voice revenues
asaresultofdecreasedMOUsanda5.2%declineindomesticwholesale
connections. The traditional voice product reductions are primarily due
to competitors de-emphasizing their local market initiatives coupled with
the effect of technology substitution. Also contributing to the decline
in voice revenues is the continuing contraction of market rates due to
competition. Partially offsetting the overall decrease in wholesale revenue was a continuing demand for high-speed digital data services from
fiber-to-the-cell customers upgrading their core data circuits to Ethernet
facilities as well as Ethernet migrations from other core customers. As a
result of the customer upgrades, the number of core data circuits experienced an 11.3% decline compared to the similar period in 2012.
2012 Compared to 2011
Global Enterprise revenues decreased during 2012 compared to 2011 primarily due to lower local services and traditional circuit-based revenues,
a decline in customer premise equipment revenues and the unfavorable
impact of foreign currency translation. Core services declined compared
to the similar period in 2011 as our customer base continued to migrate
to next generation IP services. The decline in customer premise equipment revenues reflected our focus on improving margins by continuing
to de-emphasize sales of equipment that are not part of an overall
enterprise solutions bundle. This decrease was partially offset by higher
Strategic services revenues. Strategic services revenues increased primarily due to growth in advanced services, such as managed network
solutions, contact center solutions, IP communications and our cloud
and data center offerings.
2012 Compared to 2011
Global Wholesale revenues decreased during 2012 compared to 2011
primarily due to a decline in traditional voice revenues as a result of
decreased MOUs and a 5.3% decline in domestic wholesale connections. The traditional voice product reductions are primarily due to the
continued impact of competitors de-emphasizing their local market
initiatives coupled with the impact of technology substitution. Also contributing to the decline in voice revenues is the elimination of low margin
international products and the continuing contraction of market rates due
to competition. Partially offsetting the overall decrease in wholesale revenue was a continuing demand for high-speed digital data services from
fiber-to-the-cell customers upgrading their core data circuits to Ethernet
facilities as well as Ethernet migrations from other core customers. As a
result of the customer upgrades, the number of core data circuits experienced a 9.6% decline compared to the similar period in 2011. We expect
Global Wholesale revenue to continue to decline approximately 10% per
quarter compared to the similar period in 2011, as we believe that the
continued decline in core products will only be partially offset by growth
in Ethernet and IP services.
Other
Other revenues include such services as local exchange and long distance services outside of our network footprint and operator services
which are no longer being marketed. The decrease in revenues from
other services during 2013 and 2012 was primarily due to reduced volumes outside of our network footprint.
21
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
Operating Expenses
(dollars in millions)
2013
2012
2011
$ 21,928
8,595
8,327
$ 38,850
$ 22,413
8,883
8,424
$ 39,720
$ 22,158
9,107
8,458
$ 39,723
Years Ended December 31,
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total Operating Expenses
Cost of Services and Sales
Cost of services and sales decreased during 2013 compared to 2012, primarily due to a decrease in costs related to customer premise equipment
which reflected our focus on improving margins by de-emphasizing sales
of equipment that are not part of an overall enterprise solutions bundle,
a decline in access costs resulting primarily from declines in overall
wholesale long distance volumes and the net effect of storm-related
insurance recoveries. These decreases were partially offset by higher contentcostsassociatedwithcontinuedFiOSsubscribergrowthandvendor
rate increases.
Cost of services and sales increased during 2012 compared to 2011,
primarilyduetohighercontentcostsassociatedwithcontinuedFiOS
subscriber growth and vendor rate increases and increased expenses
related to our cloud and data center offerings. Cost of services and sales
wasalsoimpactedbyhighercostsrelatedtoFiOSinstallation,aswellas
higher repair and maintenance expenses caused by storm-related events
in 2012 compared to 2011. The increases were partially offset by a decline
in access costs primarily from management actions to reduce exposure
to unprofitable international wholesale routes and declines in overall
wholesale long distance volumes. Costs related to customer premise
equipment also decreased, which reflected our focus on improving margins by de-emphasizing sales of equipment that are not part of an overall
enterprise solutions bundle.
Increase/(Decrease)
2012 vs. 2011
2013 vs. 2012
$
$
(485)
(288)
(97)
(870)
(2.2)%
(3.2)
(1.2)
(2.2)
$
$
Selling, general and administrative expense decreased during 2012 compared to 2011 primarily due to lower allocations related to centralized
administrative functions, and to a lesser extent, lower property and transaction tax expenses and employee costs.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased during 2013 compared to 2012, as well as 2012 compared to 2011, due to decreases in net
depreciable assets, partially offset by an increase in amortization expense
related to non-network software.
(dollars in millions)
2013
Years Ended December 31,
Segment operating income margin
Segment EBITDA margin
1.2 %
(2.5)
(0.4)
–
Selling, General and Administrative Expense
Selling, general and administrative expense decreased during 2013 compared to 2012 primarily due to declines in employee costs, primarily as
a result of reduced headcount, and declines in rent expenses, partially
offset by higher transaction and property tax expenses.
Segment Operating Income and EBITDA
Segment Operating Income
Add Depreciation and amortization expense
Segment EBITDA
255
(224)
(34)
(3)
$
373
8,327
$ 8,700
1.0%
22.2%
2012
$
$
60
8,424
8,484
0.2%
21.3%
2013 vs. 2012
2011
$
$
959
8,458
9,417
Increase/(Decrease)
2012 vs. 2011
$
$
313
(97)
216
nm
(1.2)%
2.5
$
$
(899)
(34)
(933)
(93.7)%
(0.4)
(9.9)
2.4%
23.1%
nm - not meaningful
The changes in Wireline’s Operating income, Segment EBITDA and
SegmentEBITDAmarginduringtheperiodspresentedwereprimarily
a result of the factors described in connection with operating revenues
and operating expenses.
22
During 2012, $0.1 billion of non-recurring or non-operational items were
excludedfromWireline’sOperatingincome.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
OTHER ITEMS
Gain on Spectrum License Transaction
During the third quarter of 2013, after receiving the required regulatory
approvals,VerizonWireless sold 39 lower 700 MHz B block spectrum
licenses to AT&T in exchange for a payment of $1.9 billion and the
transferbyAT&TtoVerizonWirelessofAWS(10MHz)licensesincertain
markets in the western United States. Verizon Wireless also sold certain
lower700MHzBblockspectrumlicensestoaninvestmentfirmforapayment of $0.2 billion. As a result, we received $0.5 billion of AWS licenses
at fair value and we recorded a pre-tax gain of approximately $0.3 billion
in Selling, general and administrative expense on our consolidated statement of income for the year ended December 31, 2013.
The Consolidated Adjusted EBITDA non-GAAP measure presented
in the Consolidated Operating Income and EBITDA discussion (See
“ConsolidatedResultsofOperations”)excludesthegainonthespectrum
license transaction described above.
Wireless Transaction Costs
During 2013, as a result of the Wireless Transaction, we recorded costs
of $0.9 billion primarily for interest expense of $0.7 billion related to the
issuance of the new notes, as well as $0.2 billion in fees primarily in connectionwiththebridgecreditagreement(see“ConsolidatedFinancial
Condition”).
Severance, Pension and Benefit (Credits) Charges
During 2013, we recorded net pre-tax severance, pension and benefits
credits of approximately $6.2 billion primarily for our pension and postretirement plans in accordance with our accounting policy to recognize
actuarial gains and losses in the year in which they occur. The credits were
primarily driven by an increase in our discount rate assumption used to
determine the current year liabilities from a weighted-average of 4.2%
at December 31, 2012 to a weighted-average of 5.0% at December 31,
2013 ($4.3 billion), lower than assumed retiree medical costs and other
assumption adjustments ($1.4 billion) and the difference between our
estimated return on assets of 7.5% at December 31, 2012 and our actual
return on assets of 8.6% at December 31, 2013 ($0.5 billion).
During 2012, we recorded net pre-tax severance, pension and benefits
charges of approximately $7.2 billion primarily for our pension and postretirement plans in accordance with our accounting policy to recognize
actuarial gains and losses in the year in which they occur. The charges
were primarily driven by a decrease in our discount rate assumption used
to determine the current year liabilities from a weighted-average of 5%
at December 31, 2011 to a weighted-average of 4.2% at December 31,
2012 ($5.3 billion) and revisions to the retirement assumptions for participants and other assumption adjustments, partially offset by the difference
between our estimated return on assets of 7.5% and our actual return on
assets of 10% ($0.7 billion). As part of this charge, we also recorded $1.0 billionrelatedtotheannuitizationofpensionliabilities(see“EmployeeBenefit
PlanFundedStatusandContributions”)aswellasseverancechargesof
$0.4 billion primarily for approximately 4,000 management employees.
determine the current year liabilities from 5.75% at December 31, 2010 to
5% at December 31, 2011 ($5.0 billion); the difference between our estimated return on assets of 8% and our actual return on assets of 5% ($0.9
billion); and revisions to the life expectancy of participants and other
adjustments to assumptions.
The Consolidated Adjusted EBITDA non-GAAP measure presented
in the Consolidated Operating Income and EBITDA discussion (See
“ConsolidatedResultsofOperations”)excludestheseverance,pension
and benefit (credits) charges presented above.
Early Debt Redemption and Other Costs
During November 2012, we recorded debt redemption costs of $0.8 billion in connection with the purchase of $0.9 billion of the $1.25 billion of
8.95% Verizon Communications Notes due 2039 in a cash tender offer.
During December 2012, we recorded debt redemption costs of $0.3 billion in connection with the early redemption of $0.7 billion of the $2.0
billion of 8.75% Verizon Communications Notes due 2018, $1.0 billion of
4.625%VerizonVirginiaLLCDebentures,SeriesA,dueMarch2013and
$0.75billionof4.35%VerizonCommunicationsNotesdueFebruary2013,
as well as $0.3 billion of other costs.
During November 2011, we recorded debt redemption costs of $0.1 billion in connection with the early redemption of $1.0 billion of 7.375%
Verizon Communications Notes due September 2012, $0.6 billion of
6.875% Verizon Communications Notes due June 2012, $0.4 billion of
6.125%VerizonFloridaInc.DebenturesdueJanuary2013,$0.5billionof
6.125%VerizonMarylandInc.DebenturesdueMarch2012and$1.0billion of 6.875% Verizon New York Inc. Debentures due April 2012.
Litigation Settlements
In the third quarter of 2012, we settled a number of patent litigation matters, including cases with ActiveVideo Networks Inc. (ActiveVideo) and TiVo
Inc. (TiVo). In connection with the settlements with ActiveVideo and TiVo,
we recorded a charge of $0.4 billion in the third quarter of 2012 and will
pay and recognize over the following six years an additional $0.2 billion.
The Consolidated Adjusted EBITDA non-GAAP measure presented
in the Consolidated Operating Income and EBITDA discussion (See
“ConsolidatedResultsofOperations”)excludesthelitigationsettlement
costs presented above.
During 2011, we recorded net pre-tax severance, pension and benefits
charges of approximately $6.0 billion for our pension and postretirement
plans in accordance with our accounting policy to recognize actuarial
gains and losses in the year in which they occur. The charges were primarily driven by a decrease in our discount rate assumption used to
23
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
CONSOLIDATED FINANCIAL CONDITION
Cash Flows Used In Investing Activities
(dollars in millions)
Years Ended December 31,
Cash Flows Provided By (Used In)
Operating activities
Investing activities
Financing activities
Increase (Decrease) In Cash and Cash
Equivalents
2013
2012
2011
$ 38,818
(14,833)
26,450
$ 31,486
(20,502)
(21,253)
$ 29,780
(17,250)
(5,836)
$ 50,435
$ (10,269)
$
6,694
We use the net cash generated from our operations to fund network
expansion and modernization, repay external financing, pay dividends,
repurchase Verizon common stock from time to time and invest in new
businesses. Our sources of funds, primarily from operations and, to the
extent necessary, from external financing arrangements, are sufficient to
meet ongoing operating and investing requirements. The cash portion
of the purchase price for the Wireless Transaction was primarily funded
by the incurrence of third-party indebtedness, including the issuance of
$49.0 billion aggregate principal amount of fixed and floating rate notes
andotherindebtedness(see“AcquisitionsandDivestitures”).Weexpect
that our capital spending requirements will continue to be financed
primarily through internally generated funds. Debt or equity financing
may be needed to fund additional investments or development activities
or to maintain an appropriate capital structure to ensure our financial
flexibility. Our cash and cash equivalents are primarily held domestically
in diversified accounts and are invested to maintain principal and
liquidity. Accordingly, we do not have significant exposure to foreign
currency fluctuations.
The volatility in world debt and equity markets has not had a significant
effect on our ability to access external financing. Our available external
financing arrangements include credit available under credit facilities and
other bank lines of credit, vendor financing arrangements, issuances of
registered debt or equity securities and privately-placed capital market
securities. We may also issue short-term debt through an active commercial paper program and have a $6.2 billion credit facility to support such
commercial paper issuances. In addition, during 2013, we entered into a
$2.0 billion 364-day revolving credit agreement.
Cash Flows Provided By Operating Activities
Our primary source of funds continues to be cash generated from
operations, primarily from our Wireless segment. Net cash provided by
operating activities during 2013 increased by $7.3 billion compared to
2012 primarily due to higher consolidated earnings, lower pension contributions and improved working capital levels. The increase in net cash
provided by operating activities in 2013 was partially offset by net distributions of $0.3 billion received from Vodafone Omnitel in 2012.
Net cash provided by operating activities during 2012 increased by
$1.7 billion compared to 2011 primarily due to higher consolidated
earnings, as well as improved working capital levels, due to timing
differences, partially offset by an increase in pension contributions. Net
cash provided by operating activities during 2012 and 2011 included
net distributions received from Vodafone Omnitel of $0.3 billion and $0.4
billion, respectively.
24
Capital Expenditures
Capital expenditures continue to be our primary use of capital resources
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 expenditures, including capitalized software, were as follows:
(dollars in millions)
Years Ended December 31,
Wireless
Wireline
Other
Total as a percentage of revenue
2013
$ 9,425
6,229
950
$ 16,604
13.8%
2012
$
8,857
6,342
976
$ 16,175
14.0%
2011
$
8,973
6,399
872
$ 16,244
14.7%
Capital expenditures increased at Wireless in 2013 compared to 2012
in order to substantially complete the build-out of our 4G LTE network.
Capital expenditures declined at Wireline as a result of decreased legacy
spendingrequirementsandadeclineinspendingonourFiOSnetwork.
Capital expenditures declined slightly at Wireless in 2012 compared to
2011 due to the decreased investment in the capacity of our wireless
EV-DO network, partially offset by the increased build-out of our 4G LTE
network. Capital expenditures declined slightly at Wireline due to lower
legacy spending requirements.
Acquisitions
During 2013, 2012 and 2011, we invested $0.6 billion, $4.3 billion and
$0.2 billion, respectively, in acquisitions of wireless licenses. During 2013,
2012 and 2011, we also invested $0.5 billion, $0.9 billion and $1.8 billion,
respectively, in acquisitions of investments and businesses, net of cash
acquired.
During the fourth quarter of 2013, Verizon acquired an industry leader in
content delivery networks for $0.4 billion. We expect the acquisition will
increase our ability to meet the growing demand for online digital media
content. Additionally, we acquired a technology and television cloud
company for cash consideration that was not significant. In February
2014, Verizon acquired a business dedicated to the development of
cloud television products and services for cash consideration that was
not significant.
During 2012, we paid approximately $4.3 billion to acquire wireless
licenses primarily to meet future LTE capacity needs and enable LTE
expansion. Additionally, during 2012, we acquired HUGHES Telematics,
aprovideroftelematicsservices,for$0.6billion.See“Acquisitionsand
Divestitures”foradditionaldetails.
During April 2011, we paid approximately $1.4 billion for the equity of
Terremark, which was partially offset by $0.1 billion of cash acquired
(see“Acquisitions and Divestitures”). See“Cash Flows From Financing
Activities”regardingthedebtobligationsofTerremarkthatwererepaid
duringMay2011.Inaddition,during2011,weacquiredvariouswireless
licenses and markets as well as a provider of cloud software technology
for cash consideration that was not significant.
Dispositions
During2013,wecompletedthesaleof700MHzlowerBblockspectrum
licenses and as a result, we received proceeds of $2.1 billion. Additionally,
onJanuary6,2014,weannouncedagreementswithT-MobileUSA,Inc.
(T-MobileUSA)pursuanttowhichwewilldisposeofourremaining700
MHzAblockspectrumlicenses,andasaresultoftheseagreementswe
expect to receive cash consideration of approximately $2.4 billion and
additional spectrum. See“Acquisitions and Divestitures” for additional
information.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
During 2012, we received $0.4 billion related to the sale of some of our 700
MHzlowerAandBblockspectrumlicenses.Weacquiredtheselicensesas
partofFederalCommunicationsCommission(FCC)Auction73in2008.
Verizon Delaware LLC Debentures due December 2023 at a redemption
price of 100% of the principal amount of the debentures. Any accrued
and unpaid interest was paid to the date of redemption.
Other, net
During 2011, Other, net primarily included proceeds related to the sales
of long-term investments, which were not significant to our consolidated
statements of income.
In addition, during 2013 we utilized $0.2 billion under fixed rate vendor
financing facilities.
Cash Flows Provided by (Used In) Financing Activities
We seek to maintain 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. During 2013, 2012 and 2011, net cash provided by (used in) financing
activities was $26.5 billion, $(21.3) billion and $(5.8) billion, respectively.
2013
DuringMarch2013,weissued$0.5billionaggregateprincipalamountof
floating rate Notes due 2015 in a private placement resulting in cash proceeds of approximately $0.5 billion, net of discounts and issuance costs.
The proceeds were used for the repayment of commercial paper.
During April 2013, $1.25 billion of 5.25% Verizon Communications Notes
maturedandwererepaid.DuringMay2013,$0.1billionof7.0%Verizon
New York Inc. Debentures matured and were repaid. During June 2013,
$0.5 billion of 4.375% Verizon Communications Notes and $0.1 billion
of 7.0% Verizon New York Inc. Debentures matured and were repaid. In
addition, during June 2013, we redeemed $0.25 billion of 7.15% Verizon
MarylandLLCDebenturesdueMay2023ataredemptionpriceof100%
of the principal amount of the debentures.
During September 2013, in connection with the Wireless Transaction, we
issued $49.0 billion aggregate principal amount of fixed and floating rate
notes resulting in cash proceeds of approximately $48.7 billion, net of discounts and issuance costs. The issuances consisted of the following: $2.25
billion aggregate principal amount of floating rate Notes due 2016 that
bear interest at a rate equal to three-month London Interbank Offered
Rate(LIBOR)plus1.53%whichratewillberesetquarterly,$1.75billion
aggregate principal amount of floating rate Notes due 2018 that bear
interestatarateequaltothree-monthLIBORplus1.75%whichratewillbe
reset quarterly, $4.25 billion aggregate principal amount of 2.50% Notes
due 2016, $4.75 billion aggregate principal amount of 3.65% Notes due
2018, $4.0 billion aggregate principal amount of 4.50% Notes due 2020,
$11.0 billion aggregate principal amount of 5.15% Notes due 2023, $6.0
billion aggregate principal amount of 6.40% Notes due 2033 and $15.0
billion aggregate principal amount of 6.55% Notes due 2043 (collectively,
the new notes). The proceeds of the new notes were used to finance, in
part, the Wireless Transaction and to pay related fees and expenses. As
a result of the issuance of the new notes, we incurred interest expense
related to the Wireless Transaction of $0.7 billion during 2013.
During October 2013, $0.3 billion of 4.75% Verizon New England Inc.
Debentures matured and were repaid.
During November 2013, $1.25 billion of 7.375% Verizon Wireless Notes
and $0.2 billion of 6.5% Verizon Wireless Notes matured and were repaid.
During November 2013, Verizon Wireless redeemed $3.5 billion of 5.55%
NotesdueFebruary1,2014ataredemptionpriceof101%oftheprincipal amount of the notes and $0.3 billion of 6.70% Verizon New York
Inc. Debentures due November 2023 at a redemption price of 100% of
the principal amount of the debentures. Any accrued and unpaid interest
was paid to the date of redemption.
During December 2013, we redeemed $0.2 billion of 7.0% Verizon New
York Inc. Debentures due December 2033 at a redemption price of
100% of the principal amount of the debentures and $20 million of 7.0%
DuringFebruary2014,weissued€1.75billionaggregateprincipalamount
of2.375%Notesdue2022,€1.25billionaggregateprincipalamountof
3.25% Notes due 2026 and £0.85 billion aggregate principal amount of
4.75% Notes due 2034. The issuance of these Notes resulted in cash proceeds of approximately $5.4 billion, net of discounts and issuance costs.
The net proceeds were used, in part, to finance the Wireless Transaction.
Any net proceeds not used to finance the Wireless Transaction will be used
forgeneralcorporatepurposes.Also,duringFebruary2014,weissued$0.5
billionaggregateprincipalamountof5.9%RetailNotesdue2054resulting
in cash proceeds of approximately $0.5 billion, net of discounts and issuance costs. The proceeds will be used for general corporate purposes.
Verizon Notes
DuringFebruary2014,inconnectionwiththeWirelessTransaction,we
issued $5.0 billion aggregate principal amount of floating rate notes.
The Verizon Notes were issued in two separate series, with $2.5 billiondueFebruary21,2022and$2.5billiondueFebruary21,2025.The
Verizon Notes bear interest at a floating rate, which will be reset quarterly,withinterestpayablequarterlyinarrears,beginningMay21,2014
(see“AcquisitionsandDivestitures”).Theeight-yearVerizonnotesbear
interestatafloatingrateequaltothree-monthLIBOR,plus1.222%,and
the eleven-year Verizon notes bear interest at a floating rate equal to
three-monthLIBOR,plus1.372%.
Term Loan Agreement
During October 2013, we entered into a term loan agreement with a
group of major financial institutions pursuant to which we drew $6.6 billioninFebruary2014tofinance,inpart,theWirelessTransactionandto
pay transaction costs. Half of any loans under the term loan agreement
have a maturity of three years and the other half have a maturity of five
years (the 5-Year Loans). The 5-Year Loans provide for the partial amortization of principal during the last two years that they are outstanding.
Loans under the term loan agreement bear interest at floating rates. The
term loan agreement contains certain negative covenants, including a
negative pledge covenant, a merger or similar transaction covenant and
an accounting changes covenant, affirmative covenants and events of
default that are customary for companies maintaining an investment
grade credit rating. In addition, the term loan agreement requires us to
maintain a leverage ratio (as defined in the term loan agreement) not in
excess of 3.50:1.00, until our credit ratings reach a certain level.
Bridge Credit Agreement
During September 2013, we entered into a $61.0 billion bridge credit
agreement with a group of major financial institutions. The credit agreement provided us with the ability to borrow up to $61.0 billion to
finance, in part, the Wireless Transaction and to pay related transaction
costs.FollowingtheSeptember2013issuanceofnotes,borrowingavailability under the bridge credit agreement was reduced to $12.0 billion.
FollowingtheeffectivenessofthetermloanagreementinOctober2013,
the bridge credit agreement was terminated in accordance with its terms
and as such, the related fees of $0.2 billion were recognized in Other
income and (expense), net during the fourth quarter of 2013.
2012
During January 2012, $1.0 billion of 5.875% Verizon New Jersey Inc.
Debenturesmaturedandwererepaid.DuringFebruary2012,$0.8billion of 5.25% Verizon Wireless Notes matured and were repaid. During
July 2012, $0.8 billion of 7.0% Verizon Wireless Notes matured and were
repaid. In addition, during 2012 we utilized $0.2 billion under fixed rate
vendor financing facilities.
25
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
On November 2, 2012, we announced the commencement of a tender
offer (the Tender Offer) to purchase for cash any and all of the outstanding $1.25 billion aggregate principal amount of 8.95% Verizon
Communications Notes due 2039. In the Tender Offer that was completed November 9, 2012, $0.9 billion aggregate principal amount of the
notes was purchased and $0.35 billion principal amount of the notes
remained outstanding. Any accrued and unpaid interest on the principal
purchased was paid to the date of purchase.
During November 2012, we issued $4.5 billion aggregate principal
amount of fixed rate notes at varying maturities resulting in cash proceeds of approximately $4.47 billion, net of discounts and issuance costs.
The net proceeds were used for general corporate purposes, for the
Tender Offer, and to redeem $0.7 billion of $2.0 billion of 8.75% Verizon
Communications Notes due 2018, $1.0 billion of 4.625% Verizon Virginia
LLC Debentures, Series A due 2013 and $0.75 billion of 4.35% Verizon
Communications Notes due 2013.
In addition, during 2012, various fixed rate notes totaling approximately
$0.2 billion were repaid and any accrued and unpaid interest was paid to
the date of payment.
See“OtherItems”regardingtheearlydebtredemptioncostsincurredin
connection with the aforementioned repurchases and redemptions.
2011
During 2011, proceeds from long-term borrowings totaled $11.1 billion,
which was primarily used to repay outstanding debt, redeem higher
interest bearing debt maturing in the near term and for other general
corporate purposes.
During 2011, $0.5 billion of 5.35% Verizon Communications Notes
matured and were repaid, and we utilized $0.3 billion under fixed rate
vendor financing facilities.
DuringMarch2011,weissued$6.25billionaggregateprincipalamount
of fixed and floating rate notes at varying maturities resulting in cash proceeds of approximately $6.19 billion, net of discounts and issuance costs.
The net proceeds were used for the repayment of commercial paper and
other general corporate purposes, as well as to redeem $2.0 billion aggregate principal amount of telephone subsidiary debt during April 2011.
In November 2012, the Board of Representatives of VerizonWireless
declared a distribution to its owners, which was paid in the fourth quarter
of 2012 in proportion to their partnership interests on the payment date,
in the aggregate amount of $8.5 billion. As a result, Vodafone received a
cash payment of $3.8 billion and the remainder of the distribution was
received by Verizon.
InJuly2011,theBoardofRepresentativesofVerizonWirelessdeclared
a distribution to its owners, which was paid in the first quarter of 2012
in proportion to their partnership interests on the payment date, in
the aggregate amount of $10 billion. As a result, Vodafone received a
cash payment of $4.5 billion and the remainder of the distribution was
received by Verizon.
Other, net
The change in Other, net financing activities during 2013 compared to
2012 was primarily driven by higher distributions to Vodafone, which
owned a 45% noncontrolling interest in Verizon Wireless as of December
31, 2013. The change in Other, net financing activities during 2012 compared to 2011 was primarily driven by higher distributions to Vodafone,
andhigherearlydebtredemptioncosts(see“OtherItems”).
Dividends
TheVerizonBoardofDirectorsdeterminestheappropriatenessofthe
level of our dividend payments on a periodic basis by considering such
factors as long-term growth opportunities, internal cash requirements
and the expectations of our shareowners. During the third quarter of
2013,theBoardincreasedourquarterlydividendpayment2.9%to$.53
per share from $.515 per share in the same period of 2012. This is the
seventhconsecutiveyearthatVerizon’sBoardofDirectorshasapproved
aquarterlydividendincrease.Duringthethirdquarterof2012,theBoard
increased our quarterly dividend payment 3.0% to $.515 per share from
$.50 per share in the same period of 2011. During the third quarter of
2011,theBoardincreasedourquarterlydividendpayment2.6%to$.50
per share from $.4875 per share in the same period of 2010.
The debt obligations of Terremark that were outstanding at the time of
its acquisition by Verizon were repaid during the second quarter of 2011.
During 2013, we paid $5.9 billion in dividends compared to $5.2 billion
in 2012 and $5.6 billion in 2011. As in prior periods, dividend payments
were a significant use of capital resources. While the dividends declared
per common share increased in 2012 compared to 2011, the total
amount of cash dividends paid decreased during 2012 compared to the
prior year as a portion of the dividends was satisfied through the issuance
ofcommonsharesfromTreasurystock(see“CommonStock”).
During November 2011, we issued $4.6 billion aggregate principal
amount of fixed rate notes at varying maturities resulting in cash proceeds of approximately $4.55 billion, net of discounts and issuance costs.
During November 2011, the net proceeds were used to redeem $1.6 billion aggregate principal amount of Verizon Communications notes and
$1.9 billion aggregate principal amount of telephone subsidiary debt.
The remaining net proceeds were used for the repayment of commercial
paperandothergeneralcorporatepurposes.See“OtherItems”regarding
the early debt redemption costs incurred in connection with the aforementioned redemptions.
Credit Facilities
On August 13, 2013, we amended our $6.2 billion credit facility with a
group of major financial institutions to extend the maturity date to August
12, 2017. As of December 31, 2013, the unused borrowing capacity under
this credit facility was approximately $6.1 billion. The credit facility does
not require us to comply with financial covenants or maintain specified credit ratings, and it permits us to borrow even if our business has
incurred a material adverse change. We use the credit facility to support
the issuance of commercial paper, for the issuance of letters of credit and
for general corporate purposes.
DuringDecember2011,werepaid$0.9billionuponmaturityforthe€0.7
billion of 7.625% Verizon Wireless Notes, and the related cross currency
swapwassettled.DuringMay2011,$4.0billionVerizonWirelesstwo-year
fixed and floating rate notes matured and were repaid.
During October 2013, we entered into a $2.0 billion 364-day revolving
credit agreement with a group of major financial institutions. Although
effective as of October 2013, we could not draw on this revolving credit
agreement prior to the completion of the Wireless Transaction. We may
use borrowings under the 364-day credit agreement for general corporate purposes. The 364-day revolving credit agreement contains certain
negative covenants, including a negative pledge covenant, a merger or
similar transaction covenant and an accounting changes covenant, affirmative covenants and events of default that are customary for companies
maintaining an investment grade credit rating. In addition, this agreement
requires us to maintain a leverage ratio (as defined in the agreement) not
in excess of 3.50:1.00, until our credit ratings reach a certain level.
Special Distributions
InMay2013,theBoardofRepresentativesofVerizonWirelessdeclared
a distribution to its owners, which was paid in the second quarter of
2013 in proportion to their partnership interests on the payment date,
in the aggregate amount of $7.0 billion. As a result, Vodafone received a
cash payment of $3.15 billion and the remainder of the distribution was
received by Verizon.
26
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
Common Stock
Common stock has been used from time to time to satisfy some of the
funding requirements of employee and shareowner plans, including 24.6
million common shares issued from Treasury stock during 2012, related
to dividend payments, which had an aggregate value of $1.0 billion. On
February3,2011,theBoardofDirectorsreplacedthepreviouslyauthorized share buyback program with a new program for the repurchase of
up to 100 million common shares terminating no later than the close
ofbusinessonFebruary28,2014.TheBoardalsodeterminedthatno
additional shares were to be purchased under the prior program. During
2013, we repurchased $0.2 billion of our common stock under this program. There were no repurchases of common stock during 2012 or 2011.
As a result of the Wireless Transaction, Verizon issued approximately 1.27
billion shares.
Credit Ratings
During the third quarter of 2013,Verizon’s credit ratings were downgradedbyMoody’sInvestorsService(Moody’s),Standard&Poor’sRatings
Services(Standard&Poor’s)andFitchRatings(Fitch)asaresultofVerizon’s
announcementoftheagreementtoacquireVodafone’s45%noncontrolling interest in Verizon Wireless for approximately $130 billion including
the incurrence of third-party indebtedness to fund the cash portion of the
purchasepricefortheWirelessTransaction.Moody’sdowngradedVerizon’s
long-term debt ratings one notch from A3 to Baa1, while Standard &
Poor’s lowered its corporate credit rating and senior unsecured debt
ratingonenotchfromA-toBBB+andFitchlowereditslong-termissuer
default rating and senior unsecured debt rating one notch from A to A-.
Although the ratings downgrade is not expected to significantly impact
our access to capital, it could increase both the cost of refinancing debt
and the cost of financing any new capital requirements. Securities ratings assigned by rating organizations are expressions of opinion and are
not recommendations to buy, sell or hold securities. A securities rating
is subject to revision or withdrawal at any time by the assigning rating
organization. Each rating should be evaluated independently of any
other rating.
Covenants
Our credit agreements contain covenants that are typical for large,
investment grade companies. These covenants include requirements to
pay interest and principal in a timely fashion, pay taxes, maintain insurance with responsible and reputable insurance companies, preserve our
corporate existence, keep appropriate books and records of financial
transactions, maintain our properties, provide financial and other reports
to our lenders, limit pledging and disposition of assets and mergers and
consolidations, and other similar covenants. Additionally, the term loan
credit agreement and the 364-day revolving credit agreement require us
to maintain a leverage ratio (as such term is defined in those agreements)
not in excess of 3.50:1.00 until our credit ratings are equal to or higher
than A3 and A-.
We and our consolidated subsidiaries are in compliance with all debt
covenants.
Increase (Decrease) In Cash and Cash Equivalents
Our Cash and cash equivalents at December 31, 2013 totaled $53.5 billion, a $50.4 billion increase compared to Cash and cash equivalents at
December 31, 2012 primarily as a result of the issuance of $49.0 billion
aggregate principal amount of fixed and floating rate notes.
Our Cash and cash equivalents at December 31, 2012 totaled $3.1 billion, a $10.3 billion decrease compared to Cash and cash equivalents at
December 31, 2011 as a result of the factors described in connection
with our cash flows provided by operating activities, cash flows used in
investing activities and cash flows used in financing activities.
Free Cash Flow
Freecashflowisanon-GAAPfinancialmeasurethatmanagementbelieves
isusefultoinvestorsandotherusersofVerizon’sfinancialinformationin
evaluatingcashavailabletopaydebtanddividends.Freecashflowiscalculated by subtracting capital expenditures from net cash provided by
operating activities. The following table reconciles net cash provided by
operatingactivitiestoFreecashflow:
(dollars in millions)
Years Ended December 31,
Net cash provided by operating activities
Less Capital expenditures (including
capitalized software)
Free cash flow
2013
2012
2011
$ 38,818
$ 31,486
$ 29,780
16,604
$ 22,214
16,175
$ 15,311
16,244
$ 13,536
The changes in free cash flow during 2013, 2012 and 2011 were a result of
the factors described in connection with net cash provided by operating
activities and capital expenditures.
Employee Benefit Plan Funded Status and Contributions
Pension Annuitization
On October 17, 2012, we, along with our subsidiary Verizon Investment
ManagementCorp.,andFiduciaryCounselorsInc.,asindependentfiduciaryoftheVerizonManagementPensionPlan(thePlan),enteredintoa
definitive purchase agreement with The Prudential Insurance Company
ofAmerica(Prudential)andPrudentialFinancial,Inc.,pursuanttowhich
the Plan would purchase a single premium group annuity contract
from Prudential.
On December 10, 2012, upon issuance of the group annuity contract by
Prudential, Prudential irrevocably assumed the obligation to make future
annuity payments to approximately 41,000 Verizon management retirees
who began receiving pension payments from the Plan prior to January 1,
2010.Theamountofeachretiree’sannuitypaymentequalstheamountof
suchindividual’spensionbenefit.Inaddition,thegroupannuitycontract
is intended to replicate the same rights to future payments, such as survivor benefits, that are currently offered by the Plan.
We contributed approximately $2.6 billion to the Plan between September
1, 2012 and December 31, 2012 in connection with the transaction so
that the Plan’s funding percentage would not decrease as a result of
the transaction.
Employer Contributions
We operate numerous qualified and nonqualified pension plans and other
postretirement benefit plans. These plans primarily relate to our domestic
business units. During 2013, contributions to our qualified pension plans
were not material. During 2012 and 2011, we contributed $0.9 billion and
$0.4 billion, respectively, to our qualified pension plans, excluding the
pension annuitization discussed above. We also contributed $0.1 billion,
$0.2 billion and $0.1 billion to our nonqualified pension plans in 2013,
2012 and 2011, respectively.
In an effort to reduce the risk of our portfolio strategy and better align
assets with liabilities, we have adopted a liability driven pension strategy
that seeks to better match cash flows from investments with projected
benefit payments. We expect that the strategy will reduce the likelihood
that assets will decline at a time when liabilities increase (referred to as
liability hedging), with the goal to reduce the risk of underfunding to the
plan and its participants and beneficiaries, however, we also expect the
strategytoresultinlowerassetreturns.Basedonthisstrategyandthe
funded status of the plans at December 31, 2013, we expect the minimum required qualified pension plan contribution in 2014 to be $1.2
billion. Nonqualified pension contributions are estimated to be approximately $0.2 billion in 2014.
27
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
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 $1.4 billion, $1.5 billion and $1.4 billion to our other postretirement benefit plans in 2013, 2012 and 2011,
respectively. Contributions to our other postretirement benefit plans are
estimated to be approximately $1.4 billion in 2014.
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 our leasing portfolio along with telecommunications equipment, commercial real estate property and other equipment. These
leases have remaining terms of up to 37 years as of December 31, 2013.
In addition, we lease space on certain of our cell towers to other wireless
carriers.Minimumleasepaymentsreceivablerepresentunpaidrentals,
less principal and interest on third-party nonrecourse debt relating to leveraged lease transactions. Since we have no general liability for this debt,
which is secured by 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 U.S. 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, 2013. 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(2)
Total long-term debt, including current maturities
Interest on long-term debt(1)
Operating leases(2)
Purchase obligations(3)
Other long-term liabilities(4)
Total contractual obligations
Total
$ 92,851
293
93,144
74,938
12,190
33,440
4,404
$ 218,116
Payments Due By Period
Less than
1 year
1–3 years
3–5 years
$
3,395
91
3,486
4,816
2,255
19,724
2,825
$ 33,106
$ 13,466
92
13,558
9,419
3,723
8,778
1,579
$ 37,057
$ 16,252
49
16,301
8,609
2,464
4,163
$ 31,537
Morethan
5 years
$ 59,738
61
59,799
52,094
3,748
775
$ 116,416
(1) Items included in long-term debt with variable coupon rates are described in Note 8 to the consolidated financial statements.
(2) See Note 7 to the consolidated financial statements.
(3) The purchase obligations reflected above are primarily commitments to purchase handsets and peripherals, equipment, software, programming and network services, and marketing activities,
which will be used or sold in the ordinary course of business. These amounts do not represent our entire anticipated purchases in the future, but represent only those items that are the subject
ofcontractualobligations.Wealsopurchaseproductsandservicesasneededwithnofirmcommitment.Forthisreason,theamountspresentedinthistablealonedonotprovideareliable
indicator of our expected future cash outflows or changes in our expected cash position (see Note 16 to the consolidated financial statements).
(4) Other long-term liabilities include estimated postretirement benefit and qualified pension plan contributions (see Note 11 to the consolidated financial statements).
We are not able to make a reliable estimate of when the unrecognized tax benefits balance of $2.1 billion and related interest and penalties will be settled with the respective taxing authorities
until issues or examinations are further developed (see Note 12 to the consolidated financial statements).
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 (see Note 16 to the consolidated financial statements).
We guarantee the debentures and first mortgage bonds of our operating telephone company subsidiaries. As of December 31, 2013, $3.1
billion principal amount of these obligations remain outstanding. Each
guarantee will remain in place for the life of the obligation unless terminated pursuant to its terms, which will occur, among other things, if the
operating telephone company is no longer a wholly-owned subsidiary
of Verizon.
28
We also guarantee the debt obligations of GTE Corporation that were
issued and outstanding prior to July 1, 2003. As of December 31, 2013,
$1.7 billion principal amount of these obligations remained outstanding
(see Note 8 to the consolidated financial statements).
As of December 31, 2013 letters of credit totaling approximately $0.1 billion, which were executed in the normal course of business and support
several financing arrangements and payment obligations to third parties,
were outstanding (see Note 16 to the consolidated financial statements).
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
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 investment, equity 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 and prepaid
forwards and collars, interest rate swap agreements, commodity swap
and forward 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 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
We are exposed to changes in interest rates, primarily on our short-term
debt and the portion of long-term debt that carries floating interest
rates. As of December 31, 2013, approximately 92% of the aggregate
principal amount of our total debt portfolio consisted of fixed rate
indebtedness, including the effect of interest rate swap agreements designated as hedges. The impact of a 100 basis point change in interest
rates affecting our floating rate debt would result in a change in annual
interest expense, including our interest rate swap agreements that are
designated as hedges, of approximately $0.1 billion. The interest rates on
our existing long-term debt obligations are unaffected by changes to our
credit ratings.
The table that follows summarizes the fair values of our long-term debt,
including current maturities, and interest rate swap derivatives as of
December 31, 2013 and 2012. 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)
FairValue
FairValue
assuming
+100basis
point shift
FairValue
assuming
- 100 basis
point shift
$ 103,103
$ 95,497
$ 111,910
$
$
$
At December 31, 2013
Long-term debt and related
derivatives
At December 31, 2012
Long-term debt and related
derivatives
61,045
56,929
65,747
Interest Rate Swaps
We have entered into domestic interest rate swaps to achieve a targeted
mix of fixed and variable rate debt. We principally receive fixed rates and
payvariableratesbasedonLIBOR,resultinginanetincreaseordecrease
to Interest expense. 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 on our consolidated balance sheets
as assets and liabilities.
During 2012, interest rate swaps with a notional value of $5.8 billion were
settled. As a result of the settlements, we received net proceeds of $0.7
billion, including accrued interest which is included in Other, net operating activities in the consolidated statement of cash flows. The fair value
basis adjustment to the underlying debt instruments was recognized
into earnings as a reduction of Interest expense over the remaining lives
of the underlying debt obligations. During the second quarter of 2013,
interest rate swaps with a notional value of $1.25 billion matured and
the impact to our consolidated financial statements was not material.
During the third quarter of 2013, we entered into interest rate swaps with
a total notional value of $1.8 billion. At December 31, 2013 and 2012, the
fair value of these interest rate swaps was not material. At December 31,
2013, the total notional amount of these interest rate swaps was $1.8 billion. The ineffective portion of these interest rate swaps was not material
at December 31, 2013.
Forward Interest Rate Swaps
In order to manage our exposure to future interest rate changes, during
the fourth quarter of 2013, we entered into forward interest rate swaps
with a notional value of $2.0 billion. We designated these contracts as
cash flow hedges. The fair value of these contracts was not material at
December 31, 2013.
Foreign Currency Translation
The functional currency for our foreign operations is primarily the
local currency. The translation of income statement and balance sheet
amounts of our foreign operations into U.S. dollars is recorded as cumulative translation adjustments, which are included in Accumulated other
comprehensive income in our consolidated balance sheets. Gains and
losses on foreign currency transactions are recorded in the consolidated
statements of income in Other income and (expense), net. At December
31, 2013, our primary translation exposure was to the British Pound
Sterling, the Euro, the Australian Dollar and the Japanese Yen.
Cross Currency Swaps
Verizon Wireless previously entered into cross currency swaps designated
ascashflowhedgestoexchangeapproximately$1.6billionofBritish
Pound Sterling and Euro-denominated debt into U.S. dollars and to fix
our future interest and principal payments in U.S. dollars, as well as to
mitigate the impact of foreign currency transaction gains or losses. A portion of the gains and losses recognized in Other comprehensive income
was reclassified to Other income and (expense), net to offset the related
pre-tax foreign currency transaction gain or loss on the underlying debt
obligations. The fair value of the outstanding swaps was not material at
December 31, 2013 or December 31, 2012. During 2013 and 2012 the
gains with respect to these swaps were not material.
DuringFebruary2014,weenteredintocrosscurrencyswapsdesignated
as cash flow hedges to exchange approximately $5.4 billion of Euro and
BritishPoundSterlingdenominateddebtintoU.S.dollarsandtofixour
future interest and principal payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses.
29
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
CRITICAL ACCOUNTING ESTIMATES AND RECENT ACCOUNTING STANDARDS
Critical Accounting Estimates
A summary of the critical accounting estimates used in preparing our
financial statements is as follows:
• Wireless licenses and Goodwill are a significant component of our consolidatedassets.Bothourwirelesslicensesandgoodwillaretreatedas
indefinite-lived intangible assets and, therefore are not amortized, but
rather are tested for impairment annually in the fourth fiscal quarter,
unless there are events or changes in circumstances during an interim
period that indicate these assets may not be recoverable. We believe
our estimates and assumptions are reasonable and represent appropriate marketplace considerations as of the valuation date. We do not
believe that reasonably likely adverse changes in our assumptions and
estimates would result in an impairment charge as of our latest impairment testing date. However, if there is a substantial and sustained
adverse decline in our operating profitability, we may have impairment
charges in future years. Any such impairment charge could be material
to our results of operations and financial condition.
Wireless Licenses
The carrying value of our wireless licenses was approximately $75.7
billion as of December 31, 2013. We aggregate our wireless licenses
into one single unit of accounting, as we utilize our wireless licenses
on an integrated basis as part of our nationwide wireless network.
Our wireless licenses provide us with the exclusive right to utilize
certain radio frequency spectrum to provide wireless communication
services. There are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of our wireless
licenses. In 2013, we performed a qualitative impairment assessment
to determine whether it is more likely than not that the fair value of
our wireless licenses was less than the carrying amount. As part of
our assessment we considered several qualitative factors including
the business enterprise value of Wireless, macroeconomic conditions
(including changes in interest rates and discount rates), industry and
marketconsiderations(includingindustryrevenueandEBITDAmargin
projections), the projected financial performance of Wireless, as well as
otherfactors.Basedonourassessmentin2013,wequalitativelyconcluded that it was more likely than not that the fair value of our wireless
licenses significantly exceeded their carrying value and therefore, did
not result in an impairment.
In 2012 and 2011, our quantitative impairment test consisted of comparing the estimated fair value of our wireless licenses to the aggregated carrying amount as of the test date. If the estimated fair value
of our wireless licenses was less than the aggregated carrying amount
of the wireless licenses then an impairment charge would have been
recognized. Our annual quantitative impairment tests for 2012 and
2011 indicated that the fair value significantly exceeded the carrying
value and, therefore, did not result in an impairment.
In 2012 and 2011, using a quantitative assessment, we estimated the
fair value of our wireless licenses using a direct income based valuation approach. This approach uses a discounted cash flow analysis to
estimate what a marketplace participant would be willing to pay to
purchase the aggregated wireless licenses as of the valuation date. As
a result we were required to make significant estimates about future
cash flows specifically associated with our wireless licenses, an appropriate discount rate based on the risk associated with those estimated
cash flows and assumed terminal value and growth rates. We consid30
ered current and expected future economic conditions, current and
expected availability of wireless network technology and infrastructure
and related equipment and the costs thereof as well as other relevant
factors in estimating future cash flows. The discount rate represented
our estimate of the weighted-average cost of capital (WACC), or
expected return, that a marketplace participant would have required
as of the valuation date. We developed the discount rate based on our
consideration of the cost of debt and equity of a group of guideline
companies as of the valuation date. Accordingly, our discount rate
incorporated our estimate of the expected return a marketplace participant would have required as of the valuation date, including the
risk premium associated with the current and expected economic
conditions as of the valuation date. The terminal value growth rate
representedourestimateofthemarketplace’slong-termgrowthrate.
Goodwill
At December 31, 2013, the balance of our goodwill was approximately
$24.6 billion, of which $18.4 billion was in our Wireless segment and
$6.2 billion was in our Wireline segment. Determining whether an
impairment has occurred requires the determination of fair value
of each respective reporting unit. Our operating segments, Wireless
and Wireline, are deemed to be our reporting units for purposes of
goodwill impairment testing. The fair value of Wireless significantly
exceeded its carrying value and the fair value of Wireline exceeded its
carrying value. Accordingly, our annual impairment tests for 2013, 2012
and 2011 did not result in an impairment.
The fair value of the reporting unit is calculated using a market
approach and a discounted cash flow method. The market approach
includes the use of comparative multiples to corroborate discounted
cash flow results. The discounted cash flow method is based on the
present value of two components—projected cash flows and a terminal value. The terminal value represents the expected normalized
future cash flows of the reporting unit beyond the cash flows from
the discrete projection period. The fair value of the reporting unit is
calculated based on the sum of the present value of the cash flows
from the discrete period and the present value of the terminal value.
The estimated cash flows are discounted using a rate that represents
our WACC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
• We maintain benefit plans for most of our employees, including, for
certain employees, pension and other postretirement benefit plans.
At December 31, 2013, 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 well as on the funded status due to
an increase or a decrease in the actual versus expected return on plan
assets as of December 31, 2013 and for the year then ended pertaining
toVerizon’spensionandpostretirementbenefitplansisprovidedinthe
table below.
(dollars in millions)
Percentage
point
change
Increase
(decrease) at
December 31, 2013*
Pension plans discount rate
+0.50
-0.50
Rate of return on pension plan assets
+1.00
-1.00
(166)
166
Postretirement plans discount rate
+0.50
-0.50
(1,332)
1,486
+1.00
-1.00
(26)
26
+1.00
-1.00
2,539
(2,086)
Rate of return on postretirement plan
assets
Health care trend rates
$
(1,105)
1,224
in income tax expense. Actual tax payments may materially differ from
estimated liabilities as a result of changes in tax laws as well as unanticipated transactions impacting related income tax balances.
• Our Plant, property and equipment balance represents a significant
component of our consolidated assets. We record plant, property and
equipment at cost. We depreciate plant, property and equipment on a
straight-line basis over the estimated useful life of the assets. We expect
that a one-year increase in estimated useful lives of our plant, property
and equipment would result in a decrease to our 2013 depreciation
expense of $1.8 billion and that a one-year decrease would result in an
increase of approximately $2.1 billion in our 2013 depreciation expense.
Recent Accounting Standards
In July 2013, the accounting standard update relating to the presentation
of an unrecognized tax benefit when a net operating loss carryforward, a
similar tax loss, or a tax credit carryforward exists was issued. The standard
update provides that a liability related to an unrecognized tax benefit
should be offset against same jurisdiction deferred tax assets for a net
operating loss carryforward, a similar tax loss, or a tax credit carryforward
if such settlement is required or expected in the event the uncertain tax
position is disallowed. We will adopt this standard update during the first
quarter of 2014. We are currently evaluating the consolidated balance
sheet impact related to this standard update.
* In determining its pension and other postretirement obligation, the Company used
a weighted-average discount rate of 5.0%. The rate was selected to approximate the
composite interest rates available on a selection of high-quality bonds available in the
market at December 31, 2013. The bonds selected had maturities that coincided with
the time periods during which benefits payments are expected to occur, were noncallable and available in sufficient quantities to ensure marketability (at least $0.3 billion
par outstanding).
• 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, changes in tax laws and rates, acquisitions and
dispositions of businesses and non-recurring items. As a global commercial enterprise, our income tax rate and the classification of income
taxes can be affected by many factors, including estimates of the
timing and realization of deferred income tax assets and the timing
and amount of income tax payments. We account for tax benefits
taken or expected to be taken in our tax returns in accordance with the
accounting standard relating to the uncertainty in income taxes, 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. We review
and adjust our liability for unrecognized tax benefits based on our best
judgment given the facts, circumstances, and information available at
each reporting date. To the extent that the final outcome of these tax
positions is different than the amounts recorded, such differences may
impact income tax expense and actual tax payments. We recognize
any interest and penalties accrued related to unrecognized tax benefits
31
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
ACQUISITIONS AND DIVESTITURES
Wireless
Wireless Transaction
On September 2, 2013, Verizon entered into a stock purchase agreement
(the Stock Purchase Agreement) with Vodafone and Vodafone 4 Limited
(Seller),pursuanttowhichVerizonagreedtoacquireVodafone’sindirect
45%interestinCellcoPartnershipd/b/aVerizonWireless(thePartnership,
and such interest, the Vodafone Interest) for aggregate consideration of
approximately $130 billion.
OnFebruary21,2014,pursuanttothetermsandsubjecttotheconditions set forth in the Stock Purchase Agreement, Verizon acquired (the
Wireless Transaction) from Seller all of the issued and outstanding capital
stock(theTransferredShares)ofVodafoneAmericasFinance1Inc.,asubsidiaryofSeller(VF1Inc.),whichindirectlythroughcertainsubsidiaries
(together withVF1 Inc., the Purchased Entities) owned theVodafone
Interest. In consideration for the Transferred Shares, upon completion of
the Wireless Transaction, Verizon (i) paid approximately $58.89 billion in
cash,(ii)issuedapproximately$60.15billionofVerizon’scommonstock,
par value $0.10 per share (the Stock Consideration), (iii) issued senior
unsecured Verizon notes in an aggregate principal amount of $5.0 billion
(theVerizonNotes),(iv)soldVerizon’sindirectlyowned23.1%interestin
Vodafone Omnitel N.V. (Omnitel, and such interest, the Omnitel Interest),
valued at $3.5 billion and (v) provided other consideration of approximately $2.5 billion. As a result of the Wireless Transaction, Verizon issued
approximately 1.27 billion shares. The total cash paid to Vodafone and
the other costs of the Wireless Transaction, including financing, legal and
bank fees, were financed through the incurrence of third-party indebtedness(see“ConsolidatedFinancialCondition”).
In accordance with the accounting standard on consolidation, a change
inaparent’sownershipinterestwhiletheparentretainsacontrolling
financial interest in its subsidiary is accounted for as an equity transaction
and remeasurement of assets and liabilities of previously controlled and
consolidated subsidiaries is not permitted. As a result, we will account for
the Wireless Transaction by adjusting the carrying amount of the noncontrollinginteresttoreflectthechangeinVerizon’sownershipinterest
in Verizon Wireless. Any difference between the fair value of the consideration paid and the amount by which the noncontrolling interest is
adjusted will be recognized in equity attributable to Verizon.
Omnitel Transaction
OnFebruary21,2014,VerizonandVodafonealsoimplementedthesaleof
the Omnitel Interest (the Omnitel Transaction) by a subsidiary of Verizon
to a subsidiary of Vodafone in connection with the Wireless Transaction
pursuant to a separate share purchase agreement. We will recognize a
gain on the disposal of the Omnitel interest in the first quarter of 2014.
Verizon Notes
TheVerizonNoteswereissuedpursuanttoVerizon’sexistingindenture.
The Verizon Notes were issued in two separate series, with $2.5 billion
dueFebruary21,2022and$2.5billiondueFebruary21,2025.TheVerizon
Notes bear interest at a floating rate, which will be reset quarterly, with
interestpayablequarterlyinarrears,beginningMay21,2014.Theeightyear Verizon notes bear interest at a floating rate equal to three-month
LIBOR,plus1.222%,andtheeleven-yearVerizonnotesbearinterestat
afloatingrateequaltothree-monthLIBOR,plus1.372%.Theindenture
that governs the Verizon Notes contains certain negative covenants,
including a negative pledge covenant and a merger or similar transaction covenant, affirmative covenants and events of default that are
32
customary for companies maintaining an investment grade credit rating.
An event of default for either series of the Verizon Notes may result in
acceleration of the entire principal amount of all debt securities of that
series.BeginningtwoyearsaftertheclosingoftheWirelessTransaction,
Verizon may redeem all or any portion of the outstanding Verizon Notes
held by Vodafone or any of its affiliates for a redemption price of 100%
of the principal amount plus accrued and unpaid interest. The Verizon
Notes may only be transferred by Vodafone to third parties in specified
amounts during specified periods, commencing January 1, 2017. The
Verizon Notes held by third parties will not be redeemable. Verizon has
agreed to file a registration statement with respect to the Verizon Notes
at least three months prior to the Verizon Notes becoming transferable.
Other Consideration
Included in the other consideration paid to Vodafone is the indirect
assumption of long-term obligations with respect to 5.143% Class D and
Class E cumulative preferred stock issued by one of the Purchased Entities.
BoththeClassD(825,000sharesoutstanding)andClassEshares(825,000
shares outstanding) are mandatorily redeemable in April 2020 at $1,000 per
share plus any accrued and unpaid dividends. Dividends accrue at 5.143%
perannumandwillbetreatedasinterestexpense.BoththeClassDand
Class E shares will be classified as liability instruments and will be recorded
at fair value as determined at the closing of the Wireless Transaction.
Spectrum License Transactions
Since 2012, we have entered into several strategic spectrum transactions
including:
• During the third quarter of 2012, after receiving the required regulatory approvals, Verizon Wireless completed the following previously
announced transactions in which we acquired wireless spectrum that
will be used to deploy additional 4G LTE capacity:
o
Verizon Wireless acquired AWS spectrum in separate transactions
with SpectrumCo and Cox TMI Wireless, LLC for which it paid an
aggregate of $3.9 billion at the time of the closings. Verizon Wireless
has also recorded a liability of $0.4 billion related to a three-year service obligation to SpectrumCo’s members pursuant to commercial
agreements executed concurrently with the SpectrumCo transaction.
o
Verizon Wireless completed license purchase and exchange transactions with Leap Wireless, Savary Island Wireless, which is majority
ownedbyLeapWireless,andasubsidiaryofT-MobileUSA.Asaresult
of these transactions, Verizon Wireless received an aggregate $2.6
billion of AWS and PCS licenses at fair value and net cash proceeds
of$0.2billion,transferredcertainAWSlicensestoT-MobileUSAand
a700megahertz(MHz)lowerAblocklicensetoLeapWireless,and
recorded an immaterial gain.
• During the first quarter of 2013, we completed license exchange transactionswithT-MobileLicenseLLCandCricketLicenseCompany,LLC,
a subsidiary of Leap Wireless, to exchange certain Advanced Wireless
Services (AWS) licenses. These non-cash exchanges include a number
of intra-market swaps that we expect will enable Verizon Wireless
to make more efficient use of the AWS band. As a result of these
exchanges, we received an aggregate $0.5 billion of AWS licenses at
fair value and recorded an immaterial gain.
• During the third quarter of 2013, after receiving the required regulatory
approvals,VerizonWireless sold 39 lower 700 MHz B block spectrum
licenses to AT&T in exchange for a payment of $1.9 billion and the
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
transferbyAT&TtoVerizonWirelessofAWS(10MHz)licensesincertain
markets in the western United States. Verizon Wireless also sold certain
lower 700 MHz B block spectrum licenses to an investment firm for
a payment of $0.2 billion. As a result, we received $0.5 billion of AWS
licenses at fair value and we recorded a pre-tax gain of approximately
$0.3 billion in Selling, general and administrative expense on our consolidated statement of income for the year ended December 31, 2013.
Terremark Worldwide, Inc.
During April 2011, we acquired Terremark for $19 per share in cash. Closing
and other direct acquisition-related costs totaled approximately $13 million after-tax. The acquisition was completed via a tender offer followed
bya“short-form”mergerunderDelawarelawthroughwhichTerremark
became a wholly-owned subsidiary of Verizon. The acquisition enhanced
Verizon’sofferingstobusinessandgovernmentcustomersglobally.
• During the fourth quarter of 2013, we entered into license exchange
agreements with T-Mobile USA to exchange certain AWS and PCS
licenses. These non-cash exchanges, which are subject to approval by
theFCCandothercustomaryclosingconditions,areexpectedtoclose
in the first half of 2014. The exchange includes a number of swaps that
we expect will result in more efficient use of the AWS and PCS bands.
As a result of these agreements, $0.9 billion of Wireless licenses are classified as held for sale and included in Prepaid expenses and other on
our consolidated balance sheet at December 31, 2013. Upon completion of the transaction, we expect to record an immaterial gain.
Other
During the fourth quarter of 2013, Verizon acquired an industry leader in
content delivery networks for $0.4 billion. We expect the acquisition will
increase our ability to meet the growing demand for online digital media
content. Upon closing, we recorded $0.3 billion of goodwill. Additionally,
we acquired a technology and television cloud company for cash consideration that was not significant. The consolidated financial statements
include the results of the operations of each of these acquisitions from
the date each acquisition closed.
• SubsequenttothetransactionwithT-MobileUSAinthefourthquarter
of 2013, on January 6, 2014, we announced two agreements with
T-MobileUSAwithrespecttoourremaining700MHzAblockspectrum
licenses. Under one agreement, we will sell certain of these licenses to
T-Mobile USA in exchange for cash consideration of approximately
$2.4 billion, and under the second agreement we will exchange the
remainder of these licenses for AWS and PCS spectrum licenses. These
transactions are subject to the approval of the FCC as well as other
customary closing conditions. These transactions are expected to close
in the middle of 2014.
On January 21, 2014, Verizon announced an agreement to acquire a business dedicated to the development of cloud television products and
services for cash consideration that was not significant. The transaction,
whichwascompletedinFebruary2014,isexpectedtoacceleratethe
availability of next-generation video services.
Other
During 2013, we acquired various other wireless licenses and markets
for cash consideration that was not significant. Additionally, we obtained
control of previously unconsolidated wireless partnerships, which were
previously accounted for under the equity method and are now consolidated, which resulted in an immaterial gain. We recorded $0.2 billion of
goodwill as a result of these transactions.
Wireline
HUGHES Telematics, Inc.
During July 2012, we acquired HUGHES Telematics for approximately $12
per share in cash for a total acquisition price of $0.6 billion. As a result
of the transaction, HUGHES Telematics became a wholly-owned subsidiary of Verizon. The consolidated financial statements include the results
ofHUGHESTelematics’ operationsfromthedatetheacquisitionclosed.
Upon closing, we recorded approximately $0.6 billion of goodwill, $0.1
billion of other intangibles, and assumed the debt obligations of HUGHES
Telematics, which were approximately $0.1 billion as of the date of acquisition, and which were repaid by Verizon. Had this acquisition been
completed on January 1, 2012 or 2011, the results of the acquired operations of HUGHES Telematics would not have had a significant impact on
the consolidated net income attributable to Verizon. The acquisition has
accelerated our ability to bring more telematics offerings to market for
existing and new customers.
The acquisition of HUGHES Telematics was accounted for as a business
combination under the acquisition method. The cost of the acquisition
was allocated to the assets and liabilities acquired based on their fair
values as of the close of the acquisition, with the excess amount being
recorded as goodwill.
33
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
Regulatory and Competitive Trends
Regulatory and Competitive Landscape
Verizon operates in a regulated and highly competitive market. Current
and potential competitors include other voice and data service providers
such as other wireless companies, traditional telephone companies, cable
companies, Internet service providers, software and application providers,
andothernon-traditionalcompanies.Manyofthesecompanieshavea
strong market presence, brand recognition, and existing customer relationships, all of which contribute to intensifying competition and may
affect our future revenue growth. Some of our competitors also are
subjecttofewerregulatoryconstraintsthanVerizon.Formanyservices
offeredbyVerizon,theFCCisourprimaryregulator.TheFCChasjurisdiction over interstate telecommunications services and other matters under
the Communications Act of 1934, as amended (Communications Act or
Act). Other Verizon services are subject to state and local regulation.
FCC Regulation
Broadband
Verizon offers many different broadband and Internet access services. The
FCChasadoptedaseriesofordersthatimposelesserregulatoryrequirements on broadband services than apply to older voice and slower data
services.Forexamplecertainfacilityunbundlingrequirementsthatapply
to narrowband facilities of traditional telephone companies do not apply
tobroadbandfacilities.Inaddition,theFCCconcludedthatbothwireline
and wireless broadband Internet access services qualify as largely deregulated information services. Our broadband Internet access services are
subject to various attempts to impose so-called“network neutrality”
rules, some of which were affirmed and others vacated on appeal in early
2014. Verizon has been and remains committed to the open Internet
which provides consumers with competitive choices and unblocked
access to lawful websites and content when, where, and how they want.
Thiswillnotchangeinlightofthecourt’sdecision.Ourcommitment
applies to broadband Internet access services provided over both our
wireline and wireless networks and can be found on our website at
http://responsibility.verizon.com/broadband-commitment.
Video
Verizon offers a multi-channel video service that is regulated like traditionalcableservice.TheFCChasabodyofrulesthatapplytocable
operators, and these rules also generally apply to Verizon. In addition, the
Act generally requires companies to obtain a local cable franchise, and
theFCChasadoptedrulesthatinterpretandimplementthisrequirement. In areas where Verizon offers its facilities-based multichannel video
services, Verizon has typically been required to obtain a franchise from
local authorities.
Wireline Voice
Verizon offers many different wireline voice services, including traditional
telephone service and other services that rely on newer technologies
such asVoIP. For regulatory purposes, legacy telephone services are
generallyconsideredtobe“commoncarrier”services.Commoncarrier
services are subject to heightened regulatory oversight with respect to
rates,termsandconditions,andotheraspectsoftheservices.TheFCC
has not decided the regulatory classification of VoIP but has said VoIP
service providers must comply with certain rules, such as 911 capabilities
and law enforcement assistance requirements.
34
Wireless Services
The FCC regulates several aspects of Verizon Wireless’ operations.
Generally,theFCChasjurisdictionovertheconstruction,operation,acquisition, and transfer of wireless communications systems. And all wireless
services require use of radio frequency spectrum, the assignment and
distributionofwhichissubjecttoFCCoversight.VerizonWirelessanticipates that it will need additional spectrum to meet future demand. It
can meet spectrum needs by purchasing licenses or leasing spectrum
from others, or by participating in a competitive bidding process for new
spectrumfromtheFCC.Bothprocessesaresubjecttocertainreviews,
approvals, and potential conditions.
Today,VerizonWireless holds FCC spectrum licenses that allow it to
provide a wide range of mobile and fixed communications services,
includingbothvoiceanddataservices.FCCspectrumlicensestypically
have a term of 10 years, at which time they are subject to renewal. While
theFCChasroutinelyrenewedallofVerizonWireless’licenses,challenges
could be raised in the future. If a wireless license were revoked or not
renewed, Verizon Wireless would not be permitted to provide services on
the spectrum. Some of our licenses require us to comply with so-called
“openaccess”FCCregulations,whichgenerallyrequirelicenseesofparticular spectrum to allow customers to use devices and applications of their
choice,subjecttocertaintechnicallimitations.TheFCChasalsoimposed
certain specific mandates on wireless carriers including construction and
geographic coverage requirements, technical operating standards, provision of enhanced 911 services, roaming obligations, and requirements for
wireless tower and antenna facilities.
The Communications Act imposes restrictions on foreign ownership
ofU.S.wirelesssystems.TheFCChasapprovedtheforeignownership
in Verizon that has resulted from the Wireless Transaction. In addition,
Verizon Wireless, Verizon and Vodafone entered into an agreement with
the federal government that imposes national security and law enforcement-related obligations on the ways in which Verizon Wireless stores
information and otherwise conducts its business.
Intercarrier Compensation and Network Access
TheFCCregulatessomeoftheratesthatcarrierspayeachotherforthe
exchange voice traffic (particularly traditional wireline traffic) over different networks and other aspects of interconnection for some voice
services. In many instances, Verizon makes payments to other providers,
and in turn Verizon receives some payments from other carriers. In 2011,
theFCCissuedabroadreformorderchanging,amongotherthings,the
framework for many of the per-minute rates that carriers charge each
other for the exchange of voice traffic. The new rules gradually reduce
many of these rates to zero. This order is subject to pending reconsiderationpetitionsandappeals.TheFCCalsoregulatessomeoftheratesand
termsandconditionsforcertainwireline“specialaccess”andotherservices and network facilities. Verizon is both a seller and a buyer of these
services.Forexample,onthewirelinesideVerizonsellswholesalecircuits
to other voice and data service providers. On the wireless side, Verizon
purchases special access and other services to transport traffic to and
from cell towers. In addition, as required by the Act, Verizon unbundles
certain wireline network elements and makes these facilities and services
available to other network providers.
Universal Service
The Communications Act charges the FCC with ensuring that certain
groups and areas have access to communications services, including
rural and other high-cost areas, low income subscribers, schools and
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
libraries, rural health-care organizations, and deaf and hard-of-hearing
individuals.TheFCCestablisheddifferentsubsidyanddiscountprograms
toachievethesegoals.Topayfortheseprograms,theFCCrequirescontributions from providers such as Verizon based on reported revenues for
certain services. Verizon also receives some payments from some of these
programs but is a net payer into them.
State Regulation and Local Regulation
Wireline Services
StatepublicutilitycommissionsregulateVerizon’stelephoneoperations
with respect to certain telecommunications intrastate matters. Verizon
operates as an“incumbent local exchange carrier” in 14 states.These
incumbent operations are subject to various levels of pricing flexibility
and other state oversight and requirements. Verizon also has other wireline operations that are more lightly regulated. In addition, as a video
services operator in many states, Verizon has been required to obtain
a cable franchise from local government entities, or in some cases a
state-wide franchise, and to comply with certain one-time and ongoing
obligations as a result.
Wireless Services
The Communications Act generally preempts regulation by state and
local governments of the entry of, or the rates charged by, wireless carriers.TheActdoesnotprohibitstatesfromregulatingtheother“terms
andconditions”ofwirelessservice.Forexample,somestatesattemptto
regulate wireless customer billing matters and impose reporting requirements. Several states also have laws or regulations that address safety
issues (e.g., use of wireless handsets while driving) and taxation matters.
In addition, wireless tower and antenna facilities are often subject to state
and local zoning and land use regulation, and securing approvals for new
or modified facilities is often a lengthy and expensive process.
Environmental Matters
During 2003, under a government-approved plan, remediation commenced at the site of a former Sylvania facility in Hicksville, New York
thatprocessednuclearfuelrodsinthe1950sand1960s.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 made based upon actual conditions discovered
during the remediation at this or any other site requiring remediation.
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
In this report we have made forward-looking statements. These statements are based on our estimates and assumptions and are subject to
risksanduncertainties.Forward-lookingstatementsincludetheinformation concerning our possible or assumed future results of operations.
Forward-looking statements also include those preceded or followed
bythewords“anticipates,”“believes,”“estimates,”“hopes”orsimilarexpressions.Forthosestatements,weclaimtheprotectionofthesafeharborfor
forward-looking statements contained in the Private Securities Litigation
ReformActof1995.
The following important factors, along with those discussed elsewhere
in this report and in other filings with the Securities and Exchange
Commission (SEC), could affect future results and could cause those
results to differ materially from those expressed in the forward-looking
statements:
• the ability to realize the expected benefits of the Wireless Transaction
in the timeframe expected or at all;
• an adverse change in the ratings afforded our debt securities by
nationally accredited ratings organizations or adverse conditions in
the credit markets affecting the cost, including interest rates, and/or
availability of further financing;
• significantly increased levels of indebtedness as a result of the Wireless
Transaction;
• changes in tax laws or treaties, or in their interpretation;
• adverse conditions in the U.S. and international economies;
• material adverse changes in labor matters, including labor negotiations,andanyresultingfinancialand/oroperationalimpact;
• material changes in technology or technology substitution;
• disruptionofourkeysuppliers’provisioningofproductsorservices;
• changes in the regulatory environment in which we operate, including
any increase in restrictions on our ability to operate our networks;
• breaches of network or information technology security, natural disasters, terrorist attacks or acts of war or significant litigation and any
resulting financial impact not covered by insurance;
• the effects of competition in the markets in which we operate;
• changes in 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;
• significant increases in benefit plan costs or lower investment returns
on plan assets; 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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FINANCIAL REPORTING
FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
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 in 1992.
To The Board of Directors and Shareowners of Verizon
Communications Inc.:
Management has assessed the effectiveness of the company’s internal
control over financial reporting as of December 31, 2013. Based on this
assessment, we believe that the internal control over financial reporting
of the company is effective as of December 31, 2013. 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.
Lowell C. McAdam
Chairman and Chief Executive Officer
Francis J. Shammo
Executive Vice President and Chief Financial Officer
Anthony T. Skiadas
Senior Vice President and Controller
36
We have audited Verizon Communications Inc. and subsidiaries’ (Verizon)
internal control over financial reporting as of December 31, 2013,
based on criteria established in Internal Control–Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 1992 (1992 framework) (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
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, 2013, 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, 2013 and 2012, and the
related consolidated statements of income, comprehensive income, cash
flows and changes in equity for each of the three years in the period
ended December 31, 2013 of Verizon and our report dated February 27,
2014 expressed an unqualified opinion thereon.
Ernst & Young LLP
New York, New York
February 27, 2014
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, 2013 and 2012, and the related consolidated statements of income,
comprehensive income, cash flows and changes in equity for each of
the three years in the period ended December 31, 2013. 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, 2013 and 2012, and the consolidated results of its
operations and its cash flows for each of the three years in the period
ended December 31, 2013, in conformity with U.S. generally accepted
accounting principles.
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, 2013, based on criteria established in Internal Control–Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(1992 framework) and our report dated February 27, 2014 expressed an
unqualified opinion thereon.
Ernst & Young LLP
New York, New York
February 27, 2014
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)
2013
2012
2011
$ 120,550
$ 115,846
$ 110,875
44,887
27,089
16,606
88,582
46,275
39,951
16,460
102,686
45,875
35,624
16,496
97,995
13,160
324
(1,016)
(2,571)
9,897
660
10,557
12,880
444
(14)
(2,827)
10,483
(285)
10,198
Years Ended December 31,
Operating Revenues
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
Income Before (Provision) Benefit For Income Taxes
(Provision) Benefit for income taxes
Net Income
31,968
142
(166)
(2,667)
29,277
(5,730)
$ 23,547
Net income attributable to noncontrolling interests
Net income attributable to Verizon
Net Income
$ 12,050
11,497
$ 23,547
$
Basic Earnings Per Common Share
Net income attributable to Verizon
Weighted-average shares outstanding (in millions)
$
4.01
2,866
Diluted Earnings Per Common Share
Net income attributable to Verizon
Weighted-average shares outstanding (in millions)
$
4.00
2,874
See Notes to Consolidated Financial Statements
38
$
$
9,682
875
10,557
$
$
.31
2,853
$
.85
2,833
$
.31
2,862
$
.85
2,839
$
$
7,794
2,404
10,198
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 COMPREHENSIVE INCOME
(dollars in millions)
Years Ended December 31,
Net Income
Other Comprehensive Income, net of taxes
Foreign currency translation adjustments
Unrealized gain (loss) on cash flow hedges
Unrealized gain (loss) on marketable securities
Defined benefit pension and postretirement plans
Other comprehensive income attributable to Verizon
Other comprehensive income (loss) attributable to noncontrolling interests
Total Comprehensive Income
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Verizon
Total Comprehensive Income
2013
$ 23,547
60
25
16
22
123
(15)
$ 23,655
12,035
11,620
$ 23,655
2012
$
$
$
10,557
69
(68)
29
936
966
10
11,533
9,692
1,841
11,533
2011
$
$
$
10,198
(119)
30
(7)
316
220
1
10,419
7,795
2,624
10,419
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 BALANCE SHEETS
(dollars in millions, except per share amounts)
2013
At December 31,
Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $645 and $641
Inventories
Prepaid expenses and other
Total current assets
$
Liabilities and Equity
Current liabilities
Debt maturing within one year
Accounts payable and accrued liabilities
Other
Total current liabilities
Long-term debt
Employee benefit obligations
Deferred income taxes
Other liabilities
Equity
Series preferred stock ($.10 par value; none issued)
Common stock ($.10 par value; 2,967,610,119 shares issued in both periods)
Contributed capital
Reinvested earnings (Accumulated deficit)
Accumulated other comprehensive income
Common stock in treasury, at cost
Deferred compensation – employee stock ownership plans and other
Noncontrolling interests
Total equity
Total liabilities and equity
See Notes to Consolidated Financial Statements
40
$
3,093
470
12,576
1,075
4,021
21,235
220,865
131,909
88,956
209,575
120,933
88,642
3,432
75,747
24,634
5,800
4,535
$ 274,098
$
3,401
77,744
24,139
5,933
4,128
225,222
$
$
Plant, property and equipment
Less accumulated depreciation
Investments in unconsolidated businesses
Wireless licenses
Goodwill
Other intangible assets, net
Other assets
Total assets
53,528
601
12,439
1,020
3,406
70,994
2012
3,933
16,453
6,664
27,050
89,658
27,682
28,639
5,653
–
297
37,939
1,782
2,358
(3,961)
421
56,580
95,416
$ 274,098
4,369
16,182
6,405
26,956
47,618
34,346
24,677
6,092
$
–
297
37,990
(3,734)
2,235
(4,071)
440
52,376
85,533
225,222
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)
Years Ended December 31,
Cash Flows from Operating Activities
Net Income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense
Employee retirement benefits
Deferred income taxes
Provision for uncollectible accounts
Equity in earnings of unconsolidated businesses, net of dividends received
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
Cash Flows from Investing Activities
Capital expenditures (including capitalized software)
Acquisitions of investments and businesses, net of cash acquired
Acquisitions of wireless licenses
Proceeds from dispositions of wireless licenses
Net change in short-term investments
Other, net
Net cash used in investing activities
Cash Flows from Financing Activities
Proceeds from long-term borrowings
Repayments of long-term borrowings and capital lease obligations
Decrease in short-term obligations, excluding current maturities
Dividends paid
Proceeds from sale of common stock
Purchase of common stock for treasury
Special distribution to noncontrolling interest
Other, net
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
2013
$ 23,547
2012
$
10,557
2011
$
10,198
16,606
(5,052)
5,785
993
(102)
16,460
8,198
(952)
972
77
16,496
7,426
(223)
1,026
36
(843)
56
(143)
925
(2,954)
38,818
(1,717)
(136)
306
1,144
(3,423)
31,486
(966)
208
86
(1,607)
(2,900)
29,780
(16,604)
(494)
(580)
2,111
63
671
(14,833)
(16,175)
(913)
(4,298)
363
27
494
(20,502)
(16,244)
(1,797)
(221)
–
35
977
(17,250)
49,166
(8,163)
(142)
(5,936)
85
(153)
(3,150)
(5,257)
26,450
4,489
(6,403)
(1,437)
(5,230)
315
–
(8,325)
(4,662)
(21,253)
11,060
(11,805)
1,928
(5,555)
241
–
–
(1,705)
(5,836)
50,435
3,093
$ 53,528
(10,269)
13,362
$
3,093
6,694
6,668
13,362
$
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
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(dollars in millions, except per share amounts, and shares in thousands)
Years Ended December 31,
Common Stock
Balance at beginning of year
Balance at end of year
2013
Shares
2,967,610
2,967,610
$
Amount
2012
Shares
297
297
2,967,610
2,967,610
$
Amount
2011
Shares
297
297
2,967,610
2,967,610
Amount
$
297
297
Contributed Capital
Balance at beginning of year
Other
Balance at end of year
37,990
(51)
37,939
37,919
71
37,990
37,922
(3)
37,919
Reinvested Earnings (Accumulated Deficit)
Balance at beginning of year
Net income attributable to Verizon
Dividends declared ($2.09, $2.03, $1.975) per share
Balance at end of year
(3,734)
11,497
(5,981)
1,782
1,179
875
(5,788)
(3,734)
4,368
2,404
(5,593)
1,179
Accumulated Other Comprehensive Income
Balance at beginning of year attributable to Verizon
Foreign currency translation adjustments
Unrealized gains (losses) on cash flow hedges
Unrealized gains (losses) on marketable securities
Defined benefit pension and postretirement plans
Other comprehensive income
Balance at end of year attributable to Verizon
2,235
60
25
16
22
123
2,358
1,269
69
(68)
29
936
966
2,235
1,049
(119)
30
(7)
316
220
1,269
Treasury Stock
Balance at beginning of year
Shares purchased
Employee plans (Note 15)
Shareowner plans (Note 15)
Balance at end of year
Deferred Compensation-ESOPs and Other
Balance at beginning of year
Restricted stock equity grant
Amortization
Balance at end of year
Noncontrolling Interests
Balance at beginning of year
Net income attributable to noncontrolling interests
Other comprehensive income (loss)
Total comprehensive income
Distributions and other
Balance at end of year
Total Equity
See Notes to Consolidated Financial Statements
42
(109,041)
(3,500)
6,835
96
(105,610)
(4,071)
(153)
260
3
(3,961)
(133,594)
–
11,434
13,119
(109,041)
(5,002)
–
433
498
(4,071)
(140,587)
–
6,982
11
(133,594)
(5,267)
–
265
–
(5,002)
440
152
(171)
421
308
196
(64)
440
200
146
(38)
308
52,376
12,050
(15)
12,035
(7,831)
56,580
49,938
9,682
10
9,692
(7,254)
52,376
48,343
7,794
1
7,795
(6,200)
49,938
$ 95,416
$
85,533
$
85,908
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 a holding company, which acting through its subsidiaries is one of the world’s leading
providers of communications, information and entertainment products
and services to consumers, businesses and governmental agencies with
a presence in over 150 countries around the world. We have two reportable segments, Wireless and Wireline. For further information concerning
our business segments, see Note 13.
The Wireless segment provides wireless communications services across
one of the most extensive wireless networks in the United States (U.S.)
and has the largest fourth-generation (4G) Long-Term Evolution (LTE)
technology and third-generation (3G) networks of any U.S. wireless service provider.
The Wireline segment provides voice, data and video communications
products and enhanced services including broadband video and data,
corporate networking solutions, data center and cloud services, security
and managed network services and local and long distance voice services. We provide these products and services to consumers in the United
States, as well as to carriers, businesses and government customers both
in the United States and in over 150 other countries around the world.
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. For controlled subsidiaries
that are not wholly-owned, the noncontrolling interests are included in
Net income and Total equity. 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 availablefor-sale securities and adjusted to fair value pursuant to the accounting
standard related to debt and equity securities. All significant intercompany accounts and transactions have been eliminated.
Basis of Presentation
We have reclassified certain prior year amounts to conform to the current
year presentation.
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, pension and
postretirement benefit assumptions, contingencies and allocation of purchase prices in connection with business combinations.
Revenue Recognition
Multiple Deliverable Arrangements
In both our Wireless and Wireline segments, we offer products and
services to our customers through bundled arrangements. These
arrangements involve multiple deliverables which may include products,
services, or a combination of products and services.
Wireless
Our Wireless segment earns revenue primarily by providing access to
and usage of its network. In general, access revenue is billed one month
in advance and recognized when earned. Usage revenue is generally
billed in arrears and 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 providing wireless services. 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 at the time of the sale.
For equipment sales, we generally subsidize the cost of wireless devices.
The amount of this subsidy is generally contingent on the arrangement
and terms selected by the customer. In multiple deliverable arrangements which involve the sale of equipment and a service contract, the
equipment revenue is recognized up to the amount collected when the
wireless device is sold.
Wireline
Our Wireline segment earns revenue based upon usage of its 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 generally billed in arrears and recognized when service is rendered.
We sell each of the services offered in bundled arrangements (i.e., voice,
video and data), as well as separately; therefore each product or service
has a standalone selling price. For these arrangements revenue is allocated to each deliverable using a relative selling price method. Under this
method, arrangement consideration is allocated to each separate deliverable based on our standalone selling price for each product or service.
These services include FiOS services, individually or in bundles, and High
Speed Internet.
When we bundle equipment with maintenance and monitoring services,
we recognize equipment revenue 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.
Installation related fees, along with the associated costs up to but not
exceeding these fees, are deferred and amortized over the estimated customer relationship period.
For each of our segments we report taxes imposed by governmental
authorities on revenue-producing transactions between us and our customers on a net basis.
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.
Advertising Costs
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 15).
Earnings Per Common Share
Basic earnings per common share are based on the weighted-average
number of shares outstanding during the period. Where appropriate,
diluted earnings per common share include the dilutive effect of shares
issuable under our stock-based compensation plans.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
There were a total of approximately 8 million, 9 million and 6 million
stock options and restricted stock units outstanding included in the
computation of diluted earnings per common share for the years ended
December 31, 2013, 2012 and 2011, respectively. Outstanding options to
purchase shares that were not included in the computation of diluted
earnings per common share, because to do so would have been antidilutive for the period, were not significant for the years ended December
31, 2013 and 2012, respectively, and included approximately 19 million
weighted-average shares for the years ended December 31, 2011.
As of December 31, 2013, we were authorized to issue up to 4.25 billion and 250 million shares of common stock and Series Preferred Stock,
respectively. On January 28, 2014, at a special meeting of our shareholders, we received shareholder approval to increase our authorized
shares of common stock by 2 billion shares to an aggregate of 6.25 billion
authorized shares of common stock. On February 4, 2014, this authorization became effective.
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 quoted market value and include amounts
held in money market funds.
Marketable Securities
We have investments in marketable securities, which are considered
“available-for-sale” under the provisions of the accounting standard for
certain debt and equity securities, and 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.
Plant and Depreciation
We record plant, property and equipment at cost. Plant, property and
equipment of wireline and wireless operations are generally depreciated
on a straight-line basis.
Leasehold improvements are amortized over the shorter of the estimated
life of the improvement or the remaining term of the related lease, calculated from the time the asset was placed in service.
When the depreciable assets of our 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 and depreciate 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 a reduction in interest expense and depreciated as
part of the cost of the network-related assets.
In connection with our ongoing review of the estimated remaining
average useful lives of plant, property and equipment at our local telephone operations, we determined that there were no changes necessary
for average useful lives for 2013, 2012 and 2011. In connection with our
ongoing review of the estimated remaining average useful lives of plant,
property and equipment at our wireless operations, we determined that
44
changes were necessary to the remaining estimated useful lives as a
result of technology upgrades, enhancements, and planned retirements.
These changes resulted in an increase in depreciation expense of $0.4
billion in 2011. While the timing and extent of current deployment plans
are subject to ongoing analysis and modification, we believe the current
estimates of useful lives are reasonable.
Computer Software Costs
We capitalize the cost of internal-use network and non-network software
that 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. Planning, 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 3 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 3 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 in the fourth fiscal quarter or more frequently if
impairment indicators are present. The Company has the option to perform a qualitative assessment to determine if the fair value of the entity
is less than its carrying value. However, the Company may elect to perform an impairment test even if no indications of a potential impairment
exist. 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/or 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 implied 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 wireless 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). License renewals 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. We reevaluate the useful
life determination for wireless licenses each year to determine whether
events and circumstances continue to support an indefinite useful life.
We test our wireless licenses for potential impairment annually. In 2013,
we performed a qualitative assessment to determine whether it is more
likely than not that the fair value of our wireless licenses was less than
the carrying amount. As part of our assessment, we considered several
qualitative factors including the business enterprise value of Wireless,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
macroeconomic conditions (including changes in interest rates and
discount rates), industry and market considerations (including industry
revenue and EBITDA (Earnings before interest, taxes, depreciation and
amortization) margin projections), the projected financial performance
of Wireless, as well as other factors. In 2012 and 2011, our quantitative
assessment consisted of comparing the estimated fair value of our wireless licenses to the aggregated carrying amount as of the test date. Using
the quantitative assessment, we evaluated our licenses on an aggregate
basis using a direct value approach. The direct value approach estimates
fair value using a discounted cash flow analysis to estimate what a marketplace participant would be willing to pay to purchase the aggregated
wireless licenses as of the valuation date. If the fair value of the aggregated wireless licenses is less than the aggregated carrying amount of
the licenses, an impairment is recognized.
Interest expense incurred while qualifying activities are performed to
ready wireless licenses for their intended use is capitalized as part of
wireless licenses. The capitalization period ends when the development
is discontinued or substantially complete and the license is ready for its
intended use.
Intangible Assets Subject to Amortization and Long-Lived Assets
Our intangible assets that do not have indefinite lives (primarily customer
lists and non-network internal-use software) are amortized over their estimated useful lives. All of our intangible assets subject to amortization
and long-lived assets are reviewed for impairment 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 group
to the net undiscounted cash flows expected to be generated from the
asset group. If those net undiscounted cash flows do not exceed the carrying amount, 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 year 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 3.
Fair Value Measurements
Fair value of financial and non-financial assets and liabilities 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. The three-tier hierarchy for inputs used in measuring
fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:
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.
Income Taxes
Our effective tax rate is based on pre-tax income, statutory tax rates, tax
laws and regulations and tax planning strategies available to us in the
various jurisdictions in which we operate.
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 tax 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.
We use a two-step approach for recognizing and measuring tax benefits
taken or expected to be taken in a tax return. 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.
The accounting standard relating to income taxes generated by leveraged lease transactions 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.
Significant management judgment is required in evaluating our tax positions and in determining our effective tax rate.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based
compensation awards made to employees and directors based on estimated fair values. See Note 10 for further details.
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 income,
a separate component of Equity, 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
income. Other exchange gains and losses are reported in income.
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 generally 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 actual fair value of plan assets. Actuarial gains
and losses are recognized in operating results in the year in which they
occur. These gains and losses are measured annually as of December
31 or upon a remeasurement event. Verizon management employees
no longer earn pension benefits or earn service towards the company
retiree medical subsidy (see Note 11).
We recognize a pension or a postretirement plan’s funded status as either
an asset or liability on the consolidated balance sheets. Also, we measure
any unrecognized prior service costs and credits that arise during the
period as a component of Accumulated other comprehensive income,
net of applicable income tax.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Derivative Instruments
We have entered into derivative transactions primarily to manage our
exposure to fluctuations in foreign currency exchange rates, interest
rates, equity and commodity prices. We employ risk management strategies, which may include the use of a variety of derivatives including
cross currency swaps, foreign currency and prepaid forwards and collars,
interest rate and commodity swap agreements and interest rate locks. We
do not hold derivatives for trading purposes.
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. Our derivative instruments
are valued primarily using models based on readily observable market
parameters for all substantial terms of our derivative contracts and thus
are classified as Level 2. 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 and recognized in
earnings when the hedged item is recognized in earnings.
Recently Adopted Accounting Standards
During the first quarter of 2013, we adopted the accounting standard
update regarding testing of intangible assets for impairment. This
standard update allows companies the option to perform a qualitative assessment to determine whether it is more likely than not that an
indefinite-lived intangible asset is impaired. An entity is not required to
calculate the fair value of an indefinite-lived intangible asset and perform
the quantitative impairment test unless the entity determines that it is
more likely than not the asset is impaired. The adoption of this standard
update did not have an impact on our consolidated financial statements.
During the first quarter of 2013, we adopted the accounting standard
update regarding reclassifications out of Accumulated other comprehensive income. This standard update requires companies to report the effect
of significant reclassifications out of Accumulated other comprehensive
income on the respective line items in our consolidated statements of
income if the amount being reclassified is required to be reclassified in
its entirety to net income. For other amounts that are not required to be
reclassified in their entirety to net income in the same reporting period,
an entity is required to cross-reference to other required disclosures that
provide additional detail about those amounts. See Note 14 for additional details.
During the third quarter of 2013, we adopted the accounting standard
update regarding the ability to use the Federal Funds Effective Swap
Rate as a U.S. benchmark interest rate for hedge accounting purposes.
Previously the interest rates on direct Treasury obligations of the U.S.
government and the London Interbank Offered Rate (LIBOR) were considered to be the only benchmark interest rates. The adoption of this
standard update did not have a significant impact on our consolidated
financial statements.
Recent Accounting Standards
In July 2013, the accounting standard update relating to the presentation
of an unrecognized tax benefit when a net operating loss carryforward, a
similar tax loss, or a tax credit carryforward exists was issued. The standard
update provides that a liability related to an unrecognized tax benefit
should be offset against same jurisdiction deferred tax assets for a net
operating loss carryforward, a similar tax loss, or a tax credit carryforward
if such settlement is required or expected in the event the uncertain tax
position is disallowed. We will adopt this standard update during the first
quarter of 2014. We are currently evaluating the consolidated balance
sheet impact related to this standard update.
46
NOTE 2
ACQUISITIONS AND DIVESTITURES
Wireless
Wireless Transaction
On September 2, 2013, Verizon entered into a stock purchase agreement
(the Stock Purchase Agreement) with Vodafone Group Plc (Vodafone) and
Vodafone 4 Limited (Seller), pursuant to which Verizon agreed to acquire
Vodafone’s indirect 45% interest in Cellco Partnership d/b/a Verizon
Wireless (the Partnership, and such interest, the Vodafone Interest) for
aggregate consideration of approximately $130 billion.
On February 21, 2014, pursuant to the terms and subject to the conditions set forth in the Stock Purchase Agreement, Verizon acquired (the
Wireless Transaction) from Seller all of the issued and outstanding capital
stock (the Transferred Shares) of Vodafone Americas Finance 1 Inc., a subsidiary of Seller (VF1 Inc.), which indirectly through certain subsidiaries
(together with VF1 Inc., the Purchased Entities) owned the Vodafone
Interest. In consideration for the Transferred Shares, upon completion of
the Wireless Transaction, Verizon (i) paid approximately $58.89 billion in
cash, (ii) issued approximately $60.15 billion of Verizon’s common stock,
par value $0.10 per share (the Stock Consideration), (iii) issued senior
unsecured Verizon notes in an aggregate principal amount of $5.0 billion
(the Verizon Notes), (iv) sold Verizon’s indirectly owned 23.1% interest in
Vodafone Omnitel N.V. (Omnitel, and such interest, the Omnitel Interest),
valued at $3.5 billion and (v) provided other consideration of approximately $2.5 billion. As a result of the Wireless Transaction, Verizon issued
approximately 1.27 billion shares. The total cash paid to Vodafone and
the other costs of the Wireless Transaction, including financing, legal and
bank fees, were financed through the incurrence of third-party indebtedness. See Note 8 for additional information.
In accordance with the accounting standard on consolidation, a change
in a parent’s ownership interest while the parent retains a controlling
financial interest in its subsidiary is accounted for as an equity transaction
and remeasurement of assets and liabilities of previously controlled and
consolidated subsidiaries is not permitted. As a result, we will account for
the Wireless Transaction by adjusting the carrying amount of the noncontrolling interest to reflect the change in Verizon’s ownership interest
in Verizon Wireless. Any difference between the fair value of the consideration paid and the amount by which the noncontrolling interest is
adjusted will be recognized in equity attributable to Verizon.
Omnitel Transaction
On February 21, 2014, Verizon and Vodafone also implemented the sale of
the Omnitel Interest (the Omnitel Transaction) by a subsidiary of Verizon
to a subsidiary of Vodafone in connection with the Wireless Transaction
pursuant to a separate share purchase agreement. We will recognize a
gain on the disposal of the Omnitel interest in the first quarter of 2014.
Verizon Notes
The Verizon Notes were issued pursuant to Verizon’s existing indenture.
The Verizon Notes were issued in two separate series, with $2.5 billion
due February 21, 2022 and $2.5 billion due February 21, 2025. The Verizon
Notes bear interest at a floating rate, which will be reset quarterly, with
interest payable quarterly in arrears, beginning May 21, 2014. The eightyear Verizon notes bear interest at a floating rate equal to three-month
LIBOR, plus 1.222%, and the eleven-year Verizon notes bear interest at
a floating rate equal to three-month LIBOR, plus 1.372%. The indenture
that governs the Verizon Notes contains certain negative covenants,
including a negative pledge covenant and a merger or similar transaction covenant, affirmative covenants and events of default that are
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
customary for companies maintaining an investment grade credit rating.
An event of default for either series of the Verizon Notes may result in
acceleration of the entire principal amount of all debt securities of that
series. Beginning two years after the closing of the Wireless Transaction,
Verizon may redeem all or any portion of the outstanding Verizon Notes
held by Vodafone or any of its affiliates for a redemption price of 100%
of the principal amount plus accrued and unpaid interest. The Verizon
Notes may only be transferred by Vodafone to third parties in specified
amounts during specified periods, commencing January 1, 2017. The
Verizon Notes held by third parties will not be redeemable. Verizon has
agreed to file a registration statement with respect to the Verizon Notes
at least three months prior to the Verizon Notes becoming transferable.
Other Consideration
Included in the other consideration paid to Vodafone is the indirect
assumption of long-term obligations with respect to 5.143% Class D and
Class E cumulative preferred stock (Preferred Stock) issued by one of the
Purchased Entities. Both the Class D (825,000 shares outstanding) and
Class E shares (825,000 shares outstanding) are mandatorily redeemable
in April 2020 at $1,000 per share plus any accrued and unpaid dividends.
Dividends accrue at 5.143% per annum and will be treated as interest
expense. Both the Class D and Class E shares will be classified as liability
instruments and will be recorded at fair value as determined at the
closing of the Wireless Transaction.
Pro Forma Information
The unaudited pro forma information presents the combined operating
results of Verizon and the Vodafone Interest, with the results prior to
the Wireless Transaction closing date adjusted to include the pro forma
impact of: the elimination of the historical equity in earnings, net of tax,
related to the investment in Omnitel; an adjustment to reflect interest
expense associated with the additional indebtedness incurred and
expected to be incurred in connection with the Wireless Transaction and
outstanding as of the closing of the Wireless Transaction; an adjustment
for the dividends on the Preferred Stock; an adjustment for the amortization of certain debt incurrence costs based on the contractual life of
the underlying indebtedness; an adjustment to reflect changes in the
provision for income taxes associated with the additional income attributable to Verizon and the benefit associated with the additional interest
expense; the elimination of the historical net income attributable to noncontrolling interests, representing the noncontrolling interest in Verizon
Wireless; and an adjustment to reflect the sum of all other adjustments
to the pro forma condensed consolidated statements of income on net
income attributable to Verizon.
The unaudited pro forma results are presented for illustrative purposes
only. These pro forma results do not purport to be indicative of the results
that would have actually been obtained if the Wireless Transaction had
occurred as of January 1, 2012, nor does the pro forma data intend to be
a projection of results that may be obtained in the future.
The following unaudited pro forma consolidated results of operations
assume that the Wireless Transaction was completed as of January 1, 2012:
(dollars in millions)
2013
Years ended December 31,
Net income attributable to Verizon
$
17,058
2012
$
4,449
Spectrum License Transactions
Since 2012, we have entered into several strategic spectrum transactions
including:
• During the third quarter of 2012, after receiving the required regulatory approvals, Verizon Wireless completed the following previously
announced transactions in which we acquired wireless spectrum that
will be used to deploy additional 4G LTE capacity:
o
Verizon Wireless acquired Advanced Wireless Services (AWS) spectrum in separate transactions with SpectrumCo and Cox TMI Wireless,
LLC for which it paid an aggregate of $3.9 billion at the time of the
closings. Verizon Wireless has also recorded a liability of $0.4 billion
related to a three-year service obligation to SpectrumCo’s members
pursuant to commercial agreements executed concurrently with the
SpectrumCo transaction.
o
Verizon Wireless completed license purchase and exchange
transactions with Leap Wireless, Savary Island Wireless, which is
majority owned by Leap Wireless, and a subsidiary of T-Mobile
USA, Inc. (T-Mobile USA). As a result of these transactions, Verizon
Wireless received an aggregate $2.6 billion of AWS and Personal
Communication Services (PCS) licenses at fair value and net cash
proceeds of $0.2 billion, transferred certain AWS licenses to T-Mobile
USA and a 700 megahertz (MHz) lower A block license to Leap
Wireless, and recorded an immaterial gain.
• During the first quarter of 2013, we completed license exchange transactions with T-Mobile License LLC and Cricket License Company, LLC,
a subsidiary of Leap Wireless, to exchange certain AWS licenses. These
non-cash exchanges include a number of intra-market swaps that we
expect will enable Verizon Wireless to make more efficient use of the
AWS band. As a result of these exchanges, we received an aggregate
$0.5 billion of AWS licenses at fair value and recorded an immaterial gain.
• During the third quarter of 2013, after receiving the required regulatory
approvals, Verizon Wireless sold 39 lower 700 MHz B block spectrum
licenses to AT&T Inc. (AT&T) in exchange for a payment of $1.9 billion
and the transfer by AT&T to Verizon Wireless of AWS (10 MHz) licenses
in certain markets in the western United States. Verizon Wireless also
sold certain lower 700 MHz B block spectrum licenses to an investment
firm for a payment of $0.2 billion. As a result, we received $0.5 billion of
AWS licenses at fair value and we recorded a pre-tax gain of approximately $0.3 billion in Selling, general and administrative expense on
our consolidated statement of income for the year ended December
31, 2013.
• During the fourth quarter of 2013, we entered into license exchange
agreements with T-Mobile USA to exchange certain AWS and PCS
licenses. These non-cash exchanges, which are subject to approval by
the FCC and other customary closing conditions, are expected to close
in the first half of 2014. The exchange includes a number of swaps that
we expect will result in more efficient use of the AWS and PCS bands. As
a result of these agreements, $0.9 billion of Wireless licenses are classified as held for sale and included in Prepaid expenses and other on our
consolidated balance sheet at December 31, 2013. Upon completion of
the transaction, we expect to record an immaterial gain.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
• Subsequent to the transaction with T-Mobile USA in the fourth quarter
of 2013, on January 6, 2014, we announced two agreements with
T-Mobile USA with respect to our remaining 700 MHz A block spectrum
licenses. Under one agreement, we will sell certain of these licenses to
T-Mobile USA in exchange for cash consideration of approximately
$2.4 billion, and under the second agreement we will exchange the
remainder of these licenses for AWS and PCS spectrum licenses. These
transactions are subject to the approval of the FCC as well as other
customary closing conditions. These transactions are expected to close
in the middle of 2014.
Other
During 2013, we acquired various other wireless licenses and markets
for cash consideration that was not significant. Additionally, we obtained
control of previously unconsolidated wireless partnerships, which were
previously accounted for under the equity method and are now consolidated, which resulted in an immaterial gain. We recorded $0.2 billion of
goodwill as a result of these transactions.
During 2012, we acquired various other wireless licenses and markets for
cash consideration that was not significant and recorded $0.2 billion of
goodwill as a result of these transactions.
Wireline
HUGHES Telematics, Inc.
During July 2012, we acquired HUGHES Telematics, Inc. (HUGHES
Telematics) for approximately $12 per share in cash for a total acquisition
price of $0.6 billion. As a result of the transaction, HUGHES Telematics
became a wholly-owned subsidiary of Verizon. The consolidated financial
statements include the results of HUGHES Telematics’ operations from the
date the acquisition closed. Upon closing, we recorded approximately
$0.6 billion of goodwill, $0.1 billion of other intangibles, and assumed the
debt obligations of HUGHES Telematics, which were approximately $0.1
billion as of the date of acquisition, and which were repaid by Verizon.
Had this acquisition been completed on January 1, 2012 or 2011, the
results of the acquired operations of HUGHES Telematics would not
have had a significant impact on the consolidated net income attributable to Verizon. The acquisition has accelerated our ability to bring more
telematics offerings to market for existing and new customers.
The acquisition of HUGHES Telematics was accounted for as a business
combination under the acquisition method. The cost of the acquisition
was allocated to the assets and liabilities acquired based on their fair
values as of the close of the acquisition, with the excess amount being
recorded as goodwill.
Terremark Worldwide, Inc.
During April 2011, we acquired Terremark Worldwide, Inc. (Terremark),
a global provider of information technology infrastructure and cloud
services, for $19 per share in cash. Closing and other direct acquisitionrelated costs totaled approximately $13 million after-tax. The acquisition
was completed via a tender offer followed by a “short-form” merger under
Delaware law through which Terremark became a wholly-owned subsidiary of Verizon. The acquisition enhanced Verizon’s offerings to business
and government customers globally.
The consolidated financial statements include the results of Terremark’s
operations from the date the acquisition closed. Had this acquisition been consummated on January 1, 2011 the results of Terremark’s
acquired operations would not have had a significant impact on the
consolidated net income attributable to Verizon. The debt obligations of
Terremark that were outstanding at the time of its acquisition by Verizon
were repaid during May 2011.
Other
During the fourth quarter of 2013, Verizon acquired an industry leader in
content delivery networks for $0.4 billion. We expect the acquisition will
increase our ability to meet the growing demand for online digital media
content. Upon closing, we recorded $0.3 billion of goodwill. Additionally,
we acquired a technology and television cloud company for cash consideration that was not significant. The consolidated financial statements
include the results of the operations of each of these acquisitions from
the date each acquisition closed.
On January 21, 2014, Verizon announced an agreement to acquire a business dedicated to the development of cloud television products and
services for cash consideration that was not significant. The transaction,
which was completed in February 2014, is expected to accelerate the
availability of next-generation video services.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 3
WIRELESS LICENSES, GOODWILL AND OTHER INTANGIBLE ASSETS
Wireless Licenses
Changes in the carrying amount of Wireless licenses are as follows:
(dollars in millions)
Balance at January 1, 2012
Acquisitions (Note 2)
Capitalized interest on wireless licenses
Reclassifications, adjustments and other
Balance at December 31, 2012
Acquisitions (Note 2)
Dispositions (Note 2)
Capitalized interest on wireless licenses
Reclassifications, adjustments and other
Balance at December 31, 2013
$
73,250
4,544
205
(255)
77,744
579
(2,361)
566
(781)
75,747
$
$
Reclassifications, adjustments and other includes $0.9 billion of Wireless licenses that are classified as held for sale and included in Prepaid expenses
and other on our consolidated balance sheet at December 31, 2013 as well as the exchanges of wireless licenses in 2013 and 2012. See Note 2 for
additional details.
At December 31, 2013 and 2012, approximately $7.7 billion and $7.3 billion, respectively, of wireless licenses were under development for commercial
service for which we were capitalizing interest costs.
The average remaining renewal period of our wireless license portfolio was 5.1 years as of December 31, 2013. See Note 1 for additional details.
Goodwill
Changes in the carrying amount of Goodwill are as follows:
(dollars in millions)
Wireless
Balance at January 1, 2012
Acquisitions (Note 2)
Reclassifications, adjustments and other
Balance at December 31, 2012
Acquisitions (Note 2)
Balance at December 31, 2013
$
$
$
17,963
209
–
18,172
204
18,376
Wireline
$
$
$
5,394
551
22
5,967
291
6,258
Total
$
23,357
760
22
24,139
495
24,634
$
$
The increase in Goodwill at Wireless at December 31, 2013 was primarily due to obtaining control of previously unconsolidated wireless partnerships,
which were previously accounted for under the equity method and are now consolidated. This resulted in an immaterial gain recorded during the year
ended December 31, 2013. The increase in Goodwill at Wireline at December 31, 2013 was primarily due to the acquisition of a provider of content
delivery networks.
Other Intangible Assets
The following table displays the composition of Other intangible assets, net:
Gross
Amount
At December 31,
Customer lists (5 to 13 years)
Non-network internal-use software (3 to 7 years)
Other (2 to 25 years)
Total
$
$
3,639
11,770
691
16,100
(dollars in millions)
2013
Net
Amount
Accumulated
Amortization
$
(2,660)
(7,317)
(323)
$ (10,300)
The amortization expense for Other intangible assets was as follows:
Years
(dollars in millions)
2013
2012
2011
$ 1,587
1,540
1,505
$
$
979
4,453
368
5,800
Gross
Amount
$
$
3,556
10,415
802
14,773
2012
Net
Amount
Accumulated
Amortization
$
$
(2,338)
(6,210)
(292)
(8,840)
$
1,218
4,205
510
5,933
$
Estimated annual amortization expense for Other intangible assets is as
follows:
Years
2014
2015
2016
2017
2018
(dollars in millions)
$
1,486
1,215
971
784
619
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 4
Summarized Financial Information
Summarized financial information for our equity investees is as follows:
PLANT, PROPERT Y AND EQUIPMENT
The following table displays the details of Plant, property and equipment,
which is stated at cost:
(dollars in millions)
At December 31,
Land
Buildings and equipment
Central office and other network
equipment
Cable, poles and conduit
Leasehold improvements
Work in progress
Furniture, vehicles and other
Lives (years)
2013
–
15 – 45
$
3 – 15
11 – 50
5 – 20
–
3 – 20
121,594
55,240
5,877
4,176
9,302
220,865
131,909
$ 88,956
Less accumulated depreciation
Total
819
23,857
2012
$
859
22,909
113,262
53,761
5,404
4,126
9,254
209,575
120,933
88,642
$
NOTE 5
INVESTMENTS IN UNCONSOLIDATED BUSINESSES
(dollars in millions)
Equity Investees
Vodafone Omnitel
Other
Total equity investees
Cost Investees
Total investments in
unconsolidated businesses
Ownership
Various
2012
Current assets
Noncurrent assets
Total assets
$ 3,983
7,748
$ 11,731
$
Current liabilities
Noncurrent liabilities
Equity
Total liabilities and equity
$ 4,692
5
7,034
$ 11,731
$
Income Statement
Years Ended December 31,
Net revenue
Operating income
Net income
3,516
8,159
$ 11,675
5,526
5
6,144
$ 11,675
(dollars in millions)
2013
2012
2011
$ 8,984
1,632
925
$ 10,825
2,823
1,679
$ 12,668
4,021
2,451
2013
NONCONTROLLING INTERESTS
Noncontrolling interests in equity of subsidiaries were as follows:
2012
(dollars in millions)
At December 31,
23.1%
Various
(dollars in millions)
2013
At December 31,
NOTE 6
Our investments in unconsolidated businesses are comprised of the
following:
At December 31,
Balance Sheet
$ 2,511
818
3,329
$
103
$ 3,432
2,200
1,106
3,306
95
$
3,401
Dividends and repatriations of foreign earnings received from these
investees were not significant in 2013, $0.4 billion in 2012 and $0.5 billion in 2011. See Note 12 regarding undistributed earnings of our foreign
subsidiaries.
Equity Method Investments
Vodafone Omnitel
Vodafone Omnitel N.V. (Vodafone Omnitel) is one of the largest wireless
communications companies in Italy. At December 31, 2013 and 2012,
our investment in Vodafone Omnitel included goodwill of $1.1 billion
and $1.0 billion, respectively. As part of the consideration of the Wireless
Transaction, a subsidiary of Verizon sold its entire ownership interest in
Vodafone Omnitel to a subsidiary of Vodafone on February 21, 2014. See
Note 2 for additional information.
Other Equity Investees
The remaining investments include wireless partnerships in the U.S., limited partnership investments in entities that invest in affordable housing
projects and other smaller domestic and international investments.
Verizon Wireless
Wireless partnerships and other
2013
2012
$ 55,465
1,115
$ 56,580
$ 51,492
884
$ 52,376
Wireless Joint Venture
Our Wireless segment is primarily comprised of Cellco Partnership doing
business as Verizon Wireless (Verizon Wireless). Cellco Partnership is a
joint venture formed in April 2000 by the combination of the U.S. wireless
operations and interests of Verizon and Vodafone. As of December 31,
2013, Verizon owned a controlling 55% interest in Verizon Wireless and
Vodafone owned the remaining 45%. On February 21, 2014, Verizon completed the Wireless Transaction and acquired 100% ownership of Verizon
Wireless. See Note 2 for additional information.
Special Distributions
In May 2013, the Board of Representatives of Verizon Wireless declared
a distribution to its owners, which was paid in the second quarter of
2013 in proportion to their partnership interests on the payment date,
in the aggregate amount of $7.0 billion. As a result, Vodafone received a
cash payment of $3.15 billion and the remainder of the distribution was
received by Verizon.
In November 2012, the Board of Representatives of Verizon Wireless
declared a distribution to its owners, which was paid in the fourth quarter
of 2012 in proportion to their partnership interests on the payment date,
in the aggregate amount of $8.5 billion. As a result, Vodafone received a
cash payment of $3.8 billion and the remainder of the distribution was
received by Verizon.
In July 2011, the Board of Representatives of Verizon Wireless declared
a distribution to its owners, which was paid in the first quarter of 2012
in proportion to their partnership interests on the payment date, in
the aggregate amount of $10 billion. As a result, Vodafone received a
cash payment of $4.5 billion and the remainder of the distribution was
received by Verizon.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 7
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 our leasing portfolio along with telecommunications equipment, commercial real estate property and other equipment. These leases have remaining
terms of up to 37 years as of December 31, 2013. In addition, we lease space on certain of our cell towers to other wireless carriers. 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 is secured by 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 U.S. GAAP. All recourse debt is reflected in our consolidated balance sheets.
At each reporting period, we monitor the credit quality of the various lessees in our portfolios. Regarding the leveraged lease portfolio, external credit
reports are used where available and where not available we use internally developed indicators. These indicators or internal credit risk grades factor
historic loss experience, the value of the underlying collateral, delinquency trends, and industry and general economic conditions. The credit quality
of our lessees varies from AAA to CCC+. For each reporting period the leveraged leases within the portfolio are reviewed for indicators of impairment
where it is probable the rent due according to the contractual terms of the lease will not be collected. All significant accounts, individually or in the
aggregate, are current and none are classified as impaired.
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)
2013
At December 31,
Leveraged
Leases
Direct Finance
Leases
$ 1,069
780
(589)
$ 1,260
Minimum lease payments receivable
Estimated residual value
Unearned income
Total
Allowance for doubtful accounts
Finance lease receivables, net
Prepaid expenses and other
Other assets
$
$
Accumulated deferred taxes arising from leveraged leases, which are
included in Deferred income taxes, amounted to $1.0 billion at December
31, 2013 and $1.2 billion at December 31, 2012.
The following table is a summary of the components of income from
leveraged leases:
(dollars in millions)
2013
Years Ended December 31,
Pre-tax income
Income tax expense
$
34
12
2012
$
30
12
2011
$
61
24
The future minimum lease payments to be received from noncancelable
capital leases (direct financing and leveraged leases), net of nonrecourse
loan payments related to leveraged leases and allowances for doubtful
accounts, along with expected receipts relating to operating leases for
the periods shown at December 31, 2013, are as follows:
(dollars in millions)
Capital
Leases
Years
2014
2015
2016
2017
2018
Thereafter
Total
$
$
34
46
114
38
56
797
1,085
Operating
Leases
$
$
197
170
142
50
23
19
601
16
5
(4)
17
Total
$ 1,085
785
(593)
$ 1,277
(90)
$ 1,187
$
5
1,182
$ 1,187
2012
Leveraged
Leases
$
$
1,253
923
(654)
1,522
Direct Finance
Leases
$
$
Total
58
6
(10)
54
$
$
$
$
$
1,311
929
(664)
1,576
(99)
1,477
22
1,455
1,477
As Lessee
We lease certain facilities and equipment for use in our operations under
both capital and operating leases. Total rent expense under operating
leases amounted to $2.6 billion in 2013 and $2.5 billion in 2012 and 2011,
respectively.
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:
(dollars in millions)
2013
At December 31,
Capital leases
Less accumulated amortization
Total
$
$
353
188
165
2012
$
$
358
158
200
The aggregate minimum rental commitments under noncancelable
leases for the periods shown at December 31, 2013, are as follows:
(dollars in millions)
Capital
Leases
Years
2014
2015
2016
2017
2018
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, 2013
$
$
110
70
54
46
20
83
383
90
293
91
202
Operating
Leases
$
2,255
2,020
1,703
1,379
1,085
3,748
$ 12,190
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 8
DEBT
Changes to debt during 2013 are as follows:
(dollars in millions)
Debt Maturing
within One Year
Balance at January 1, 2013
Proceeds from long-term borrowings
Repayments of long-term borrowings and capital leases obligations
Decrease in short-term obligations, excluding current maturities
Reclassifications of long-term debt
Other
Balance at December 31, 2013
$
$
Long-term
Debt
4,369
–
(3,943)
(142)
3,328
321
3,933
$
$
Total
47,618
49,166
(4,220)
–
(3,328)
422
89,658
Debt maturing within one year is as follows:
$
$
51,987
49,166
(8,163)
(142)
–
743
93,591
(dollars in millions)
2013
At December 31,
$
Long-term debt maturing within one year
Commercial paper and other
Total debt maturing within one year
$
2012
3,486
447
3,933
$
$
3,869
500
4,369
The weighted-average interest rate for our commercial paper outstanding was 0.2% and 0.4% at December 31, 2013 and 2012, respectively.
Credit Facilities
On August 13, 2013, we amended our $6.2 billion credit facility with a group of major financial institutions to extend the maturity date to August 12,
2017. As of December 31, 2013, the unused borrowing capacity under this credit facility was approximately $6.1 billion.
During October 2013, we entered into a $2.0 billion 364-day revolving credit agreement with a group of major financial institutions. Although effective
as of October 2013, we could not draw on this revolving credit agreement prior to the completion of the Wireless Transaction. We may use borrowings
under the 364-day credit agreement for general corporate purposes. The 364-day revolving credit agreement contains certain negative covenants,
including a negative pledge covenant, a merger or similar transaction covenant and an accounting changes covenant, affirmative covenants and
events of default that are customary for companies maintaining an investment grade credit rating. In addition, this agreement requires us to maintain
a leverage ratio (as defined in the agreement) not in excess of 3.50:1.00, until our credit ratings reach a certain level.
Long-Term Debt
Outstanding long-term debt obligations are as follows:
At December 31,
(dollars in millions)
Interest Rates %
Maturities
0.50 – 3.85
4.50 – 5.50
5.55 – 6.90
7.35 – 8.95
Floating
2014
2015
2016
2018
2014
Verizon Wireless–notes payable and other
8.50 – 8.88
2015 – 2018
3,931
8,635
Verizon Wireless–Alltel assumed notes
6.80 – 7.88
2016 – 2032
1,300
1,500
Telephone subsidiaries–debentures
5.13 – 6.86
7.38 – 7.88
8.00 – 8.75
2027 – 2033
2022 – 2032
2019 – 2031
1,075
1,099
880
2,045
1,349
880
Other subsidiaries–debentures and other
6.84 – 8.75
2018 – 2028
1,700
1,700
293
(264)
93,144
3,486
89,658
298
(228)
51,487
3,869
47,618
52
2042
2041
2043
2039
2018
$
$
20,416
20,226
31,965
5,023
5,500
2012
Verizon Communications–notes payable and other
Capital lease obligations (average rate of 8.1% and 6.3% in 2013 and 2012, respectively)
Unamortized discount, net of premium
Total long-term debt, including current maturities
Less long-term debt maturing within one year
Total long-term debt
–
–
–
–
–
2013
$
$
11,198
7,062
11,031
5,017
1,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
2013
During March 2013, we issued $0.5 billion aggregate principal amount of
floating rate Notes due 2015 in a private placement resulting in cash proceeds of approximately $0.5 billion, net of discounts and issuance costs.
The proceeds were used for the repayment of commercial paper.
During April 2013, $1.25 billion of 5.25% Verizon Communications Notes
matured and were repaid. In addition, during June 2013, $0.5 billion of
4.375% Verizon Communications Notes matured and were repaid.
During September 2013, in connection with the Wireless Transaction,
we issued $49.0 billion aggregate principal amount of fixed and floating
rate notes resulting in cash proceeds of approximately $48.7 billion,
net of discounts and issuance costs. The issuances consisted of the following: $2.25 billion aggregate principal amount of floating rate Notes
due 2016 that bear interest at a rate equal to three-month LIBOR plus
1.53% which rate will be reset quarterly, $1.75 billion aggregate principal amount of floating rate Notes due 2018 that bear interest at a rate
equal to three-month LIBOR plus 1.75% which rate will be reset quarterly, $4.25 billion aggregate principal amount of 2.50% Notes due 2016,
$4.75 billion aggregate principal amount of 3.65% Notes due 2018, $4.0
billion aggregate principal amount of 4.50% Notes due 2020, $11.0 billion aggregate principal amount of 5.15% Notes due 2023, $6.0 billion
aggregate principal amount of 6.40% Notes due 2033 and $15.0 billion
aggregate principal amount of 6.55% Notes due 2043 (collectively, the
new notes). The proceeds of the new notes were used to finance, in part,
the Wireless Transaction and to pay related fees and expenses. As a result
of the issuance of the new notes, we incurred interest expense related to
the Wireless Transaction of $0.7 billion during 2013.
In addition, during 2013 we utilized $0.2 billion under fixed rate vendor
financing facilities.
During February 2014, we issued €1.75 billion aggregate principal amount
of 2.375% Notes due 2022, €1.25 billion aggregate principal amount of
3.25% Notes due 2026 and £0.85 billion aggregate principal amount of
4.75% Notes due 2034. The issuance of these Notes resulted in cash proceeds of approximately $5.4 billion, net of discounts and issuance costs.
The net proceeds were used, in part, to finance the Wireless Transaction.
Any net proceeds not used to finance the Wireless Transaction will be
used for general corporate purposes. Also, during February 2014, we
issued $0.5 billion aggregate principal amount of 5.9% Retail Notes
due 2054 resulting in cash proceeds of approximately $0.5 billion, net
of discounts and issuance costs. The proceeds will be used for general
corporate purposes.
Verizon Notes
During February 2014, in connection with the Wireless Transaction, we
issued $5.0 billion aggregate principal amount of floating rate notes. The
Verizon Notes were issued in two separate series, with $2.5 billion due
February 21, 2022 and $2.5 billion due February 21, 2025. The Verizon
Notes bear interest at a floating rate, which will be reset quarterly, with
interest payable quarterly in arrears, beginning May 21, 2014 (see Note
2). The eight-year Verizon notes bear interest at a floating rate equal to
three-month LIBOR, plus 1.222%, and the eleven-year Verizon notes bear
interest at a floating rate equal to three-month LIBOR, plus 1.372%.
during the last two years that they are outstanding. Loans under the
term loan agreement bear interest at floating rates. The term loan agreement contains certain negative covenants, including a negative pledge
covenant, a merger or similar transaction covenant and an accounting
changes covenant, affirmative covenants and events of default that are
customary for companies maintaining an investment grade credit rating.
In addition, the term loan agreement requires us to maintain a leverage
ratio (as defined in the term loan agreement) not in excess of 3.50:1.00,
until our credit ratings reach a certain level.
Bridge Credit Agreement
During September 2013, we entered into a $61.0 billion bridge credit
agreement with a group of major financial institutions. The credit agreement provided us with the ability to borrow up to $61.0 billion to
finance, in part, the Wireless Transaction and to pay related transaction
costs. Following the September 2013 issuance of notes, borrowing availability under the bridge credit agreement was reduced to $12.0 billion.
Following the effectiveness of the term loan agreement in October 2013,
the bridge credit agreement was terminated in accordance with its terms
and as such, the related fees of $0.2 billion were recognized in Other
income and (expense), net during the fourth quarter of 2013.
2012
On November 2, 2012, we announced the commencement of a tender
offer (the Tender Offer) to purchase for cash any and all of the outstanding $1.25 billion aggregate principal amount of 8.95% Verizon
Communications Notes due 2039. In the Tender Offer that was completed
November 9, 2012, $0.9 billion aggregate principal amount of the notes
was purchased at a price of 186.5% of the principal amount of the notes
(see “Early Debt Redemption and Other Costs”) and $0.35 billion principal
amount of the notes remained outstanding. Any accrued and unpaid
interest on the principal purchased was paid to the date of purchase.
During November 2012, we issued $4.5 billion aggregate principal
amount of fixed rate notes resulting in cash proceeds of approximately
$4.47 billion, net of discounts and issuance costs. The issuances consisted
of the following: $1.0 billion of 0.70% Notes due 2015, $0.5 billion of 1.10%
Notes due 2017, $1.75 billion of 2.45% Notes due 2022 and $1.25 billion of 3.85% Notes due 2042. During December 2012, the net proceeds
were used to redeem: $0.7 billion of the $2.0 billion of 8.75% Notes due
November 2018 at a redemption price of 140.2% of the principal amount
of the notes (see “Early Debt Redemption and Other Costs”), $0.75 billion
of 4.35% Notes due February 2013 at a redemption price of 100.7% of the
principal amount of the notes and certain telephone subsidiary debt (see
“Telephone and Other Subsidiary Debt”), as well as for the Tender Offer
and other general corporate purposes. Any accrued and unpaid interest
was paid to the date of redemption.
In addition, during 2012 we utilized $0.2 billion under fixed rate vendor
financing facilities.
Term Loan Agreement
During October 2013, we entered into a term loan agreement with a
group of major financial institutions pursuant to which we drew $6.6 billion to finance, in part, the Wireless Transaction and to pay transaction
costs. Half of any loans under the term loan agreement have a maturity
of three years and the other half have a maturity of five years (the 5-Year
Loans). The 5-Year Loans provide for the partial amortization of principal
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Verizon Wireless – Notes Payable and Other
Verizon Wireless Capital LLC, a wholly-owned subsidiary of Verizon
Wireless, 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 co-issued notes.
2013
During November 2013, $1.25 billion of 7.375% Verizon Wireless Notes
and $0.2 billion of 6.50% Verizon Wireless Notes matured and were
repaid. Also during November 2013, Verizon Wireless redeemed $3.5 billion of 5.55% Notes, due February 1, 2014 at a redemption price of 101%
of the principal amount of the notes. Any accrued and unpaid interest
was paid to the date of redemption.
2012
During February 2012, $0.8 billion of 5.25% Verizon Wireless Notes
matured and were repaid. During July 2012, $0.8 billion of 7.0% Verizon
Wireless Notes matured and were repaid.
Telephone and Other Subsidiary Debt
2013
During May 2013, $0.1 billion of 7.0% Verizon New York Inc. Debentures
matured and were repaid. During June 2013, $0.1 billion of 7.0% Verizon
New York Inc. Debentures matured and were repaid. In addition, during
June 2013, we redeemed $0.25 billion of 7.15% Verizon Maryland LLC
Debentures, due May 2023 at a redemption price of 100% of the principal amount of the debentures. During October 2013, $0.3 billion of
4.75% Verizon New England Inc. Debentures matured and were repaid.
During November 2013, we redeemed $0.3 billion of 6.70% Verizon New
York Inc. Debentures, due November 2023 at a redemption price of 100%
of the principal amount of the debentures. During December 2013,
we redeemed $0.2 billion of 7.0% Verizon New York Inc. Debentures,
due December 2033 at a redemption price of 100% of the principal
amount of the debentures and $20 million of 7.0% Verizon Delaware LLC
Debentures, due December 2023 at a redemption price of 100% of the
principal amount of the debentures. Any accrued and unpaid interest
was paid to the date of redemption.
2012
During January 2012, $1.0 billion of 5.875% Verizon New Jersey Inc.
Debentures matured and were repaid. During December 2012, we
redeemed the $1.0 billion of 4.625% Verizon Virginia LLC Debentures,
Series A, due March 2013 at a redemption price of 101.1% of the principal
amount of the debentures. Any accrued and unpaid interest was paid to
the date of redemption.
In addition, during 2012, various Telephone and Other Subsidiary
Debentures totaling approximately $0.2 billion were repaid and any
accrued and unpaid interest was paid to the date of payment.
54
Early Debt Redemption and Other Costs
During November 2012, we recorded debt redemption costs of $0.8 billion in connection with the purchase of $0.9 billion of the $1.25 billion of
8.95% Verizon Communications Notes due 2039 in a cash tender offer.
During December 2012, we recorded debt redemption costs of $0.3 billion in connection with the early redemption of $0.7 billion of the $2.0
billion of 8.75% Verizon Communications Notes due 2018, $1.0 billion of
4.625% Verizon Virginia LLC Debentures, Series A, due March 2013 and
$0.75 billion of 4.35% Verizon Communications Notes due February 2013,
as well as $0.3 billion of other costs.
Guarantees
We guarantee the debentures and first mortgage bonds of our operating
telephone company subsidiaries. As of December 31, 2013, $3.1 billion
principal amount of these obligations remain outstanding. Each guarantee will remain in place for the life of the obligation unless terminated
pursuant to its terms, including the operating telephone company no
longer being a wholly-owned subsidiary of Verizon.
We also guarantee the debt obligations of GTE Corporation that were
issued and outstanding prior to July 1, 2003. As of December 31, 2013,
$1.7 billion principal amount of these obligations remain outstanding.
Debt Covenants
We and our consolidated subsidiaries are in compliance with all debt
covenants.
Maturities of Long-Term Debt
Maturities of long-term debt outstanding at December 31, 2013 are as
follows:
Years
2014
2015
2016
2017
2018
Thereafter
(dollars in millions)
$
3,486
2,740
10,818
1,331
14,970
59,799
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 9
FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2013:
(dollars in millions)
Level 1(1)
Assets:
Cash and cash equivalents:
Fixed income securities
Short-term investments:
Equity securities
Fixed income securities
Other assets:
Forward interest rate swaps
Fixed income securities
Cross currency swaps
Total
Liabilities:
Other liabilities:
Interest rate swaps
Total
$ 9,190
Level 2(2)
$
–
Level 3(3)
$
Total
–
$ 9,190
387
3
–
211
–
–
387
214
–
–
–
$ 9,580
76
875
166
$ 1,328
$
–
–
–
–
76
875
166
$ 10,908
$
$
$
$
$
$
–
–
$
$
–
–
23
23
23
23
(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
Equity securities consist of investments in common stock of domestic and
international corporations measured using quoted prices in active markets.
Fixed income securities consist primarily of investments in U.S. Treasuries,
as well as municipal bonds. We use quoted prices in active markets for
our U.S. Treasury securities, and therefore these securities are classified
as Level 1. For all other fixed income securities that do not have quoted
prices in active markets, we use alternative matrix pricing resulting in
these debt securities being classified as Level 2.
Derivative contracts 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. We use mid-market pricing for fair
value measurements of our derivative instruments. Our derivative instruments are recorded on a gross basis.
We recognize transfers between levels of the fair value hierarchy as of the
end of the reporting period. There were no transfers within the fair value
hierarchy during 2013.
Fair Value of Short-term and Long-term Debt
The fair value of our debt is determined using various methods, including
quoted prices for identical terms and maturities, which is a Level 1 measurement, as well as quoted prices for similar terms and maturities in
inactive markets and future cash flows discounted at current rates, which
are Level 2 measurements. The fair value of our short-term and long-term
debt, excluding capital leases, was as follows:
(dollars in millions)
At December 31,
Carrying
Amount
Short- and long-term debt,
excluding capital leases
$ 93,298
2013
Fair
Value
$ 103,527
Carrying
Amount
2012
Fair
Value
$ 51,689
$ 61,552
Derivative Instruments
Interest Rate Swaps
We have entered into domestic interest rate swaps to achieve a targeted
mix of fixed and variable rate debt. We principally receive fixed rates and
pay variable rates based on LIBOR, resulting in a net increase or decrease
to Interest expense. 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 on our consolidated balance sheets
as assets and liabilities.
During 2012, interest rate swaps with a notional value of $5.8 billion were
settled. As a result of the settlements, we received net proceeds of $0.7
billion, including accrued interest which is included in Other, net operating activities in the consolidated statement of cash flows. The fair value
basis adjustment to the underlying debt instruments was recognized
into earnings as a reduction of Interest expense over the remaining lives
of the underlying debt obligations. During the second quarter of 2013,
interest rate swaps with a notional value of $1.25 billion matured and
the impact to our consolidated financial statements was not material.
During the third quarter of 2013, we entered into interest rate swaps with
a total notional value of $1.8 billion. At December 31, 2013 and 2012, the
fair value of these interest rate swaps was not material. At December 31,
2013, the total notional amount of these interest rate swaps was $1.8 billion. The ineffective portion of these interest rate swaps was not material
at December 31, 2013.
Forward Interest Rate Swaps
In order to manage our exposure to future interest rate changes, during
the fourth quarter of 2013, we entered into forward interest rate swaps
with a notional value of $2.0 billion. We designated these contracts as
cash flow hedges. The fair value of these contracts was not material at
December 31, 2013.
Cross Currency Swaps
Verizon Wireless previously entered into cross currency swaps designated
as cash flow hedges to exchange approximately $1.6 billion of British
Pound Sterling and Euro-denominated debt into U.S. dollars and to fix
our future interest and principal payments in U.S. dollars, as well as to
mitigate the impact of foreign currency transaction gains or losses. A portion of the gains and losses recognized in Other comprehensive income
was reclassified to Other income and (expense), net to offset the related
pre-tax foreign currency transaction gain or loss on the underlying debt
obligations. The fair value of the outstanding swaps was not material at
December 31, 2013 or December 31, 2012. During 2013 and 2012 the
gains with respect to these swaps were not material.
During February 2014, we entered into cross currency swaps designated
as cash flow hedges to exchange approximately $5.4 billion of Euro and
British Pound Sterling denominated debt into U.S. dollars and to fix our
future interest and principal payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses.
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 with whom
we have negotiated derivatives agreements (ISDA master agreement)
and credit support annex agreements which provide rules for collateral exchange. We generally apply collateralized arrangements with our
counterparties for uncleared derivatives to mitigate credit risk. We may
enter into swaps on an uncollateralized basis in certain circumstances.
While we may be exposed to credit losses due to the nonperformance
of our counterparties, 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.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 10
STOCK-BASED COMPENSATION
Verizon Communications Long-Term Incentive Plan
The Verizon Communications Inc. Long-Term Incentive Plan (the Plan)
permits the granting of stock options, stock appreciation rights, restricted
stock, restricted stock units, performance shares, performance stock units
and other awards. The maximum number of shares available for awards
from the Plan is 119.6 million shares.
Restricted Stock Units
The Plan provides for grants of Restricted Stock Units (RSUs) that generally vest at the end of the third year after the grant. The RSUs are classified
as equity awards because the RSUs will be paid in Verizon common stock
upon vesting. The RSU equity awards are measured using the grant date
fair value of Verizon common stock and are not remeasured at the end
of each reporting period. Dividend equivalent units are also paid to participants at the time the RSU award is paid, and in the same proportion
as the RSU award.
Performance Stock Units
The Plan also provides for grants of Performance Stock Units (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 performance goals have been achieved
over the three-year performance cycle. 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
common 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 granted and cancelled activity for the PSU award includes
adjustments for the performance goals achieved.
The following table summarizes Verizon’s Restricted Stock Unit and
Performance Stock Unit activity:
(shares in thousands)
Outstanding January 1, 2011
Granted
Payments
Cancelled/Forfeited
Outstanding December 31, 2011
Granted
Payments
Cancelled/Forfeited
Outstanding December 31, 2012
Granted
Payments
Cancelled/Forfeited
Outstanding December 31, 2013
56
Restricted
Stock Units
20,923
6,667
(7,600)
(154)
19,836
6,350
(7,369)
(148)
18,669
4,950
(7,246)
(180)
16,193
Performance
Stock Units
32,380
10,348
(12,137)
(2,977)
27,614
20,537
(8,499)
(189)
39,463
7,470
(22,703)
(506)
23,724
As of December 31, 2013, unrecognized compensation expense related to
the unvested portion of Verizon’s RSUs and PSUs was approximately $0.4
billion and is expected to be recognized over approximately two years.
The RSUs granted in 2013 and 2012 have weighted-average grant date
fair values of $47.96 and $38.67 per unit, respectively. During 2013, 2012
and 2011, we paid $1.1 billion, $0.6 billion and $0.7 billion, respectively, to
settle RSUs and PSUs classified as liability awards.
Verizon Wireless’ Long-Term Incentive Plan
The Verizon Wireless Long-Term Incentive Plan (the Wireless Plan) provides
compensation opportunities to eligible employees of Verizon Wireless
(the Partnership). Under the Wireless Plan, Value Appreciation Rights
(VARs) were granted to eligible employees. As of December 31, 2013, all
VARs were fully vested. We have not granted new VARs since 2004.
VARs reflect the change in the value of the Partnership, as defined in the
Wireless Plan. Similar to stock options, the valuation is determined using a
Black-Scholes model. 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. All outstanding VARs are fully exercisable and
have a maximum term of 10 years. All VARs were 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.
The following table summarizes the assumptions used in the BlackScholes model during 2013:
End of Period
Risk-free rate
Expected term (in years)
Expected volatility
0.11%
0.12
43.27%
The risk-free rate is based on the U.S. Treasury yield curve in effect at the
time of the measurement date. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
The following table summarizes the Value Appreciation Rights activity:
(shares in thousands)
Outstanding rights, January 1, 2011
Exercised
Cancelled/Forfeited
Outstanding rights, December 31, 2011
Exercised
Cancelled/Forfeited
Outstanding rights, December 31, 2012
Exercised
Cancelled/Forfeited
Outstanding rights, December 31, 2013
VARs
WeightedAverage
Grant-Date
Fair Value
11,569
(3,303)
(52)
8,214
(3,427)
(21)
4,766
(1,916)
(3)
2,847
$
13.11
14.87
14.74
12.39
10.30
11.10
13.89
13.89
13.89
13.89
During 2013, 2012 and 2011, we paid $0.1 billion, respectively, to settle
VARs classified as liability awards.
Stock-Based Compensation Expense
After-tax compensation expense for stock-based compensation related
to RSUs, PSUs, and VARs described above included in Net income attributable to Verizon was $0.4 billion, $0.7 billion and $0.5 billion for 2013,
2012 and 2011, respectively.
All stock options outstanding at December 31, 2013, 2012 and 2011 were
exercisable.
The following table summarizes information about Verizon’s stock options
outstanding as of December 31, 2013:
Range of
Exercise Prices
$
30.00–39.99
40.00–49.99
Total
WeightedAverage
Stock Options Remaining Life
(in thousands)
(years)
969
14
983
0.1
0.1
0.1
WeightedAverage
Exercise Price
$
34.18
46.31
34.35
The total intrinsic value for stock options outstanding as of December 31,
2013 is not significant. The total intrinsic value of stock options exercised
was not significant in 2013 and the associated tax benefits were not significant in 2013, 2012 and 2011. The amount of cash received from the
exercise of stock options was $0.1 billion in 2013, $0.3 billion in 2012 and
$0.2 billion in 2011. There was no stock option expense for 2013, 2012
and 2011.
Stock Options
The Plan provides for grants of stock options to participants at an option
price per share of no less than 100% of the fair market value of Verizon
common 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.
The following table summarizes Verizon’s stock option activity:
(shares in thousands)
Outstanding, January 1, 2011
Exercised
Cancelled/Forfeited
Outstanding, December 31, 2011
Exercised
Cancelled/Forfeited
Outstanding, December 31, 2012
Exercised
Cancelled/Forfeited
Outstanding, December 31, 2013
Stock
Options
56,844
(7,104)
(21,921)
27,819
(7,447)
(17,054)
3,318
(2,253)
(82)
983
WeightedAverage
Exercise
Price
$
44.25
35.00
51.06
41.24
35.20
45.15
34.69
34.85
34.49
34.35
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 11
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 our
share of the cost for certain recent and future retirees. In accordance
with our accounting policy for pension and other postretirement benefits, operating expenses include pension and benefit related credits
and/or charges based on actuarial assumptions, including projected
discount rates and an estimated return on plan assets. These estimates
are updated in the fourth quarter to reflect actual return on plan assets
and updated actuarial assumptions. The adjustment is recognized in the
income statement during the fourth quarter or upon a remeasurement
event pursuant to our accounting policy for the recognition of actuarial
gains/losses.
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. 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
Curtailment and termination
benefits
Annuity purchase
Settlements paid
End of year
2013
(dollars in millions)
Pension
2012
Health Care and Life
2013
2012
$ 26,773
395
1,002
(149)
(2,327)
(1,777)
$ 30,582
358
1,449
183
6,074
(2,735)
$ 26,844
318
1,095
(119)
(3,576)
(1,520)
$ 27,369
359
1,284
(1,826)
1,402
(1,744)
4
–
(889)
$ 23,032
–
(8,352)
(786)
$ 26,773
–
–
–
$ 23,042
–
–
–
$ 26,844
Change in Plan Assets
Beginning of year
Actual return on plan assets
Company contributions
Benefits paid
Settlements paid
Annuity purchase
End of year
$ 18,282
1,388
107
(1,777)
(889)
–
$ 17,111
$ 24,110
2,326
3,719
(2,735)
(786)
(8,352)
$ 18,282
$ 2,657
556
1,360
(1,520)
–
–
$ 3,053
$
Funded Status
End of year
$ (5,921)
$ (8,491)
$ (19,989)
$ (24,187)
58
2,628
312
1,461
(1,744)
–
–
$ 2,657
(dollars in millions)
At December 31,
2013
Amounts recognized on the
balance sheet
Noncurrent assets
$
339
Current liabilities
(137)
Noncurrent liabilities
(6,123)
Total
$ (5,921)
Amounts recognized in
Accumulated Other
Comprehensive Income
(Pre–tax)
Prior Service Benefit (Cost) $
Total
$
25
25
Pension
2012
Health Care and Life
2013
2012
236
(129)
(8,598)
$ (8,491)
$
–
(710)
(19,279)
$ (19,989)
$
$
$
$ (2,120)
$ (2,120)
$ (2,247)
$ (2,247)
$
181
181
–
(766)
(23,421)
$ (24,187)
Beginning in 2013, as a result of federal health care reform, Verizon no
longer files for the Retiree Drug Subsidy (RDS) and instead contracts with
a Medicare Part D plan on a group basis to provide prescription drug
benefits to Medicare eligible retirees.
During 2012, we reached agreements with the Communications Workers
of America and the International Brotherhood of Electrical Workers on
new, three-year contracts that cover approximately 43,000 Wireline
employees. This resulted in the adoption of plan amendments which will
result in lower other postretirement benefit costs in 2013 and beyond.
The accumulated benefit obligation for all defined benefit pension
plans was $22.9 billion and $26.5 billion at December 31, 2013 and 2012,
respectively.
Information for pension plans with an accumulated benefit obligation in
excess of plan assets follows:
(dollars in millions)
At December 31,
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2013
2012
$ 22,610
22,492
16,350
$ 26,351
26,081
17,623
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Net Periodic Cost
The following table summarizes the benefit (income) cost related to our pension and postretirement health care and life insurance plans:
(dollars in millions)
2013
Years Ended December 31,
Service cost
Amortization of prior service cost (credit)
Subtotal
Expected return on plan assets
Interest cost
Subtotal
Remeasurement (gain) loss, net
Net periodic benefit (income) cost
Curtailment and termination benefits
Total
$
395
6
401
(1,245)
1,002
158
(2,470)
(2,312)
4
$ (2,308)
2012
$
358
(1)
357
(1,795)
1,449
11
5,542
5,553
–
$ 5,553
Pension
2011
Health Care and Life
2012
2011
2013
$
318
(247)
71
(143)
1,095
1,023
(3,989)
(2,966)
–
$ (2,966)
$
307
72
379
(1,976)
1,590
(7)
4,146
4,139
–
$ 4,139
$
359
(89)
270
(171)
1,284
1,383
1,262
2,645
–
2,645
$
Other pre-tax changes in plan assets and benefit obligations recognized in other comprehensive (income) loss are as follows:
2013
At December 31,
Prior service cost
Reversal of amortization items
Prior service cost
Total recognized in other comprehensive (income) loss (pre-tax)
Pension
2012
$
$
299
(57)
242
(163)
1,421
1,500
1,787
3,287
–
3,287
(dollars in millions)
Health Care and Life
2013
2012
$
(149)
$
183
$
(119)
$ (1,826)
$
(6)
(155)
$
1
184
$
247
128
89
$ (1,737)
2013
Health Care and Life
2012
The estimated prior service cost for the defined benefit pension plan that
will be amortized from Accumulated other comprehensive income (loss)
into net periodic benefit cost over the next fiscal year is not significant.
The estimated prior service cost for the defined benefit postretirement
plans that will be amortized from Accumulated other comprehensive
income into net periodic benefit (income) cost over the next fiscal year
is $0.3 billion.
Assumptions
The weighted-average assumptions used in determining benefit obligations follow:
At December 31,
2013
Discount Rate
Rate of compensation increases
5.00%
3.00
Pension
2012
4.20%
3.00
5.00%
N/A
4.20%
N/A
The weighted-average assumptions used in determining net periodic cost follow:
At December 31,
Discount Rate
Expected return on plan assets
Rate of compensation increases
2013
4.20%
7.50
3.00
2012
5.00%
7.50
3.00
Pension
2011
5.75%
8.00
3.00
2013
4.20%
5.60
N/A
2012
Health Care and Life
2011
5.00%
7.00
N/A
5.75%
6.00
N/A
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. Those estimates are based on
a combination of factors including the current market interest rates and
valuation levels, consensus earnings expectations and historical longterm risk premiums. 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 longterm asset allocation policy.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
The assumed health care cost trend rates follow:
At December 31,
Healthcare cost trend rate assumed for
next year
Rate to which cost trend rate gradually
declines
Year the rate reaches the level it is
assumed to remain thereafter
2013
Health Care and Life
2012
2011
(dollars in millions)
Asset Category
6.50%
7.00%
7.50%
4.75
5.00
5.00
2020
2016
2016
A one-percentage point change in the assumed health care cost trend
rate would have the following effects:
(dollars in millions)
Increase
One-Percentage Point
Effect on 2013 service and interest cost
Effect on postretirement benefit obligation as of
December 31, 2013
$
184
2,539
Decrease
$
(150)
(2,086)
Plan Assets
Historically, our portfolio strategy emphasized a long-term equity orientation, significant global diversification, and the use of both public
and private investments. In an effort to reduce the risk of our portfolio
strategy and better align assets with liabilities, we have shifted our
strategy to one that is more liability driven, where cash flows from investments better match projected benefit payments but result in lower asset
returns. We intend to reduce the likelihood that assets will decline at a
time when liabilities increase (referred to as liability hedging), with the
goal to reduce the risk of underfunding to the plan and its participants
and beneficiaries. Both active and passive management approaches are
used depending on perceived market efficiencies and various other factors. Our diversification and risk control processes serve to minimize the
concentration of risk.
While target allocation percentages will vary over time, the company’s
overall investment strategy is to achieve a mix of assets, which allows
us to meet projected benefits payments while taking into consideration
risk and return. The current target allocation for plan assets is designed
so that 70% of the assets have the objective of achieving a return in
excess of the growth in liabilities (comprised of public equities, private
equities, real estate, hedge funds and emerging debt) and 30% of the
assets are invested as liability hedging assets (typically longer duration
fixed income). This allocation will shift as funded status improves to a
higher allocation to liability hedging assets. Target policies will be revisited periodically to ensure they are in line with fund objectives. Due to
our diversification and risks control processes, there are no significant
concentrations of risk, in terms of sector, industry, geography or company names.
Pension and healthcare and life plans assets do not include significant
amounts of Verizon common stock.
60
Pension Plans
The fair values for the pension plans by asset category at December 31,
2013 are as follows:
Cash and cash equivalents
Equity securities
Fixed income securities
U.S. Treasuries and agencies
Corporate bonds
International bonds
Other
Real estate
Other
Private equity
Hedge funds
Total
Total
$
968
4,200
Level 1
$
881
3,300
Level 2
$
87
900
Level 3
$
–
–
1,097
2,953
364
3
1,784
691
212
51
–
–
406
2,579
313
3
–
–
162
–
–
1,784
3,942
1,800
$ 17,111
–
–
$ 5,135
–
604
$ 4,892
3,942
1,196
$ 7,084
The fair values for the pension plans by asset category at December 31,
2012 are as follows:
(dollars in millions)
Asset Category
Cash and cash equivalents
Equity securities
Fixed income securities
U.S. Treasuries and agencies
Corporate bonds
International bonds
Other
Real estate
Other
Private equity
Hedge funds
Total
Total
$
1,618
2,944
Level 1
$
1,586
2,469
Level 2
$
32
475
Level 3
$
–
–
1,589
2,456
601
210
2,018
1,125
35
140
–
–
464
2,225
461
210
–
–
196
–
–
2,018
5,039
1,807
$ 18,282
–
–
5,355
–
1,249
5,116
5,039
558
7,811
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
The following is a reconciliation of the beginning and ending balance of pension plan assets that are measured at fair value using significant unobservable inputs:
(dollars in millions)
Corporate Bonds
Balance at January 1, 2012
Actual gain on plan assets
Purchases and sales
Transfers in
Balance at December 31, 2012
Actual gain on plan assets
Purchases and sales
Transfers in (out)
Balance at December 31, 2013
$
Real Estate
189
12
(14)
9
196
12
(13)
(33)
162
$
$
$
2,158
84
(224)
–
$ 2,018
81
(315)
–
$ 1,784
Health Care and Life Plans
The fair values for the other postretirement benefit plans by asset category at December 31, 2013 are as follows:
(dollars in millions)
Asset Category
Cash and cash equivalents
Equity securities
Fixed income securities
U.S. Treasuries and agencies
Corporate bonds
International bonds
Other
Total
Total
$
237
2,178
121
252
104
161
$ 3,053
Level 1
$
12
1,324
94
45
18
40
$ 1,533
Level 2
$
225
854
27
207
86
121
$ 1,520
Level 3
$
$
–
–
–
–
–
–
–
The fair values for the other postretirement benefit plans by asset category at December 31, 2012 are as follows:
(dollars in millions)
Asset Category
Cash and cash equivalents
Equity securities
Fixed income securities
U.S. Treasuries and agencies
Corporate bonds
International bonds
Other
Total
Total
$
$
291
1,753
118
192
189
114
2,657
Level 1
$
$
13
1,004
80
11
72
–
1,180
Level 2
$
$
278
749
38
181
117
114
1,477
Level 3
$
$
–
–
–
–
–
–
–
The following are general descriptions of asset categories, as well as the
valuation methodologies and inputs used to determine the fair value of
each major category of assets.
Cash and cash equivalents include short-term investment funds, primarily
in diversified portfolios of investment grade money market instruments
and are valued using quoted market prices or other valuation methods,
and thus are classified within Level 1 or Level 2.
Equity securities are investments in common stock of domestic and
international corporations in a variety of industry sectors, and are valued
primarily using quoted market prices or other valuation methods, and
thus are classified within Level 1 or Level 2.
Private Equity
$
6,055
146
(1,162)
–
$ 5,039
674
(1,732)
(39)
$ 3,942
Hedge Funds
$
662
43
(147)
–
$
558
84
(124)
678
$ 1,196
Total
$
9,064
285
(1,547)
9
$ 7,811
851
(2,184)
606
$ 7,084
Fixed income securities include U.S. Treasuries and agencies, debt obligations of foreign governments and domestic and foreign corporations.
Fixed income also includes investments in collateralized mortgage obligations, mortgage backed securities and interest rate swaps. The fair
value of fixed income securities is based on observable prices for identical or comparable assets, adjusted using benchmark curves, sector
grouping, matrix pricing, broker/dealer quotes and issuer spreads, and
thus is classified within Level 1 or Level 2.
Real estate investments include those in limited partnerships that invest
in various commercial and residential real estate projects both domestically and internationally. The fair values of real estate assets are typically
determined by using income and/or cost approaches or a comparable
sales approach, taking into consideration discount and capitalization
rates, financial conditions, local market conditions and the status of the
capital markets, and thus are classified within Level 3.
Private equity investments include those in limited partnerships that
invest in operating companies that are not publicly traded on a stock
exchange. Investment strategies in private equity include leveraged buyouts, venture capital, distressed investments and investments in natural
resources. These investments are valued using inputs such as trading
multiples of comparable public securities, merger and acquisition activity
and pricing data from the most recent equity financing taking into consideration illiquidity, and thus are classified within Level 3.
Hedge fund investments include those seeking to maximize absolute
returns using a broad range of strategies to enhance returns and provide
additional diversification. The fair values of hedge funds are estimated
using net asset value per share (NAV) of the investments. Verizon has the
ability to redeem these investments at NAV within the near term and
thus are classified within Level 2. Investments that cannot be redeemed
in the near term are classified within Level 3.
Cash Flows
In 2013, contributions to our qualified pension plans were not material.
Also in 2013, we contributed $0.1 billion to our nonqualified pension
plans and $1.4 billion to our other postretirement benefit plans. We anticipate approximately $1.2 billion in contributions to our qualified pension
plans, $0.2 billion to our nonqualified pension plans and $1.4 billion to
our other postretirement benefit plans in 2014.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Estimated Future Benefit Payments
The benefit payments to retirees are expected to be paid as follows:
(dollars in millions)
Year
2014
2015
2016
2017
2018
2019-2023
Pension Benefits
$
2,980
2,280
1,742
1,666
1,377
6,712
Health Care and Life
$
1,582
1,574
1,538
1,506
1,474
6,846
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, 2013, the
number of unallocated and allocated shares of common stock in this
ESOP was 163 thousand and 62 million, respectively. All leveraged ESOP
shares are included in earnings per share computations.
Total savings plan costs were $1.0 billion in 2013 and $0.7 billion in 2012
and 2011, respectively.
Pension Annuitization
On October 17, 2012, we, along with our subsidiary Verizon Investment
Management Corp., and Fiduciary Counselors Inc., as independent fiduciary of the Verizon Management Pension Plan (the Plan), entered into a
definitive purchase agreement with The Prudential Insurance Company
of America (Prudential) and Prudential Financial, Inc., pursuant to which
the Plan would purchase a single premium group annuity contract from
Prudential.
On December 10, 2012, upon issuance of the group annuity contract by
Prudential, Prudential irrevocably assumed the obligation to make future
annuity payments to approximately 41,000 Verizon management retirees
who began receiving pension payments from the Plan prior to January 1,
2010. The amount of each retiree’s annuity payment equals the amount
of such individual’s pension benefit. In addition, the group annuity contract is intended to replicate the same rights to future payments, such as
survivor benefits, that are currently offered by the Plan.
We contributed approximately $2.6 billion to the Plan between
September 1, 2012 and December 31, 2012 in connection with the transaction so that the Plan’s funding percentage would not decrease as a
result of the transaction.
62
Severance Benefits
The following table provides an analysis of our actuarially determined
severance liability recorded in accordance with the accounting standard
regarding employers’ accounting for postemployment benefits:
(dollars in millions)
Year
2011
2012
2013
Beginning
of Year
$
1,569
1,113
1,010
Charged to
Expense
$
32
396
134
Payments
$
(474)
(531)
(381)
Other
$
(14)
32
(6)
End of Year
$
1,113
1,010
757
Severance, Pension and Benefit (Credits) Charges
During 2013, we recorded net pre-tax severance, pension and benefits
credits of approximately $6.2 billion primarily for our pension and postretirement plans in accordance with our accounting policy to recognize
actuarial gains and losses in the year in which they occur. The credits were
primarily driven by an increase in our discount rate assumption used to
determine the current year liabilities from a weighted-average of 4.2%
at December 31, 2012 to a weighted-average of 5.0% at December 31,
2013 ($4.3 billion), lower than assumed retiree medical costs and other
assumption adjustments ($1.4 billion) and the difference between our
estimated return on assets of 7.5% at December 31, 2012 and our actual
return on assets of 8.6% at December 31, 2013 ($0.5 billion).
During 2012, we recorded net pre-tax severance, pension and benefits
charges of approximately $7.2 billion primarily for our pension and postretirement plans in accordance with our accounting policy to recognize
actuarial gains and losses in the year in which they occur. The charges
were primarily driven by a decrease in our discount rate assumption used
to determine the current year liabilities from a weighted-average of 5% at
December 31, 2011 to a weighted-average of 4.2% at December 31, 2012
($5.3 billion) and revisions to the retirement assumptions for participants
and other assumption adjustments, partially offset by the difference
between our estimated return on assets of 7.5% and our actual return
on assets of 10% ($0.7 billion). As part of this charge, we also recorded
$1.0 billion related to the annuitization of pension liabilities, as described
above, as well as severance charges of $0.4 billion primarily for approximately 4,000 management employees.
During 2011, we recorded net pre-tax severance, pension and benefits
charges of approximately $6.0 billion for our pension and postretirement
plans in accordance with our accounting policy to recognize actuarial
gains and losses in the year in which they occur. The charges were primarily driven by a decrease in our discount rate assumption used to
determine the current year liabilities from 5.75% at December 31, 2010 to
5% at December 31, 2011 ($5.0 billion); the difference between our estimated return on assets of 8% and our actual return on assets of 5% ($0.9
billion); and revisions to the life expectancy of participants and other
adjustments to assumptions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 12
TAXES
The components of income before (provision) benefit for income taxes
are as follows:
(dollars in millions)
2013
Years Ended December 31,
Domestic
Foreign
Total
$ 28,833
444
$ 29,277
2012
$
$
9,316
581
9,897
2011
$
9,724
759
$ 10,483
The components of the provision (benefit) for income taxes are as follows:
(dollars in millions)
2013
Years Ended December 31,
Current
Federal
Foreign
State and Local
Total
Deferred
Federal
Foreign
State and Local
Total
Total income tax provision (benefit)
$
(197)
(59)
201
(55)
5,060
8
717
5,785
$ 5,730
2012
$
$
223
(45)
114
292
(559)
10
(403)
(952)
(660)
2011
$
$
193
25
290
508
270
(38)
(455)
(223)
285
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 rate, net of
federal tax benefits
Affordable housing credit
Employee benefits including ESOP
dividend
Equity in earnings from unconsolidated
businesses
Noncontrolling interests
Other, net
Effective income tax rate
2013
2012
2011
35.0 %
35.0 %
35.0 %
2.1
(0.6)
(1.9)
(1.9)
(1.0)
(1.8)
(0.4)
(1.1)
(1.4)
(0.3)
(14.3)
(1.9)
19.6 %
(1.4)
(33.7)
(1.7)
(6.7) %
(1.9)
(23.0)
(3.2)
2.7 %
The effective income tax rate for 2013 was 19.6% compared to (6.7)%
for 2012. The increase in the effective income tax rate and provision for
income taxes was primarily due to higher income before income taxes
as a result of severance, pension and benefit credits recorded during
2013 compared to lower income before income taxes as a result of severance, pension and benefit charges as well as early debt redemption costs
recorded during 2012.
The effective income tax rate for 2012 was (6.7)% compared to 2.7% for
2011. The negative effective income tax rate for 2012 and the decrease
in the provision for income taxes during 2012 compared to 2011 was
primarily due to lower income before income taxes as a result of higher
severance, pension and benefit charges as well as early debt redemption
costs recorded during 2012.
The amounts of cash taxes paid are as follows:
(dollars in millions)
2013
Years Ended December 31,
Income taxes, net of amounts refunded
Employment taxes
Property and other taxes
Total
$
422
1,282
2,082
$ 3,786
2012
$
$
351
1,308
1,727
3,386
2011
$
$
762
1,328
1,883
3,973
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Deferred taxes arise because of differences in the book and tax bases
of certain assets and liabilities. Significant components of deferred tax
assets and liabilities are as follows:
Unrecognized Tax Benefits
A reconciliation of the beginning and ending balance of unrecognized
tax benefits is as follows:
(dollars in millions)
(dollars in millions)
At December 31,
2013
2012
Valuation allowances
Deferred tax assets
$ 10,242
2,747
213
959
14,161
(1,596)
12,565
$ 13,644
4,819
206
1,050
19,719
(2,041)
17,678
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
1,121
14,030
997
23,032
1,470
40,650
$ 28,085
1,275
13,953
1,208
22,171
1,320
39,927
$ 22,249
Employee benefits
Tax loss and credit carry forwards
Uncollectible accounts receivable
Other – assets
At December 31, 2013, undistributed earnings of our foreign subsidiaries
indefinitely invested outside the U.S. amounted to approximately $2.1
billion. The majority of Verizon's cash flow is generated from domestic
operations and we are not dependent on foreign cash or earnings to
meet our funding requirements, nor do we intend to repatriate these
undistributed foreign earnings to fund U.S. operations. Furthermore, a
portion of these undistributed earnings represent amounts that legally
must be kept in reserve in accordance with certain foreign jurisdictional
requirements and are unavailable for distribution or repatriation. As a
result, we have not provided U.S. deferred taxes on these undistributed
earnings because we intend that they will remain indefinitely reinvested
outside of the U.S. and therefore unavailable for use in funding U.S. operations. Determination of the amount of unrecognized deferred taxes
related to these undistributed earnings is not practicable.
At December 31, 2013, we had net after-tax loss and credit carry forwards
for income tax purposes of approximately $2.7 billion. Of these net aftertax loss and credit carry forwards, approximately $2.1 billion will expire
between 2014 and 2033 and approximately $0.6 billion may be carried
forward indefinitely. The amount of net after-tax loss and credit carry
forwards reflected as a deferred tax asset above has been reduced by
approximately $0.1 billion at December 31, 2012 due to federal and state
tax law limitations on utilization of net operating losses.
During 2013, the valuation allowance decreased approximately $0.4 billion. The balance of the valuation allowance at December 31, 2013 and
the 2013 activity is primarily related to state and foreign tax losses and
credit carry forwards.
64
2013
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,
$ 2,943
116
250
(801)
(210)
(168)
$ 2,130
2012
$
3,078
$
131
92
(415)
100
(43)
2,943
2011
$
3,242
$
111
456
(644)
(56)
(31)
3,078
Included in the total unrecognized tax benefits at December 31, 2013,
2012 and 2011 is $1.4 billion, $2.1 billion and $2.2 billion, respectively,
that if recognized, would favorably affect the effective income tax rate.
We recognized the following net after-tax benefits related to interest and
penalties in the provision for income taxes:
Years Ended December 31,
2013
2012
2011
(dollars in millions)
$
33
82
60
The after-tax accruals for the payment of interest and penalties in the
consolidated balance sheets are as follows:
At December 31,
2013
2012
(dollars in millions)
$
274
386
The decrease in unrecognized tax benefits was primarily due to the resolution of issues with the Internal Revenue Services (IRS) involving tax
years 2004 through 2006, as well as the resolution of tax controversies in
Canada and Italy.
Verizon and/or its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and various state, local and foreign jurisdictions. As a large
taxpayer, we are under audit by the IRS and multiple state and foreign
jurisdictions for various open tax years. The IRS is currently examining the
Company’s U.S. income tax returns for tax years 2007-2009 and Cellco
Partnership’s U.S. income tax returns for tax years 2010-2011. Significant
tax examinations and litigation are ongoing in New York City for tax years
as early as 2000. The amount of the liability for unrecognized tax benefits will change in the next twelve months due to the expiration of the
statute of limitations in various jurisdictions and it is reasonably possible
that various current tax examinations will conclude or require reevaluations of the Company’s tax positions during this period. An estimate of
the range of the possible change cannot be made until these tax matters
are further developed or resolved.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 13
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 measure and evaluate our reportable segments based on segment operating
income, consistent with the chief operating decision maker’s 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, pension and other employee benefit related costs, lease
financing, as well as other adjustments and gains and losses that are not
allocated in assessing segment performance due to their 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 as these items are included in the chief operating decision maker’s
assessment of segment performance.
We have adjusted prior period consolidated and segment information,
where applicable, to conform to current year presentation.
Our segments and their principal activities consist of the following:
Segment
Description
Wireless
Wireless’ communications products and services include wireless voice and data services and equipment sales, which are
provided to consumer, business and government customers
across the United States.
Wireline
Wireline’s voice, data and video communications products and
enhanced services include broadband video and data, corporate networking solutions, data center and cloud services,
security and managed network services and local and long
distance voice services. We provide these products and services to consumers in the United States, as well as to carriers,
businesses and government customers both in the United
States and in over 150 other countries around the world.
The reconciliation of segment operating revenues and expenses to consolidated operating revenues and expenses below also includes 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.
The following table provides operating financial information for our two reportable segments:
(dollars in millions)
2013
External Operating Revenues
Retail service
Other service
Service revenue
Wireless
$
66,282
2,691
68,973
Wireline
$
–
–
–
Total Segments
$
66,282
2,691
68,973
8,096
3,851
–
–
8,096
3,851
Consumer retail
Small business
Mass Markets
–
–
–
14,737
2,587
17,324
14,737
2,587
17,324
Strategic services
Core
Global Enterprise
–
–
–
8,410
6,267
14,677
8,410
6,267
14,677
Global Wholesale
Other
Intersegment revenues
Total operating revenues
–
–
103
81,023
5,703
456
1,063
39,223
5,703
456
1,166
120,246
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total operating expenses
Operating income
$
23,648
23,176
8,202
55,026
25,997
21,928
8,595
8,327
38,850
373
$
45,576
31,771
16,529
93,876
26,370
Assets
Plant, property and equipment, net
Capital expenditures
$ 146,429
35,932
9,425
84,573
51,885
6,229
$ 231,002
87,817
15,654
Equipment
Other
$
$
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(dollars in millions)
2012
External Operating Revenues
Retail service
Other service
Service revenue
Wireless
$
Equipment
Other
61,383
2,290
63,673
Wireline
$
–
–
–
Total Segments
$
61,383
2,290
63,673
8,010
4,096
–
–
8,010
4,096
Consumer retail
Small business
Mass Markets
–
–
–
14,043
2,648
16,691
14,043
2,648
16,691
Strategic services
Core
Global Enterprise
–
–
–
8,052
7,240
15,292
8,052
7,240
15,292
Global Wholesale
Other
Intersegment revenues
Total operating revenues
–
–
89
75,868
6,177
508
1,112
39,780
6,177
508
1,201
115,648
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total operating expenses
Operating income
24,490
21,650
7,960
54,100
21,768
22,413
8,883
8,424
39,720
60
46,903
30,533
16,384
93,820
21,828
Assets
Plant, property and equipment, net
Capital expenditures
$
$
142,485
34,545
8,857
$
$
84,815
52,911
6,342
$
$
227,300
87,456
15,199
(dollars in millions)
2011
External Operating Revenues
Retail service
Other service
Service revenue
Wireless
$
Equipment
Other
56,601
2,497
59,098
Wireline
$
–
–
–
Total Segments
$
56,601
2,497
59,098
7,446
3,517
–
–
7,446
3,517
Consumer retail
Small business
Mass Markets
–
–
–
13,605
2,720
16,325
13,605
2,720
16,325
Strategic services
Core
Global Enterprise
–
–
–
7,607
8,014
15,621
7,607
8,014
15,621
Global Wholesale
Other
Intersegment revenues
Total operating revenues
–
–
93
70,154
6,795
704
1,237
40,682
6,795
704
1,330
110,836
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total operating expenses
Operating income
24,086
19,579
7,962
51,627
18,527
22,158
9,107
8,458
39,723
959
46,244
28,686
16,420
91,350
19,486
Assets
Plant, property and equipment, net
Capital expenditures
66
$
$
147,378
33,451
8,973
$
$
86,185
54,149
6,399
$
$
233,563
87,600
15,372
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Reconciliation to Consolidated Financial Information
A reconciliation of the segment operating revenues to consolidated operating revenues is as follows:
(dollars in millions)
2013
Years Ended December 31,
Operating Revenues
Total reportable segments
Reconciling items:
Corporate, eliminations and other
Consolidated operating revenues
2012
2011
$ 120,246
$
115,648
$
110,836
304
$ 120,550
$
198
115,846
$
39
110,875
A reconciliation of the total of the reportable segments' operating income to consolidated Income before (provision) benefit for income taxes is as follows:
(dollars in millions)
2013
Years Ended December 31,
Operating Income
Total segment operating income
Severance, pension and benefit credits (charges) (Note 11)
Gain on spectrum license transaction (Note 2)
Litigation settlements (Note 16)
Other costs (Note 8)
Corporate, eliminations and other
Consolidated operating income
Equity in earnings of unconsolidated businesses
Other income and (expense), net
Interest expense
Income Before (Provision) Benefit for Income Taxes
$
$
26,370
6,232
278
–
–
(912)
31,968
142
(166)
(2,667)
29,277
2012
$
$
21,828
(7,186)
–
(384)
(276)
(822)
13,160
324
(1,016)
(2,571)
9,897
2011
$
$
19,486
(5,954)
–
–
–
(652)
12,880
444
(14)
(2,827)
10,483
A reconciliation of the total of the reportable segments' assets to consolidated assets is as follows:
(dollars in millions)
At December 31,
Assets
Total reportable segments
Corporate, eliminations and other
Total consolidated
2013
$ 231,002
43,096
$ 274,098
2012
$
$
227,300
(2,078)
225,222
Corporate, eliminations and other at December 31, 2013 is primarily comprised of cash and cash equivalents which were used to complete the
Wireless Transaction on February 21, 2014.
We generally account for intersegment sales of products and services and asset transfers at current market prices. No single customer accounted for
more than 10% of our total operating revenues during the years ended December 31, 2013, 2012 and 2011. International operating revenues and
long-lived assets are not significant.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 14
COMPREHENSIVE INCOME
Comprehensive income consists of net income and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income.
Significant changes in the components of Other comprehensive income, net of provision for income taxes are described below.
Accumulated Other Comprehensive Income
The changes in the balances of Accumulated other comprehensive income by component are as follows:
(dollars in millions)
Balance at January 1, 2013
Other comprehensive income
Amounts reclassified to net income
Net other comprehensive income
Balance at December 31, 2013
Foreign
currency
translation
adjustments
$
$
793
60
–
60
853
Unrealized
gain on cash
flow hedges
$
$
The amounts presented above in net other comprehensive income
are net of taxes and noncontrolling interests, which are not significant.
For the year ended December 31, 2013, the amounts reclassified to net
income related to defined benefit pension and postretirement plans in
the table above are included in Cost of services and sales and Selling,
general and administrative expense on our consolidated statements of
income. For the year ended December 31, 2013, all other amounts reclassified to net income in the table above are included in Other income, net
on our consolidated statements of income.
Foreign Currency Translation Adjustments
The change in Foreign currency translation adjustments during 2013,
2012 and 2011 was primarily related to our investment in Vodafone
Omnitel N.V. and was primarily driven by the movements of the U.S.
dollar against the Euro.
Net Unrealized Gains (Losses) on Cash Flow Hedges
During 2013, 2012 and 2011, Unrealized gains (losses) on cash flow
hedges included in Other comprehensive income (loss) attributable to
noncontrolling interests, primarily reflect activity related to a cross currency swap (see Note 9). Reclassification adjustments for gains (losses)
realized in net income were not significant.
68
88
50
(25)
25
113
Unrealized
gain on
marketable
securities
$
$
101
33
(17)
16
117
Defined benefit
pension and
postretirement
plans
$
1,253
–
22
22
$ 1,275
Total
$
2,235
143
(20)
123
$ 2,358
Net Unrealized Gains (Losses) on Marketable Securities
During 2013, 2012 and 2011, reclassification adjustments on marketable
securities for gains (losses) realized in net income were not significant.
Defined Benefit Pension and Postretirement Plans
The change in Defined benefit pension and postretirement plans at
December 31, 2013 was not significant.
The change in Defined benefit pension and postretirement plans of $0.9
billion, net of taxes of $0.6 billion at December 31, 2012 was primarily a
result of plan amendments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 15
ADDITIONAL FINANCIAL INFORMATION
The tables that follow provide additional financial information related to our consolidated financial statements:
Income Statement Information
(dollars in millions)
2013
Years Ended December 31,
Depreciation expense
Interest costs on debt balances
Capitalized interest costs
Advertising expense
$
15,019
3,421
(754)
2,438
2012
$
14,920
2,977
(406)
2,381
Balance Sheet Information
$
14,991
3,269
(442)
2,523
(dollars in millions)
2013
At December 31,
Accounts Payable and Accrued Liabilities
Accounts payable
Accrued expenses
Accrued vacation, salaries and wages
Interest payable
Taxes payable
$
$
Other Current Liabilities
Advance billings and customer deposits
Dividends payable
Other
$
$
2012
4,954
3,954
4,790
1,199
1,556
16,453
$
2,829
1,539
2,296
6,664
$
Cash Flow Information
$
$
4,454
4,529
5,006
632
1,561
16,182
3,554
1,494
1,357
6,405
(dollars in millions)
2013
Years Ended December 31,
Cash Paid
Interest, net of amounts capitalized
2011
$
2,122
2012
$
1,971
2011
$
2,629
Common stock has been used from time to time to satisfy some of the funding requirements of employee and shareowner plans, including 24.6 million common shares issued from Treasury stock during 2012, related to dividend payments, which had an aggregate value of $1.0 billion.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 16
COMMITMENTS AND CONTINGENCIES
In the ordinary course of business Verizon is involved in various commercial litigation and regulatory proceedings at the state and federal level.
Where it is determined, in consultation with counsel based on litigation
and settlement risks, that a loss is probable and estimable in a given
matter, the Company establishes an accrual. In none of the currently
pending matters is the amount of accrual material. An estimate of the
reasonably possible loss or range of loss in excess of the amounts already
accrued cannot be made at this time due to various factors typical in
contested proceedings, including (1) uncertain damage theories and
demands; (2) a less than complete factual record; (3) uncertainty concerning legal theories and their resolution by courts or regulators; and
(4) the unpredictable nature of the opposing party and its demands.
We continuously monitor these proceedings as they develop and adjust
any accrual or disclosure as needed. We do not expect that the ultimate
resolution of any pending regulatory or legal matter 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.
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 made based upon actual conditions discovered
during the remediation at this or any other site requiring remediation.
Verizon is currently involved in approximately 50 federal district court
actions alleging that Verizon is infringing various patents. Most of these
cases are brought by non-practicing entities and effectively seek only
monetary damages; a small number are brought by companies that sell
products and seek injunctive relief as well. These cases have progressed
to various degrees and a small number may go to trial in the coming 12
months if they are not otherwise resolved. In the third quarter of 2012,
we settled a number of patent litigation matters, including cases with
ActiveVideo Networks Inc. (ActiveVideo) and TiVo Inc. (TiVo). In connection with the settlements with ActiveVideo and TiVo, we recorded a
charge of $0.4 billion in the third quarter of 2012 and will pay and recognize over the following six years an additional $0.2 billion.
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. From time to time, counterparties may make
claims under these provisions, and Verizon will seek to defend against
those claims and resolve them in the ordinary course of business.
70
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 as a variety of the potential outcomes available under the
guarantee result in costs and revenues or benefits that may offset each
other. We do not believe performance under the guarantee is likely.
As of December 31, 2013, letters of credit totaling approximately $0.1 billion, which were executed in the normal course of business and support
several financing arrangements and payment obligations to third parties,
were outstanding.
We have several commitments primarily to purchase handsets and
peripherals, equipment, software, programming and network services,
and marketing activities, which will be used or sold in the ordinary course
of business, from a variety of suppliers totaling $33.4 billion. Of this total
amount, $19.7 billion is attributable to 2014, $8.8 billion is attributable to
2015 through 2016, $4.1 billion is attributable to 2017 through 2018 and
$0.8 billion is attributable to years thereafter. These amounts do not represent our entire anticipated purchases in the future, but represent only
those items that are the subject of contractual obligations. Our commitments are generally determined based on the noncancelable quantities
or termination amounts. Purchases against our commitments for 2013
totaled approximately $16 billion. Since the commitments to purchase
programming services from television networks and broadcast stations
have no minimum volume requirement, we estimated our obligation
based on number of subscribers at December 31, 2013, and applicable
rates stipulated in the contracts in effect at that time. We also purchase
products and services as needed with no firm commitment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 17
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(dollars in millions, except per share amounts)
Net Income (Loss) attributable to Verizon(1)
Per SharePer ShareAmount
Basic
Diluted
Quarter Ended
Operating
Revenues
Operating
Income (Loss)
2013
March 31
June 30
September 30
December 31
$ 29,420
29,786
30,279
31,065
$ 6,222
6,555
7,128
12,063
$ 1,952
2,246
2,232
5,067
$
.68
.78
.78
1.77
$
.68
.78
.78
1.76
$ 4,855
5,198
5,578
7,916
2012
March 31
June 30
September 30
December 31
$ 28,242
28,552
29,007
30,045
$
$
$
.59
.64
.56
(1.48)
$
.59
.64
.56
(1.48)
$
5,195
5,651
5,483
(3,169)
1,686
1,825
1,593
(4,229)
Net Income
(Loss)
3,906
4,285
4,292
(1,926)
• Resultsofoperationsforthesecondquarterof2013includeafter-taxcreditsattributabletoVerizonof$0.1billionrelatedtoapensionremeasurement.
• Resultsofoperationsforthethirdquarterof2013includeimmaterialafter-taxcreditsattributabletoVerizonrelatedtoagainonaspectrumlicensetransaction,aswellasimmaterialafter-tax
costs attributable to Verizon related to the Wireless Transaction.
• Resultsofoperationsforthefourthquarterof2013includeafter-taxcreditsattributabletoVerizonof$3.7billionrelatedtoseverance,pensionandbenefitcredits,aswellasafter-taxcosts
attributable to Verizon of $0.5 billion related to the Wireless Transaction.
• Resultsofoperationsforthethirdquarterof2012includeafter-taxchargesattributabletoVerizonof$0.2billionrelatedtolegalsettlements.
• Resultsofoperationsforthefourthquarterof2012includeafter-taxchargesattributabletoVerizonof$5.3billionrelatedtoseverance,pensionandbenefitchargesandearlydebtredemption
and other costs.
(1) Net income (loss) attributable to Verizon 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
Shellye L. Archambeau*
Chief Executive Officer
MetricStream, Inc.
Richard L. Carrión
Chairman, President and Chief Executive Officer
Popular, Inc.
and Chairman, President and Chief Executive Officer
Banco Popular de Puerto Rico
Melanie L. Healey
Group President – North America and Global Hyper-Market,
Super-Market and Mass Channel
The Procter & Gamble Company
M. Frances Keeth
Retired Executive Vice President
Royal Dutch Shell plc
Robert W. Lane
Retired Chairman and Chief Executive Officer
Deere & Company
Lowell C. McAdam
Chairman and Chief Executive Officer
Verizon Communications Inc.
Sandra O. Moose**
President
Strategic Advisory Services LLC
Joseph Neubauer**
Chairman
ARAMARK Holdings Corporation
Donald T. Nicolaisen
Former Chief Accountant
United States Securities and Exchange Commission
Clarence Otis, Jr.
Chairman and Chief Executive Officer
Darden Restaurants, Inc.
Hugh B. Price**
Non-Resident Senior Fellow
The Brookings Institution
Rodney E. Slater
Partner
Patton Boggs LLP
Kathryn A. Tesija
Executive Vice President, Merchandising and
Supply Chain
Target Corporation
Gregory D. Wasson
President and Chief Executive Officer
Walgreen Co.
* Shellye L. Archambeau was elected to the Board
in 2013.
** Sandra O. Moose, Joseph Neubauer and Hugh B. Price
will retire from the Board in April 2014.
72
CORPORATE OFFICERS AND
EXECUTIVE LEADERSHIP
Lowell C. McAdam
Chairman and Chief Executive Officer
Francis J. Shammo
Executive Vice President and
Chief Financial Officer
Roy H. Chestnutt
Executive Vice President –
Strategy, Development and Planning
Nancy B. Clark
Senior Vice President – Operational Excellence
Matthew D. Ellis
Senior Vice President and Treasurer
Roger Gurnani
Executive Vice President and
Chief Information Officer
William L. Horton, Jr.
Senior Vice President, Deputy General Counsel and
Corporate Secretary
Rose Stuckey Kirk
President – Verizon Foundation
Daniel S. Mead
Executive Vice President and
President and Chief Executive Officer –
Verizon Wireless
Anthony J. Melone
Executive Vice President and
Chief Technology Officer
Randal S. Milch
Executive Vice President – Public Policy and
General Counsel
W. Robert Mudge
President –
Consumer and Mass Business Markets
Marc C. Reed
Executive Vice President and
Chief Administrative Officer
Shane A. Sanders
Senior Vice President – Internal Auditing
Anthony T. Skiadas
Senior Vice President and Controller
Michael T. Stefanski
Senior Vice President – Investor Relations
John G. Stratton
Executive Vice President and President –
Verizon Enterprise Solutions
Marni M. Walden
Executive Vice President and President –
Product and New Business Innovation
V E R I ZO N CO M M U N I C AT I O N S I N C . 2 0 1 3 A N N UA L R E P O R T
Investor Information
Stock Transfer Agent
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 Inc.
c/o Computershare
P.O. Box 43078
Providence, RI 02940-3078
Phone: 800 631-2355
781 575-3994 — outside the U.S.
Website: www.computershare.com/verizon
Email: [email protected]
Persons using a telecommunications device for the deaf (TDD) may call:
800 952-9245
Shareowner Services
Please contact our Transfer Agent regarding information on the
following services:
Online Account Access — Registered shareowners can view account
information online at: www.computershare.com/verizon
Click on “Create Login” to register. For existing users, click on “Login.”
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.
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. For more
information, go to www22.verizon.com/investor/directinvest
Electronic Delivery — 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. If your shares are held by a broker, bank
or other nominee, you may elect to receive an electronic copy of the
annual report and proxy materials online at www.proxyvote.com, or you
can contact your broker.
Corporate Sponsored Nominee
If you hold shares of Verizon stock in the form of CDIs through the
Verizon Corporate Sponsored Nominee (applicable only to shareholders
in the UK, Ireland and other permitted jurisdictions in Europe), questions
or requests for assistance should be directed to Computershare
Company Nominee Limited at:
Verizon Communications Inc.
c/o Computershare
The Pavilions
Bridgwater Road
Bristol
BS99 6ZZ
Phone: +44 (0)870 707 1739 (UK & Overseas)
+00 353 1 696 8421 (Ireland)
Website: www.investorcentre.co.uk
Investor Services
Investor Website — Get company information and news on our
investor website — www.verizon.com/investor
Email Alerts — Get the latest investor information delivered directly to
you. Subscribe to Email alerts at our investor website.
Stock Market Information
Shareowners of record at December 31, 2013: 585,931
Verizon (ticker symbol: VZ) is listed on the New York Stock Exchange
(NYSE) and the NASDAQ Global Select Market (NASDAQ). Verizon
also maintains a standard listing on the London Stock Exchange.
Dividend Information
At its September 2013 meeting, the Board of Directors increased
our quarterly dividend 2.9 percent. On an annual basis, this increased
Verizon’s dividend to $2.12 per share. Dividends have been paid
since 1984.
Form 10-K
To receive a printed copy of the 2013 Annual Report on Form 10-K,
which is filed with the Securities and Exchange Commission, please
contact Investor Relations:
Verizon Communications Inc.
Investor Relations
One Verizon Way
Basking Ridge, NJ 07920
Phone: 212 395-1525
Corporate Governance Statement
Verizon is subject to the corporate governance standards of the
NYSE and NASDAQ, which are available on their respective websites.
In addition, Verizon has adopted its own corporate governance
framework. Information relating to Verizon's corporate governance
framework, including Verizon's Code of Conduct, Corporate Governance
Guidelines and the charters of the Committees of its Board of Directors,
can be found on Verizon's website at: www.verizon.com/investor/
corporategovernance. Verizon believes it is in compliance with the
applicable corporate governance requirements in the United States,
including under Delaware law, the corporate governance standards of
the NYSE and NASDAQ, and U.S. federal securities laws.
If you would like to receive a printed copy of Verizon’s Corporate
Governance Guidelines, please contact the Assistant Corporate
Secretary:
Verizon Communications Inc.
Assistant Corporate Secretary
140 West Street, 6th Floor
New York, New York 10007
Printed with
inks containing
soy and/or
vegetable oils
Verizon Communications Inc.
140 West Street
New York, New York 10007
212 395-1000
verizon.com
©2014.Verizon.AllRightsReserved.
002CSN34DE
3.EPCP74448125.100.
Was this manual useful for you? yes no
Thank you for your participation!

* Your assessment is very important for improving the work of artificial intelligence, which forms the content of this project

Download PDF

advertisement