EXHIBIT 10s
Verizon
Executive Life Insurance Plan
As Amended and Restated
September 2009
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Page
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1. INTRODUCTION
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1
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2. PURPOSE
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3. DEFINITIONS
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3.1 Actively-at-Work
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1
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3.2 Actuarial Assumptions
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3.3 Annual Compensation
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1
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3.4 Company
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1
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3.5 Downgrade
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2
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3.6 Employee
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2
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3.7 EMP
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2
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3.8 ERLIP
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2
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3.9 Estimated Cost of Current Life Insurance Coverage
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2
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3.10 Executive
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2
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3.11 MetLife
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2
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3.12 NYNEX Participant
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2
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3.13 Original VELIP
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2
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3.14 Participant
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2
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3.15 Plan
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2
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3.16 Plan Administrator
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2
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3.17 Plan Maturity Date
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2
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3.18 Policy
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2
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3.19 Premium Bonus
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2
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3.20 Program Administrator
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2
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3.21 Retire or Retirement
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2
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3.22 Retirement-Eligible
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2
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3.23 Senior Manager
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2
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3.24 SLIP
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2
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3.25 VELIP
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2
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3.26 Verizon
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3
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3.27 Voluntary Premium Contribution
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3
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4. ELIGIBILITY AND ENROLLMENT
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3
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4.1 Eligibility Requirements
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3
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4.2 Enrollment Procedure
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3
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-i-
Table of Contents
(continued)
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Page
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4.3 Effective Date of Coverage
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3
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4.4 Group Life Insurance
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3
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4.5 Dependents’ Coverage
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4
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5. LIFE INSURANCE POLICY RIGHTS
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4
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5.1 Ownership
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4
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5.2 Beneficiary Designation
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4
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5.3 Cash Value Account
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4
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5.4 Premium Payment Procedure
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4
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6. AMOUNT OF COVERAGE WHILE EMPLOYED
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5
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6.1 Coverage Formula
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5
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6.2 Annual Compensation
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5
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6.3 Evidence of Insurability
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5
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6.4 Special Rule for NYNEX SLIP
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5
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7. TARGET AMOUNT OF COVERAGE AFTER RETIREMENT
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6
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7.1 Target Amount of Post-Retirement Coverage
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6
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7.2 Retirement Prior to Plan Maturity Date
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6
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7.3 Plan Maturity Date
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7
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8. PLAN BENEFITS
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8
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8.1 Determination of Annual Premiums
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8
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8.2 Cost Sharing and Premium Bonus
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8
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8.3 Voluntary Premium Contributions
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8
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9. TERMINATION OF PARTICIPATION
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9
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9.1 Length of Cost Sharing and Plan Participation
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9
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9.2 Participation at Retirement
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9
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9.3 Borrowing or Withdrawing Cash Value
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10
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9.4 Leave of Absence
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11
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9.5 Disability
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11
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9.6 Termination of Employment Prior to Retirement-Eligibility
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12
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9.7 Downgrade
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12
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9.8 Rehire
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12
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Table of Contents
(continued)
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Page
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10. PLAN AMENDMENTS AND TERMINATION
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12
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11. ADMINISTRATION
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13
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11.1 Administration
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13
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11.2 Claims
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13
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11.3 Liability
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13
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12. MISCELLANEOUS
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14
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12.1 Benefit Statements
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14
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12.2 Notices
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14
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12.3 Validity
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14
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12.4 Governing Documents
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14
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12.5 Applicable Law
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14
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-iii-
VERIZON EXECUTIVE LIFE INSURANCE PLAN
The Verizon
Executive Life Insurance Plan (“VELIP”) is a successor to the NYNEX Supplemental Life Insurance Plan (“SLIP”), the Bell Atlantic Estate Management Plan (“EMP”), and Verizon’s original Executive Life Insurance Plan
(“Original VELIP”). These predecessor arrangements all were financed using an employee-contributory collateral-assignment split dollar approach. In addition, GTE’s Executive Retirement Life Insurance Plan (“ERLIP”) was
incorporated into VELIP. In December 2003 the contributory collateral assignment split dollar approach was replaced by an employee-contributory, bonus-premium approach with a “gross-up” for taxes, resulting in this Plan. In 2009, the VELIP
was amended to eliminate the tax “gross-up” feature for all active employee participants and for all retired participants whose date of separation from service is after December 31, 2009. In addition to changing the funding method,
the funding schedule applicable to the policies issued in connection with the former NYNEX SLIP was changed. For all NYNEX SLIP policies, the schedule of fixed premiums was terminated, and a “dynamic funding” method (already used by
Verizon for the other predecessor arrangements) was adopted. Under the “dynamic funding” approach the Plan compares actual policy performance to certain actuarial assumptions to adjust the policy premiums each year so as to guide the
policy cash value to the value estimated to be required to provide a prescribed amount of paid-up post-retirement life insurance coverage.
The purposes of
VELIP are to (i) provide participants with life insurance coverage while they are employed by Verizon, and (ii) help participants build policy cash value to allow them to enjoy continued life insurance coverage on a paid-up basis after
they retire. To accomplish these goals, the participants purchase an individually-owned universal life insurance policy underwritten by the Metropolitan Life Insurance Company (MetLife). Specifically, Verizon will annually pay to a participant a
“Premium Bonus” designed to (i) pay a portion of the cost of the current life insurance coverage (in an amount determined by formula), plus (ii) add to the cash value an actuarially determined amount, which if contributed on a
level basis to a Plan Maturity Date, is estimated to be sufficient to provide a level of paid-up insurance at retirement (in an amount determined by formula).
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3.1
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Actively-at-Work — has the meaning set forth in Section 4.1.
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3.2
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Actuarial Assumptions — are set forth in Appendix A.
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3.3
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Annual Compensation — has the meaning set forth in Section 5.2.
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3.4
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Company — means Verizon.
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3.5
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Downgrade — has the meaning described in Section 9.8
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3.6
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Employee — means a common law employee of Verizon.
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3.7
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EMP — means the Bell Atlantic EMP, as defined in the Introduction.
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3.8
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ERLIP — means the GTE ERLIP, as defined in the Introduction.
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3.9
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Estimated Cost of Current Life Insurance Coverage — has the meaning set forth in Section 8.2.
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3.10
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Executive — means an Employee who is a Senior Manager.
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3.11
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MetLife — means the Metropolitan Life Insurance Company.
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3.12
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NYNEX Participant — has the meaning set forth in Section 6.1.
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3.13
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Original VELIP — means the original Verizon VELIP, as defined in the Introduction.
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3.14
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Participant — means an Executive for whom a Policy has been purchased and who is entitled to receive a Premium Bonus.
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3.15
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Plan — means the VELIP.
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3.16
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Plan Administrator — means Verizon.
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3.17
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Plan Maturity Date — has the meaning set forth in Section 7.3.
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3.18
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Policy — means the MetLife universal life insurance policy issued on the life of the Participant in connection with this Plan.
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3.19
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Premium Bonus — has the meaning set forth in Section 8.2.
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3.20
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Program Administrator — means the third party administrator appointed by the Plan Administrator to manage the day-to-day operations of the Plan.
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3.21
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Retire or Retirement — has the meaning set forth in Section 9.2.
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3.22
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Retirement-Eligible — has the meaning set forth in Section 9.2.
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3.23
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Senior Manager — Career Band 4 or higher
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3.24
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SLIP — means the NYNEX SLIP, as defined in the Introduction.
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3.25
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VELIP — means the Verizon Executive Life Insurance Plan, as set forth in this plan document, as amended from time to time.
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3.26
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Verizon — means Verizon Communications Inc. and its controlled subsidiaries.
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3.27
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Voluntary Premium Contribution — has the meaning set forth in Section 8.3.
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4.
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ELIGIBILITY AND ENROLLMENT
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4.1
Eligibility Requirements
. To be eligible to participate in the Plan, an employee must: (i) be
actively employed by Verizon in a Senior Manager position; and (ii) satisfy MetLife’s “Actively-at-Work” requirement. Generally, Actively-at-Work means that the Executive cannot have been absent from work due to illness or
medical treatment for a period of more than five (5) consecutive working days in the three (3) months preceding completion of the application for the Policy. If an Executive does not meet the “Actively-at-Work” requirement when
they are first eligible to participate in the Plan, they may apply for coverage as soon as they meet the requirement. Participation is contingent on the employee continuing to hold a Senior Manager position until they are Retirement-Eligible.
4.2
Enrollment Procedure
. When an Executive becomes eligible to participate in the Plan, they
will automatically receive an enrollment kit from the Program Administrator. The kit may contain:
(a) A
personalized life insurance exhibit showing illustrative projection of the benefits and cost of the life insurance policy;
(b) A Plan participation election form;
(c) An application for the Policy;
(d) A form for Certification of Trustee(s) and Proposed Insured, which is required if the Executive elects to
assign the ownership of their Policy to a trust; and
(e) Illustration Certification.
The Executive must complete the forms and return them to the Program Administrator within sixty (60) days after satisfying the eligibility
requirements to enroll in the Plan.
This will be the Executive’s only opportunity to enroll in the Plan
If an Executive elects
not
to participate in the Plan, they may instead participate in Verizon’s group term life
insurance program.
4.3
Effective Date of Participation
. An Executive who is eligible to
Participate becomes a Participant upon the approval of MetLife of the Executive’s application for a Policy.
4.4
MetLife Policy Coverage
. The Policy coverage will begin as soon as practicable after: the Executive
completes and returns the enrollment forms to the Program Administrator, the application is approved by MetLife, and the Executive pays
-3-
the initial premium. The Policy normally will have an issue date of (and coverage will be effective as of) the first day of the month in which the Executive became eligible to participate in the
Plan. If the Executive has been participating in Verizon’s group term life insurance plan while their application to participate in the Plan is pending, then (i) such group term coverage shall cease as of the date coverage under the Policy
is effective, (ii) the Executive will be reimbursed for any group term life insurance premiums that they may have paid for the period after the effective date of the Policy’s coverage, and (iii) the Executive will not be imputed
income for such group term life insurance coverage for such period after the effective date of the Policy. Once an Executive is covered by the MetLife Policy, they no longer qualify for any basic or supplemental life insurance coverage on their life
under Verizon’s group term life insurance plan. The company-paid AD&D coverage, however, is
not
affected by coverage under the MetLife Policy.
No dependents’ coverage is available under the Policy.
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5.
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LIFE INSURANCE POLICY RIGHTS
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5.1
Ownership
. The coverage under VELIP is provided through a universal life insurance policy underwritten by MetLife. The participant will be the owner of the life insurance
policy unless they assign ownership to a trust or another person. The Policy may be assigned in accordance with its terms. Any assignment shall be effective only after MetLife receives the properly completed assignment form, and only if the form is
received while the participant is still alive.
5.2
Beneficiary Designation
. The owner of the
Policy may designate a beneficiary to receive life insurance benefits under the policy. If the owner fails to name a beneficiary or if all of the named beneficiaries pre-decease the participant or are deemed to die contemporaneously with the
participant, then the participant’s estate shall be the beneficiary.
The owner of the Policy can change beneficiary
designation at any time. Any beneficiary designation shall be effective only after MetLife receives the properly completed designation form, and only if the form is received while the participant is still alive.
5.3
Cash Value Account
. The Plan is designed such that the Policy will accumulate cash value to provide for
continuation of coverage after retirement. The owner of the Policy owns all of the cash value in the Policy.
5.4
Premium Payment Procedure
. The participant (or the owner of the Policy) is required to pay the
entire
annual premium for the Policy by April 1
st
of each calendar year. During each calendar year, prior to each
premium due date, Verizon will pay each participant a Premium Bonus to help pay the Policy premium. Participants cannot pay the Policy premiums by payroll deduction.
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6.
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AMOUNT OF COVERAGE WHILE EMPLOYED
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6.1
Coverage Formula
. Subject to MetLife underwriting requirements, until Retirement (or, if earlier, the Plan Maturity Date), the life insurance coverage under the Policy
will be equal to five (5) times the participant’s Annual Compensation. On March 1 of each year, the amount of coverage will be adjusted to reflect any increases in the Annual Compensation for such year, provided that the amount of
coverage will not be adjusted if the participant has attained age 60 by such January 1. The amount of the coverage will not be affected by decreases in the Annual Compensation.
6.2
Annual Compensation
. In general, Annual Compensation means the sum of the Executive’s:
(i) annual base salary, plus (ii) 50% of the
Maximum
Short Term Incentive compensation (not the Short Term Incentive actually paid). The Annual Compensation will be rounded up to the next higher multiple of $1,000, if not an exact
multiple. For example, if the annual base salary is $200,400 and the Maximum Short Term Incentive for the executive’s position is $160,000, the coverage amount will be calculated as follows:
Preliminary Annual Compensation = $200,400 + (50% of $160,000) = $280,400
Rounded Annual Compensation = $281,000
Coverage Amount = 5 x $281,000 = $1,405,000
For those Executives who became participants in the
Plan under NYNEX SLIP, see Section 6.4 for special rules for calculating Annual Compensation and the amount of coverage.
6.3
Evidence of Insurability
. An employee, who enrolls in the Plan when first eligible will be eligible to
receive coverage of up to a maximum of $6 million without evidence of good health, provided they satisfy the “Actively-at-Work” requirement.
In the event that (1) the initial coverage, as defined by the formula in Section 6.1, exceeds $6 million or (2) the increase in the coverage amount from one year to the next is unusually
large, the employee may have to provide MetLife with evidence of good health to qualify for full coverage. For evidence of good health MetLife typically requires the employee to complete health and lifestyle questionnaires and, sometimes, to undergo
medical tests and a physical examination. To the extent MetLife will provide the coverage only at rates higher than standard premium rates, it will not affect the cost-sharing under the Plan; the participant’s share of the premium cost will
continue to be calculated using MetLife’s substitute PS-58 rates as described in Section 8.2 and the Premium Bonus will be increased for any extra cost.
6.4
Special Rule for NYNEX SLIP
. If an Executive is a NYNEX Participant, their amount of coverage is equal to five (5) times their Annual Compensation, but their Annual
Compensation depends on their position at the time of entry into the NYNEX SLIP. If a NYNEX Participant was an officer of NYNEX when they first became a participant, then their Annual Compensation is their Adjusted Position Rate on the date of
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entry into the NYNEX SLIP; if they were a department head of NYNEX, then their Annual Compensation is their Adjusted Position Rate plus the Adjusted Standard Incentive Award or its equivalent on
the date of entry into the NYNEX SLIP.
“Adjusted Position Rate” means the position rate as in effect in 1992,
increased by 5% per year until the participant’s year of entry into the NYNEX SLIP. “Adjusted Standard Incentive Award” similarly means the Standard Incentive Award in effect in 1992, increased by 5% per year until the
participant’s year of entry into the NYNEX SLIP. Annual Compensation will be rounded up to the next higher multiple of $1,000.
After the first year of participation, the amount of coverage will be automatically increased each year by 5% through age 60 at which time the amount of coverage will be frozen. Any exceptions, for
example, to reflect significant increases in compensation due to a promotion, must be approved by the Plan Administrator.
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7.
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TARGET AMOUNT OF COVERAGE AFTER RETIREMENT
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7.1
Target Amount of Post-Retirement Coverage
. In general, the target post-retirement amount of coverage for a participant is two (2) times the participant’s
highest annual base salary earned while a participant (prior to Plan Maturity Date), provided that for a NYNEX Participant, the amount of coverage shall be the same amount of coverage as the participant had prior to retirement. The target cash value
of the Policy at Plan Maturity Date will be designed (using the Actuarial Assumptions), but not guaranteed, to provide this target amount of paid-up coverage to age 95.
7.2
Retirement Prior to Plan Maturity Date
. If the participant has reached their Plan Maturity Date on or before the date they retire, their participation in the Plan (and
all of the Premium Bonuses) will have ended on their Plan Maturity Date, and the amount of coverage provided under the Policy will be decided by the owner of the Policy. However, if the participant has not yet reached their Plan Maturity Date when
they retire, they will continue to be eligible to participate in the Plan, meaning that Verizon will continue to pay Premium Bonuses in accordance with the Plan (up to their Plan Maturity Date). During this period, after retirement but prior to Plan
Maturity Date, the amount of coverage under the Policy will depend upon the terms of the program under which the participant first became, and continues to be, a participant, as follows:
(a)
New Plan and Original VELIP
. If the participant has only been a participant in this Plan or was part of
the Original VELIP, then during this period prior to Plan Maturity Date, the amount of coverage shall be equal to what they had at retirement.
(b)
Bell Atlantic EMP
. If the participant was a participant in the Bell Atlantic EMP, then during this period prior to Plan Maturity Date, but in no event for more than 5
years following retirement, the amount of coverage shall be equal to what they had at retirement. For the remainder of this period (if any), the amount of coverage shall be equal to two (2) times the participant’s highest annual base
salary earned while a participant (prior to retirement).
-6-
(c)
NYNEX SLIP
. If the participant was a participant in the
NYNEX SLIP, then during this period prior to Plan Maturity Date, the amount of coverage shall be equal to what he had at retirement (without any increase, for example, for the 5% annual increase).
(d)
GTE ERLIP
. If the participant was an employee of GTE at the time of formation of Verizon and was
eligible for GTE’s ERLIP benefit, then during the period prior to Plan Maturity Date, the amount of coverage the participant will receive depends upon which predecessor plan the participant entered the plan:
(i)
Original VELIP
: If the participant became a participant in the Plan through their participation in the
Original VELIP, then during this period the amount of coverage shall be equal to what they had at retirement.
(ii)
Bell Atlantic EMP
: If the participant became a participant in the Plan through their participation in
the Bell Atlantic EMP plan, then during this period prior to Plan Maturity Date, but in no event for more than 5 years after retirement, the amount of coverage shall be equal to what they had at retirement. For the remainder of the period (if any),
the amount of coverage shall be equal to two (2) times the participant’s highest annual base salary earned while a participant (prior to retirement), or, if higher, the amount of post-retirement coverage that they would have received under
GTE’s ERLIP.
7.3
Plan Maturity Date
. The definition of Plan Maturity Date depends on the
terms of the program under which the Participant first became, and continues to be, a participant, as follows:
(a)
New Plan and Original VELIP
. If the participant has only been a participant in this Plan or was part of
the Original VELIP, then Plan Maturity Date means the anniversary of the Policy’s issue date on or next following the
latest
of: (i) participant’s attainment of age 60; (ii) completion of 5 years of VELIP participation;
and (iii) retirement from Verizon.
(b)
Bell Atlantic EMP
. If the participant was a
participant in the Bell Atlantic EMP, then Plan Maturity Date means the anniversary date of the Policy’s issue date on or next following the
later
of: (i) participant’s attainment of age 65; and (ii) completion of 15 years
of VELIP participation, including years of participation in Bell Atlantic’s EMP.
(c)
NYNEX
SLIP
. If the participant was a participant in the NYNEX SLIP, then Plan Maturity Date means the anniversary of the Policy’s issue date on or next following the
later
of: (i) participant’s attainment of age 70; and
(ii) completion of 20 years of VELIP participation, including years of participation in NYNEX SLIP and Bell Atlantic’s EMP.
-7-
8.1
Determination of Annual Premiums
. The annual premiums for each participant’s Policy will be
actuarially determined (using the Actuarial Assumptions) so that (i) it pays for the cost of the current life insurance benefit, as described in Article 6, and (ii) assuming continuing level contributions until Plan Maturity Date (assuming
the Participants remains employed until the Plan Maturity Date), will build the Policy’s Cash Value Account to an amount estimated to be sufficient at Plan Maturity Date to provide paid-up life insurance coverage to age 95, in an amount
described in Article 7.
Notwithstanding the foregoing, for a participant who was an employee of GTE at the time of formation of Verizon and
who was eligible for GTE’s ERLIP benefit, the target cash value of the Policy at Plan Maturity Date will be designed (using the Actuarial Assumptions), but is not guaranteed, to provide coverage to age 95 in an amount equal to two
(2) times the participant’s highest annual base salary earned while a participant (prior to retirement) or, if higher, the amount of post-retirement coverage that the participant would have received under GTE’s Executive Retiree Life
Insurance Plan (ERLIP). That is, the target cash value will not be less than the cash settlement value that the participant would have received under ERLIP if he had retired on the Plan Maturity Date.
8.2
Cost Sharing and Premium Bonus
. While the Executive is a Plan participant, Verizon will pay the
participant an annual Premium Bonus to facilitate the participant’s payment of premiums for the Policy. No Premium Bonuses will be calculated, or paid, for a period after the Plan Maturity Date.
The participant shall be responsible for funding the “
Estimated
Cost of Current Life Insurance Coverage”
(that is, the portion of each annual premium which represents the cost of the current life insurance coverage for the year). The Estimated Cost of Current Life Insurance Coverage shall be determined by multiplying (i) the amount of
coverage, and (ii) an age-specific rate taken from the term insurance rate table published by MetLife as a substitute for the IRS “PS-58” Table.
Verizon will pay the participant a taxable Premium Bonus equal to (i) the remainder of the premium, that is, the total annual premium calculated in Section 8.1 less the Estimated Cost of Current
Life Insurance Coverage, plus (ii) a “gross-up” to cover the federal, state and local income and payroll taxes required to be withheld on the amount of the net premium funded by the bonus
and
the gross-up itself. The exact
amount of the “gross-up” will depend on the state and local taxes to which the Premium Bonus is subject. The “gross-up” will not take into account any transfer taxes, such as gift taxes, which may apply if, for example, the
Policy is owned by a trust. Notwithstanding the foregoing, as of April 2009, Verizon will no longer provide any tax “gross-up” benefit for active employee participants or any retired participants whose date of separation from service is
after December 31, 2009.
8.3
Voluntary Premium Contributions
. A participant or owner of a
Policy may pay additional premiums to the Policy, subject to prior approval from MetLife. If a participant or the owner of the Policy makes an additional “Voluntary Premium
-8-
Contribution”, in excess of the total annual premium determined under Section 8.1, then the amount of coverage under the Policy may be increased by the amount of the Voluntary Premium
Contribution so that, in case of subsequent death of the Executive while a participant, the beneficiary may receive from the Policy the amount of the Voluntary Premium Contribution (without interest) in addition to the normal, formula-based death
benefit under the Plan.
The amount of any Voluntary Premium Contributions will not affect the calculation of the total annual
premium for the Policy under the Plan or the Premium Bonus. For example, the Estimated Cost of Current Life Insurance Coverage will be determined based on the formula death benefit amount described in Articles 6 and 7 and not the enhanced death
benefit.
|
9.
|
TERMINATION OF PARTICIPATION
|
9.1
Length of Cost Sharing and Plan Participation
. A participant shall continue to participate in the Plan and receive the Premium Bonuses until the
earliest
of:
|
|
(a)
|
The Plan Maturity Date; and
|
|
|
(b)
|
Other events enumerated below:
|
1. Participant separates from service with Verizon prior to Retirement-Eligibility;
2. The owner of the Policy exercises any policy ownership rights that would change the coverage (including complete or partial surrenders, loans, or withdrawals);
3. The participant is downgraded from a Senior Manager position prior to Retirement-Eligibility;
4. The owner of the Policy fails to pay the total premiums described in
Section 8.1 when due;
5. The participant otherwise does not abide by the rules of
the Plan;
6. The participant requests that participation be terminated; or
7. Verizon amends the Plan to eliminate the Premium Bonuses or terminates the Plan.
9.2
Participation at Retirement
. A participant is vested in the Plan benefits, including future Premium
Bonuses, once they are Retirement-Eligible. The following rules apply at Retirement:
-9-
(a)
On or After Plan Maturity Date
. If a participant retires
on or after their Plan Maturity Date, Verizon will not pay any additional Premium Bonuses. All of the annual premiums scheduled for the Policy will have been completed on the Plan Maturity Date.
(b)
Prior to Plan Maturity Date
. If a participant retires prior to their Plan Maturity Date, they will
continue to be eligible to participate in the Plan, meaning that Verizon will continue to pay them Premium Bonuses in accordance with the Plan (up until their Plan Maturity Date), except that if the Participant is a “specified employee”
(within the meaning of Section 409A of the Internal Revenue Code), the first annual payment following a separation from service shall be no earlier than the first business day that occurs more than six (6) months after the date the
separation from service. The amount of coverage during the period between retirement and the Plan Maturity Date is specified in Section 7.2.
(c)
Definition of Retirement
. Retirement means separation from service with Verizon after becoming Retirement-Eligible. A Verizon employee is Retirement-Eligible when he
meets the requirements under Verizon’s retiree health benefit plan for company contributions toward or access to retiree welfare benefits after his separation from service. If such plan no longer exists for determining Retirement-Eligibility,
the Executive Vice President – Human Resources (or their successor) shall determine the relevant applicable requirements.
9.3
Borrowing or Withdrawing Cash Value
.
(a)
In general
. If the owner of the Policy withdraws or borrows from the Policy’s Cash Value Account
(with the exception of Voluntary Premium Contributions) prior to the Plan Maturity Date, participation in the Plan will terminate, and Verizon will cease to pay any Premium Bonuses.
(b)
NYNEX SLIP
. Prior to the conversion to the bonus-premium approach for funding, the NYNEX version of the
Plan allowed participants to withdraw their share of the Policy cash value at anytime. If the owner of the Policy made any cash value withdrawals during the period the Policy was funded under the NYNEX SPLIP split-dollar arrangement, then the
normally applicable amount of coverage under this Plan will be reduced, and the Plan benefits will be adjusted as follows:
1. The amount of coverage under the Plan will be reduced by the aggregate amount of the withdrawals.
2. The total annual premium for the Policy will be calculated as if the cash value withdrawals had never taken place and the amount of coverage had never been reduced. In particular, the Estimated Cost of
Current Life Insurance Coverage will be determined based on the amount of coverage determined by the Plan’s formula, not the reduced amount of coverage.
-10-
3. Because the annual premiums for the Policy will be calculated as if the
cash value had never been withdrawn, the assumed cash value for purposes of the premium calculation will be higher than the actual value each year. As a result, if the Executive remains a participant until the Plan Maturity Date, the actual cash
value at the Plan Maturity Date will be lower than the target cash value by the amounts withdrawn plus interest adjustments.
9.4
Leave of Absence
. If a participant’s active employment is interrupted by an approved leave under
the Verizon Management Leave of Absence Policy, the participant will continue to participate in the Plan, without change, until the following January 1st. If the participant is still on an approved leave of absence on that date, the
Executive’s participation shall cease and Verizon will not pay any additional Premium Bonus, except as may be required by the Family and Medical Leave Act.
9.5
Disability
. If a participant is enrolled in the Verizon Management Long-Term Disability Plan with a 66 2/3% payment option and has been approved for long term disability
(LTD) benefits under the Verizon Management LTD Plan, they will continue to participate in the Plan (with Verizon continuing to make its Premium Bonus payments to the participant) for as long as they remain eligible for such LTD benefits or their
participation terminates for any other reason, with the amount of coverage frozen at the level in effect immediately before the disability occurred. The participant or Policy owner must pay the entire required premium payments during this period,
including the Estimated Cost of Current Life Insurance Coverage.
If the participant ceases to meet the definition of
“totally disabled” under the Verizon Management LTD Plan, or fails to continue to comply with the terms and conditions under that plan, the Executive’s participation in the Plan will cease and Verizon will discontinue the Premium
Bonuses. In addition, Executive’s participation (and Verizon’s Premium Bonuses) will not continue beyond the maximum time for receiving benefits under the terms of the Verizon Management LTD Plan. If the participant’s disability began
before he reached the age of 60, then their LTD benefits end at the earliest of the following dates: (i) the date they recover; (ii) the date they no longer are considered “totally disabled” under the Verizon Management LTD Plan;
or (iii) the first day of the month after they reach age 65.
While the participant is receiving benefits under the
Verizon Management LTD Plan, they will be placed on an inactive disability leave status. This means that if the participant recovers from their disability and is able to return to work, their participation in the Plan shall continue for a period of
up to 90 days to conduct an internal job search. If the participant does not have a position with Verizon at the end of such 90 days, their participation in the Plan will be terminated unless they are Retirement-Eligible. If they return to work at
Verizon as a Senior Manager prior to expiration of the 90-day period, their participation in the Plan will continue and their amount of coverage will again be adjusted annually for changes in Annual Compensation until they reach age 60. If the
participant returns to work at Verizon prior to the expiration of the 90-day period, but not as a Senior Manager, they will be treated as a Downgrade under Section 9.8.
-11-
9.6
Termination of Employment Prior to Retirement-Eligibility
.
If a participant separates from service with Verizon before Retirement-Eligibility, their participation in the Plan will end immediately.
9.7
Downgrade
. If a participant’s employment position is downgraded from a Senior Manager position, but they are Retirement-Eligible, then they will continue to
participate in the Plan. The coverage amount (and the target paid-up coverage amount used to determine the target cash value at Plan Maturity Date) will be frozen based on their annual base salary/Annual Compensation in effect on the date of the
downgrade. Their Post-Retirement Coverage amount will be two times their final base salary.
If a participant’s
employment position is downgraded from a Senior Manager position, and they are not Retirement-Eligible, then their participation in the Plan will end immediately. The participant will no longer be covered by the Policy, and the participant will then
be eligible to elect basic and supplemental life insurance under Verizon’s group term life insurance plan, subject to such plan’s requirements including, proof of insurability, provided that evidence of insurability will not be required
for coverage amounts up to the participant’s Policy coverage.
9.8
Rehire
. If a former
participant is rehired by Verizon in (or re-promoted to) a Senior Manager position, they may enroll in the Plan that is available to new participants at the time of their rehire. If the Policy purchased under the Plan when the Executive previously
was a participant is still in force when they are rehired, then the Executive must consent to the use of the Policy for the Plan in order to re-enroll. If the Policy is still in force but is otherwise unavailable for reuse when they are rehired, the
Executive may not be able to re-enroll in the Plan.
|
10.
|
PLAN AMENDMENTS AND TERMINATION
|
Verizon reserves the right to change or terminate the Plan at any time. Nevertheless, if Verizon is subject to a Change of Control, then Verizon (or its successor) may not amend the Plan for a period of 5
years after the occurrence of a Change in Control to reduce benefits provided to Plan participants, or terminate or merge the Plan or amend this Change in Control provision.
A “Change in Control” shall occur if any Person becomes the beneficial owner of more than 20% of the voting power of the Company’s outstanding stock, the Company merges or consolidates with
any other business (except a transaction engaged in solely to accomplish a recapitalization of the Company with no material change in the Company’s business or ownership) or the Board authorizes the liquidation or sale of all or substantially
all of the assets of the Company. Nevertheless, a Change in Control shall not occur if: (i) the owners of the Company’s voting stock, determined immediately before the transaction, will continue to represent no less than 45% of the
combined voting power of the surviving entity, determined immediately after the transaction; (ii) the members of the board of directors of the Company, determined immediately before the transaction, will continue to constitute a least one-half
of the board of directors of the
-12-
surviving entity, determined immediately after the transaction; (iii) the Chief Executive Officer (“CEO”) of the Company immediately before the transaction will be the CEO of the
successor company; and (iv) the headquarters of the successor company will be located in New York, New York.
“Person” shall mean any corporation, partnership, firm, joint venture, association, individual, trust or other entity, but does
not include the Company or any of its wholly-owned or majority-owned subsidiaries, employee benefit plans or related trusts.
11.1
Administration.
The Plan Administrator shall have the discretionary authority to control and manage the
operation and administration of the Plan, including but not limited to the power to construe and interpret the provisions of the Plan, to determine the eligibility of employees to participate in the Plan and the benefit entitlements of Participants,
and to establish rules and procedures (and to amend, modify or rescind the same) for the administration of the Plan. The Plan Administrator may delegate ministerial duties to other employees of the Company and to third parties.
11.2
Claims
. The Plan Administrator shall make all determinations concerning a Participant’s
entitlement to benefits under the Plan. The Plan Administrator shall establish a procedure for participants and designated beneficiaries to file a claim for benefits under the Plan. In the absence of any other procedure designated by the Plan
Administrator, the following procedure shall be applicable:
If a Participant believes that he has been denied a benefit under
the Plan to which he is entitled, the Participant may file a written request for such benefit with the Program Administrator, setting forth his claim. Any decision by the Program Administrator denying a claim for benefits by a Participant shall be
set forth in writing specifying the reasons for the denial in a manner calculated to be understood by the Participant and advising the Participant of his or her right to obtain a review of such decision. Participants may request a review of any
decision denying a benefit claim by filing a request for such in writing to the Program Administrator within 60 days of the Participant’s receipt of the denial of his claim; otherwise he shall be barred and stopped from challenging such claim
denial. The Plan Administrator shall conduct a full and fair review of the request for review and the underlying claim and shall render a decision thereon in writing, generally within 60 days of receiving the Participant’s request for review
(but may extend the period for rendering a decision to 120 days if special circumstances warrant the extension).
The
interpretation and construction of the Plan by the Plan Administrator, and any action taken there under, shall be binding and conclusive upon all persons and entities claiming to have an interest under the Plan.
11.3
Liability
. The Plan Administrator and its agents shall not be liable to any person for any action
taken or omitted to be taken in connection with the interpretation,
-13-
construction or administration of the Plan provided that such action or omission is made in good faith.
12.1
Benefit Statements
. Each year, each participant in the Plan will receive a Benefit Statement. The
statement will provide the participant with current information about the Policy, such as:
(a) Owner of
the Policy;
(b) Primary beneficiary of the Policy;
(c) Coverage amount;
(d) Premium for the current year; and
(e) Cash surrender value.
12.2
Notices
. Any notice or document required to be given to or filed with the Company or the Plan Administrator shall be deemed given or filed if delivered by certified or
registered mail, return receipt requested, to such party’s attention at the Company’s offices:
140 West Street, New York NY 10007
or at such other address as the Plan Administrator may provide from time to time.
12.3
Validity
. In the event any provision of the Plan is held invalid, void or unenforceable, the same
shall not affect in any respect the validity of the remaining provisions of the Plan.
12.4
Governing Documents
. In the event of any inconsistency between the terms of the Plan set forth herein
and the terms of any Policy purchased with respect to a participant, the terms of such Policy shall be controlling as to that participant, the owner of the Policy, any designated beneficiary, and any assignee or successor-in-interest of any of the
foregoing persons.
12.5
Applicable Law
. The provisions of the Plan shall be construed and
administered in accordance with the laws of the State of New York (without regard to any choice of law rules), except to the extent superseded by applicable Federal law.
12.6 Section
409A
.
(a) The Plan will be interpreted and construed in favor of it meeting the applicable requirements of
section 409A of the Internal Revenue Code (“Section 409A”). The Company, in its reasonable discretion, may amend the Plan (including retroactively) in any manner to conform with Section 409A. Despite the foregoing, the
Company will not guarantee any particular tax effect to any person of participation in the Plan. In any event, and except for tax withholding obligations, the Company will have no
-14-
obligation relating to any tax or penalty applicable to any person as a result of participation in the Plan.
(b) For purposes of Section 409A, each Premium Bonus payment is treated as a separate payment.
-15-
APPENDIX A – ACTUARIAL ASSUMPTIONS
This Appendix describes the procedure used to calculate the annual premiums for the VELIP Policies each year. The method described below has been in use unchanged since 2003 when the Section 162
(bonus) approach to funding of VELIP policies was adopted by Verizon, but the actuarial assumptions used in the calculations predate the adoption of the bonus approach by a number of years.
Background
VELIP is designed to provide life insurance coverage both
during employment and after retirement using individually-owned universal life insurance policies issued by MetLife. The premium cost is borne predominantly by Verizon. Under the VELIP umbrella, there are actually three separate plans. The varying
plan designs, particularly the benefit formulas, reflect grandfathering of the plan designs originally adopted by the various historical corporate entities that came to make up Verizon: NYNEX, Bell Atlantic, and GTE. Notwithstanding the varying plan
designs, the general goal of VELIP funding is the same:
to provide the plan participants with reasonably sufficient policy cash value once the funding ends to continue the target post-retirement life insurance coverage on a paid-up basis.
VELIP assigns to each participant a specific date called the Plan Maturity Date, which varies by plan
type but always falls on a policy anniversary. Normally the last annual premium payment is assumed to take place in the month of May preceding the Plan Maturity Date. The NYNEX SLIP version of VELIP has the longest funding period with its Plan
Maturity Date being the later of the 20
th
anniversary of
the entry into the plan or the policy anniversary on which the participant attains age 70. Prior to the Plan Maturity Date, Verizon must contribute a series of annual premium payments that will allow each policy to accumulate “reasonably
sufficient policy cash value” to provide a paid-up benefit. Normally, Verizon’s premium obligation with respect to a participant ends with his termination of employment. Where a participant
retires
prior to his Plan Maturity Date,
the contributions from Verizon vest. Consequently, many retirees are entitled to one or more annual contributions from Verizon after they retire. Verizon’s financial obligation with respect to VELIP ends with the last premium payment.
Verizon’s annual premium contribution for each participant is re-determined annually. There are two reasons why we
cannot predetermine the premiums (i.e., calculate fixed schedule of premiums at plan entry) to fund the VELIP policies.
|
|
1.
|
The coverage amounts depend on compensation and it is impossible to predict a participant’s future compensation or retirement date with any
certainty. Until one knows the exact target post-maturity coverage amount, one can only estimate the “reasonably sufficient policy cash value.” Furthermore, since annual premiums must provide for not only paid-up post-maturity life
insurance coverage but also for pre-maturity life insurance coverage,
|
A-1
|
|
uncertainty about future levels of coverage prior to Plan Maturity also adds to the uncertainty regarding the cost of VELIP.
|
|
|
2.
|
In addition to the coverage amounts, the cash value buildup also depends on policy performance, particularly the interest rates credited on the cash values. While there
is a 4% minimum guarantee under the VELIP policies, the actual credited rates change from month to month. So even if we could predict the future coverage amounts exactly (as is the case for the retirees), the premiums must still be periodically
adjusted to reflect each policy’s actual performance in order to achieve a particular cash value target. All policy performance risks (as well as rewards) under VELIP are borne solely by Verizon until the last premium is paid (similar to cash
balance pension plans) so that the premium funding provided by Verizon must remain somewhat flexible in order to accommodate variations in policy performance.
|
Although future VELIP premiums are variable and cannot be set in advance for these two reasons, VELIP uses a fixed calculation procedure which is consistently applied from year to year to calculate the
premiums. These calculations rely on a very small set of long-term actuarial assumptions that are applied uniformly to all VELIP policies and are expected to be changed rarely. The following sections describe the assumptions and calculation
methodology.
Assumptions
The annually re-determined VELIP premiums depend on three actuarial assumptions. These assumptions tend to be long-term in nature (i.e., rarely changed) so as to stabilize the premium stream:
|
|
1.
|
Internal policy rates for the cost of life insurance coverage—
These are the rates charged by MetLife for life insurance coverage under the universal life
insurance product used to provide VELIP coverage. These rates are modified relatively rarely. The original rates under the policies in questions were set in 1988 and remained basically unchanged until 2006. In 2006, MetLife reviewed the mortality
experience under the life insurance product used by VELIP as well as a number of other very large corporate sponsored life insurance programs and implemented a prospective rate reduction. For determining the cost of future life insurance coverage,
VELIP uses the set of rates currently being charged by MetLife. Accordingly, any change in this assumption depends on MetLife.
|
|
|
2.
|
Interest rate credited on the policy cash value—
Subject to a 4% minimum guarantee, the interest rate credited on the VELIP policy cash
value can vary from month to month. Compared to the cost of insurance rates, the interest rates credited on the cash value are significantly more volatile. Since changes to the long-term interest rate assumption can cause wide swings in the premium
cost, Verizon selected what it believes is a reasonable long-term interest rate expected to be earned by VELIP policies back in 1998 and has maintained it ever since in order to stabilize plan cost. This rate is 6% during the first 9 policy years
following the
|
A-2
|
|
policy issue date and 6.5% thereafter (to reflect the non-guaranteed 0.5% interest bonus paid beginning in the 10
th
policy year). As described below, the calculation procedure calls for a rolling 5-year formulaic modification of this
long-term crediting rate assumption in order to reflect short-term interest rate outlook and to stabilize the premium stream even further.
|
|
|
3.
|
Salary scale—
For a compensation-related benefit with a significant post-retirement component, it is a good accounting and budgetary practice to incorporate
a salary scale in determining the annual benefit cost. The NYNEX SLIP version of VELIP has had 5% benefit increases built into its benefit formula from the start (1992) so no salary scale assumption is required for that plan. In calculating the
premiums for all other versions of VELIP (under which the pre-maturity coverage amounts as well as post-maturity target coverage amount are directly tied to actual pay), a 5% salary scale has always been used.
|
In addition to these three long-term actuarial assumptions, there is a fourth item which may best be characterized as a calculation
parameter and not as an assumption per se. It is usually called the “skewing factor.” Its purpose is to back-load Verizon premium contributions so as to reduce waste of premium dollars on the younger participants, who are much more likely
to leave the company (to work for a competitor) than the older participants. The use of this parameter is explained in greater detail in the following section.
Calculation Methodology
VELIP uses the following procedure
each
year
to determine Verizon’s premium contribution for
each participant.
|
|
1.
|
Review long-term actuarial assumptions—
This step needs to be performed each year, but, as noted above, changes are normally instigated by events beyond
Verizon’s control (e.g., MetLife’s revision of rates for cost of insurance). The assumptions within Verizon’s control have held steady for a number of years.
|
|
|
2.
|
Project the coverage amounts—
This and all subsequent steps are carried out mechanically (by a computer program) and there is no discretion or judgment
involved. We begin by projecting the pre-maturity coverage amounts and the target post-maturity coverage amount. For the participants in the NYNEX version of VELIP, these amounts are pre-determined. For all other participants, these coverage amounts
are projected using the current actual pay rate modified by the assumed salary scale. For the retirees still eligible for additional premium contributions from Verizon, their coverage amounts are frozen at the time of retirement.
|
|
|
3.
|
Determine the hypothetical stream of participant’s share of future premiums—
VELIP is a contributory plan. Each year prior to the Plan
Maturity Date, the
|
A-3
|
|
participants are required to pay a premium amount equal to the coverage amount for the year multiplied by an age-specific rate from a substitute PS-58 rate table supplied by MetLife to determine
economic value of life insurance coverage. We determine expected future contributions from each participant based on the projected coverage amounts from Step #2 and the rates from MetLife rate table.
|
|
|
4.
|
Set the interest rates assumption—
Based on the maturity characteristics of the fixed income investments underlying VELIP policy cash values and
MetLife’s interest crediting methodology, a number of years will normally be required to bridge any significant gap between the actual composite rate currently being credited on the cash value and the 6%/6.5% assumed for long-term crediting
rate. Consequently, rather than applying the long-term credited rate assumption immediately as of the premium determination date, VELIP always grades the interest rates used for premium determination over a rolling 5-year period, starting from the
actual current credited rate and ending with the long-term rates. Assuming that VELIP will eventually achieve the long-term crediting rates, this scheme is more realistic in terms of how the future credited rates will actually behave.
|
|
|
5.
|
Determine the target cash value at plan maturity—
Based on (a) the assumed rates for the cost of insurance, (b) the assumed future interest rates
per Step #4, and (c) the target post-maturity coverage amount as determined in Step #2, we can determine the cash value required at plan maturity to provide a paid-up coverage equal to the target post- maturity coverage amount.
|
|
|
6.
|
Determine the hypothetical stream of Verizon’s share of future premiums—
Beginning with each policy’s actual cash value as of the calculation date,
we can solve for a stream of hypothetical annual premium contributions from Verizon that will cause the cash value to grow to the target cash value at plan maturity per Step #5, taking into consideration (a) future stream of hypothetical
premium contributions from the participant per Step #3, (b) the schedule of projected pre-maturity coverage amounts per Step #2, (c) the assumed rates for the cost of insurance, (b) the assumed future interest rates per Step #4.
Rather than solving for a level annual stream of hypothetical premiums, VELIP solves for a skewed annual stream of premiums such that each hypothetical premium (except the first one, of course) must be equal to 110% of the preceding one. This is the
so-called “skewing factor.” If the skewing factor were 100% instead, we would get a
level
stream of contributions.
|
|
|
7.
|
Determine Verizon’s premium contribution for the current year—
Current year’s premium contribution from Verizon is equal to the
initial year’s premium out of the hypothetical premium stream calculated in Step #6. The hypothetical premium stream amounts after the initial year represent estimates of future premiums which will only be realized if plan experience develops
|
A-4
|
|
exactly according to actuarial assumptions, not a likely event.
|
The factors described in this Appendix (or the objective formulas describing such factors) are fixed, with respect to an Executive, no later than the date on which the Executive becomes a Participant.
A-5
EXHIBIT 13
|
|
|
Selected Financial Data Verizon
Communications Inc. and Subsidiaries – As Adjusted*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts)
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
106,565
|
|
|
$
|
107,808
|
|
|
$
|
97,354
|
|
|
$
|
93,469
|
|
|
$
|
88,182
|
|
|
Operating income
|
|
|
14,645
|
|
|
|
15,978
|
|
|
|
2,612
|
|
|
|
17,816
|
|
|
|
17,137
|
|
|
Income (loss) before discontinued operations,
extraordinary item and cumulative effect
of accounting change attributable to
Verizon
|
|
|
2,549
|
|
|
|
4,894
|
|
|
|
(2,193
|
)
|
|
|
7,201
|
|
|
|
7,763
|
|
|
Per common share – basic
|
|
|
.90
|
|
|
|
1.72
|
|
|
|
(.77
|
)
|
|
|
2.48
|
|
|
|
2.67
|
|
|
Per common share – diluted
|
|
|
.90
|
|
|
|
1.72
|
|
|
|
(.77
|
)
|
|
|
2.48
|
|
|
|
2.64
|
|
|
Net income (loss) attributable to Verizon
|
|
|
2,549
|
|
|
|
4,894
|
|
|
|
(2,193
|
)
|
|
|
7,212
|
|
|
|
8,480
|
|
|
Per common share – basic
|
|
|
.90
|
|
|
|
1.72
|
|
|
|
(.77
|
)
|
|
|
2.49
|
|
|
|
2.91
|
|
|
Per common share – diluted
|
|
|
.90
|
|
|
|
1.72
|
|
|
|
(.77
|
)
|
|
|
2.49
|
|
|
|
2.89
|
|
|
Cash dividends declared per common share
|
|
|
1.925
|
|
|
|
1.870
|
|
|
|
1.780
|
|
|
|
1.670
|
|
|
|
1.620
|
|
|
Net income attributable to noncontrolling interest
|
|
|
7,668
|
|
|
|
6,707
|
|
|
|
6,155
|
|
|
|
5,053
|
|
|
|
4,038
|
|
|
|
|
|
|
|
|
|
Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
220,005
|
|
|
$
|
226,907
|
|
|
$
|
202,185
|
|
|
$
|
186,942
|
|
|
$
|
189,072
|
|
|
Debt maturing within one year
|
|
|
7,542
|
|
|
|
7,205
|
|
|
|
4,993
|
|
|
|
2,954
|
|
|
|
7,715
|
|
|
Long-term debt
|
|
|
45,252
|
|
|
|
55,051
|
|
|
|
46,959
|
|
|
|
28,203
|
|
|
|
28,646
|
|
|
Employee benefit obligations
|
|
|
28,164
|
|
|
|
32,622
|
|
|
|
32,512
|
|
|
|
29,960
|
|
|
|
30,779
|
|
|
Noncontrolling interest
|
|
|
48,343
|
|
|
|
42,761
|
|
|
|
37,199
|
|
|
|
32,266
|
|
|
|
28,310
|
|
|
Equity attributable to Verizon
|
|
|
38,569
|
|
|
|
41,382
|
|
|
|
41,592
|
|
|
|
50,580
|
|
|
|
48,830
|
|
|
•
|
|
Significant events affecting our historical earnings trends in 2008 through 2010 are described in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
|
|
•
|
|
2007 data includes sales of business, severance, pension and benefit charges, merger integration costs, and other items.
|
|
•
|
|
2006 data includes sales of business, severance, pension and benefit charges, merger integration costs, as well as relocation charges and other
items.
|
* During 2010, we retrospectively changed our method of accounting for benefit plans as described in
Note 1 to the consolidated financial statements. As a result, all prior periods have been adjusted.
Comparison of Five-Year Total Return Among Verizon,
S&P 500 Telecommunications Services Index and S&P 500 Stock Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
Data Points in Dollars
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Verizon
|
|
|
100.0
|
|
|
|
134.6
|
|
|
|
164.3
|
|
|
|
134.6
|
|
|
|
139.8
|
|
|
|
172.1
|
|
|
S&P Telecom Services
|
|
|
100.0
|
|
|
|
136.7
|
|
|
|
152.9
|
|
|
|
106.3
|
|
|
|
115.8
|
|
|
|
137.8
|
|
|
S&P 500
|
|
|
100.0
|
|
|
|
115.8
|
|
|
|
122.1
|
|
|
|
77.0
|
|
|
|
97.3
|
|
|
|
112.0
|
|
The graph compares the cumulative total returns of Verizon, the S&P 500 Telecommunications Services Index, and the S&P 500 Stock
Index over a five-year period, adjusted for the spin-off of our local exchange business and related landline activities in predominantly rural areas in 14 states, completed in 2010, and in Maine, New Hampshire and Vermont, completed in 2008, and our
domestic yellow pages directories business, completed in 2006. It assumes $100 was invested on December 31, 2005, with dividends reinvested.
|
|
|
Management’s Discussion and
Analysis of Financial Condition and Results of Operations – As Adjusted
|
During the fourth
quarter of 2010, Verizon retrospectively changed its method of accounting for benefit plans as described in Note 1 to the consolidated financial statements. As a result, all prior periods have been adjusted. As part of this change to our method of
accounting, the service cost and the amortization of prior service costs, which are representative of the benefits earned by active employees during the period, will continue to be allocated to the segment in which the employee is employed, while
interest cost and expected return on assets will now be recorded at the Corporate level. The recognition of actuarial gains and losses will also be recorded at the Corporate level.
In addition, in order to comply with regulatory conditions related to the acquisition of Alltel in January 2009, Verizon Wireless
divested certain overlapping properties during the first half of 2010. On July 1, 2010, certain of Verizon’s local exchange business and related landline activities were spun off. During the second quarter of 2010, we recorded a non-cash
adjustment primarily to adjust wireless data revenues.
Accordingly, Domestic Wireless and Wireline results from these
operations as well as the deferred revenue adjustment have been reclassified to Corporate and Other to reflect comparable segment operating results consistent with the information regularly reviewed by our chief operating decision maker.
We have adjusted prior-period consolidated and segment information, where applicable, to conform to current year
presentation.
Verizon Communications Inc. (Verizon, or the Company), is one of the world’s leading providers of communications services. Our
domestic wireless business, operating as Verizon Wireless, provides wireless voice and data products and services across the United States using one of the most extensive and reliable wireless networks. Our wireline business provides communications
products and services, including voice, broadband data and video services, network access, 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 diverse workforce of approximately 194,400 employees as of December 31, 2010.
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. We also monitor several key economic indicators, as well as the state of the economy in general, primarily in the United States, where the majority of our operations are located for
purposes of evaluating our operating results and assessing the potential impacts of these factors on our businesses. While most key economic indicators, including gross domestic product, affect our operations to some degree, we historically have
noted higher correlations to non-farm employment, personal consumption expenditures and capital spending, as well as more general economic indicators such as inflationary or recessionary trends and housing starts.
During 2010, we faced the challenges posed by a global economic downturn and continued to increase revenues in our growth businesses,
increase free cash flow, and make strategic investments in wireless, broadband, global connectivity and video. At the same time, we took significant actions to improve our cost structure, in part by reaching agreements with certain unions on
temporary enhancements and addressing future profitability as described below.
During the second quarter of 2010, as a
condition of the regulatory approvals by the Department of Justice (DOJ) and the Federal Communications Commission (FCC) to complete the acquisition of Alltel Corporation (Alltel) in January 2009, Verizon Wireless divested overlapping properties in
105 operating markets in 24 states (Alltel Divestiture Markets). The Verizon Wireless customer base was reduced by approximately 2.1 million customers, after certain adjustments. In July 2010, the Company spun-off to its stockholders a
subsidiary of Verizon (Spinco) which held defined assets and liabilities of the local exchange business and related landline activities of Verizon in predominantly rural areas in 14 states. Immediately following the spin-off, Spinco merged with
Frontier Communications Corporation (Frontier) pursuant to a definitive agreement with Frontier. This transaction further focused Verizon’s asset base around its fastest growing businesses – wireless, FiOS and other broadband development
and global IP networks. (See “Acquisitions and Divestitures.”)
Our results of operations, financial position and
sources and uses of cash in the current and future periods reflect our focus on the following strategic imperatives:
Revenue Growth
– To generate revenue growth we are devoting our resources to higher growth markets, such as the wireless
voice and data markets, the broadband and video markets, and the provision of strategic services to business markets, rather than to the traditional wireline voice market. During 2010, consolidated revenue decreased 1.2% compared to 2009 primarily
due to the sale of divested operations as well as lower revenue in the Wireline segment resulting from switched access line losses and decreased minutes of use (MOUs), partially offset by higher revenues in our growth markets. We continue to develop
and market innovative product bundles to include local, long distance, wireless, broadband data and video services for consumer, business and government customers. We anticipate that these efforts will help counter the effects of competition and
technology substitution that have resulted in access line losses, and enable us to grow consolidated revenues.
Market Share Gains
– In our wireless business, our goal is to continue to be the
market leader in providing wireless voice and data communication services in the United States. As the demand for wireless data services grows, we continue to increase our data revenues by expanding our penetration of data services as a result of
increased sales of smartphone and other data-capable devices. In 2010, we launched our fourth-generation (4G) Long-Term Evolution technology (LTE) network in 38 major metropolitan areas and more than 60 commercial airports in the United States.
We expect to deploy 4G LTE in an additional 140 markets by the end of 2011 and in virtually our entire current 3G network footprint by the end of 2013. In our wireline business, our goal is to become the leading provider of communications products
and services in each of the markets in which we operate. We are focused on providing the highest network reliability and innovative products and services. During 2010, we invested $16.5 billion in capital expenditures.
In Domestic Wireless:
|
|
•
|
|
as of December 31, 2010 compared to 2009, total customers increased 5.6% to 94.1 million; and
|
|
|
•
|
|
during 2010 compared to 2009, total data average revenue per customer per month (ARPU) increased by 17.3% to $17.73.
|
During 2010, in Wireline:
|
|
•
|
|
we added 232,000 net wireline broadband connections, including 796,000 net new FiOS Internet subscribers, for a total of 8.4 million
connections, including 4.1 million FiOS Internet subscribers;
|
|
|
•
|
|
we added 722,000 net new FiOS TV subscribers, for a total of 3.5 million FiOS TV subscribers; and
|
|
|
•
|
|
total broadband and video revenues were approximately $6.8 billion.
|
As of December 31, 2010, we passed 15.6 million premises with our high-capacity fiber optics network operated under the FiOS
service mark. With FiOS, we have created the opportunity to increase revenue per customer as well as improve Wireline profitability as the traditional fixed-line telephone business continues to decline due to customer migration to wireless, cable
and other newer technologies.
We are also focused on gaining market share in our enterprise business through the deployment
of strategic enterprise service offerings, including expansion of our Voice over Internet Protocol (VoIP) and international Ethernet capabilities, the introduction of video and web-based conferencing capabilities, and enhancements to our virtual
private network portfolio. During 2010, revenues from strategic enterprise services grew 6.3% compared to 2009 and represent more than 42% of total Global Enterprise revenues.
Profitability Improvement
– Our goal is to increase operating income and margins. Strong wireless data and FiOS revenue growth continue to positively impact operating results. In addition,
while revenues in the business market continue to be affected by macro-economic pressures, we are seeing some signs of stability. If there is a sustained economic recovery, it should positively impact our revenue and profitability in future
quarters. However, we remain focused on cost controls with the objective of driving efficiencies to offset business volume declines.
Operational Efficiency
– While focusing resources on revenue growth and market share gains, we are continually challenging our management team to lower expenses, particularly through
technology-assisted productivity improvements, including self-service initiatives. These and other efforts, such as real estate consolidation, call center routing improvements, a centralized shared services organization, and information technology
and marketing efforts, have led to changes in our cost structure with a goal of maintaining and improving operating income margins. Through our deployment of the FiOS network, we expect to realize savings annually in our ongoing operating expenses
as a result of efficiencies gained from fiber network facilities.
Customer Service
– Our goal is to be the
leading company in customer service in every market we serve. We view superior product offerings and customer service experiences as a competitive differentiator and a catalyst to growing revenues and gaining market share. We are committed to
providing high-quality customer service and continually monitor customer satisfaction in all facets of our business. Verizon Wireless ranked highest among wireless providers in small to mid-sized business customer satisfaction in the J.D. Power and
Associates 2010 U.S. Business Wireless Satisfaction Study released in June. During 2010, J.D. Power and Associates also ranked FiOS TV service with the “Highest in Residential Television Service Satisfaction in the East Region” in the J.D.
Power and Associates 2010 Residential Television Service Satisfaction Study.
Performance and Values-Based Culture
– We embrace a performance and values-based culture that demonstrates our commitment to integrity, respect, performance excellence, accountability, and putting our customers first. Our individual and team objectives are tied to
Verizon’s strategic imperatives. Key objectives of our compensation programs are pay-for-performance and the alignment of executives’ and stockholders’ long-term interests. We also employ a highly diverse workforce, as respect for
diversity is an integral part of Verizon’s culture and a critical element of our competitive success.
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.
Customer and Operating Trends
In our Domestic Wireless segment, we expect
to continue to attract and maintain the loyalty of high-quality retail postpaid customers, capitalizing on customer demand for data services, and bringing our customers new ways of using wireless services in their daily lives. We expect that future
customer growth will accelerate as a result of the introduction of new smartphones, including the iPhone 4, internet devices, such as tablets, and our suite of 4G LTE devices. We believe these devices will attract and retain higher value customers,
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 data 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.
In recent years, we have experienced continuing access line losses in our Wireline segment as customers have disconnected both primary and secondary lines and switched to alternative technologies, such as
wireless, 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 key aspects of our wireline business will continue to grow by providing superior network reliability as we continue to offer innovative product bundles
that include high-speed Internet access, digital television and local and long distance voice services, offering more robust IP products and services as well as accelerating our cloud computing strategy. We will continue to focus on cost
efficiencies to attempt to offset adverse impacts from unfavorable economic conditions and secular changes.
Operating Revenue
We expect to experience service revenue growth in our Domestic Wireless segment, primarily as a result of the growth of
our customer base as well as continued data revenue growth driven by increased penetration of data services resulting from increased sales of smartphone and other data-capable devices. We expect that the introduction of new smartphones, including
the iPhone 4, and our suite of 4G LTE devices will contribute to an increase in our average revenue per user (ARPU) for data. However, we expect to continue to experience sequential declines in our overall average voice revenue per user due to the
ongoing impact of customers seeking to optimize the value of our voice plans. We expect that our future service revenue growth will be substantially derived from data revenue growth as we continue to expand the penetration of our wireless data
offerings and increase our sales and usage of innovative wireless smartphone and other data-capable devices.
Although we have
experienced declines in Domestic Wireless Equipment and other revenue as a result of a reduction in the number of wireless devices sold, we expect that sales of newly introduced devices will result in increased sales volume and an overall increase
in revenues from device sales.
We expect broadband penetration to positively impact our Mass Markets revenue and subscriber
base, but we expect to continue to experience declining revenues in our Wireline segment primarily due to access line losses as a result of wireless substitution and current economic conditions. We also expect to experience period to period declines
in reported revenue due to the transaction with Frontier described above.
We expect continued expansion of strategic services
revenue as we derive additional revenues from cloud, security and other solutions-based services and customers continue to migrate their services to Private IP and other strategic networking services.
Operating Costs and Expenses
We anticipate that 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 costs. We expect that
the impact of these increased operating costs will cause a decline in our near-term Verizon Wireless Segment earnings before interest, taxes, depreciation and amortization (EBITDA) margins. However, we expect to continue to achieve other operating
cost efficiencies through a number of cost savings initiatives to help control our overall operating costs. In addition, labor costs are expected to decrease in our Wireline segment as a result of headcount reductions, which will be partially offset
by increased content costs for video in our growth businesses.
Capital Expenditures
Our 2011 capital program includes capital to fund advanced networks and services, including FiOS and LTE, the continued expansion of our core networks, including our IP and wireless Evolution-Data
Optimized (EV-DO) networks, maintenance and support for our legacy voice networks and other expenditures. Additionally, during 2010 we substantially completed the initial FiOS deployment program. The amount and the timing of the Company’s
capital expenditures within these broad categories can vary significantly as a result of a variety of factors outside our control, including, for example, material weather events. We are not subject to any agreement that would constrain our ability
to control our capital expenditures by requiring material capital expenditures on a designated schedule or upon the occurrence of designated events. Capital expenditures declined in 2010 compared to 2009. We believe that we have sufficient
discretion over the amount and timing of our capital expenditures on a company-wide basis that we can reasonably expect 2011 capital expenditures to be flat or lower than 2010.
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 our strategic imperatives, 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’s Board of Directors increased the Company’s quarterly dividend by 2.6% during 2010, which was the fourth consecutive year in which we have raised our dividend. Net cash provided by
operating activities for the year ended December 31, 2010 of $33.4 billion increased by $2.0 billion from $31.4 billion for the year ended December 31, 2009.
Other
We do not currently expect that legislative efforts relating
to climate control will have a material adverse impact on our consolidated financial results or financial condition. We believe there may be opportunities for companies to increase their use of communications services, including those we
provide, in order to minimize the environmental impact of their businesses.
|
|
|
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, which we operate and manage as strategic business units and organize by products and services. Our segments are Domestic Wireless and Wireline. In
the “Segment Results of Operations” section, we review the performance of our two reportable segments.
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, and divested operations 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 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 believe that this presentation assists users of our financial statements in better understanding our results of operations and trends from period to period.
In the following discussion, all prior period results have been adjusted to reflect the change in accounting for benefit plans (see Note 1 to the consolidated financial statements). Reclassifications have
also been made primarily to reflect comparable operating results for the spin-off of our local exchange business and related landline activities in predominantly rural areas in 14 states, completed in 2010, and in Maine, New Hampshire and Vermont,
completed in 2008, as well as sale of the Alltel Divestiture Markets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Domestic Wireless
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
55,629
|
|
|
$
|
52,046
|
|
|
$
|
42,602
|
|
|
$
|
3,583
|
|
|
|
6.9
|
%
|
|
$
|
9,444
|
|
|
|
22.2
|
%
|
|
Equipment and other
|
|
|
7,778
|
|
|
|
8,279
|
|
|
|
6,696
|
|
|
|
(501
|
)
|
|
|
(6.1
|
)
|
|
|
1,583
|
|
|
|
23.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
63,407
|
|
|
|
60,325
|
|
|
|
49,298
|
|
|
|
3,082
|
|
|
|
5.1
|
|
|
|
11,027
|
|
|
|
22.4
|
|
|
Wireline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mass Markets
|
|
|
16,256
|
|
|
|
16,115
|
|
|
|
15,831
|
|
|
|
141
|
|
|
|
0.9
|
|
|
|
284
|
|
|
|
1.8
|
|
|
Global Enterprise
|
|
|
15,669
|
|
|
|
15,667
|
|
|
|
16,601
|
|
|
|
2
|
|
|
|
–
|
|
|
|
(934
|
)
|
|
|
(5.6
|
)
|
|
Global Wholesale
|
|
|
8,393
|
|
|
|
9,155
|
|
|
|
9,832
|
|
|
|
(762
|
)
|
|
|
(8.3
|
)
|
|
|
(677
|
)
|
|
|
(6.9
|
)
|
|
Other
|
|
|
909
|
|
|
|
1,514
|
|
|
|
2,059
|
|
|
|
(605
|
)
|
|
|
(40.0
|
)
|
|
|
(545
|
)
|
|
|
(26.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
41,227
|
|
|
|
42,451
|
|
|
|
44,323
|
|
|
|
(1,224
|
)
|
|
|
(2.9
|
)
|
|
|
(1,872
|
)
|
|
|
(4.2
|
)
|
|
Corporate, eliminations and other
|
|
|
1,931
|
|
|
|
5,032
|
|
|
|
3,733
|
|
|
|
(3,101
|
)
|
|
|
(61.6
|
)
|
|
|
1,299
|
|
|
|
34.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Revenues
|
|
$
|
106,565
|
|
|
$
|
107,808
|
|
|
$
|
97,354
|
|
|
$
|
(1,243
|
)
|
|
|
(1.2
|
)
|
|
$
|
10,454
|
|
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Compared to 2009
The decrease in Consolidated revenues during 2010 compared to 2009 was primarily due to the sale of divested operations and declines in revenues at our Wireline segment resulting from switched access line
losses and decreased MOUs in traditional voice products, partially offset by higher revenues in our growth markets.
Corporate, eliminations and other during 2010 included a one-time non-cash adjustment of $0.2 billion primarily to reduce wireless data
revenues. This adjustment was recorded to properly defer previously recognized wireless data revenues that will be earned and recognized in future periods. As the amounts involved were not material to the consolidated financial statements in the
current or any previous reporting period, the adjustment was recorded during the second quarter of 2010 (see “Other Items”). In addition, the results of operations related to the divestitures included in Corporate, eliminations and other
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Impact of Divested Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
2,407
|
|
|
$
|
5,297
|
|
|
$
|
4,084
|
|
|
Cost of services and sales
|
|
|
574
|
|
|
|
1,288
|
|
|
|
1,076
|
|
|
Selling, general and administrative expense
|
|
|
665
|
|
|
|
1,356
|
|
|
|
895
|
|
|
Depreciation and amortization expense
|
|
|
413
|
|
|
|
884
|
|
|
|
916
|
|
The increase in
Domestic Wireless’ revenues during 2010 compared to 2009 was primarily due to growth in service revenue. Service revenue increased during 2010 compared to 2009 primarily due to an increase in total customers since January 1, 2010, as well
as continued growth in our data ARPU, partially offset by a decline in voice ARPU.
Total wireless data revenue was $19.6
billion and accounted for 35.1% of service revenue during 2010, compared to $15.6 billion and 29.9% during 2009. Total data revenue continues to increase as a result of the increased penetration of data offerings, in particular for e-mail and web
services resulting in part from increased sales of smartphone and other data-capable devices. Voice revenue decreased as a result of continued declines in our voice ARPU, partially offset by an increase in the number of customers.
Equipment and other revenue decreased during 2010 compared to 2009 due to a decrease in the number of equipment units sold, which
resulted from a decrease in customer gross additions.
The decrease in Wireline’s revenues during 2010 compared to 2009
was primarily due to lower Global Wholesale and Other revenue, partially offset by an increase in Mass Markets revenue. The decrease in Global Wholesale revenues during 2010 compared to 2009 was primarily due to decreased MOUs in traditional voice
products, increases in voice termination pricing on certain international routes, which negatively impacted volume, and continued rate compression due to competition in the marketplace. The decrease in Other revenue during 2010 compared to 2009 was
primarily due to reduced business volumes, including former MCI mass market customer losses. The increase in Mass Markets revenue during 2010 compared to 2009 was primarily driven by the expansion of consumer and business FiOS services (Voice,
Internet and TV), which are typically sold in bundles, partially offset by the decline of local exchange revenues principally as a result of a decline in switched access lines. Global Enterprise revenues during 2010 compared to 2009 were essentially
unchanged. Higher customer premises equipment and strategic networking revenues, were offset by lower local services and traditional circuit-based revenues.
2009 Compared to 2008
The increase in Consolidated revenues in 2009 compared to the similar period in 2008 was primarily due to the inclusion of the operating results of Alltel in our Wireless segment and higher revenues in
our growth markets. These revenue increases were partially offset by declines in revenues at our Wireline segment due to switched access line losses and decreased MOUs in traditional voice products.
The increase in Domestic Wireless’ revenues in 2009 compared to the similar period in 2008 was primarily due to the inclusion of the
operating results of Alltel and continued growth in service revenue. Service revenue in 2009 increased compared to the similar period in 2008 primarily due to an increase in net new customers, after conforming adjustments, which we acquired in
connection with the acquisition of Alltel on January 9, 2009, as well as an increase in total customers from sources other than acquisitions. Total data revenue was $15.6 billion and accounted for 29.9% of service revenue in 2009, compared to
$10.6 billion and 24.9%, respectively, during the similar period in 2008 because of increased use of Mobile Broadband, e-mail, and messaging
.
Domestic Wireless’ equipment and other revenue increased during 2009 compared to the similar period in 2008 primarily due to an increase in the number of units sold, partially offset by a decrease in
the average revenue per unit. Other revenues increased primarily due to the inclusion of the operating results of Alltel and an increase in our cost recovery rate.
The decrease in Wireline’s revenues in 2009 compared to 2008 was primarily driven by declines in Global Enterprise, Global Wholesale and Other revenue, partially offset by an increase in Mass Markets
revenue. The decrease in Global Enterprise revenues in 2009 compared to the similar period in 2008 was primarily due to lower long distance and traditional circuit-based data revenues, and lower customer premise equipment combined with the negative
effects of movements in foreign exchange rates versus the U.S. dollar. This decrease was partially offset by an increase in IP, managed network solutions and security solutions revenues. The decrease in Global Wholesale revenues in 2009 compared to
the similar period in 2008 was primarily due to decreased MOUs in traditional voice products and continued rate compression due to competition in the marketplace. The decrease in revenues from other services during 2009 compared to 2008 was mainly
due to the discontinuation of non-strategic product lines and reduced business volumes, including former MCI mass market customer losses. The increase in Mass Markets revenue in 2009 compared to the similar period in 2008 was primarily driven by the
expansion of FiOS services (Voice, Internet and TV), partially offset by a decline in local exchange revenues principally due to switched access line losses.
|
|
|
Consolidated Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Cost of services and sales
|
|
$
|
44,149
|
|
|
$
|
44,579
|
|
|
$
|
38,615
|
|
|
$
|
(430
|
)
|
|
|
(1.0
|
)%
|
|
$
|
5,964
|
|
|
|
15.4
|
%
|
|
Selling, general and administrative expense
|
|
|
31,366
|
|
|
|
30,717
|
|
|
|
41,517
|
|
|
|
649
|
|
|
|
2.1
|
|
|
|
(10,800
|
)
|
|
|
(26.0
|
)
|
|
Depreciation and amortization expense
|
|
|
16,405
|
|
|
|
16,534
|
|
|
|
14,610
|
|
|
|
(129
|
)
|
|
|
(0.8
|
)
|
|
|
1,924
|
|
|
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Operating Expenses
|
|
$
|
91,920
|
|
|
$
|
91,830
|
|
|
$
|
94,742
|
|
|
$
|
90
|
|
|
|
0.1
|
|
|
$
|
(2,912
|
)
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating expenses increased during 2010 compared to 2009 primarily due to increased
expenses at Domestic Wireless as well as higher severance, pension and benefit charges. Consolidated operating expenses in 2010 were favorably impacted by the sale of divested operations and cost reduction initiatives at Wireline and Domestic
Wireless. Consolidated operating expenses decreased during 2009 compared to 2008 primarily due to lower severance, pension and benefit charges, partially offset by increased expenses at Wireless, in part due to the acquisition of Alltel.
Severance, pension and benefit charges during 2010, 2009 and 2008 included pension settlement losses and remeasurement (gains) losses of
$0.6 billion, ($1.4 billion) and $15.0 billion, respectively. See Note 1 to the consolidated financial statements regarding the change in accounting for benefit plans.
2010 Compared to 2009
Cost of Services and Sales
Cost of services and sales includes the following costs directly attributable to a service or product: salaries and wages, benefits,
materials and supplies, contracted services, network access and transport costs, wireless equipment costs, customer provisioning costs, computer systems support, costs to support our outsourcing contracts and technical facilities and contributions
to the Universal Service Fund. Aggregate customer care costs, which include billing and service provisioning, are allocated between Cost of services and sales and Selling, general and administrative expense.
Cost of services and sales decreased during 2010 compared to 2009 primarily due to the sale
of the divested operations, lower headcount and productivity improvements at our Wireline and Domestic Wireless segments, partially offset by higher severance, pension and benefit charges recorded during 2010 and other non-operational charges noted
in the table below as well as higher customer premise equipment and content costs. In addition, lower access costs at Wireline were primarily driven by management actions to reduce exposure to unprofitable international wholesale routes. Our FiOS TV
and Internet cost of acquisition per addition also decreased in 2010 compared to 2009. Wireless network costs also increased as a result of an increase in local interconnection cost and increases in roaming costs.
Selling, General and Administrative Expense
Selling, general and administrative expense includes salaries and wages and benefits not directly attributable to a service or product; bad debt charges; taxes other than income taxes; advertising and
sales commission costs; customer billing; call center and information technology costs; professional service fees; and rent and utilities for administrative space.
Selling, general and administrative expense increased during 2010 compared to 2009 primarily due to higher severance, pension and benefit charges which primarily included a pension and postretirement
benefit plan remeasurement loss in 2010 compared to a remeasurement gain in 2009 as well as the charges in connection with an agreement reached with certain unions on temporary enhancements (see “Other Items”). In addition, the increase in
Selling, general and administrative expense reflected higher sales commission expense at our Domestic Wireless segment in our indirect channel as a result of increases in both the average commission per unit, as the mix of units continues to shift
toward data devices and more customers activating data service, and increased contract renewals in connection with equipment upgrades. Partially offsetting the increase was the sale of the divested operations and the impact of cost reduction
initiatives in our Wireline segment. Selling, general and administrative expense during 2010 was also impacted by lower access line spin-off and merger integration related charges noted in the table below.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased during 2010 compared to 2009. The decrease was primarily due to the sale of the divested operations partially offset by additions to the depreciable asset
base. Depreciation and amortization expense during 2010 was also impacted by lower non-operational charges noted in the table below.
2009
Compared to 2008
Cost of Services and Sales
Consolidated cost of services and sales during 2009 increased compared to 2008 primarily due to higher severance, pension and benefits charges recorded during 2009 and other non-operational charges noted
in the table below. Also contributing to the increases were higher wireless network costs, including the effects of operating an expanded wireless network as a result of the acquisition of Alltel, and increased costs of equipment. Additionally, we
experienced increased costs associated with our growth businesses including higher content and customer acquisition costs. Also contributing to the increase were an increase in the numbers of both data and phone equipment units sold as well as an
increase in the average cost per equipment unit. Partially offsetting these increases were reduced roaming costs realized by moving more traffic to our own network as a result of the acquisition of Alltel and declines due in part to lower headcount
and productivity improvements at our Wireline segment.
Selling, General and Administrative Expense
Consolidated selling, general and administrative expense in 2009 decreased compared to 2008 primarily due to the pension and
postretirement benefit plan remeasurement gain in 2009 compared to the remeasurement loss in 2008 noted in the table below. Partially offsetting the decrease were other non-operational charges noted in the table below as well as increased wireless
salary and benefits as a result of a larger employee base after the acquisition of Alltel and higher sales commission in our indirect channel in Domestic Wireless, partially offset by the impact of cost reduction initiatives in our Wireline segment.
Depreciation and Amortization Expense
Depreciation and amortization expense in 2009 increased compared to 2008 mainly driven by depreciable property and equipment and finite-lived intangible assets acquired from Alltel, as well as growth in
depreciable plant from capital spending partially offset by lower rates of depreciation. Depreciation and amortization expense in 2009 included merger integration costs related to the Alltel acquisition.
Non-operational Charges
Non-operational charges included in operating expenses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Merger Integration and Acquisition Related Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales
|
|
$
|
376
|
|
|
$
|
195
|
|
|
$
|
24
|
|
|
Selling, general and administrative expense
|
|
|
389
|
|
|
|
442
|
|
|
|
150
|
|
|
Depreciation and amortization expense
|
|
|
102
|
|
|
|
317
|
|
|
|
–
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
867
|
|
|
$
|
954
|
|
|
$
|
174
|
|
|
|
|
|
|
|
|
Access Line Spin-off Related Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales
|
|
$
|
42
|
|
|
$
|
38
|
|
|
$
|
16
|
|
|
Selling, general and administrative expense
|
|
|
365
|
|
|
|
415
|
|
|
|
87
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
407
|
|
|
$
|
453
|
|
|
$
|
103
|
|
|
|
|
|
|
|
|
Severance, Pension and Benefit Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales
|
|
$
|
1,723
|
|
|
$
|
1,443
|
|
|
$
|
65
|
|
|
Selling, general and administrative expense
|
|
|
1,331
|
|
|
|
(3
|
)
|
|
|
15,537
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,054
|
|
|
$
|
1,440
|
|
|
$
|
15,602
|
|
|
|
|
|
|
|
See “Other Items” for a description of non-operational items.
|
|
|
Other Consolidated Results
|
Equity in Earnings of Unconsolidated Businesses
Equity in earnings of
unconsolidated businesses decreased 8.1% in 2010 compared to 2009 primarily due to lower earnings at Vodafone Omnitel N.V. (Vodafone Omnitel), which were primarily driven by the devaluation of the Euro versus the U.S. dollar.
Equity in earnings of unconsolidated businesses decreased 2.5% in 2009 compared to 2008 primarily due to higher income tax benefits
recorded at Vodafone Omnitel during 2008 and the devaluation of the Euro versus the U.S. dollar. Partially offsetting the decrease were higher earnings at Vodafone Omnitel.
Other Income and (Expense), Net
Additional information relating to Other income and
(expense), net is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Interest income
|
|
$
|
92
|
|
|
$
|
75
|
|
|
$
|
362
|
|
|
$
|
17
|
|
|
|
22.7
|
%
|
|
$
|
(287
|
)
|
|
|
(79.3
|
)%
|
|
Foreign exchange gains (losses), net
|
|
|
5
|
|
|
|
–
|
|
|
|
(46
|
)
|
|
|
5
|
|
|
|
nm
|
|
|
|
46
|
|
|
|
nm
|
|
|
Other, net
|
|
|
(43
|
)
|
|
|
16
|
|
|
|
(33
|
)
|
|
|
(59
|
)
|
|
|
nm
|
|
|
|
49
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54
|
|
|
$
|
91
|
|
|
$
|
283
|
|
|
$
|
(37
|
)
|
|
|
(40.7
|
)
|
|
$
|
(192
|
)
|
|
|
(67.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm – not meaningful
Other income and (expense), net decreased during 2010 compared to 2009 primarily due to fees incurred during the third quarter of 2010 related to the early extinguishment of debt (see “Consolidated
Financial Condition”). Partially offsetting the decrease was higher distributions from investments and foreign exchange gains at our international wireline operations.
Other income and (expense), net decreased during 2009 compared to 2008 primarily driven by lower interest income, in part due to lower invested balances. The investment in $4.8 billion of Alltel debt
obligations acquired in 2008 was eliminated in consolidation beginning in January 2009, subsequent to the close of the Alltel transaction.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Total interest costs on debt balances
|
|
$
|
3,487
|
|
|
$
|
4,029
|
|
|
$
|
2,566
|
|
|
$
|
(542
|
)
|
|
|
(13.5
|
)%
|
|
$
|
1,463
|
|
|
|
57.0
|
%
|
|
Less capitalized interest costs
|
|
|
964
|
|
|
|
927
|
|
|
|
747
|
|
|
|
37
|
|
|
|
4.0
|
|
|
|
180
|
|
|
|
24.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,523
|
|
|
$
|
3,102
|
|
|
$
|
1,819
|
|
|
$
|
(579
|
)
|
|
|
(18.7
|
)
|
|
$
|
1,283
|
|
|
|
70.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average debt outstanding
|
|
$
|
57,278
|
|
|
$
|
64,039
|
|
|
$
|
41,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective interest rate
|
|
|
6.1
|
%
|
|
|
6.3
|
%
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest costs on debt balances decreased during 2010 compared to 2009 primarily due to a
$6.8 billion decline in average debt (see “Consolidated Financial Condition”). Interest costs during 2009 included fees related to the bridge facility that was entered into and utilized to complete the acquisition of Alltel, which
contributed to the higher effective interest rate.
Total interest costs on debt balances increased during 2009 compared to
2008 primarily due to a $23 billion increase in the average debt levels. The increase in average debt outstanding compared to 2008 was primarily driven by borrowings to finance the acquisition of Alltel. The increase in capitalized interest costs
during 2009 primarily related to capitalization of interest on wireless licenses under development for commercial service (see “Consolidated Financial Condition”).
Provision (Benefit) for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in
millions)
Increase/(Decrease)
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Provision (benefit) for income taxes
|
|
$
|
2,467
|
|
|
$
|
1,919
|
|
|
$
|
(2,319
|
)
|
|
$
|
548
|
|
|
|
28.6
|
%
|
|
$
|
4,238
|
|
|
|
nm
|
|
|
Effective income tax rate
|
|
|
19.4
|
%
|
|
|
14.2
|
%
|
|
|
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 tax rate is significantly lower than the
statutory federal income tax rate for all years presented due to the inclusion of income attributable to Vodafone Group Plc.’s (Vodafone) noncontrolling interest in the Verizon Wireless partnership within our Income before the provision for
income taxes.
The effective income tax rate in 2010 increased to 19.4% from 14.2% in 2009. The increase was primarily driven
by a one-time, non-cash income tax charge of $1.0 billion. The one-time non-cash income tax charge was a result of the enactment of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, both of
which became law in March 2010 (collectively the Health Care Act). Under the Health Care Act, beginning in 2013, Verizon and other companies that receive a subsidy under Medicare Part D to provide retiree prescription drug coverage will no longer
receive a federal income tax deduction for the expenses incurred in connection with providing the subsidized coverage to the extent of the subsidy received. Because future anticipated retiree prescription drug plan liabilities and related subsidies
were already reflected in Verizon’s financial statements, this change required Verizon to reduce the value of the related tax benefits recognized in its financial statements in the period during which the Health Care Act was enacted. The
increase was partially offset by higher earnings attributable to the noncontrolling interest.
During 2008, we recorded a
pension and postretirement benefit plan remeasurement loss rendering the 2008 effective tax rate not meaningful. Excluding the tax impact of this actuarial loss in 2008, the effective income tax rate decreased in 2009 primarily driven by higher
earnings attributable to the noncontrolling interest.
A reconciliation of the statutory federal income tax rate to the
effective income tax rate for each period is included in Note 13 to the consolidated financial statements.
Net Income Attributable to
Noncontrolling Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Net income attributable to noncontrolling interest
|
|
$
|
7,668
|
|
|
$
|
6,707
|
|
|
$
|
6,155
|
|
|
$
|
961
|
|
|
|
14.3
|
%
|
|
$
|
552
|
|
|
|
9.0
|
%
|
The increase in Net income
attributable to noncontrolling interest during 2010 compared to 2009, and 2009 compared to 2008 was due to higher earnings in our Domestic Wireless segment, which has a 45% noncontrolling partnership interest attributable to Vodafone.
|
|
|
Segment Results of
Operations
|
We have two reportable segments, Domestic Wireless and Wireline, which we operate and
manage as strategic business units and organize by products and services. We measure and evaluate our reportable segments based on segment operating income. The use of segment operating income is consistent with the chief operating decision
maker’s assessment of segment performance.
Segment earnings before interest, taxes, depreciation and amortization
(Segment EBITDA), which is presented below, is a non-GAAP measure and does not purport to be an alternative to operating income as a measure of operating performance. Management believes that this measure is useful 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 operating performance in relation to Verizon’s competitors. Segment EBITDA is calculated by adding back depreciation and amortization expense to segment operating income.
Verizon Wireless Segment EBITDA service margin, also presented below, is calculated by dividing Verizon Wireless Segment EBITDA by
Verizon Wireless service revenues. Verizon Wireless Segment EBITDA service margin utilizes service revenues rather than total revenues. Service revenues exclude primarily equipment revenues in order to reflect the impact of providing service to the
wireless customer base on an ongoing basis. Verizon Wireline EBITDA margin is calculated by dividing Wireline EBITDA by total Wireline revenues.
It is management’s intent to provide non-GAAP financial information to enhance the understanding of Verizon’s GAAP financial information, and it should be considered by the reader in addition
to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-GAAP 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. You can find additional information about our segments in Note 14 to the consolidated financial statements.
Our Domestic Wireless segment provides wireless voice and data services and equipment sales across the United States. This segment primarily represents the operations of the Verizon joint venture with
Vodafone, operating as Verizon Wireless. We own a 55% interest in the joint venture and Vodafone owns the remaining 45%. All financial results included in the tables below reflect the consolidated results of Verizon Wireless excluding the results of
operations of the Alltel Divestiture Markets through the date the divestitures were completed (see “Acquisitions and Divestitures”).
Operating Revenue and Selected Operating Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except
ARPU)
Increase/(Decrease)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Service revenue
|
|
$
|
55,629
|
|
|
$
|
52,046
|
|
|
$
|
42,602
|
|
|
$
|
3,583
|
|
|
|
6.9
|
%
|
|
$
|
9,444
|
|
|
|
22.2
|
%
|
|
Equipment and other
|
|
|
7,778
|
|
|
|
8,279
|
|
|
|
6,696
|
|
|
|
(501
|
)
|
|
|
(6.1
|
)
|
|
|
1,583
|
|
|
|
23.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenue
|
|
$
|
63,407
|
|
|
$
|
60,325
|
|
|
$
|
49,298
|
|
|
$
|
3,082
|
|
|
|
5.1
|
|
|
$
|
11,027
|
|
|
|
22.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total customers (’000)
|
|
|
94,135
|
|
|
|
89,172
|
|
|
|
72,056
|
|
|
|
4,963
|
|
|
|
5.6
|
|
|
|
17,116
|
|
|
|
23.8
|
|
|
Retail customers (’000)
|
|
|
87,535
|
|
|
|
85,445
|
|
|
|
70,021
|
|
|
|
2,090
|
|
|
|
2.4
|
|
|
|
15,424
|
|
|
|
22.0
|
|
|
|
|
|
|
|
|
|
|
|
Total customer net additions
(excluding acquisitions and
divestitures) (’000)
|
|
|
4,839
|
|
|
|
5,656
|
|
|
|
5,779
|
|
|
|
(817
|
)
|
|
|
(14.4
|
)
|
|
|
(123
|
)
|
|
|
(2.1
|
)
|
|
Retail customer net additions
(excluding acquisitions and
divestitures) (’000)
|
|
|
1,977
|
|
|
|
4,369
|
|
|
|
5,752
|
|
|
|
(2,392
|
)
|
|
|
(54.7
|
)
|
|
|
(1,383
|
)
|
|
|
(24.0
|
)
|
|
|
|
|
|
|
|
|
|
|
Total churn rate
|
|
|
1.33
|
%
|
|
|
1.41
|
%
|
|
|
1.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail postpaid churn rate
|
|
|
1.02
|
%
|
|
|
1.07
|
%
|
|
|
0.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service ARPU
|
|
$
|
50.46
|
|
|
$
|
50.53
|
|
|
$
|
51.55
|
|
|
$
|
(0.07
|
)
|
|
|
(0.1
|
)
|
|
$
|
(1.02
|
)
|
|
|
(2.0
|
)
|
|
Retail service ARPU
|
|
|
51.56
|
|
|
|
50.89
|
|
|
|
51.84
|
|
|
|
0.67
|
|
|
|
1.3
|
|
|
|
(0.95
|
)
|
|
|
(1.8
|
)
|
|
Total data ARPU
|
|
|
17.73
|
|
|
|
15.11
|
|
|
|
12.85
|
|
|
|
2.62
|
|
|
|
17.3
|
|
|
|
2.26
|
|
|
|
17.6
|
|
2010 Compared to 2009
The increase in Domestic Wireless’ total operating revenue during 2010 compared to 2009 was primarily due to growth in service revenue.
Service revenue
Service revenue increased during 2010 compared to 2009
primarily due to an increase in total customers since January 1, 2010, as well as continued growth in our data ARPU, partially offset by a decline in voice ARPU.
The decline in retail customer net additions during 2010 compared to 2009 was due to a decrease in retail customer gross additions, as well as an increase in churn for our retail prepaid base in
part attributable to a marketplace shift in customer activations during the first half of the year toward unlimited prepaid offerings of the type being sold by a number of resellers. Retail (non-wholesale) customers are customers who are
directly served and managed by Verizon Wireless and who buy its branded services. However, we expect to continue to experience retail customer growth based on the strength of our product offerings and network service quality. Our total churn rate
during 2010 compared to 2009 improved as a result of successful customer retention efforts. Churn is the rate at which customers disconnect individual lines of service.
Total customer net additions decreased during 2010 compared to 2009 due to the decline in retail customer net additions described above partially offset by the cumulative increase during the year in
customer net additions from our reseller channel as a result of the marketplace shift in customer activations mentioned above.
Customers from acquisitions and adjustments at December 31, 2010 included approximately 106,000 net customers, after conforming
adjustments, that we acquired in a transaction with AT&T. Customers from acquisitions at December 31, 2009 included approximately 11.4 million total customer net additions, after conforming adjustments and the impact of required
divestitures, which resulted from our acquisition of Alltel on January 9, 2009.
Total data revenue was $19.6 billion and
accounted for 35.1% of service revenue during 2010 compared to $15.6 billion and 29.9% during 2009. Total data revenue continues to increase as a result of the increased penetration of data offerings, in particular for e-mail and web services
resulting in part from increased sales of smartphone and other data-capable devices. Voice revenue decreased as a result of continued declines in our voice ARPU, as discussed below, partially offset by an increase in the number of customers. We
expect that total service revenue and data revenue will continue to grow as we grow our customer base, increase the penetration of our data offerings and increase the proportion of our customer base using smartphone and other data-capable devices.
The decline in service ARPU during 2010 compared to 2009 was due to a continued reduction in voice revenue per
customer and the impact of changes in our customer mix as a result of increased reseller customer net additions, partially offset by an increase in data ARPU. Total voice ARPU declined $2.69, or 7.6%, due to the ongoing impact of customers seeking
to optimize the value of our voice minute bundles. Total data ARPU increased as a result of continued growth and penetration of our data offerings, resulting in part from the above mentioned increase in sales of our smartphone and other data-capable
devices. Retail service ARPU, the average revenue per user from retail customers, increased during 2010 due to increases in our penetration of data offerings, which more than offset declines in our voice revenues.
Equipment and Other Revenue
Equipment and other revenue decreased during 2010 compared to 2009 due to a decrease in the number of equipment units sold as a result of a decrease in customer gross additions.
2009 Compared to 2008
Domestic Wireless’ total operating revenue increased during 2009 compared to 2008 primarily due to the inclusion of the operating
results of Alltel, as well as growth in our service revenue from sources other than the acquisition of Alltel.
Service revenue
Service revenue increased during 2009 compared to 2008 primarily due to the inclusion of service revenue as a result of
the 11.4 million net new customers, after conforming adjustments and the impact of required divestitures, which we acquired in connection with the acquisition of Alltel. Since January 1, 2009, service revenue also increased as a result of
an increase in total customers from sources other than customer acquisitions, as well as continued growth from data services.
The decline in retail customer net additions during 2009 compared to 2008 was due to an increase in churn partially offset by an increase
in customer gross additions due to the expansion of our sales and distribution channels as a result of the acquisition of Alltel. The decrease in total customer net additions for 2009 was due to the above mentioned decline in retail customer net
additions, partially offset by an increase in customer gross additions from our reseller channels, primarily during the fourth quarter of 2009. The increases in our total and retail postpaid churn rates were primarily a result of increased
disconnections of Mobile Broadband service and business share lines, primarily attributable to economic conditions.
Total
data revenue during 2009 was $15.6 billion and accounted for 29.9% of service revenue compared to $10.6 billion and 24.9% during 2008. Total data revenue continues to increase as a result of increased use of Mobile Broadband, e-mail and
messaging
.
Service ARPU and retail service ARPU declined during 2009 compared to 2008 due to the inclusion of
customers acquired in connection with the acquisition of Alltel, as well as continued reductions in voice ARPU, partially offset by an increase in total data ARPU. Total voice ARPU declined $3.28, or 8.5% during 2009 compared to 2008 due to the
on-going impact of bundled plans and increases in the proportion of
customers on our Family Share plans as customers sought to optimize the value of our offerings. Total data ARPU increased by $2.26, or 17.6% during 2009 compared to 2008 as a result of the
increased usage of our data services.
Customer acquisitions during 2008 included approximately 650,000 total customer net
additions, after conforming adjustments, acquired from Rural Cellular Corporation (Rural Cellular). As a result of an exchange with AT&T consummated on December 22, 2008, Domestic Wireless transferred a net of approximately 122,000 total
customers.
Equipment and Other Revenue
Equipment and other revenue increased during 2009 compared to 2008 primarily due to an increase in the number of both data and phone equipment units sold, partially offset by a decrease in the average
revenue per unit. The increase in the number of equipment units sold was a result of both the increase in customer gross additions as well as an increase in the number of units sold to existing customers upgrading their wireless devices. Other
revenues increased primarily due to the inclusion of the operating results of Alltel and an increase in our cost recovery rate.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Cost of services and sales
|
|
$
|
19,245
|
|
|
$
|
19,348
|
|
|
$
|
15,660
|
|
|
$
|
(103
|
)
|
|
|
(0.5
|
)%
|
|
$
|
3,688
|
|
|
|
23.6
|
%
|
|
Selling, general and administrative expense
|
|
|
18,082
|
|
|
|
17,309
|
|
|
|
14,273
|
|
|
|
773
|
|
|
|
4.5
|
|
|
|
3,036
|
|
|
|
21.3
|
|
|
Depreciation and amortization expense
|
|
|
7,356
|
|
|
|
7,030
|
|
|
|
5,405
|
|
|
|
326
|
|
|
|
4.6
|
|
|
|
1,625
|
|
|
|
30.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
$
|
44,683
|
|
|
$
|
43,687
|
|
|
$
|
35,338
|
|
|
$
|
996
|
|
|
|
2.3
|
|
|
$
|
8,349
|
|
|
|
23.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Services and Sales
Cost of services and sales decreased during 2010 compared to 2009 due to a decrease in the cost of equipment sales, partially offset by an increase in cost of services. Cost of equipment sales
decreased by $0.6 billion primarily due to both a decrease in retail customer gross additions and cost reduction initiatives, partially offset by an increase in the average cost per unit. Cost of services increased due to higher wireless
network costs driven by increases in local interconnection cost, as a result of both higher capacity needs from increases in data usage as well as costs incurred to transition to Ethernet facilities that will be used to support the LTE
network. In addition, the increase in costs of services was impacted by higher roaming costs as a result of increased international roaming volumes, data roaming and roaming costs incurred in the Alltel Divestiture Markets, partially offset by
synergies from moving traffic to our own network. Also contributing to higher wireless network costs during 2010 compared to 2009 was an increase in operating lease expense related to our network cell sites.
Cost of services and sales increased during 2009 compared to 2008 primarily due to higher wireless network costs including the effects of
operating an expanded wireless network as a result of the acquisition of Alltel. This increase included network usage for voice and data services, use of data services and applications such as e-mail and messaging provided by third party vendors,
operating lease expense related to a larger number of cell sites, as well as salary and benefits as a result of an increase in network-related headcount. These increases were partially offset by a decrease in roaming costs that was realized
primarily by moving more traffic to our own network as a result of the acquisition of Alltel. Cost of equipment increased by $2.1 billion primarily due to the increase in the number of both data and phone equipment units sold as well as an increase
in the average cost per equipment unit.
Selling, General and Administrative Expense
Selling, general and administrative expense increased during 2010 compared to 2009 primarily due to an increase in sales commission
expense in our indirect channel, as well as increases in other general and administrative expenses, partially offset by a decrease in advertising and promotional costs. Indirect sales commission expense increased $0.8 billion during 2010 compared to
2009 as a result of increases in both the average commission per unit, as the mix of units continues to shift toward data devices and more customers activate data service, and in contract renewals in connection with equipment upgrades. Other general
and administrative expenses such as billing and data processing charges, non-income taxes, and bad debt expense increased primarily as a result of the growth of our customer base. Advertising and promotional costs decreased $0.2 billion during 2010
compared to 2009 primarily due to reductions in media spending.
Selling, general and administrative expense increased during
2009 compared to 2008 primarily due to a $0.9 billion increase in salary and benefits as a result of a larger employee base after the acquisition of Alltel, as well as an $0.8 billion increase in sales commission expense, primarily in our indirect
channel as a result of increases in both equipment upgrades leading to contract renewals and customer gross additions, as well as an increase in the average commission per unit. We also experienced increases in other selling, general and
administrative expenses primarily as a result of supporting a larger customer base as a result of our acquisition of Alltel.
Depreciation and Amortization Expense
Depreciation and amortization expense increased during 2010 compared to 2009 primarily driven by growth in depreciable assets.
Depreciation and amortization expense increased during 2009 compared to 2008 primarily driven by depreciable property and equipment and finite-lived intangible assets acquired from Alltel, including its customer lists, as well as growth in
depreciable assets during 2009.
Segment Operating Income and EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Segment Operating Income
|
|
$
|
18,724
|
|
|
$
|
16,638
|
|
|
$
|
13,960
|
|
|
$
|
2,086
|
|
|
|
12.5
|
%
|
|
$
|
2,678
|
|
|
|
19.2
|
%
|
|
Add Depreciation and amortization expense
|
|
|
7,356
|
|
|
|
7,030
|
|
|
|
5,405
|
|
|
|
326
|
|
|
|
4.6
|
|
|
|
1,625
|
|
|
|
30.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment EBITDA
|
|
$
|
26,080
|
|
|
$
|
23,668
|
|
|
$
|
19,365
|
|
|
$
|
2,412
|
|
|
|
10.2
|
|
|
$
|
4,303
|
|
|
|
22.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income margin
|
|
|
29.5
|
%
|
|
|
27.6
|
%
|
|
|
28.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment EBITDA service margin
|
|
|
46.9
|
%
|
|
|
45.5
|
%
|
|
|
45.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increases in Domestic Wireless’ Operating income and Segment EBITDA during 2010 and 2009,
were primarily as a result of the impact of factors described above.
Non-recurring or non-operational items excluded from Domestic
Wireless’ Operating income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Merger integration and acquisition costs
|
|
$
|
867
|
|
|
$
|
954
|
|
|
$
|
–
|
|
|
Impact of divested operations
|
|
|
(348
|
)
|
|
|
(789
|
)
|
|
|
–
|
|
|
Deferred revenue adjustment
|
|
|
235
|
|
|
|
(78
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
$
|
754
|
|
|
$
|
87
|
|
|
$
|
(34
|
)
|
|
|
|
|
|
|
The Wireline segment provides customers with communication products and services, including voice, broadband video and data, network access, long distance, and other services, to residential and small
business customers and carriers, as well as next-generation IP network services and communications solutions to medium and large businesses and government customers globally.
The following discussion reflects the impact related to the change in accounting for benefit plans (see Note 1 to the consolidated financial statements). Reclassifications have been made to reflect
comparable operating results for the spin-off of the operations in the Frontier transaction, which we owned through June 30, 2010, and the spin-off of the local exchange business and related landline activities in Maine, New Hampshire and
Vermont, which was completed on March 31, 2008 (see “Acquisitions and Divestitures”).
Operating Revenues and Selected
Operating Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Mass Markets
|
|
$
|
16,256
|
|
|
$
|
16,115
|
|
|
$
|
15,831
|
|
|
$
|
141
|
|
|
|
0.9
|
%
|
|
$
|
284
|
|
|
|
1.8%
|
|
|
Global Enterprise
|
|
|
15,669
|
|
|
|
15,667
|
|
|
|
16,601
|
|
|
|
2
|
|
|
|
–
|
|
|
|
(934
|
)
|
|
|
(5.6)
|
|
|
Global Wholesale
|
|
|
8,393
|
|
|
|
9,155
|
|
|
|
9,832
|
|
|
|
(762
|
)
|
|
|
(8.3
|
)
|
|
|
(677
|
)
|
|
|
(6.9)
|
|
|
Other
|
|
|
909
|
|
|
|
1,514
|
|
|
|
2,059
|
|
|
|
(605
|
)
|
|
|
(40.0
|
)
|
|
|
(545
|
)
|
|
|
(26.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenues
|
|
$
|
41,227
|
|
|
$
|
42,451
|
|
|
$
|
44,323
|
|
|
$
|
(1,224
|
)
|
|
|
(2.9
|
)
|
|
$
|
(1,872
|
)
|
|
|
(4.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Switched access lines in service ('000)
|
|
|
26,001
|
|
|
|
28,323
|
|
|
|
31,370
|
|
|
|
(2,322
|
)
|
|
|
(8.2
|
)
|
|
|
(3,047
|
)
|
|
|
(9.7)
|
|
|
|
|
|
|
|
|
|
|
|
Broadband connections ('000)
|
|
|
8,392
|
|
|
|
8,160
|
|
|
|
7,676
|
|
|
|
232
|
|
|
|
2.8
|
|
|
|
484
|
|
|
|
6.3
|
|
|
FiOS Internet subscribers ('000)
|
|
|
4,082
|
|
|
|
3,286
|
|
|
|
2,371
|
|
|
|
796
|
|
|
|
24.2
|
|
|
|
915
|
|
|
|
38.6
|
|
|
FiOS TV subscribers ('000)
|
|
|
3,472
|
|
|
|
2,750
|
|
|
|
1,849
|
|
|
|
722
|
|
|
|
26.3
|
|
|
|
901
|
|
|
|
48.7
|
|
Mass Markets
Mass Markets revenue includes local exchange (basic service and end-user access), long distance (including regional
toll), broadband services (including high-speed Internet and FiOS Internet) and FiOS TV services for residential and small business subscribers.
2010 Compared to 2009
The increase in Mass Markets revenue during 2010
compared to 2009 was primarily driven by the expansion of consumer and business FiOS services (Voice, Internet and TV), which are typically sold in bundles, partially offset by the decline of local exchange revenues principally as a result of a
decline in switched access lines as of December 31, 2010 compared to December 31, 2009, primarily as a result of competition and technology substitution. The majority of the decrease was sustained in the residential retail market, which
experienced a 9.0% access line loss primarily due to substituting traditional landline services with wireless, VoIP, broadband and cable services. Also contributing to the decrease was a decline of nearly 5.0% in small business retail access lines,
primarily reflecting economic conditions, competition and a shift to both IP and high-speed circuits.
As we continue to
expand the number of premises eligible to order FiOS services and extend our sales and marketing efforts to attract new FiOS subscribers, we have continued to grow our subscriber base and consistently improved penetration rates within our FiOS
service areas. Our bundled pricing strategy allows us to provide competitive offerings to our customers and potential customers. As of December 31, 2010, we achieved penetration rates of 31.9% and 28.0% for FiOS Internet and FiOS TV,
respectively, compared to penetration rates of 28.3% and 24.7% for FiOS Internet and FiOS TV, respectively, at December 31, 2009.
2009 Compared to 2008
The increase in Mass Markets revenue during 2009 compared to 2008 was primarily driven by the expansion of FiOS services (Voice, Internet
and TV), partially offset by a decline in local exchange revenues principally due to a decline in switched access lines as of December 31, 2009 compared to December 31, 2008, primarily as a result of competition and technology
substitution. The majority of the decrease was sustained in the residential retail market, which experienced a 10.5% access line loss primarily due to substituting traditional landline services with wireless, VoIP, broadband and cable services. Also
contributing to the decrease was a decline of nearly 6.2% in small business retail access lines, primarily reflecting economic conditions, competition and a shift to both IP and high-speed circuits.
As of December 31, 2009, we achieved penetration rates of 28.3% and 24.7% for FiOS Internet and FiOS TV, respectively, compared to
penetration rates of 25.1% and 21.1% for FiOS Internet and FiOS TV, respectively, at December 31, 2008.
Global Enterprise
Global Enterprise offers voice, data and Internet communications services to medium and large business customers, multinational corporations, and state and federal government customers. In addition to
traditional voice and data services, Global Enterprise offers managed and advanced products and solutions including IP services and value-added solutions that make communications more secure, reliable and efficient. Global Enterprise also provides
managed network services for customers that outsource all or portions of their communications and information processing operations and data services such as private IP, private line, frame relay and asynchronous transfer mode (ATM) services, both
domestically and internationally. In addition, Global Enterprise offers professional services in more than 30 countries supporting a range of solutions including network service, managing a move to IP-based unified communications and providing
application performance support.
2010 Compared to 2009
Global Enterprise revenues were essentially unchanged during 2010 compared to 2009. Higher customer premises equipment and strategic networking revenues, were offset by lower local services and
traditional circuit-based revenues. The increase in customer premises equipment and strategic networking revenue may indicate that companies are beginning to increase capital expenditures. Long distance revenues declined due to negative
effects of the continuing global economic conditions and competitive rate pressures. In addition to increased customer premise equipment revenues, strategic enterprise services revenue increased $0.4 billion, or 6.3%, during 2010 compared to
2009 primarily due to higher information technology, security solution and strategic networking revenues. Strategic enterprise services continues to be Global Enterprise’s fastest growing suite of offerings. Traditional circuit-based services
such as frame relay, private line and ATM services declined compared to the similar period last year as our customer base continues its migration to next generation IP services.
2009 Compared to 2008
The decrease in Global Enterprise revenues during
2009 compared to 2008 was primarily due to lower long distance and traditional circuit based data revenues and lower customer premises equipment revenue, combined with the negative effect of movements in foreign exchange rates versus the U.S.
dollar. The decline in long distance revenue was driven by a 2.2% decline in MOUs compared to 2008, due to global economic conditions and competitive rate pressures, which adversely impacted our business customers. Traditional circuit based services
such as frame relay, private line and ATM services declined compared to the similar period in 2008 as our customer base continued its migration to next generation IP services. Customer premises equipment revenue decreased approximately 6.7% compared
to 2008 reflecting cautious investment decisions in the marketplace in response to the uncertain economic environment. Partially offsetting these declines was an increase of 14.6% in IP and security solutions revenues. Strategic enterprise services
revenue increased 4.9% in 2009 compared to 2008.
Global Wholesale
Global Wholesale revenues are primarily earned from long distance and other carriers who use our facilities to provide services to their
customers. Switched access revenues are generated from fixed and usage-based charges paid by carriers for access to our local network, interexchange wholesale traffic sold in the United States, as well as internationally destined traffic that
originates in the United States. Special access revenues are generated from carriers that buy dedicated local exchange capacity to support their private networks. Wholesale services also include local wholesale revenues from unbundled network
elements and interconnection revenues from competitive local exchange carriers and wireless carriers. A portion of Global Wholesale revenues are generated by a few large telecommunication companies, many of whom compete directly with us.
2010 Compared to 2009
The decrease in Global Wholesale revenues during 2010 compared to 2009 was primarily due to decreased MOUs in traditional voice products,
increases in voice termination pricing on certain international routes, which negatively impacted volume, and continued rate compression due to competition in the marketplace. Switched access and interexchange wholesale MOUs declined primarily as a
result of wireless substitution and access line losses. Domestic wholesale lines declined by 9.0% as of December 31, 2010 compared to December 31, 2009 due to the continued impact of competitors deemphasizing their local market initiatives
coupled with the impact of technology substitution, as well as the continued level of economic pressure. Voice and local loop services declined during 2010 compared to 2009. Continuing demand for high-capacity, high-speed digital services was
partially offset by lower demand for older, low-speed data products and services. As of December 31, 2010, customer demand, as measured in DS1 and DS3 circuits, for high-capacity and high-speed digital data services increased 4.6% compared to
2009.
2009 Compared to 2008
The decrease in Global Wholesale revenues during 2009 compared to 2008 was primarily due to decreased MOUs in traditional voice products, and continued rate compression due to competition in the
marketplace. Switched access and interexchange wholesale MOUs declined primarily as a result of wireless substitution and access line losses. Wholesale lines declined by 21.1% in 2009 due to the continued impact of competitors deemphasizing their
local market initiatives coupled with the impact of technology substitution as well as the continued level of economic pressure compared to a 20.1% decline in 2008. Changes in foreign exchange rates resulted in a revenue decline of approximately
1.0% in 2009 compared to 2008. Continuing demand for high-capacity, high-speed digital services was partially offset by lower demand for older, low-speed data products and services. As of December 31, 2009, customer demand, as measured in DS1
and DS3 circuits, for high-capacity and digital data services increased 2.2% compared to an increase of 5.1% in 2008.
The FCC regulates the rates charged to customers for interstate access services. See
“Other Factors That May Affect Future Results – Regulatory and Competitive Trends – FCC Regulation” for additional information on FCC rulemaking concerning federal access rates, universal service and certain broadband services.
Other Revenues
Other revenues include such services as local exchange and long distance services from former MCI mass market customers, operator services, pay phone, card services and supply sales. The decrease in
revenues from other services during 2010 compared to 2009 was primarily due to reduced business volumes, including former MCI mass market customer losses.
The decrease in revenues from other services during 2009 compared to 2008 was mainly due to the discontinuation of non-strategic product lines and reduced business volumes, including former MCI mass
market customer losses.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Cost of services and sales
|
|
$
|
22,618
|
|
|
$
|
22,693
|
|
|
$
|
22,890
|
|
|
$
|
(75
|
)
|
|
|
(0.3
|
)%
|
|
$
|
(197
|
)
|
|
|
(0.9)%
|
|
|
Selling, general and administrative expense
|
|
|
9,372
|
|
|
|
9,947
|
|
|
|
10,169
|
|
|
|
(575
|
)
|
|
|
(5.8
|
)
|
|
|
(222
|
)
|
|
|
(2.2)
|
|
|
Depreciation and amortization expense
|
|
|
8,469
|
|
|
|
8,238
|
|
|
|
8,174
|
|
|
|
231
|
|
|
|
2.8
|
|
|
|
64
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
$
|
40,459
|
|
|
$
|
40,878
|
|
|
$
|
41,233
|
|
|
$
|
(419
|
)
|
|
|
(1.0
|
)
|
|
$
|
(355
|
)
|
|
|
(0.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Services and Sales
Cost of services and sales were essentially unchanged during 2010 compared to 2009. Decreases were primarily due to lower costs associated with compensation and installation expenses as a result of lower
headcount and productivity improvements, as well as lower access costs driven mainly by management actions to reduce exposure to unprofitable international wholesale routes and declines in overall wholesale long distance volumes. In addition, our
FiOS TV and Internet cost of acquisition per addition also decreased in 2010 compared to 2009. These declines were partially offset by higher customer premise equipment costs and content costs associated with continued FiOS subscriber
growth. Our FiOS TV and FiOS Internet cost of acquisition per addition also decreased in 2010 compared to 2009.
Cost of
services and sales in 2009 decreased compared to 2008, primarily due to lower costs associated with compensation, installation, repair and maintenance expenses as a result of fewer access lines, lower headcount and productivity improvements. Also
contributing to the decreases were lower long distance MOUs and customer premise equipment costs, as well as favorable foreign exchange movements. Partially offsetting these decreases were higher content and customer acquisition costs associated
with continued subscriber growth. Our FiOS TV and FiOS Internet cost of acquisition per addition also decreased in 2009 compared to 2008.
Selling, General and Administrative Expense
Selling, general and administrative expense decreased during 2010 compared to 2009 primarily due to the decline in compensation expense as a result of lower headcount and cost reduction initiatives,
partially offset by higher gains on sales of assets in 2009. Selling, general and administrative expense in 2009 decreased compared to 2008 primarily due to the decline in compensation expense as a result of lower headcount and cost reduction
initiatives, as well as favorable foreign exchange movements.
Depreciation and Amortization Expense
Depreciation and amortization expense increased during 2010 compared to 2009 due to growth in depreciable telephone plant from capital
spending. Depreciation and amortization expense in 2009 increased compared to 2008 primarily driven by growth in depreciable telephone plant from capital spending, partially offset by lower rates of depreciation as a result of changes in the
estimated useful lives of certain asset classes.
Segment Operating Income and EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
|
|
|
Segment Operating Income
|
|
$
|
768
|
|
|
$
|
1,573
|
|
|
$
|
3,090
|
|
|
$
|
(805
|
)
|
|
|
(51.2
|
)%
|
|
$
|
(1,517
|
)
|
|
|
(49.1)%
|
|
|
Add Depreciation and amortization expense
|
|
|
8,469
|
|
|
|
8,238
|
|
|
|
8,174
|
|
|
|
231
|
|
|
|
2.8
|
|
|
|
64
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment EBITDA
|
|
$
|
9,237
|
|
|
$
|
9,811
|
|
|
$
|
11,264
|
|
|
$
|
(574
|
)
|
|
|
(5.9
|
)
|
|
$
|
(1,453
|
)
|
|
|
(12.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income margin
|
|
|
1.9
|
%
|
|
|
3.7
|
%
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment EBITDA margin
|
|
|
22.4
|
%
|
|
|
23.1
|
%
|
|
|
25.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decreases in Wireline’s Operating income and Segment EBITDA during 2010 and 2009 were
primarily a result of the impact of factors described in connection with operating revenue and operating expenses above.
Non-recurring or
non-operational items excluded from Wireline’s Operating income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Severance, pension and benefit charges
|
|
$
|
2,237
|
|
|
$
|
2,253
|
|
|
$
|
506
|
|
|
Access line spin-off and other charges
|
|
|
79
|
|
|
|
51
|
|
|
|
34
|
|
|
Merger integration costs
|
|
|
–
|
|
|
|
–
|
|
|
|
151
|
|
|
Impact of divested operations
|
|
|
(408
|
)
|
|
|
(980
|
)
|
|
|
(1,197
|
)
|
|
|
|
|
|
|
|
|
|
$
|
1,908
|
|
|
$
|
1,324
|
|
|
$
|
(506
|
)
|
|
|
|
|
|
|
|
|
|
Severance, Pension and Benefit Charges
|
During 2010, we recorded net pre-tax severance, pension and benefits charges of $3.1 billion primarily in connection with an agreement we
reached with certain unions on temporary enhancements to the separation programs contained in their existing collective bargaining agreements. These temporary enhancements were intended to help address a previously declared surplus of employees and
to help reduce the need for layoffs. Accordingly, during 2010, we recorded severance, pension and benefits charges associated with the approximately 11,900 union-represented employees who volunteered for the incentive offer. These charges included
$1.2 billion for severance for the 2010 programs mentioned above and a planned workforce reduction of approximately 2,500 employees in 2011. In addition, we recorded $1.3 billion for pension and postretirement curtailment losses and special
termination benefits that were due to the workforce reductions, which caused the elimination of a significant amount of future service. Also, we recorded remeasurement losses of $0.6 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 remeasurement losses included $0.1 billion of pension settlement losses related to employees that received lump sum distributions, primarily
resulting from our previously announced separation plans.
During 2009, we recorded net pre-tax severance, pension and
benefits charges of $1.4 billion primarily for pension and postretirement curtailment losses and special termination benefits of $1.9 billion as workforce reductions caused the elimination of a significant amount of future service requiring us to
recognize a portion of the prior service costs. These charges also included $0.9 billion for workforce reductions of approximately 17,600 employees; 4,200 of whom were separated during late 2009 and the remainder in 2010. Also, we recorded
remeasurement gains of $1.4 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.
During 2008, we recorded net pre-tax severance, pension and benefits charges of $15.6 billion primarily due to remeasurement losses of
$15.0 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. These remeasurement losses included $0.5 billion of pension settlement losses
related to employees that received lump sum distributions, primarily resulting from our previously announced separation plans. These severance, pension and benefit charges also included $0.5 billion for workforce reductions in connection with the
separation of approximately 8,600 employees and related charges; 3,500 of whom were separated in the second half of 2008 and the remainder in 2009 and $0.1 billion for pension and postretirement curtailment losses and special termination benefits,
that were due to the workforce reductions, which caused the elimination of a significant amount of future service.
|
|
|
Merger Integration and Acquisition Costs
|
During 2010, we recorded pre-tax merger integration charges of $0.9 billion primarily related to the Alltel acquisition. These charges
primarily related to the decommissioning of overlapping cell sites, preacquisition contingencies, handset conversions and trade name amortization.
During 2009, we recorded pre-tax merger integration and acquisition charges of $1.2 billion. These charges primarily related to the Alltel acquisition and were comprised of trade name amortization,
re-branding initiatives and handset conversions. The charges during 2009 were also comprised of transaction fees and costs associated with the acquisition, including fees related to the credit facility that was entered into and utilized to complete
the acquisition.
In 2008, we recorded pre-tax charges of $0.2 billion, primarily comprised of systems integration activities
and other costs related to re-branding initiatives, facility exit costs and advertising associated with the MCI acquisition.
|
|
|
Medicare Part D Subsidy Charges
|
Under the Health Care Act, beginning in 2013, Verizon and other companies that receive a subsidy under Medicare Part D to provide retiree
prescription drug coverage will no longer receive a federal income tax deduction for the expenses incurred in connection with providing the subsidized coverage to the extent of the subsidy received. Because future anticipated retiree prescription
drug plan liabilities and related subsidies were already reflected in Verizon’s financial statements, this change required Verizon to reduce the value of the related tax benefits recognized in its financial statements in the period during which
the Health Care Act was enacted. As a result, Verizon recorded a one-time, non-cash income tax charge of $1.0 billion in the first quarter of 2010 to reflect the impact of this change.
Access Line Spin-off and Other Charges
During 2010 and 2009, we recorded
pre-tax charges of $0.5 billion and $0.2 billion, respectively, primarily for costs incurred related to network, non-network software and other activities to enable the divested markets in the transaction with Frontier to operate on a stand-alone
basis subsequent to the closing of the transaction, and professional advisory and legal fees in connection with this transaction. Also included during 2010 are fees related to early extinguishment of debt. During 2009, we also recorded pre-tax
charges of $0.2 billion for costs incurred related to our Wireline cost reduction initiatives.
During 2008, we recorded
pre-tax charges of $0.1 billion for costs incurred related to network, non-network software, and other activities to enable the operations in Maine, New Hampshire and Vermont to operate on a stand-alone basis subsequent to the spin-off of our
telephone access line operations in those states, and professional advisory and legal fees in connection with this transaction.
Alltel
Divestiture Markets
During 2010, we recorded a tax charge of approximately $0.2 billion for the taxable gain on the excess
of book over tax basis of the goodwill associated with the Alltel Divestiture Markets.
|
|
|
Investment Impairment Charges
|
During 2008, we recorded a pre-tax charge of $48 million related to an other-than-temporary decline in the fair value of our investments
in certain marketable securities.
Corporate, eliminations and other during the periods presented include a non-cash adjustment of $0.2 billion, ($0.1 billion) and ($34 million) in 2010, 2009 and 2008, respectively, primarily to
adjust wireless data revenues. This adjustment was recorded to properly defer previously recognized wireless data revenues that will be earned and recognized in future periods. Consolidated revenues in 2009 and 2008 were not affected as the amounts
involved were not material to the consolidated financial statements.
|
|
|
Consolidated Financial
Condition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash Flows Provided By (Used In)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
33,363
|
|
|
$
|
31,390
|
|
|
$
|
27,452
|
|
|
Investing activities
|
|
|
(15,054)
|
|
|
|
(23,156)
|
|
|
|
(31,474)
|
|
|
Financing activities
|
|
|
(13,650)
|
|
|
|
(16,007)
|
|
|
|
12,651
|
|
|
|
|
|
|
|
|
Increase (Decrease) In Cash and Cash Equivalents
|
|
$
|
4,659
|
|
|
$
|
(7,773)
|
|
|
$
|
8,629
|
|
|
|
|
|
|
|
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. While our current liabilities typically exceed current assets, 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. We expect 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 development activities or to maintain our capital structure to ensure our financial flexibility.
We manage our capital structure to balance our cost of capital and the need for financial flexibility. We believe that we will continue to have the necessary access to capital markets.
Our available external financing arrangements include the issuance of commercial paper, 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 currently have a shelf registration available for the issuance of up to $4.0 billion of
additional unsecured debt or equity 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.
|
|
|
Cash Flows From Operating Activities
|
Our primary source of funds continues to be cash generated from operations. Net cash provided by operating activities during 2010
increased by $2.0 billion compared to 2009 primarily due to higher operating cash flows at Domestic Wireless, changes in working capital related in part to management of inventory and the timing of tax payments. Partially offsetting these increases
were lower operating cash flows at Wireline, as well as a lower net distribution from Vodafone Omnitel.
Net cash provided by
operating activities in 2009 increased by $3.9 billion compared to the similar period in 2008 primarily driven by higher operating cash flows at Domestic Wireless resulting from the acquisition of Alltel, as well as a higher net distribution from
Vodafone Omnitel. Partially offsetting the increase in net cash provided by operating activities were payments totaling $0.5 billion to settle the acquired Alltel interest rate swaps.
|
|
|
Cash Flows From Investing Activities
|
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. We are directing our capital spending primarily toward higher growth markets.
Capital expenditures, including capitalized software, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
Domestic Wireless
|
|
$
|
8,438
|
|
|
$
|
7,152
|
|
|
$
|
6,510
|
|
|
Wireline
|
|
|
7,269
|
|
|
|
8,892
|
|
|
|
9,797
|
|
|
Other
|
|
|
751
|
|
|
|
828
|
|
|
|
826
|
|
|
|
|
|
|
|
|
|
|
$
|
16,458
|
|
|
$
|
16,872
|
|
|
$
|
17,133
|
|
|
|
|
|
|
|
|
Total as a percentage of total revenue
|
|
|
15.4%
|
|
|
|
15.7%
|
|
|
|
17.6%
|
|
During 2010, we
continued to focus on increasing our return on capital expenditures by shifting capital more towards investing in the capacity of our wireless EV-DO networks and funding the build-out of our 4G LTE network. Accordingly, during 2010, capital
expenditures at Domestic Wireless increased nearly $1.3 billion compared to 2009. The increase in capital expenditures at Domestic Wireless were more than offset by the decrease in capital expenditures at Wireline during 2010 compared to 2009
primarily due to lower capital expenditures related to FiOS.
The increase in capital expenditures at Domestic Wireless during
2009 compared to 2008 was primarily due to the incremental capital spending on the acquired Alltel properties, continued investment in our wireless EV-DO networks, and funding the development of our 4G LTE network. The decrease in capital
expenditures at Wireline during 2009 was primarily due to the FiOS deployment plan, which included larger expenditures in 2008, as well as lower legacy spending requirements.
Dispositions
During 2010, we received cash proceeds of $2.6 billion in
connection with the required divestitures of overlapping properties as a result of the acquisition of Alltel (see “Acquisitions and Divestitures”).
Acquisitions
During 2010, 2009 and 2008, we invested $1.4 billion, $6.0
billion and $15.9 billion, respectively, in acquisitions of licenses, investments and businesses. See “Other Consolidated Results” for the amounts of interest paid that were capitalized during 2010, 2009 and 2008.
|
•
|
|
On August 23, 2010, Verizon Wireless acquired the net assets and related customers of six operating markets in Louisiana and Mississippi in a
transaction with AT&T Inc. for cash consideration of $0.2 billion.
|
|
•
|
|
On January 9, 2009, Verizon Wireless paid approximately $5.9 billion for the equity of Alltel, which was partially offset by $1.0 billion of
cash acquired at closing.
|
|
•
|
|
During 2008, Verizon Wireless was the winning bidder in the Federal Communications Commission’s (FCC) auction of spectrum in the 700 MHz band
and paid the FCC $9.4 billion to acquire 109 licenses in the 700 MHz band.
|
|
•
|
|
On August 7, 2008, Verizon Wireless completed its acquisition of Rural Cellular for cash consideration of $0.9 billion, net of cash acquired
and after an exchange transaction with another carrier to complete the required divestiture of certain markets.
|
|
•
|
|
On June 10, 2008, in connection with the announcement of the Alltel transaction, Verizon Wireless purchased approximately $5.0 billion
aggregate principal amount of debt obligations of Alltel for approximately $4.8 billion plus accrued and unpaid interest.
|
|
|
|
Cash Flows From Financing Activities
|
During 2010 and 2009, net cash used in financing activities was $13.7 billion and $16.0 billion, respectively. During 2008, net cash
provided by financing activities was $12.7 billion.
2010
During July 2010, Verizon received approximately $3.1 billion in cash in connection with the completion of the spin-off and merger of Spinco (see “Acquisitions and Divestitures”). This special
cash payment was subsequently used to redeem $2.0 billion of 7.25% Verizon Communications Notes due December 2010 at a redemption price of 102.7% of the principal amount of the notes, plus accrued and unpaid interest through the date of redemption,
as well as other short-term borrowings. During 2010, $0.3 billion of 6.125% and $0.2 billion of 8.625% Verizon New York Inc. Debentures, $0.2 billion of 6.375% Verizon North Inc. Debentures and $0.2 billion of 6.3% Verizon Northwest Inc. Debentures
matured and were repaid. In addition, during 2010, Verizon repaid $0.2 billion of floating rate vendor financing debt.
During
2011, $0.5 billion of 5.35% Verizon Communications notes matured and were repaid and Verizon utilized $0.3 billion of a fixed rate vendor financing facility.
2009
During 2009, Verizon issued $1.8 billion of 6.35% Notes due 2019 and
$1.0 billion of 7.35% Notes due 2039, resulting in cash proceeds of $2.7 billion, net of discounts and issuance costs, which was used to reduce our commercial paper borrowings, repay maturing debt and for general corporate purposes. In January 2009,
Verizon utilized a $0.2 billion floating rate vendor financing facility. During 2009, we redeemed $0.1 billion of 6.8% Verizon New Jersey Inc. Debentures, $0.3 billion of 6.7% and $0.2 billion of 5.5% Verizon California Inc. Debentures and $0.2
billion of 5.875% Verizon New England Inc. Debentures. In April 2009, we redeemed $0.5 billion of 7.51% GTE Corporation Debentures. In addition, during 2009, $0.5 billion of floating rate Notes due 2009 and $0.1 billion of 8.23% Verizon Notes
matured and were repaid.
2008
During 2008, we made debt repayments of approximately $2.6 billion which primarily included $0.2 billion of 5.55% Verizon Northwest Debentures, $0.3 billion of 6.9% and $0.3 billion of 5.65% Verizon North
Inc. Debentures, $0.1 billion of 7.0% Verizon California Inc. Debentures, $0.3 billion of 6.0% Verizon New York Inc. Debentures, $0.3 billion of 6.46% GTE Corporation Debentures, $0.1 billion of 6.0% Verizon South Inc. Debentures, and $1.0 billion
of 4.0% Verizon Communications Inc. Notes. As a result of the spin-off of our local exchange business and related activities in Maine, New Hampshire and Vermont, in March 2008, our net debt was reduced by approximately $1.4 billion.
In November 2008, Verizon issued $2.0 billion of 8.75% Notes due 2018 and $1.3 billion of 8.95% Notes due 2039, which resulted in cash
proceeds of $3.2 billion net of discount and issuance costs. In April 2008, Verizon issued $1.3 billion of 5.25% Notes due 2013, $1.5 billion of 6.10% Notes due 2018, and $1.3 billion of 6.90% Notes due 2038, resulting in cash proceeds of $4.0
billion, net of discounts and issuance costs. In February 2008, Verizon issued $0.8 billion of 4.35% Notes due 2013, $1.5 billion of 5.50% Notes due 2018, and $1.8 billion of 6.40% Notes due 2038, resulting in cash proceeds of $4.0 billion, net of
discounts and issuance costs. In January 2008, Verizon utilized a $0.2 billion fixed rate vendor financing facility.
Verizon Wireless
2010
On
June 28, 2010, Verizon Wireless exercised its right to redeem the outstanding $1.0 billion of aggregate floating rate notes due June 2011 at a redemption price of 100% of the principal amount of the notes, plus accrued and unpaid interest
through the date of redemption. In addition, during 2010 Verizon Wireless repaid the remaining $4.0 billion of borrowings that were outstanding under a $4.4 billion Three-Year Term Loan Facility Agreement with a maturity date of September 2011
(Three-Year Term Loan Facility). No borrowings remain outstanding under this facility as of December 31, 2010 and this facility has been cancelled.
2009
During 2009, Verizon Wireless raised capital to fund the acquisition of Alltel.
|
•
|
|
On January 9, 2009, Verizon Wireless borrowed $12.4 billion under a $17.0 billion credit facility (Bridge Facility) in order to complete the
acquisition of Alltel and repay a portion of the approximately $24 billion of Alltel debt assumed. Verizon Wireless used cash generated from operations and the net proceeds from the sale of the notes in private placements issued in February
2009, May 2009 and June 2009, which are described below to repay the borrowings under the Bridge Facility. The Bridge Facility and the commitments under the Bridge Facility have been terminated.
|
|
•
|
|
In February 2009, Verizon Wireless and Verizon Wireless Capital LLC co-issued $4.3 billion aggregate principal amount of three and five-year fixed
rate notes in a private placement resulting in cash proceeds of $4.2 billion, net of discounts and issuance costs.
|
|
•
|
|
In May 2009, Verizon Wireless and Verizon Wireless Capital LLC co-issued $4.0 billion aggregate principal amount of two-year fixed and floating rate
notes in a private placement resulting in cash proceeds of approximately $4.0 billion, net of discounts and issuance costs.
|
|
•
|
|
In June 2009, Verizon Wireless issued $1.0 billion aggregate principal amount of floating rate notes due 2011. As described above, during 2010 these
notes were repaid.
|
|
•
|
|
In August 2009, Verizon Wireless repaid $0.4 billion of borrowings that were outstanding under the Three-Year Term Loan Facility, reducing the
outstanding borrowings under this facility to $4.0 billion as of December 31, 2009. As described above, during 2010 this facility was repaid in full.
|
During November 2009, Verizon Wireless and Verizon Wireless Capital LLC, completed an exchange offer to exchange the privately placed notes issued in November 2008, and February and May 2009, for new
notes with similar terms.
2008
In December 2008, Verizon Wireless and Verizon Wireless Capital LLC co-issued €0.7 billion of 7.625% notes due 2011, €0.5 billion of 8.750% notes due 2015 and £0.6 billion of 8.875% notes
due 2018 resulting in net cash proceeds of $2.4 billion. In November 2008, Verizon Wireless and Verizon Wireless Capital LLC co-issued $3.5 billion aggregate principal amount of five-year and ten-year fixed rate notes in a private placement
resulting in cash proceeds of $3.5 billion, net of discounts and issuance costs. These proceeds were used in connection with the acquisition of Alltel and the repayment of the Alltel debt that was assumed.
On September 30, 2008, Verizon Wireless and Verizon Wireless Capital LLC entered into the $4.4 billion Three-Year Term Loan
Facility. On June 5, 2008, Verizon Wireless entered into a $7.6 billion 364-Day Credit Agreement which included a $4.8 billion term facility and a $2.8 billion delayed draw facility. On June 10, 2008, Verizon Wireless borrowed $4.8 billion
under the 364-Day Credit Agreement in order to purchase Alltel debt obligations acquired in the second quarter of 2008 and, during the third quarter of 2008, borrowed $2.8 billion under the delayed draw facility to complete the purchase of Rural
Cellular and to repay Rural Cellular’s debt and pay fees and expenses incurred in connection therewith. During 2008, the borrowings under the 364-Day Credit Agreement were repaid.
Other, net
The increase in Other, net financing activities during 2010 and
2009 was primarily driven by higher distributions to Vodafone, which owns a 45% noncontrolling interest in Verizon Wireless. In addition, Other, net financing activities during 2009 included the buyout of wireless partnerships in which our ownership
interests increased as a result of the acquisition of Alltel.
Credit Facility and Shelf Registration
On April 14, 2010, we terminated all commitments under our previous $5.3 billion 364-day credit facility with a syndicate of lenders
and entered into a new $6.2 billion three-year credit facility with a group of major financial institutions. As of December 31, 2010, the unused borrowing capacity under the three-year 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.
We have a shelf registration available for the issuance of up to $4.0 billion of additional unsecured debt or equity securities.
Verizon’s ratio of debt to debt combined with Verizon’s equity was 57.8% at December 31, 2010 compared to
60.1% at December 31, 2009.
Dividends Paid
During 2010, we paid $5.4 billion in dividends compared to $5.3 billion in 2009 and $5.0 billion in 2008. As in prior periods, dividend payments were a significant use of capital resources. The Verizon
Board of Directors determines the appropriateness of the 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 2010, the Board increased our quarterly dividend payment 2.6% to $.4875 per share from $.475 per share in the same period of 2009. During the third quarter of 2009 and 2008, the Board increased our dividend payments 3.3% and 7.0%,
respectively.
Common Stock
Common stock has been used from time to time to satisfy some of the funding requirements of employee and shareowner plans.
On February 3, 2011, the Board of Directors replaced the current share buyback program with a new program for the repurchase of up to 100 million common shares terminating no later than the
close of business on February 28, 2014. The Board also determined that no additional shares were to be purchased under the prior program.
During the first quarter of 2009, we entered into a privately negotiated prepaid forward agreement for 14 million shares of Verizon common stock at a cost of approximately $0.4 billion. We terminated
the prepaid forward agreement with respect to 5 million of the shares during the fourth quarter of 2009 and 9 million of the shares in the first quarter of 2010, which resulted in the delivery of those shares to Verizon.
There were no repurchases of common stock during 2010 and 2009. During 2008, we repurchased $1.4 billion of our common stock.
Credit Ratings
The debt
securities of Verizon Communications and its subsidiaries continue to be accorded high ratings by the three primary rating agencies.
Although a one-level ratings downgrade would not be expected to significantly impact our access to capital, it could increase both the cost of refinancing existing 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.
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, 2010 totaled $6.7 billion, a $4.7 billion increase compared to Cash and cash
equivalents at December 31, 2009 for the reasons discussed above. Our Cash and cash equivalents at December 31, 2009 totaled $2.0 billion, a $7.8 billion decrease compared to Cash and cash equivalents at December 31, 2008 for the
reasons discussed above.
Free Cash Flow
Free cash flow is a non-GAAP financial measure that management believes is useful to investors and other users of Verizon’s financial information in evaluating cash available to pay debt and
dividends. Free cash flow is calculated by subtracting capital expenditures from net cash provided by operating activities. The following table reconciles net cash provided by operating activities to free cash flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net cash provided by operating activities
|
|
$
|
33,363
|
|
|
$
|
31,390
|
|
|
$
|
27,452
|
|
|
Less Capital expenditures (including capitalized software)
|
|
|
16,458
|
|
|
|
16,872
|
|
|
|
17,133
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
16,905
|
|
|
$
|
14,518
|
|
|
$
|
10,319
|
|
|
|
|
|
|
|
|
|
|
Employee Benefit Plan Funded Status and Contributions
|
We operate numerous qualified and nonqualified pension plans and other postretirement benefit plans. These plans primarily relate to our
domestic business units. During 2010, contributions to our qualified pension plans were not significant. We contributed $0.2 billion and $0.3 billion in 2009 and 2008, respectively, to our qualified pension plans. We also contributed $0.1 billion,
$0.1 billion and $0.2 billion to our nonqualified pension plans in 2010, 2009 and 2008, respectively.
During January 2011, we
contributed $0.4 billion to our qualified pension plans. We do not expect to make additional qualified pension plan contributions during the remainder of 2011. Nonqualified pension contributions are estimated to be approximately $0.1 billion for
2011.
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 $1.2 billion, $1.6 billion and $1.2 billion to our other postretirement benefit plans in 2010, 2009 and 2008,
respectively. Contributions to our other postretirement benefit plans are estimated to be approximately $1.5 billion in 2011.
We are the lessor in leveraged and direct financing lease agreements for commercial aircraft and power generating facilities, which
comprise the majority of the portfolio along with telecommunications equipment, real estate property and other equipment. These leases have remaining terms up to 40 years as of December 31, 2010. 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 holds a senior security interest in the leased equipment and rentals, the related principal and interest have been offset against the minimum lease payments receivable in accordance with generally accepted accounting principles. 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, 2010. Additional detail about these items is included in the notes to the consolidated
financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Payments Due By Period
|
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
|
Long-term debt
(1)
|
|
$
|
52,462
|
|
|
$
|
7,467
|
|
|
$
|
11,703
|
|
|
$
|
4,653
|
|
|
$
|
28,639
|
|
|
Capital lease obligations (see Note 8)
|
|
|
332
|
|
|
|
75
|
|
|
|
114
|
|
|
|
77
|
|
|
|
66
|
|
|
|
|
|
|
|
|
Total long-term debt, including current maturities
|
|
|
52,794
|
|
|
|
7,542
|
|
|
|
11,817
|
|
|
|
4,730
|
|
|
|
28,705
|
|
|
Interest on long-term debt
(1)
|
|
|
35,194
|
|
|
|
3,143
|
|
|
|
5,375
|
|
|
|
4,265
|
|
|
|
22,411
|
|
|
Operating leases (see Note 8)
|
|
|
12,633
|
|
|
|
1,898
|
|
|
|
3,191
|
|
|
|
2,267
|
|
|
|
5,277
|
|
|
Purchase obligations (see Note 17)
(2)
|
|
|
57,277
|
|
|
|
17,852
|
|
|
|
36,779
|
|
|
|
2,132
|
|
|
|
514
|
|
|
Income tax audit settlements
(3)
|
|
|
208
|
|
|
|
208
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Other long-term liabilities
(4)
|
|
|
3,900
|
|
|
|
2,500
|
|
|
|
1,400
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
162,006
|
|
|
$
|
33,143
|
|
|
$
|
58,562
|
|
|
$
|
13,394
|
|
|
$
|
56,907
|
|
|
|
|
|
|
|
|
(1)
|
Items included
in long-term debt with variable coupon rates are described in Note 9 to the consolidated financial statements.
|
|
(2)
|
The purchase
obligations reflected above are primarily commitments to purchase 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 for which we are contractually committed. We also purchase products and services as needed with no firm commitment. For this reason, the amounts
presented in this table alone do not provide a reliable indicator of our expected future cash outflows or changes in our expected cash position (see Note 17 to the consolidated financial statements).
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|
(3)
|
Income tax
audit settlements include gross unrecognized tax benefits of $0.1 billion and related gross interest and penalties of $0.1 billion as determined under the accounting standard relating to the uncertainty in income taxes. We are not able to make a
reliable estimate of when the unrecognized tax benefits balance of $3.1 billion and related interest and penalties will be settled with the respective taxing authorities until issues or examinations are further developed (see Note 13 to the
consolidated financial statements).
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|
(4)
|
Other long-term
liabilities include estimated postretirement benefit and qualified pension plan contributions (see Note 12 to the consolidated financial statements).
|
In connection with the execution of agreements for the sale of businesses and investments, Verizon ordinarily provides representations and warranties to the purchasers pertaining to a variety of
nonfinancial matters, such as ownership of the securities being sold, as well as financial losses.
As of December 31,
2010, letters of credit totaling approximately $0.1 billion were executed in the normal course of business, which support several financing arrangements and payment obligations to third parties.
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 and commodity swap agreements and interest rate locks. We do not hold derivatives for trading purposes.
It is our general policy to enter into interest rate, foreign currency and other derivative transactions only to the extent necessary to
achieve our desired objectives in limiting our exposure to 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.
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, 2010, more than three-fourths
in 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, 2010 and 2009. 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.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
At December 31, 2010
|
|
Fair Values
|
|
|
Fair Value assuming
+ 100 basis point shift
|
|
|
Fair Value assuming
- 100 basis point shift
|
|
|
Long-term debt and related derivatives
|
|
$
|
58,591
|
|
|
$
|
55,427
|
|
|
$
|
62,247
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and related derivatives
|
|
$
|
66,042
|
|
|
$
|
62,788
|
|
|
$
|
69,801
|
|
Interest Rate Swaps
We have entered into domestic interest rate swaps to achieve a targeted mix of fixed and variable rate debt, where we
principally receive fixed rates and pay variable rates based on London Interbank Offered Rate. 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. Changes in the fair value of the interest rate swaps are recorded to Interest expense, which are offset by changes in the fair value of the debt due to changes in interest
rates. The fair value of these contracts was $0.3 billion and $0.2 billion at December 31, 2010 and December 31, 2009, respectively, and are primarily included in Other assets and Long-term debt. As of December 31, 2010, the total
notional amount of these interest rate swaps was $6.0 billion. During February 2011, we entered into interest rate swaps, designated as fair value hedges, with a notional amount of approximately $3.0 billion.
Forward Interest Rate Swaps
In order to manage our exposure to future interest rate changes, during 2010, we entered into forward interest rate swaps with a total notional value of $1.4 billion. We have designated these
contracts as cash flow hedges. The fair value of these contracts was $0.1 billion at December 31, 2010 and the contracts are included in Other assets. On or before February 7, 2011, Verizon terminated these forward interest rate swaps.
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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 are recorded as cumulative translation adjustments, which are included in Accumulated other comprehensive loss 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, 2010, our primary translation exposure was to the British Pound Sterling, the Euro and the Australian Dollar.
Cross Currency Swaps
Verizon Wireless has entered into cross currency swaps designated as cash flow hedges to exchange approximately $2.4 billion 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 mitigate the impact of foreign currency transaction gains or losses. The fair value of these swaps
included primarily in Other assets was approximately $0.1 billion and $0.3 billion at December 31, 2010 and December 31, 2009, respectively. During 2010 and 2009, a pre-tax loss of $0.2 billion, and a pre-tax gain of $0.3 billion,
respectively, was recognized in Other comprehensive income, a portion of which was reclassified to Other income and (expense), net to offset the related pre-tax foreign currency transaction gain on the underlying debt obligations.
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Critical Accounting Estimates and
Recent Accounting Standards
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|
|
|
Critical Accounting Estimates
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A summary of the critical accounting estimates used in preparing our financial statements is as follows:
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•
|
|
Wireless licenses and Goodwill are a significant component of our consolidated assets. Both our wireless licenses and goodwill are treated as
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 indicates 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.
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Wireless Licenses
The carrying value of our wireless licenses was approximately $73.0 billion as of December 31, 2010.
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. Our impairment test
consists 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 is less than the aggregated carrying amount of the wireless licenses
then an impairment charge is recognized. Our annual impairment tests for 2010, 2009 and 2008 indicated that the fair value significantly exceeded the carrying value and, therefore, did not result in an impairment.
We estimate 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 are 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 consider 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 represents our estimate of the
weighted average cost of capital (or expected return, “WACC”) that a marketplace participant would require as of the valuation date. We develop 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 incorporates our estimate of the expected return a marketplace participant would require 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 represents our estimate of the marketplace’s long-term growth rate.
Goodwill
At December 31, 2010, the balance of our
goodwill was approximately $22.0 billion, of which $17.9 billion was in our Wireless segment and $4.1 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, Domestic Wireless and Wireline, are deemed to be our reporting units for purposes of goodwill impairment testing. The fair value of Domestic Wireless significantly exceeded its carrying value. The fair value
of Wireline exceeded its carrying value. Accordingly, our annual impairment tests for 2010, 2009 and 2008 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.
With regards to the Wireline goodwill valuation, a critical assumption includes the development of the WACC for use in our
estimate of fair value. The WACC is based on current market conditions, including the equity-risk premium and risk-free interest rate. The projected WACC used in the estimate of fair value in future periods may be impacted by adverse changes in
market and economic conditions, including risk-free interest rates, and are subject to change based on the facts and circumstances that exist at the time of the valuation, which may increase the likelihood of a potential future impairment charge
related to Wireline goodwill. Reducing the calculated fair value of Wireline’s net assets by more than 20 percent would not have resulted in a potential goodwill impairment.
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•
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|
We maintain benefit plans for most of our employees, including, for certain employees, pension and other postretirement benefit plans. At
December 31, 2010, 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 the on the funded status due to an increase or a decrease in the
actual versus expected return on plan assets as of December 31, 2010 and for the year then ended pertaining to Verizon’s pension and postretirement benefit plans is provided in the table below.
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|
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|
|
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|
|
|
|
|
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(dollars in millions)
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|
Percentage point
change
|
|
|
Increase (decrease) at
December 31, 2010*
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|
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Pension plans discount rate
|
|
|
+0.50
|
|
|
$
|
(1,341
|
)
|
|
|
|
|
-0.50
|
|
|
|
1,472
|
|
|
|
|
|
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Rate of return on pension plan assets
|
|
|
+1.00
|
|
|
|
(256
|
)
|
|
|
|
|
-1.00
|
|
|
|
256
|
|
|
|
|
|
|
Postretirement plans discount rate
|
|
|
+0.50
|
|
|
|
(1,348
|
)
|
|
|
|
|
-0.50
|
|
|
|
1,494
|
|
|
|
|
|
|
Rate of return on postretirement plan assets
|
|
|
+1.00
|
|
|
|
(31
|
)
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|
|
|
|
-1.00
|
|
|
|
31
|
|
|
|
|
|
|
Health care trend rates
|
|
|
+1.00
|
|
|
|
2,788
|
|
|
|
|
|
-1.00
|
|
|
|
(2,303
|
)
|
|
*
|
In determining its pension and other postretirement obligation, the Company used a 5.75% discount rate. The rate was selected to approximate the
composite interest rates available on a selection of bonds available in the market at December 31, 2010. The bonds selected had maturities that coincided with the time periods during which benefits payments are expected to occur, were
non-callable and available in sufficient quantities to ensure marketability (at least $0.2 billion par outstanding).
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|
•
|
|
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 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.
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|
•
|
|
Our Plant, property and equipment balance represents a significant component of our consolidated assets. We record plant, property and
equipment at cost. Depreciation expense on our local telephone operations is principally based on the composite group remaining life method and straight-line composite rates, which provides for the recognition of the cost of the remaining net
investment in local telephone plant, less anticipated net salvage value, over the remaining asset lives. An increase or decrease of 50 basis points to the composite rates of this class of assets would result in an increase or decrease of
approximately $0.6 billion to depreciation expense based on year-end plant balances at December 31, 2010. We depreciate other 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 that we depreciate on a straight line basis would result in a decrease to our 2010 depreciation expense of $1.0 billion and that a one-year decrease would
result in an increase of approximately $1.2 billion in our 2010 depreciation expense.
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|
|
|
Recent Accounting Standards
|
On January 1, 2011, we prospectively adopted the accounting standard update regarding revenue recognition for multiple deliverable
arrangements. This method allows a vendor to allocate revenue in an arrangement using its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists. Accordingly, the residual
method of revenue allocation is no longer permissible. The adoption of this standard update is not expected to have a significant impact on our consolidated financial statements.
On January 1, 2011, we prospectively adopted the accounting standard update regarding revenue recognition for arrangements that
include software elements. This update requires tangible products that contain software and non-software elements that work together to deliver the products’ essential functionality to be evaluated under the accounting standard regarding
multiple deliverable arrangements. The adoption of this standard update is not expected to have a significant impact on our consolidated financial statements.
Other
Factors That May Affect Future Results
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|
|
Acquisitions and Divestitures
|
Terremark Worldwide, Inc.
On January 27, 2011, Verizon announced that
it had entered into a definitive agreement to acquire all of the common stock of Terremark Worldwide, Inc., a global provider of IT infrastructure and cloud services, for $19 per share in cash (or approximately $1.4 billion). Terremark had
approximately $0.5 billion of debt outstanding as of December 31, 2010. The acquisition, which is subject to the satisfaction of conditions, including the receipt of a regulatory approval, is expected to close in the first quarter of 2011. The
acquisition will enhance Verizon’s offerings to governmental and large enterprise customers.
Access Lines Spin-offs
Frontier Transaction
On
May 13, 2009, we announced plans to spin off a newly formed subsidiary of Verizon (Spinco) to our stockholders and for Spinco to merge with Frontier immediately following the spin-off pursuant to a definitive agreement with Frontier, with
Frontier to be the surviving corporation.
On July 1, 2010, after receiving regulatory approval, we completed the spin-off
of the shares of Spinco to Verizon stockholders and the merger of Spinco with Frontier, resulting in Verizon stockholders collectively owning approximately 68 percent of Frontier’s equity which was outstanding immediately following the merger.
Frontier issued approximately 678.5 million shares of Frontier common stock in the aggregate to Verizon stockholders in the merger, and Verizon stockholders received one share of Frontier common stock for every 4.165977 shares of Verizon common
stock they owned as of June 7, 2010. Verizon stockholders received cash in lieu of any fraction of a share of Frontier common stock to which they otherwise were entitled.
At the time of the spin-off and the merger, Spinco held defined assets and liabilities of the local exchange business and related landline activities of Verizon in Arizona, Idaho, Illinois, Indiana,
Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia and Wisconsin, and in portions of California bordering Arizona, Nevada and Oregon, including Internet access and long distance services and broadband video
provided to designated customers in those areas. The transactions did not involve any assets or liabilities of Verizon Wireless. The merger resulted in Frontier acquiring approximately 4 million access lines and certain related
businesses from Verizon, which collectively generated revenues of approximately $4 billion for Verizon’s Wireline segment during 2009 and approximately $1.7 billion of revenue for Verizon’s Wireline segment during the six months ended
June 30, 2010.
Pursuant to the terms of Verizon’s equity incentive plans, shortly following the closing of the
spin-off and the merger, the number of outstanding and unvested restricted stock units (RSUs) and performance stock units (PSUs) held by current and former Verizon employees (including Verizon employees who became employees of Frontier in connection
with the merger) was increased to reflect a number of additional units approximately equal to the cash value of the Frontier common stock that the holders of the RSUs and PSUs would have received with respect to hypothetical shares of Verizon common
stock subject to awards under those plans. In addition, the exercise prices and number of shares of Verizon common stock underlying stock options to purchase shares of Verizon common stock previously granted to employees under equity incentive plans
were adjusted pursuant to the terms of those plans to take into account the decrease in the value of Verizon common stock immediately following the spin-off and merger.
The total value of the transaction to Verizon and its stockholders was approximately $8.6 billion. Verizon stockholders received $5.3 billion in Frontier common stock (based on the valuation formula
contained in the merger agreement with Frontier) as described above, and Verizon received $3.3 billion in aggregate value, comprised of $3.1 billion in the form of a special cash payment from Spinco and $0.3 billion in a reduction in Verizon’s
consolidated indebtedness. During July 2010, Verizon used the proceeds from the special cash payment to reduce its consolidated indebtedness. The accompanying consolidated financial statements for the year ended December 31, 2010 include these
operations prior to the completion of the spin-off on July 1, 2010. The spin-off decreased Total equity and Goodwill by approximately $1.9 billion and $0.6 billion, respectively.
On April 12, 2010, Spinco completed a financing of $3.2 billion in principal amount of notes. The gross proceeds of the offering
were deposited into an escrow account. Immediately prior to the spin-off on July 1, 2010, the funds in the escrow account representing the net cash proceeds from the offering were released to Verizon. These proceeds are reflected in the
consolidated statement of cash flows as Proceeds from access line spin-off.
FairPoint Transaction
On March 31, 2008, we completed the spin-off of the shares of Northern New England Spinco Inc. to Verizon shareowners and the merger of
Northern New England Spinco Inc. with FairPoint Communications, Inc. As a result of the spin-off, our net debt was reduced by approximately $1.4 billion. The consolidated statements of income for the periods presented include the results of
operations of the local exchange and related business assets in Maine, New Hampshire and Vermont through the date of completion of the spin-off.
Alltel Divestiture Markets
As a condition of the regulatory approvals by
the DOJ and the FCC to complete the acquisition of Alltel in January 2009, Verizon Wireless was required to divest overlapping properties in 105 operating markets in 24 states. Total assets and total liabilities divested were $2.6 billion and $0.1
billion, respectively, principally comprised of network assets, wireless licenses and customer relationships that were included in Prepaid expenses and other current assets and Other current liabilities, respectively, on the consolidated balance
sheet at December 31, 2009.
On May 8, 2009, Verizon Wireless entered into a definitive agreement with AT&T
Mobility, pursuant to which AT&T Mobility agreed to acquire 79 of the 105 Alltel Divestiture Markets, including licenses and network assets, for approximately $2.4 billion in cash. On June 9, 2009, Verizon Wireless entered into a definitive
agreement with Atlantic Tele-Network, Inc. (ATN), pursuant to which ATN agreed to acquire the remaining 26 Alltel Divestiture Markets, including licenses and network assets, for $0.2 billion in cash. During the second quarter of 2010, Verizon
Wireless completed both transactions.
Other
On August 23, 2010, Verizon Wireless acquired the net assets and related customers of six operating markets in Louisiana and Mississippi in a transaction with AT&T Inc. for cash consideration of
$0.2 billion. These assets were acquired to enhance Verizon Wireless’ network coverage in these operating markets. The preliminary purchase price allocation primarily resulted in $0.1 billion of wireless licenses and $0.1 billion in goodwill.
|
|
|
Regulatory and Competitive Trends
|
Competition and Regulation
Technological, regulatory and market changes
have provided Verizon both new opportunities and challenges. These changes have allowed Verizon to offer new types of services in an increasingly competitive market. At the same time, they have allowed other service providers to broaden the scope of
their own competitive offerings. Current and potential competitors for network services include other telephone companies, cable companies, wireless service providers, foreign telecommunications providers, satellite providers, electric utilities,
Internet service providers, providers of VoIP services, and other companies that offer network services using a variety of technologies. Many of these companies have a strong market presence, brand recognition and existing customer relationships,
all of which contribute to intensifying competition and may affect our future revenue growth. Many of our competitors also remain subject to fewer regulatory constraints than us.
We are unable to predict definitively the impact that the ongoing changes in the telecommunications industry will ultimately have on our
business, results of operations or financial condition. The financial impact will depend on several factors, including the timing, extent and success of competition in our markets, the timing and outcome of various regulatory proceedings and any
appeals, and the timing, extent and success of our pursuit of new opportunities.
FCC Regulation
The FCC has jurisdiction over our interstate telecommunications services and other matters under the Communications Act of 1934, as
amended (Communications Act). The Communications Act generally provides that we may not charge unjust or unreasonable rates, or engage in unreasonable discrimination when we are providing services as a common carrier, and regulates some of the
rates, terms and conditions under which we provide certain services. The FCC also has adopted regulations governing various aspects of our business including: (i) use and disclosure of customer proprietary network information;
(ii) telemarketing; (iii) assignment of telephone numbers to customers; (iv) provision to law enforcement agencies of the capability to obtain call identifying information and call content information from calls pursuant to lawful
process; (v) accessibility of services and equipment to individuals with disabilities if readily achievable; (vi) interconnection with the networks of other carriers; and (vii) customers’ ability to keep (or “port”)
their telephone numbers when switching to another carrier. In addition, we pay various fees to support other FCC programs, such as the universal service program discussed below. Changes to these mandates, or the adoption of additional mandates,
could require us to make changes to our operations or otherwise increase our costs of compliance.
Broadband
The FCC previously adopted a series of orders that impose lesser regulatory requirements on broadband services and facilities than apply
to narrowband or traditional telephone services. With respect to wireline facilities, the FCC determined that certain unbundling requirements that apply to narrowband facilities of local exchange carriers do not apply to broadband facilities such as
fiber to the premise loops and packet switches. With respect to services, the FCC concluded that both wireline and wireless broadband Internet access services qualify as largely deregulated information services. Separately, certain of our wireline
broadband services sold primarily to larger business customers
were largely deregulated when our forbearance petition was deemed granted by operation of law. The latter relief has been upheld on appeal, but is subject to a continuing challenge before the
FCC.
In December of 2010, the FCC adopted so-called “net neutrality” rules governing broadband Internet access
services that it describes as intended to preserve the openness of the Internet. The rules require providers of broadband Internet access to publicly disclose information relating to the performance and terms of its services. For “fixed”
services, the rules prohibit blocking lawful content, applications, services or non-harmful devices. The rules also prohibit unreasonable discrimination in transmitting lawful traffic over a consumer’s broadband Internet access service. For
“mobile” services, the rules prohibit blocking access to lawful websites or blocking applications that compete with the provider’s voice or video telephony services. The restrictions are subject to “reasonable network
management.” The rules also establish a complaint process, and state that the FCC will continue to monitor developments to determine whether to impose further regulations. The rules are scheduled to take effect following their review by the
Office of Management and Budget, and will be subject to appeals.
Video
The FCC has a body of rules that apply to cable operators under Title VI of the Communications Act of 1934, and these rules also generally
apply to telephone companies that provide cable services over their networks. In addition, the Act generally requires companies that provide cable service over a cable system to obtain a local cable franchise, and the FCC has adopted rules that
interpret and implement this requirement.
Interstate Access Charges and Intercarrier Compensation
The FCC’s current framework for interstate switched access rates was established in the Coalition for Affordable Local and Long
Distance Services (CALLS) plan which the FCC adopted in 2000, and it has adopted a separate framework that applies to dial-up Internet-bound traffic. The FCC currently is conducting a broad rulemaking to determine whether and how these existing
frameworks should be modified.
An FCC rulemaking proceeding is also pending to address the regulation of services that use
IP. The issues raised in the rulemaking as well as in several petitions currently pending before the FCC include whether, and under what circumstances, access charges should apply to voice or other IP services and the scope of federal and state
commission authority over these services.
The FCC’s current rules for special access services provide for pricing
flexibility and ultimately the removal of services from price regulation when prescribed competitive thresholds are met. More than half of special access revenues are now removed from price regulation. The FCC currently has a rulemaking proceeding
underway to determine whether and how these rules should be modified.
Universal Service
The FCC has adopted a body of rules implementing the universal service provisions of the Telecommunications Act of 1996, including
provisions to support rural and non-rural high-cost areas, low income subscribers, schools and libraries and rural health care. The FCC’s rules require telecommunications companies including Verizon to pay into the Universal Service Fund (USF),
which then makes distributions in support of the programs. Certain of the FCC’s rules for support to high-cost areas served by larger “non-rural” local telephone companies are the subject of a pending appeal. Separately, in response
to growth in the size of the USF, the FCC has capped the amount of distributions competitive carriers (including all wireless carriers) may receive from the USF. In its 2008 order approving Verizon Wireless’ acquisition of Alltel, the FCC also
required Verizon Wireless to phase out the high-cost universal service support the merged company receives by 20 percent during the first year following completion of the acquisition and by an additional 20 percent for each of the following three
years, after which no support will be provided. The FCC currently is considering other changes to the rules governing contributions to, and disbursements from, the fund. Any change in the current rules could result in a change in the contribution
that Verizon and others must make and that would have to be collected from customers, or in the amounts that these providers receive from the USF.
Unbundling of Network Elements
Under Section 251 of the
Telecommunications Act of 1996, incumbent local exchange carriers are required to provide competing carriers with access to components of their network on an unbundled basis, known as UNEs, where certain statutory standards are satisfied. The FCC
has adopted rules defining the network elements that must be made available, including criteria for determining whether high-capacity loops, transport or dark fiber transport must be unbundled in individual wire centers. The Telecommunications Act
of 1996 also adopted a cost-based pricing standard for these UNEs, which the FCC interpreted as allowing it to impose a pricing standard known as “total element long run incremental cost” or “TELRIC.”
Wireless Services
The
FCC regulates the licensing, construction, operation, acquisition and transfer of wireless communications systems, including the systems that Verizon Wireless operates, pursuant to the Communications Act, other legislation, and the FCC’s rules.
The FCC and Congress continuously consider changes to these laws and rules. Adoption of new laws or rules may raise the cost of providing service or require modification of Verizon Wireless’ business plans or operations.
To use the radio frequency spectrum, wireless communications systems must be licensed by the FCC to operate the wireless network and
mobile devices in assigned spectrum segments. Verizon Wireless holds FCC licenses to operate in several different radio services, including the cellular radiotelephone service, personal communications service, wireless communications service, and
point-to-point radio service. The technical and service rules, the specific radio frequencies and amounts of spectrum Verizon Wireless holds, and the sizes of the geographic areas it is authorized to operate in, vary for each of these services.
However, all of the licenses Verizon Wireless holds allow it to use spectrum to provide a wide range of mobile and fixed communications services, including both voice and data services, and Verizon Wireless operates a seamless network that utilizes
those licenses to provide services to customers. Because the FCC issues licenses for only a fixed time, generally 10 years, Verizon Wireless must periodically seek renewal of those licenses. Although the FCC has routinely renewed all of
Verizon Wireless’ licenses that have come up for renewal to date, challenges could be brought against the licenses in the future. If a wireless license were revoked or not renewed upon
expiration, Verizon Wireless would not be permitted to provide services on the licensed spectrum in the area covered by that license.
The FCC has also imposed specific mandates on carriers that operate wireless communications systems, which increase Verizon Wireless’ costs. These mandates include requirements that Verizon Wireless:
(i) meet specific construction and geographic coverage requirements during the license term; (ii) meet technical operating standards that, among other things, limit the radio frequency radiation from mobile devices and antennas;
(iii) deploy “Enhanced 911” wireless services that provide the wireless caller’s number, location and other information to a state or local public safety agency that handles 911 calls; (iv) provide roaming services to other
wireless service providers; and (v) comply with regulations for the construction of transmitters and towers that, among other things, restrict siting of towers in environmentally sensitive locations and in places where the towers would affect a
site listed or eligible for listing on the National Register of Historic Places. Changes to these mandates could require Verizon Wireless to make changes to operations or increase its costs of compliance. In its November 4, 2008 order approving
Verizon Wireless’ acquisition of Alltel, the FCC adopted conditions that impose additional requirements on Verizon Wireless in its provision of Enhanced 911 services and roaming services.
The Communications Act imposes restrictions on foreign ownership of U.S. wireless systems. The FCC has approved the interest that
Vodafone Group Plc holds, through various of its subsidiaries, in Verizon Wireless. The FCC may need to approve any increase in Vodafone’s interest or the acquisition of an ownership interest by other foreign entities. In addition, as part of
the FCC’s approval of Vodafone’s ownership interest, Verizon Wireless, Verizon and Vodafone entered into an agreement with the U.S. Department of Defense, Department of Justice and Federal Bureau of Investigation which imposes national
security and law enforcement-related obligations on the ways in which Verizon Wireless stores information and otherwise conducts its business.
Verizon Wireless anticipates that it will need additional spectrum to meet future demand. It can meet spectrum needs by purchasing licenses or leasing spectrum from other licensees, or by acquiring new
spectrum licenses from the FCC. Under the Communications Act, before Verizon Wireless can acquire a license from another licensee in order to expand its coverage or its spectrum capacity in a particular area, it must file an application with the
FCC, and the FCC can grant the application only after a period for public notice and comment. This review process can delay acquisition of spectrum needed to expand services, and can result in conditions on the purchaser that can impact its costs
and business plans. The Communications Act also requires the FCC to award new licenses for most commercial wireless services through a competitive bidding process in which spectrum is awarded to bidders in an auction. Verizon Wireless has
participated in spectrum auctions to acquire licenses for radio spectrum in various bands. Most recently, Verizon Wireless participated in the FCC’s auction of spectrum in the 700 MHz band, and was the high bidder on 109 700 MHz licenses. The
FCC granted all of those licenses to Verizon Wireless on November 26, 2008.
The FCC also adopted service rules that will
impose costs on licensees that acquire the 700 MHz band spectrum either through auction or by purchasing such spectrum from other companies. These rules include minimum coverage mandates by specific dates during the license terms, and, for
approximately one-third of the spectrum, known as the “C Block,” “open access” requirements, which generally require licensees of that spectrum to allow customers to use devices and applications of their choice on the LTE network
we are deploying on that spectrum, including those obtained from sources other than us or our distributors or dealers, subject to certain technical limitations established by us. Verizon Wireless holds the C Block 700 MHz licenses covering the
entire United States. In adopting its “net neutrality” rules discussed above, the FCC stated that the new rules operate independently from the “open access” requirements that continue to apply to the C Block licensees.
The FCC is also conducting several proceedings to explore making additional spectrum available for licensed and/or unlicensed
use. These proceedings could increase radio interference to Verizon Wireless’ operations from other spectrum users and could impact the ways in which it uses spectrum, the capacity of that spectrum to carry traffic, and the value of that
spectrum.
State Regulation and Local Approvals
Telephone Operations
State public utility commissions regulate our
telephone operations with respect to certain telecommunications intrastate rates and services and other matters. Our competitive local exchange carrier and long distance operations are generally classified as nondominant and lightly regulated the
same as other similarly situated carriers. Our incumbent local exchange operations are generally classified as dominant. These latter operations (California, Connecticut, Delaware, the District of Columbia, Florida, Maryland, Massachusetts, New
Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Texas and Virginia) are subject to various levels of pricing flexibility, deregulation, detariffing, and service quality standards. None of the states are subject to earnings regulation.
Video
Companies that provide cable service over a cable system are typically subject to state and/or local cable television rules and
regulations. As noted above, cable operators generally must obtain a local cable franchise from each local unit of government prior to providing cable service in that local area. Some states have enacted legislation that enables cable operators to
apply for, and obtain, a single cable franchise at the state, rather than local, level. To date, Verizon has applied for and received state-issued franchises in California, Florida, New Jersey, Texas and the unincorporated areas of Delaware. We also
have obtained authorization from the state commission in Rhode Island to provide cable service in certain areas in that state, have obtained required state commission approvals for our local franchises in New York, and will need to obtain additional
state commission approvals in these states to provide cable service in additional areas. Virginia law provides us the option of entering a given franchise area using state standards if local franchise negotiations are unsuccessful.
Wireless Services
The rapid growth of the wireless industry has led to efforts by some state legislatures and state public utility commissions to regulate the industry in ways that may impose additional costs on Verizon
Wireless. The Communications Act generally preempts regulation by state and local governments of the entry of, or the rates charged by, wireless carriers, but does not prohibit states from regulating the other “terms and conditions” of
wireless service. While numerous state commissions do not currently have jurisdiction over wireless services, state legislatures may decide to grant them such jurisdiction, and those commissions that already have authority to impose regulations on
wireless carriers may adopt new rules.
State efforts to regulate wireless services have included proposals to regulate
customer billing, termination of service, trial periods for service, advertising, the use of handsets while driving, reporting requirements for system outages and the availability of broadband wireless services. Wireless tower and antenna facilities
are also subject to state and local zoning and land use regulation, and securing approvals for new or modified tower or antenna sites is often a lengthy and expensive process.
Verizon Wireless (as well as AT&T and Sprint-Nextel) is a party to an Assurance of Voluntary Compliance (AVC) with 33 State Attorneys General. The AVC, which generally reflected Verizon Wireless’
practices at the time it was entered into in July 2004, obligates the company to disclose certain rates and terms during a sales transaction, to provide maps depicting coverage, and to comply with various requirements regarding advertising, billing,
and other practices.
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.
|
|
|
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 risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations.
Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes” or similar expressions. For those statements, we claim the protection of the safe
harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
The following
important factors, along with those discussed elsewhere in this Report could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements:
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|
•
|
|
the effects of adverse conditions in the U.S. and international economies;
|
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|
•
|
|
the effects of competition in our markets;
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|
•
|
|
materially adverse changes in labor matters, including labor negotiations, and any resulting financial and/or operational impact;
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|
•
|
|
the effect of material changes in available technology;
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|
•
|
|
any disruption of our key suppliers’ provisioning of products or services;
|
|
|
•
|
|
significant increases in benefit plan costs or lower investment returns on plan assets;
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|
•
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|
the impact of natural disasters, terrorist attacks, breaches of network or information technology security or existing or future litigation and any
resulting financial impact not covered by insurance;
|
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|
•
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|
technology substitution;
|
|
|
•
|
|
an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations or adverse conditions in the credit
markets impacting the cost, including interest rates, and/or availability of financing;
|
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|
•
|
|
any changes in the regulatory environments in which we operate, including any increase in restrictions on our ability to operate our networks;
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|
•
|
|
the timing, scope and financial impact of our deployment of broadband technology;
|
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|
•
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|
changes in our accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules
or their application, which could result in an impact on earnings;
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|
•
|
|
our ability to complete acquisitions and dispositions; and
|
|
|
•
|
|
the inability to implement our business strategies.
|
|
|
|
Report of Management 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.
Management has assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2010.
Based on this assessment, we believe that the internal control over financial reporting of the company is effective as of December 31, 2010. 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.
|
|
|
/s/ Ivan G. Seidenberg
Ivan G. Seidenberg
|
|
Chairman and Chief Executive Officer
|
|
|
|
/s/ Francis J. Shammo
Francis J. Shammo
|
|
Executive Vice President and Chief Financial Officer
|
|
|
|
/s/ Robert J. Barish
Robert J. Barish
|
|
Senior Vice President and Controller
|
|
|
|
Report of Independent Registered
Public Accounting Firm on Internal Control Over Financial Reporting
|
To The Board of Directors and Shareowners of
Verizon Communications Inc.:
We have audited Verizon Communications Inc. and subsidiaries’ (Verizon) internal control
over financial reporting as of December 31, 2010, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Verizon’s
management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
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, 2010, 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, 2010 and 2009, and the related consolidated statements of income, cash flows and
changes in equity for each of the three years in the period ended December 31, 2010 of Verizon and our report dated February 28, 2011 expressed an unqualified opinion thereon.
|
|
|
|
|
/s/ Ernst & Young LLP
|
|
Ernst & Young LLP
|
|
New York, New York
|
|
|
|
February 28, 2011
|
|
|
|
Report of Independent Registered
Public Accounting Firm on Financial Statements
|
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, 2010 and 2009, and the related consolidated statements of income, cash flows and changes in equity for each of the three years in the period ended December 31, 2010. 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, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, Verizon has elected to change its methods of
accounting for actuarial gains and losses and the calculation of expected returns on plan assets for all pension and other postretirement benefit plans during the fourth quarter of 2010.
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, 2010, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 28, 2011 expressed an unqualified opinion thereon.
|
|
|
|
|
/s/ Ernst & Young LLP
|
|
Ernst & Young LLP
|
|
New York, New York
|
|
|
|
February 28, 2011
|
|
|
|
Consolidated Statements of Income
Verizon Communications Inc. and Subsidiaries – As Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Operating Revenues
|
|
$
|
106,565
|
|
|
$
|
107,808
|
|
|
$
|
97,354
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales (exclusive of items shown below)
|
|
|
44,149
|
|
|
|
44,579
|
|
|
|
38,615
|
|
|
Selling, general and administrative expense
|
|
|
31,366
|
|
|
|
30,717
|
|
|
|
41,517
|
|
|
Depreciation and amortization expense
|
|
|
16,405
|
|
|
|
16,534
|
|
|
|
14,610
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
91,920
|
|
|
|
91,830
|
|
|
|
94,742
|
|
|
|
|
|
|
|
Operating Income
|
|
|
14,645
|
|
|
|
15,978
|
|
|
|
2,612
|
|
|
Equity in earnings of unconsolidated businesses
|
|
|
508
|
|
|
|
553
|
|
|
|
567
|
|
|
Other income and (expense), net
|
|
|
54
|
|
|
|
91
|
|
|
|
283
|
|
|
Interest expense
|
|
|
(2,523
|
)
|
|
|
(3,102
|
)
|
|
|
(1,819)
|
|
|
|
|
|
|
|
|
Income Before (Provision) Benefit for Income Taxes
|
|
|
12,684
|
|
|
|
13,520
|
|
|
|
1,643
|
|
|
(Provision) benefit for income taxes
|
|
|
(2,467
|
)
|
|
|
(1,919
|
)
|
|
|
2,319
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
10,217
|
|
|
$
|
11,601
|
|
|
$
|
3,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest
|
|
$
|
7,668
|
|
|
$
|
6,707
|
|
|
$
|
6,155
|
|
|
Net income (loss) attributable to Verizon
|
|
|
2,549
|
|
|
|
4,894
|
|
|
|
(2,193)
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
10,217
|
|
|
$
|
11,601
|
|
|
$
|
3,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Verizon
|
|
$
|
.90
|
|
|
$
|
1.72
|
|
|
$
|
(.77)
|
|
|
Weighted-average shares outstanding (in millions)
|
|
|
2,830
|
|
|
|
2,841
|
|
|
|
2,849
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Verizon
|
|
$
|
.90
|
|
|
$
|
1.72
|
|
|
$
|
(.77)
|
|
|
Weighted-average shares outstanding (in millions)
|
|
|
2,833
|
|
|
|
2,841
|
|
|
|
2,849
|
|
See Notes to Consolidated Financial
Statements
|
|
|
Consolidated Balance Sheets Verizon
Communications Inc. and Subsidiaries – As Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts)
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,668
|
|
|
$
|
2,009
|
|
|
Short-term investments
|
|
|
545
|
|
|
|
490
|
|
|
Accounts receivable, net of allowances of $876 and $976
|
|
|
11,781
|
|
|
|
12,573
|
|
|
Inventories
|
|
|
1,131
|
|
|
|
1,426
|
|
|
Prepaid expenses and other
|
|
|
2,223
|
|
|
|
5,247
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
22,348
|
|
|
|
21,745
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant, property and equipment
|
|
|
211,655
|
|
|
|
229,743
|
|
|
Less accumulated depreciation
|
|
|
123,944
|
|
|
|
137,758
|
|
|
|
|
|
|
|
|
|
|
|
87,711
|
|
|
|
91,985
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated businesses
|
|
|
3,497
|
|
|
|
3,118
|
|
|
Wireless licenses
|
|
|
72,996
|
|
|
|
72,067
|
|
|
Goodwill
|
|
|
21,988
|
|
|
|
22,472
|
|
|
Other intangible assets, net
|
|
|
5,830
|
|
|
|
6,764
|
|
|
Other assets
|
|
|
5,635
|
|
|
|
8,756
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
220,005
|
|
|
$
|
226,907
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Debt maturing within one year
|
|
$
|
7,542
|
|
|
$
|
7,205
|
|
|
Accounts payable and accrued liabilities
|
|
|
15,702
|
|
|
|
15,223
|
|
|
Other
|
|
|
7,353
|
|
|
|
6,708
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
30,597
|
|
|
|
29,136
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
45,252
|
|
|
|
55,051
|
|
|
Employee benefit obligations
|
|
|
28,164
|
|
|
|
32,622
|
|
|
Deferred income taxes
|
|
|
22,818
|
|
|
|
19,190
|
|
|
Other liabilities
|
|
|
6,262
|
|
|
|
6,765
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Series preferred stock ($.10 par value; none issued)
|
|
|
–
|
|
|
|
–
|
|
|
Common stock ($.10 par value; 2,967,610,119 shares issued in both periods)
|
|
|
297
|
|
|
|
297
|
|
|
Contributed capital
|
|
|
37,922
|
|
|
|
40,108
|
|
|
Reinvested earnings
|
|
|
4,368
|
|
|
|
7,260
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
1,049
|
|
|
|
(1,372)
|
|
|
Common stock in treasury, at cost
|
|
|
(5,267
|
)
|
|
|
(5,000)
|
|
|
Deferred compensation - employee stock ownership plans and other
|
|
|
200
|
|
|
|
89
|
|
|
Noncontrolling interest
|
|
|
48,343
|
|
|
|
42,761
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
86,912
|
|
|
|
84,143
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
220,005
|
|
|
$
|
226,907
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
|
|
|
Consolidated Statements of Cash Flows
Verizon Communications Inc. and Subsidiaries – As Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
10,217
|
|
|
$
|
11,601
|
|
|
$
|
3,962
|
|
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
16,405
|
|
|
|
16,534
|
|
|
|
14,610
|
|
|
Employee retirement benefits
|
|
|
3,988
|
|
|
|
2,964
|
|
|
|
16,077
|
|
|
Deferred income taxes
|
|
|
3,233
|
|
|
|
2,093
|
|
|
|
(3,468)
|
|
|
Provision for uncollectible accounts
|
|
|
1,246
|
|
|
|
1,306
|
|
|
|
1,085
|
|
|
Equity in earnings of unconsolidated businesses, net of
dividends received
|
|
|
2
|
|
|
|
389
|
|
|
|
212
|
|
|
Changes in current assets and liabilities, net of effects from
acquisition/disposition of businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(859
|
)
|
|
|
(1,393
|
)
|
|
|
(1,085)
|
|
|
Inventories
|
|
|
299
|
|
|
|
235
|
|
|
|
(188)
|
|
|
Other assets
|
|
|
(313
|
)
|
|
|
(102
|
)
|
|
|
(59)
|
|
|
Accounts payable and accrued liabilites
|
|
|
1,075
|
|
|
|
(1,251
|
)
|
|
|
(1,701)
|
|
|
Other, net
|
|
|
(1,930
|
)
|
|
|
(986
|
)
|
|
|
(1,993)
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
33,363
|
|
|
|
31,390
|
|
|
|
27,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (including capitalized software)
|
|
|
(16,458
|
)
|
|
|
(16,872
|
)
|
|
|
(17,133)
|
|
|
Acquisitions of licenses, investments and businesses, net of cash acquired
|
|
|
(1,438
|
)
|
|
|
(5,958
|
)
|
|
|
(15,904)
|
|
|
Proceeds from dispositions
|
|
|
2,594
|
|
|
|
–
|
|
|
|
–
|
|
|
Net change in short-term investments
|
|
|
(3
|
)
|
|
|
84
|
|
|
|
1,677
|
|
|
Other, net
|
|
|
251
|
|
|
|
(410
|
)
|
|
|
(114)
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(15,054
|
)
|
|
|
(23,156
|
)
|
|
|
(31,474)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term borrowings
|
|
|
–
|
|
|
|
12,040
|
|
|
|
21,598
|
|
|
Repayments of long-term borrowings and capital lease obligations
|
|
|
(8,136
|
)
|
|
|
(19,260
|
)
|
|
|
(4,146)
|
|
|
Increase (decrease) in short-term obligations, excluding current maturities
|
|
|
(1,097
|
)
|
|
|
(1,652
|
)
|
|
|
2,389
|
|
|
Dividends paid
|
|
|
(5,412
|
)
|
|
|
(5,271
|
)
|
|
|
(4,994)
|
|
|
Proceeds from access line spin-off
|
|
|
3,083
|
|
|
|
–
|
|
|
|
–
|
|
|
Proceeds from sale of common stock
|
|
|
–
|
|
|
|
–
|
|
|
|
16
|
|
|
Purchase of common stock for treasury
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,368)
|
|
|
Other, net
|
|
|
(2,088
|
)
|
|
|
(1,864
|
)
|
|
|
(844)
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(13,650
|
)
|
|
|
(16,007
|
)
|
|
|
12,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
4,659
|
|
|
|
(7,773
|
)
|
|
|
8,629
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
2,009
|
|
|
|
9,782
|
|
|
|
1,153
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
6,668
|
|
|
$
|
2,009
|
|
|
$
|
9,782
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
|
|
|
Consolidated Statements of Changes in
Equity Verizon Communications Inc. and Subsidiaries – As Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts, and shares in thousands)
|
|
|
Years Ended December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
2,967,610
|
|
|
$
|
297
|
|
|
|
2,967,610
|
|
|
$
|
297
|
|
|
|
2,967,610
|
|
|
$
|
297
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
2,967,610
|
|
|
|
297
|
|
|
|
2,967,610
|
|
|
|
297
|
|
|
|
2,967,610
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributed Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
|
|
|
|
40,108
|
|
|
|
|
|
|
|
40,291
|
|
|
|
|
|
|
|
40,316
|
|
|
Access line spin-off
|
|
|
|
|
|
|
(2,184
|
)
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
|
Other
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(183
|
)
|
|
|
|
|
|
|
(25)
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
|
|
|
|
37,922
|
|
|
|
|
|
|
|
40,108
|
|
|
|
|
|
|
|
40,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinvested Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
|
|
|
|
7,260
|
|
|
|
|
|
|
|
7,676
|
|
|
|
|
|
|
|
17,884
|
|
|
Benefit plan accounting changes (Note 1)
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
(2,953)
|
|
|
|
|
|
|
|
|
Adjusted balance at beginning of year
|
|
|
|
|
|
|
7,260
|
|
|
|
|
|
|
|
7,676
|
|
|
|
|
|
|
|
14,931
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Verizon
|
|
|
|
|
|
|
2,549
|
|
|
|
|
|
|
|
4,894
|
|
|
|
|
|
|
|
(2,193)
|
|
|
Dividends declared ($1.925, $1.87 and $1.78 per share)
|
|
|
|
|
|
|
(5,441
|
)
|
|
|
|
|
|
|
(5,310
|
)
|
|
|
|
|
|
|
(5,062)
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
|
|
|
|
4,368
|
|
|
|
|
|
|
|
7,260
|
|
|
|
|
|
|
|
7,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year attributable to Verizon
|
|
|
|
|
|
|
(1,372
|
)
|
|
|
|
|
|
|
(1,912
|
)
|
|
|
|
|
|
|
(4,484)
|
|
|
Spin-off of local exchange businesses and related landline activities (Note 3)
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
27
|
|
|
Benefit plan accounting changes (Note 1)
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
2,930
|
|
|
|
|
|
|
|
|
Adjusted balance at beginning of year
|
|
|
|
|
|
|
(1,349
|
)
|
|
|
|
|
|
|
(1,912
|
)
|
|
|
|
|
|
|
(1,527)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
(171
|
)
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
(231)
|
|
|
Unrealized gains (losses) on marketable securities
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
(97)
|
|
|
Unrealized gains (losses) on cash flow hedges
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
(40)
|
|
|
Defined benefit pension and postretirement plans
|
|
|
|
|
|
|
2,451
|
|
|
|
|
|
|
|
288
|
|
|
|
|
|
|
|
(17)
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
2,398
|
|
|
|
|
|
|
|
540
|
|
|
|
|
|
|
|
(385)
|
|
|
|
|
|
|
|
|
Balance at end of year attributable to Verizon
|
|
|
|
|
|
|
1,049
|
|
|
|
|
|
|
|
(1,372
|
)
|
|
|
|
|
|
|
(1,912)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(131,942
|
)
|
|
|
(5,000
|
)
|
|
|
(127,090
|
)
|
|
|
(4,839
|
)
|
|
|
(90,786
|
)
|
|
|
(3,489)
|
|
|
Shares purchased
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(36,779
|
)
|
|
|
(1,368)
|
|
|
Other (Note 10)
|
|
|
(9,000
|
)
|
|
|
(280
|
)
|
|
|
(5,000
|
)
|
|
|
(166
|
)
|
|
|
–
|
|
|
|
–
|
|
|
Shares distributed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee plans
|
|
|
347
|
|
|
|
13
|
|
|
|
142
|
|
|
|
5
|
|
|
|
468
|
|
|
|
18
|
|
|
Shareowner plans
|
|
|
8
|
|
|
|
–
|
|
|
|
6
|
|
|
|
–
|
|
|
|
7
|
|
|
|
–
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
(140,587
|
)
|
|
|
(5,267
|
)
|
|
|
(131,942
|
)
|
|
|
(5,000
|
)
|
|
|
(127,090
|
)
|
|
|
(4,839)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation–ESOPs and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
79
|
|
|
Restricted stock equity grant
|
|
|
|
|
|
|
97
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
|
Amortization
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
|
|
|
|
42,761
|
|
|
|
|
|
|
|
37,199
|
|
|
|
|
|
|
|
32,266
|
|
|
Net income attributable to noncontrolling interest
|
|
|
|
|
|
|
7,668
|
|
|
|
|
|
|
|
6,707
|
|
|
|
|
|
|
|
6,155
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
(30)
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
7,633
|
|
|
|
|
|
|
|
6,810
|
|
|
|
|
|
|
|
6,125
|
|
|
|
|
|
|
|
|
Distributions and other
|
|
|
|
|
|
|
(2,051
|
)
|
|
|
|
|
|
|
(1,248
|
)
|
|
|
|
|
|
|
(1,192)
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
|
|
|
|
48,343
|
|
|
|
|
|
|
|
42,761
|
|
|
|
|
|
|
|
37,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
|
|
|
$
|
86,912
|
|
|
|
|
|
|
$
|
84,143
|
|
|
|
|
|
|
$
|
78,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
$
|
10,217
|
|
|
|
|
|
|
$
|
11,601
|
|
|
|
|
|
|
$
|
3,962
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
2,363
|
|
|
|
|
|
|
|
643
|
|
|
|
|
|
|
|
(415)
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
$
|
12,580
|
|
|
|
|
|
|
$
|
12,244
|
|
|
|
|
|
|
$
|
3,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interest
|
|
|
|
|
|
$
|
7,633
|
|
|
|
|
|
|
$
|
6,810
|
|
|
|
|
|
|
$
|
6,125
|
|
|
Comprehensive income (loss) attributable to Verizon
|
|
|
|
|
|
|
4,947
|
|
|
|
|
|
|
|
5,434
|
|
|
|
|
|
|
|
(2,578)
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
$
|
12,580
|
|
|
|
|
|
|
$
|
12,244
|
|
|
|
|
|
|
$
|
3,547
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
|
|
|
Notes to Consolidated Financial
Statements Verizon Communications Inc. and Subsidiaries
|
|
|
|
Description of Business and Summary of Significant Accounting Policies
|
Description of Business
Verizon Communications Inc. (Verizon or the Company) is one of the world’s leading providers of communications services. We have two
reportable segments, Domestic Wireless and Wireline. For further information concerning our business segments, see Note 14.
Verizon’s Domestic Wireless segment, operating as Verizon Wireless, provides wireless voice and data services and equipment across
the United States (U.S.) using one of the most extensive and reliable wireless networks in the nation. Verizon Wireless continues to expand its penetration of data services and offerings of data devices for both consumer and business customers.
Our Wireline segment provides communications services, including voice, broadband video and data, network access, nationwide
long distance and other communications products and services, and also owns and operates one of the most expansive end-to-end global Internet Protocol (IP) networks. We continue to deploy advanced broadband network technology, with our
fiber-to-the-premises network, operated under the FiOS service mark, creating a platform with sufficient bandwidth and capabilities to meet customers’ current and future needs. FiOS allows us to offer our customers a wide array of broadband
services, including advanced data and video offerings. Our IP network includes over 485,000 route miles of fiber optic cable and provides access to over 150 countries across six continents, enabling us to provide next-generation IP network products
and information technology services to medium and large businesses and government customers worldwide.
Consolidation
The method of accounting applied to investments, whether consolidated, equity or cost, involves an evaluation of all significant terms of
the investments that explicitly grant or suggest evidence of control or influence over the operations of the investee. The consolidated financial statements include our controlled subsidiaries. For controlled subsidiaries that are not wholly owned,
the noncontrolling interest is 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 available-for-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. Also, refer to “Employee Benefit
Plans” below regarding a change in accounting for benefit plans.
Corporate, eliminations and other during the periods
presented include a non-cash adjustment of $0.2 billion, ($0.1 billion) and ($34 million) in 2010, 2009 and 2008, respectively, primarily to adjust wireless data revenues. This adjustment was recorded to properly defer previously recognized
wireless data revenues that will be earned and recognized in future periods. The adjustment was recorded during 2010, which reduced Net income (loss) attributable to Verizon by approximately $0.1 billion. Consolidated revenues in 2009 and 2008 were
not affected as the amounts involved were not material to our consolidated financial statements.
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
Domestic
Wireless
Our Domestic Wireless segment earns revenue by providing access to and usage of its network, which includes voice
and data revenue. 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 the sale of
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.
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 such services are provided.
When we bundle the 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. Long-term contracts are accounted for using
the percentage of completion method. We use the completed contract method if we cannot estimate the costs with a reasonable degree of reliability.
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.
We report taxes imposed by governmental authorities on revenue-producing transactions between us and our customers on a net basis.
Discontinued Operations, Assets Held for Sale, and Sales of Businesses and Investments
We classify as discontinued operations for all periods presented any component of our business that we hold for sale that has operations
and cash flows that are clearly distinguishable operationally and for financial reporting purposes.
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 16).
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.
There were a total of approximately 3 million stock options and restricted stock units outstanding to purchase shares included in
the computation of diluted earnings per common share for the year ended December 31, 2010. Dilutive stock options outstanding to purchase shares included in the computation of diluted earnings per common share for the years ended
December 31, 2009 and 2008 were not significant. 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 anti-dilutive for the period, including
approximately 73 million, 112 million, and 158 million weighted-average shares for the years ended December 31, 2010, 2009 and 2008, respectively.
We are authorized to issue up to 4.25 billion and 250 million shares of common stock and Series Preferred Stock, respectively.
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. Marketable securities are included in the accompanying consolidated balance sheets in Short-term investments,
Investments in unconsolidated businesses or Other assets. We continually evaluate our investments in marketable securities for impairment due to declines in market value considered to be other-than-temporary. That evaluation includes, in addition to
persistent, declining stock prices, general economic and company-specific evaluations. In the event of a determination that a decline in market value is other-than-temporary, a charge to earnings is recorded for the loss, and a new cost basis in the
investment is established.
Inventories
Inventory consists of wireless and wireline equipment held for sale, which is carried at the lower of cost (determined principally on
either an average cost or first-in, first-out basis) or market.
Plant and Depreciation
We record plant, property and equipment at cost. Our local telephone operations’ depreciation expense is principally based on the composite group remaining life method and straight-line composite
rates. This method provides for the recognition of the cost of the remaining net investment in local telephone plant, less anticipated net salvage value, over the remaining asset lives. This method requires the periodic revision of depreciation
rates.
Plant, property and equipment of other wireline and wireless operations are generally depreciated on a straight-line
basis. The asset lives used by our operations are presented in the following table:
|
|
|
|
|
|
|
Average Useful Lives (in years)
|
|
|
Buildings
|
|
|
15 - 45
|
|
|
Central office and other network equipment
|
|
|
3 - 15
|
|
|
Outside communications plant
|
|
|
|
|
|
Copper cable
|
|
|
15
|
|
|
Fiber cable (including undersea cable)
|
|
|
11 - 25
|
|
|
Poles, conduit and other
|
|
|
30 - 50
|
|
|
Furniture, vehicles and other
|
|
|
2 - 20
|
|
When we replace, retire
or otherwise dispose of depreciable plant used in our local telephone network, we deduct the carrying amount of such plant from the respective accounts and charge it to accumulated depreciation. When the depreciable assets of our other wireline and
wireless operations are retired or otherwise disposed of, the related cost and accumulated depreciation are deducted from the plant accounts, and any gains or losses on disposition are recognized in income.
We capitalize 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 to average useful lives for 2010. We determined effective January 1, 2009 that the average useful lives of fiber cable (not including undersea cable) would be increased to
25 years from 20 to 25 years and the average useful lives of copper cable would be changed to 15 years from 13 to 18 years. The changes to average useful lives of fiber cable did not have a significant impact on depreciation expense. 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 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 $0.3 billion in 2010 and 2009, and $0.2 billion in 2008. 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, which has a useful life in excess of one year. Subsequent
additions, modifications or upgrades to internal-use network and non-network software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance and training costs are
expensed in the period in which they are incurred. Also, we capitalize interest associated with the development of internal-use network and non-network software. Capitalized non-network internal-use software costs are amortized using the
straight-line method over a period of 2 to 7 years and are included in Other intangible assets, net in our consolidated balance sheets. For a discussion of our impairment policy for capitalized software costs, see “Goodwill and Other Intangible
Assets” below. Also, see Note 4 for additional detail of internal-use non-network 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 indications of 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 regularly reviewed by our chief operating decision maker. 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 cellular communication services. While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the Federal Communications Commission (FCC).
Renewals of licenses have occurred routinely and at nominal cost. Moreover, we have determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of our wireless licenses. As
a result, we treat the wireless licenses as an indefinite-lived intangible asset. 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 or more frequently if indications of impairment exist.
We evaluate our licenses on an aggregate basis using a direct value approach. The direct value approach 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 substantially complete and the license is ready for its intended use.
Intangible Assets Subject to Amortization
Our intangible assets that do
not have indefinite lives (primarily customer lists and non-network internal-use software) are amortized over their useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset
may not be recoverable. If any indications were present, we would test for recoverability by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset. If those net undiscounted cash flows
do not exceed the carrying amount, 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 4.
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 11 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 (loss), 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 (loss). 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 12).
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 (loss), net of applicable income tax.
Change in Accounting for Benefit Plans
During the fourth quarter of 2010, Verizon retrospectively changed its method of accounting for pension and other postretirement benefits.
Historically, Verizon has recognized actuarial gains and losses as a component of Equity in its consolidated balance sheets on an annual basis. These gains and losses were amortized into operating results generally over the average future service
period of active employees. Verizon elected to immediately recognize actuarial gains and losses in its operating results in the year in which the gains and losses occur. This change is intended to improve the transparency of Verizon’s
operational performance by recognizing the effects of current economic and interest rate trends on plan investments and assumptions. Additionally, Verizon will no longer calculate expected return on plan assets using an averaging technique permitted
under U.S. GAAP for market-related value of plan assets but instead will use actual fair value of plan assets. Accordingly, the financial data for all periods presented has been adjusted to reflect the effect of these accounting changes.
The cumulative effect of the change on Reinvested earnings as of January 1, 2008 was a decrease of approximately $3.0 billion, with
the corresponding adjustment to Accumulated other comprehensive loss. The significant effects of the change in accounting for benefit plans on our consolidated statements of income and consolidated balance sheet for the periods presented were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts)
|
|
|
Years ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Recognized
Under
Previous
Method
|
|
|
Recognized
Under New
Method
|
|
|
Previously
Reported
|
|
|
Adjusted
|
|
|
Previously
Reported
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales
|
|
$
|
45,127
|
|
|
$
|
44,149
|
|
|
$
|
44,299
|
|
|
$
|
44,579
|
|
|
$
|
39,007
|
|
|
$
|
38,615
|
|
|
Selling, general and administrative expense
|
|
|
31,298
|
|
|
|
31,366
|
|
|
|
32,950
|
|
|
|
30,717
|
|
|
|
26,898
|
|
|
|
41,517
|
|
|
Depreciation and amortization expense
|
|
|
16,400
|
|
|
|
16,405
|
|
|
|
16,532
|
|
|
|
16,534
|
|
|
|
14,565
|
|
|
|
14,610
|
|
|
Income before (provision) benefit for income taxes
|
|
|
11,780
|
|
|
|
12,684
|
|
|
|
11,568
|
|
|
|
13,520
|
|
|
|
15,914
|
|
|
|
1,643
|
|
|
(Provision) benefit for income taxes
|
|
|
(2,094
|
)
|
|
|
(2,467
|
)
|
|
|
(1,210
|
)
|
|
|
(1,919
|
)
|
|
|
(3,331
|
)
|
|
|
2,319
|
|
|
Net income
|
|
|
9,686
|
|
|
|
10,217
|
|
|
|
10,358
|
|
|
|
11,601
|
|
|
|
12,583
|
|
|
|
3,962
|
|
|
Net income (loss) attributable to Verizon
|
|
|
2,018
|
|
|
|
2,549
|
|
|
|
3,651
|
|
|
|
4,894
|
|
|
|
6,428
|
|
|
|
(2,193
|
)
|
|
Basic Earnings (Loss) Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Verizon
|
|
|
0.71
|
|
|
|
0.90
|
|
|
|
1.29
|
|
|
|
1.72
|
|
|
|
2.26
|
|
|
|
(0.77
|
)
|
|
Diluted Earnings (Loss) Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Verizon
|
|
|
0.71
|
|
|
|
0.90
|
|
|
|
1.29
|
|
|
|
1.72
|
|
|
|
2.26
|
|
|
|
(0.77
|
)
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Recognized
Under
Previous
Method
|
|
|
Recognized
Under New
Method
|
|
|
Previously
Reported
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinvested earnings
|
|
$
|
14,168
|
|
|
$
|
4,368
|
|
|
$
|
17,592
|
|
|
$
|
7,260
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
(8,443
|
)
|
|
|
1,049
|
|
|
|
(11,479
|
)
|
|
|
(1,372
|
)
|
|
|
|
|
|
|
|
|
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
(loss) and recognized in earnings when the hedged item is recognized in earnings.
Recently Adopted Accounting Standards
The adoption of the following accounting standards and updates during 2010 did not result in a significant impact to our consolidated
financial statements:
In January 2010, we adopted the accounting standard regarding consolidation accounting for variable
interest entities. This standard requires an enterprise to perform an analysis to determine whether the entity’s variable interest or interests give it a controlling interest in a variable interest entity.
In January 2010, we adopted the accounting standard update regarding fair value measurements and disclosures, which requires additional
disclosures regarding assets and liabilities measured at fair value.
In December 2010, we adopted the accounting standard
update regarding disclosures for finance receivables and allowances for credit losses. This standard update requires that entities disclose information at more disaggregated levels than previously required.
Recent Accounting Standards
On January 1, 2011, we prospectively adopted the accounting standard update regarding revenue recognition for multiple deliverable arrangements. This method allows a vendor to allocate revenue in an
arrangement using its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists. Accordingly, the residual method of revenue allocation is no longer permissible. The adoption
of this standard update is not expected to have a significant impact on our consolidated financial statements.
On
January 1, 2011, we prospectively adopted the accounting standard update regarding revenue recognition for arrangements that include software elements. This update requires tangible products that contain software and non-software elements that
work together to deliver the products’ essential functionality to be evaluated under the accounting standard regarding multiple deliverable arrangements. The adoption of this standard update is not expected to have a significant impact on our
consolidated financial statements.
Acquisition of Alltel Corporation
On June 5, 2008, Verizon Wireless entered into an agreement and plan of merger with Alltel Corporation (Alltel), a provider of wireless voice and data services to consumer and business customers in
34 states, and its controlling stockholder, Atlantis Holdings LLC, an affiliate of private investment firms TPG Capital and GS Capital Partners, to acquire, in an all-cash merger, 100% of the equity of Alltel for cash consideration of $5.9 billion
and the assumption of approximately $24 billion of aggregate principal amount of Alltel debt. Verizon Wireless closed the transaction on January 9, 2009.
We have completed the appraisals necessary to assess the fair values of the tangible and intangible assets acquired and liabilities assumed, the fair value of noncontrolling interests, and the amount of
goodwill recognized as of the acquisition date.
The fair values of the assets acquired and liabilities assumed were
determined using the income, cost, and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market other than interest rate swaps (see Note 10) and long-term debt assumed in the
acquisition.
The income approach was primarily used to value the intangible assets, consisting primarily of wireless licenses and customer relationships. The cost approach was used, as appropriate, for plant, property and equipment. The
market approach, which indicates value for a subject asset based on available market pricing for comparable assets, was utilized in combination with the income approach for certain acquired investments. Additionally, Alltel historically conducted
business operations in certain markets through non-wholly owned entities (Managed Partnerships). The fair value of the noncontrolling interests in these Managed Partnerships as of the acquisition date of approximately $0.6 billion was estimated by
using a market approach. The fair value of the majority of the long-term debt assumed and held was primarily valued using quoted market prices.
In December 2008, Verizon Wireless and Verizon Wireless Capital LLC, as the borrowers,
entered into a $17.0 billion credit facility (Bridge Facility). On January 9, 2009, Verizon Wireless borrowed $12.4 billion under the Bridge Facility in order to complete the acquisition of Alltel and repay a portion of the approximately $24
billion of Alltel debt assumed. Verizon Wireless used cash generated from operations and the net proceeds from the sale of notes in private placements issued in February 2009, May 2009 and June 2009, to repay the borrowings under the Bridge
Facility (see Note 9). The Bridge Facility and the commitments under the Bridge Facility have been terminated.
The following
table summarizes the consideration paid and the allocation of the assets acquired, including cash acquired of $1.0 billion, and liabilities assumed as of the close of the acquisition, as well as the fair value at the acquisition date of
Alltel’s noncontrolling partnership interests:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Assets acquired
|
|
|
|
|
|
Current assets
|
|
$
|
2,760
|
|
|
Plant, property and equipment
|
|
|
3,513
|
|
|
Wireless licenses
|
|
|
9,444
|
|
|
Goodwill
|
|
|
16,353
|
|
|
Intangible assets subject to amortization
|
|
|
2,391
|
|
|
Other assets
|
|
|
2,444
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
36,905
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
|
|
Current liabilities
|
|
|
1,833
|
|
|
Long-term debt
|
|
|
23,929
|
|
|
Deferred income taxes and other liabilities
|
|
|
5,032
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
30,794
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
6,111
|
|
|
Noncontrolling interest
|
|
|
(519)
|
|
|
Contributed capital
|
|
|
333
|
|
|
|
|
|
|
|
|
Total cash consideration
|
|
$
|
5,925
|
|
|
|
|
|
|
|
Included in the above purchase price allocation is $2.1 billion of net assets that were divested as a
condition of the regulatory approval as described below.
Wireless licenses have an indefinite life, and accordingly, are not
subject to amortization. The weighted average period prior to renewal of these licenses at acquisition was approximately 5.7 years. The customer relationships included in Intangible assets subject to amortization are being amortized using an
accelerated method over 8 years, and other intangibles are being amortized on a straight-line basis or an accelerated method over a period of 2 to 3 years. At the time of the acquisition, goodwill of approximately $1.4 billion was expected to be
deductible for tax purposes.
Alltel Divestiture Markets
As a condition of the regulatory approvals by the Department of Justice (DOJ) and the FCC to complete the acquisition in January 2009, Verizon Wireless was required to divest overlapping properties in 105
operating markets in 24 states (Alltel Divestiture Markets). Total assets and total liabilities divested were $2.6 billion and $0.1 billion, respectively, principally comprised of network assets, wireless licenses and customer relationships that
were included in Prepaid expenses and other current assets and Other current liabilities, respectively, on the accompanying consolidated balance sheet at December 31, 2009.
On May 8, 2009, Verizon Wireless entered into a definitive agreement with AT&T Mobility LLC (AT&T Mobility), a subsidiary of
AT&T Inc., pursuant to which AT&T Mobility agreed to acquire 79 of the 105 Alltel Divestiture Markets, including licenses and network assets, for approximately $2.4 billion in cash. On June 9, 2009, Verizon Wireless entered into a
definitive agreement with Atlantic Tele-Network, Inc. (ATN), pursuant to which ATN agreed to acquire the remaining 26 Alltel Divestiture Markets, including licenses and network assets, for $0.2 billion in cash. During the second quarter of 2010,
Verizon Wireless completed both transactions. Upon completion of the divestitures, we recorded a tax charge of approximately $0.2 billion for the taxable gain associated with the Alltel Divestiture Markets.
Pro Forma Information
The unaudited pro forma information presents the combined operating results of Verizon and Alltel, with the results prior to the
acquisition date adjusted to include the pro forma impact of: the elimination of transactions between Verizon and Alltel; the adjustment of amortization of intangible assets and depreciation of fixed assets based on the purchase price allocation;
the elimination of merger expenses and management fees incurred by Alltel; and the adjustment of interest expense reflecting the assumption and partial redemption of Alltel’s debt and incremental borrowing incurred by Verizon Wireless to
complete the acquisition of Alltel.
The unaudited pro forma results are presented for illustrative purposes only and do not
reflect the realization of potential cost savings, or any related integration costs. These pro forma results do not purport to be indicative of the results that would have actually been obtained if the merger had occurred as of January 1, 2008,
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
acquisition of Alltel was completed as of January 1, 2008:
|
|
|
|
|
|
|
(dollars in millions, except per share amounts)
|
|
|
Year ended December 31,
|
|
2008
|
|
|
Operating revenues
|
|
$
|
106,509
|
|
|
Net loss attributable to Verizon
|
|
|
(2,140
|
)
|
|
|
|
|
Loss per common share from net loss attributable to Verizon:
|
|
|
|
|
|
Basic
|
|
|
(.75
|
)
|
|
Diluted
|
|
|
(.75
|
)
|
Consolidated results of
operations reported for the year ended December 31, 2009 were not significantly different than the pro forma consolidated results of operations assuming the acquisition of Alltel was completed on January 1, 2009.
Acquisition of Rural Cellular Corporation
On August 7, 2008, Verizon Wireless acquired 100% of the outstanding common stock and redeemed all of the preferred stock of Rural Cellular Corporation (Rural Cellular) in a cash transaction valued
at approximately $1.3 billion. The final purchase price allocation primarily resulted in $1.1 billion of wireless licenses and $0.9 billion in goodwill. Rural Cellular was a wireless communications service provider operating under the trade
name of “Unicel,” focusing primarily on rural markets in the United States.
As part of its regulatory approval for
the Rural Cellular acquisition, the FCC and DOJ required the divestiture of six operating markets. On December 22, 2008, we exchanged assets acquired from Rural Cellular and an additional cellular license with AT&T for assets having a total
aggregate value of approximately $0.5 billion.
Other
On August 23, 2010, Verizon Wireless acquired the net assets and related customers of six operating markets in Louisiana and Mississippi in a transaction with AT&T Inc. for cash consideration of
$0.2 billion. These assets were acquired to enhance Verizon Wireless’ network coverage in these operating markets. The preliminary purchase price allocation primarily resulted in $0.1 billion of wireless licenses and $0.1 billion in goodwill.
Terremark Worldwide, Inc.
On January 27, 2011, Verizon announced that it had entered into a definitive agreement to acquire all of the common stock of Terremark Worldwide, Inc., a global provider of IT infrastructure and
cloud services, for $19 per share in cash (or approximately $1.4 billion). Terremark had approximately $0.5 billion of debt outstanding as of December 31, 2010. The acquisition, which is subject to the satisfaction of conditions, including the
receipt of a regulatory approval, is expected to close in the first quarter of 2011. The acquisition will enhance Verizon’s offerings to governmental and large enterprise customers.
Merger Integration and Acquisition Related Charges
During 2010, we
recorded pre-tax merger integration charges of $0.9 billion primarily related to the Alltel acquisition. These charges primarily related to the decommissioning of overlapping cell sites, preacquisition contingencies, handset conversions and trade
name amortization.
During 2009, we recorded pre-tax merger integration and acquisition charges of $1.2 billion. These charges
primarily related to the Alltel acquisition and were comprised of trade name amortization, re-branding initiatives and handset conversions. The charges during 2009 were also comprised of transaction fees and costs associated with the acquisition,
including fees related to the credit facility that was entered into and utilized to complete the acquisition.
During 2008, we
recorded pre-tax charges of $0.2 billion, primarily comprised of systems integration activities and other costs related to re-branding initiatives, facility exit costs and advertising associated with the MCI acquisition.
Frontier Transaction
On May 13, 2009, we announced plans to spin off
a newly formed subsidiary of Verizon (Spinco) to our stockholders and for Spinco to merge with Frontier Communications Corporation (Frontier) immediately following the spin-off pursuant to a definitive agreement with Frontier, with Frontier to be
the surviving corporation.
On July 1, 2010, after receiving regulatory approval, we completed the spin-off of the shares
of Spinco to Verizon stockholders and the merger of Spinco with Frontier, resulting in Verizon stockholders collectively owning approximately 68 percent of Frontier’s equity which was outstanding immediately following the merger. Frontier
issued approximately 678.5 million shares of Frontier common stock in the aggregate to Verizon stockholders in the merger, and Verizon stockholders received one share of Frontier common stock for every 4.165977 shares of Verizon common stock
they owned as of June 7, 2010. Verizon stockholders received cash in lieu of any fraction of a share of Frontier common stock to which they otherwise were entitled.
At the time of the spin-off and the merger, Spinco held defined assets and liabilities of the local exchange business and related landline activities of Verizon in Arizona, Idaho, Illinois, Indiana,
Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia and Wisconsin, and in portions of California bordering Arizona, Nevada and Oregon, including Internet access and long distance services and broadband video
provided to designated customers in those areas. The transactions did not involve any assets or liabilities of Verizon Wireless. The merger resulted in Frontier acquiring approximately 4 million access lines and certain related
businesses from Verizon, which collectively generated revenues of approximately $4 billion for Verizon’s Wireline segment during 2009 and approximately $1.7 billion of revenue for Verizon’s Wireline segment during the six months ended
June 30, 2010.
Pursuant to the terms of Verizon’s equity incentive plans, shortly following the closing of the
spin-off and the merger, the number of outstanding and unvested restricted stock units (RSUs) and performance stock units (PSUs) held by current and former Verizon employees (including Verizon employees who became employees of Frontier in connection
with the merger) was increased to reflect a number of additional units approximately equal to the cash value of the Frontier common stock that the holders of the RSUs and PSUs would have received with respect to hypothetical shares of Verizon common
stock subject to awards under those plans. In addition, the exercise prices and number of shares of Verizon common stock underlying stock options to purchase shares of Verizon common stock previously granted to employees under equity incentive plans
were adjusted pursuant to the terms of those plans to take into account the decrease in the value of Verizon common stock immediately following the spin-off and merger.
The total value of the transaction to Verizon and its stockholders was approximately $8.6 billion. Verizon stockholders received $5.3 billion in Frontier common stock (based on the valuation formula
contained in the merger agreement with Frontier) as described above, and Verizon received $3.3 billion in aggregate value, comprised of $3.1 billion in the form of a special cash payment from Spinco and $0.3 billion in a reduction in Verizon’s
consolidated indebtedness. During July 2010, Verizon used the proceeds from the special cash payment to reduce its consolidated indebtedness (see Note 9). The accompanying consolidated financial statements for the year ended December 31, 2010
include these operations prior to the completion of the spin-off on July 1, 2010. The spin-off decreased Goodwill and Total equity by approximately $0.6 billion and $1.9 billion, respectively.
On April 12, 2010, Spinco completed a financing of $3.2 billion in principal amount of notes. The gross proceeds of the offering
were deposited into an escrow account. Immediately prior to the spin-off on July 1, 2010, the funds in the escrow account representing the net cash proceeds from the offering were released to Verizon. These proceeds are reflected in the
consolidated statement of cash flows as Proceeds from access line spin-off.
Verizon received a ruling from the Internal
Revenue Service confirming that both the spin-off and the merger qualify as tax-free transactions for U.S. tax purposes, except to the extent that cash is paid to Verizon shareholders in lieu of fractional shares. In addition, Verizon received a
ruling from Canada Revenue Agency confirming that the spin-off qualifies as a tax-free transaction for Canadian tax purposes.
During 2010 and 2009, we recorded pre-tax charges of $0.5 billion and $0.2 billion, respectively, primarily for costs incurred related to
network, non-network software and other activities to enable the divested markets in the transaction with Frontier to operate on a stand-alone basis subsequent to the closing of the transaction, and professional advisory and legal fees in connection
with this transaction. Also included during 2010 are fees related to early extinguishment of debt. During 2009, we also recorded pre-tax charges of $0.2 billion for costs incurred related to our Wireline cost reduction initiatives.
FairPoint Transaction
On March 31, 2008, we completed the spin-off of the shares of Northern New England Spinco Inc. to Verizon shareowners and the merger
of Northern New England Spinco Inc. with FairPoint Communications, Inc. As a result of the spin-off, our net debt was reduced by approximately $1.4 billion. The consolidated statements of income for the periods presented include the results of
operations of the local exchange and related business assets in Maine, New Hampshire and Vermont through the date of completion of the spin-off.
During 2008, we recorded charges of $0.1 billion for costs incurred related to the separation of the wireline facilities and operations in Maine, New Hampshire and Vermont from Verizon at the closing of
the transaction, as well as for professional advisory and legal fees in connection with this transaction.
|
|
|
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 December 31, 2008
|
|
$
|
61,974
|
|
|
Wireless licenses acquired (Note 2)
|
|
|
9,444
|
|
|
Capitalized interest on wireless licenses
|
|
|
730
|
|
|
Reclassifications, adjustments and other
|
|
|
(81)
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
72,067
|
|
|
Wireless licenses acquired (Note 2)
|
|
|
178
|
|
|
Capitalized interest on wireless licenses
|
|
|
748
|
|
|
Reclassifications, adjustments and other
|
|
|
3
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
72,996
|
|
|
|
|
|
|
|
During the years ended December 31, 2010 and 2009, approximately $12.2 billion of wireless licenses
were under development for commercial service for which we were capitalizing interest costs. In December 2010, a portion of these licenses were placed in service. Accordingly, approximately $3.3 billion of wireless licenses continue to be under
development for commercial service.
During 2008, Verizon Wireless was the winning bidder in the FCC auction of spectrum in
the 700 MHz band and paid the FCC $9.4 billion to acquire 109 licenses in the 700 MHz band.
The average remaining renewal
period of our wireless license portfolio was 6.9 years as of December 31, 2010 (see Note 1, Goodwill and Other Intangible Assets –
Intangible Assets Not Subject to Amortization
).
Goodwill
Changes in the carrying amount
of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Domestic
Wireless
|
|
|
Wireline
|
|
|
Total
|
|
|
Balance at December 31, 2008
|
|
$
|
1,297
|
|
|
$
|
4,738
|
|
|
$
|
6,035
|
|
|
Acquisitions (Note 2)
|
|
|
16,353
|
|
|
|
–
|
|
|
|
16,353
|
|
|
Reclassifications, adjustments and other
|
|
|
88
|
|
|
|
(4
|
)
|
|
|
84
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
17,738
|
|
|
$
|
4,734
|
|
|
$
|
22,472
|
|
|
Acquisitions (Note 2)
|
|
|
131
|
|
|
|
–
|
|
|
|
131
|
|
|
Dispositions (Note 3)
|
|
|
–
|
|
|
|
(614
|
)
|
|
|
(614)
|
|
|
Reclassifications, adjustments and other
|
|
|
–
|
|
|
|
(1
|
)
|
|
|
(1)
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
17,869
|
|
|
$
|
4,119
|
|
|
$
|
21,988
|
|
|
|
|
|
|
|
Reclassifications, adjustments and other in Domestic Wireless during 2009 relate to the finalization of the
Rural Cellular purchase accounting.
Other Intangible Assets
The following table displays the composition of other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
At December 31, 2010
|
|
|
At December 31, 2009
|
|
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists (6 to 8 years)
|
|
$
|
3,150
|
|
|
$
|
(1,551
|
)
|
|
$
|
1,599
|
|
|
$
|
3,134
|
|
|
$
|
(1,012
|
)
|
|
$
|
2,122
|
|
|
Non-network internal-use
software (2 to 7 years)
|
|
|
8,446
|
|
|
|
(4,614
|
)
|
|
|
3,832
|
|
|
|
8,455
|
|
|
|
(4,346
|
)
|
|
|
4,109
|
|
|
Other (2 to 25 years)
|
|
|
885
|
|
|
|
(486
|
)
|
|
|
399
|
|
|
|
865
|
|
|
|
(332
|
)
|
|
|
533
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,481
|
|
|
$
|
(6,651
|
)
|
|
$
|
5,830
|
|
|
$
|
12,454
|
|
|
$
|
(5,690
|
)
|
|
$
|
6,764
|
|
|
|
|
|
|
|
The amortization expense for other intangible assets was as follows:
|
|
|
|
|
|
|
Years
|
|
(dollars in millions)
|
|
|
2010
|
|
$
|
1,812
|
|
|
2009
|
|
|
1,970
|
|
|
2008
|
|
|
1,383
|
|
Estimated annual amortization expense
for other intangible assets is as follows:
|
|
|
|
|
|
|
Years
|
|
(dollars in millions)
|
|
|
2011
|
|
$
|
1,656
|
|
|
2012
|
|
|
1,335
|
|
|
2013
|
|
|
1,100
|
|
|
2014
|
|
|
729
|
|
|
2015
|
|
|
512
|
|
|
|
|
Plant, Property and Equipment
|
The following table displays the details of Plant, property and equipment, which is stated at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
$
|
865
|
|
|
$
|
925
|
|
|
Buildings and equipment
|
|
|
21,064
|
|
|
|
21,492
|
|
|
Network equipment
|
|
|
170,086
|
|
|
|
184,547
|
|
|
Furniture, office and data processing equipment
|
|
|
8,301
|
|
|
|
9,083
|
|
|
Work in progress
|
|
|
4,375
|
|
|
|
4,194
|
|
|
Leasehold improvements
|
|
|
4,816
|
|
|
|
4,694
|
|
|
Vehicles and other
|
|
|
2,148
|
|
|
|
4,808
|
|
|
|
|
|
|
|
|
|
|
|
211,655
|
|
|
|
229,743
|
|
|
Less accumulated depreciation
|
|
|
123,944
|
|
|
|
137,758
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
87,711
|
|
|
$
|
91,985
|
|
|
|
|
|
|
|
|
|
|
Investments in Unconsolidated Businesses
|
Our investments in unconsolidated businesses are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
At December 31,
|
|
Ownership
|
|
|
2010
|
|
|
2009
|
|
|
Equity Investees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vodafone Omnitel
|
|
|
23.1
|
%
|
|
$
|
2,002
|
|
|
$
|
1,978
|
|
|
Other
|
|
|
Various
|
|
|
|
1,471
|
|
|
|
1,130
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity investees
|
|
|
|
|
|
|
3,473
|
|
|
|
3,108
|
|
|
|
|
|
|
|
Cost Investees
|
|
|
Various
|
|
|
|
24
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in unconsolidated businesses
|
|
|
|
|
|
$
|
3,497
|
|
|
$
|
3,118
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and repatriations of foreign earnings received from these investees amounted to $0.5 billion in
2010, $0.9 billion in 2009 and $0.8 billion in 2008.
Equity Method Investments
Vodafone Omnitel
Vodafone Omnitel N.V. (Vodafone Omnitel) is the second largest wireless communications company in Italy. At December 31, 2010 and
2009, our investment in Vodafone Omnitel included goodwill of $1.1 billion.
Other Equity Investees
We have limited partnership investments in entities that invest in affordable housing projects, for which we provide funding as a limited
partner and receive tax deductions and tax credits based on our partnership interests. At December 31, 2010 and 2009, we had equity investments in these partnerships of $1.2 billion and $0.9 billion, respectively. We adjust the carrying value
of these investments for any losses incurred by the limited partnerships through earnings.
The remaining investments include
wireless partnerships in the U.S. and other smaller domestic and international investments.
Cost Method Investments
Some of our cost investments are carried at their current market value. Other cost investments are carried at their original cost if the
current market value is not readily determinable. We do however, adjust the carrying value of these securities in cases where we have determined that a decline in their estimated market value is other-than-temporary.
Summarized Financial Information
Summarized financial information for our equity investees is as follows:
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
Current assets
|
|
$
|
3,620
|
|
|
$
|
3,588
|
|
|
Noncurrent assets
|
|
|
7,568
|
|
|
|
8,179
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,188
|
|
|
$
|
11,767
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
5,509
|
|
|
$
|
6,804
|
|
|
Noncurrent liabilities
|
|
|
8
|
|
|
|
49
|
|
|
Equity
|
|
|
5,671
|
|
|
|
4,914
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
11,188
|
|
|
$
|
11,767
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue
|
|
$
|
12,356
|
|
|
$
|
12,903
|
|
|
$
|
13,077
|
|
|
Operating income
|
|
|
4,156
|
|
|
|
4,313
|
|
|
|
3,820
|
|
|
Net income
|
|
|
2,563
|
|
|
|
2,717
|
|
|
|
2,634
|
|
Noncontrolling interests in equity of subsidiaries were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
Noncontrolling interests in consolidated subsidiaries:
|
|
|
|
|
|
|
|
|
|
Verizon Wireless
|
|
$
|
47,557
|
|
|
$
|
41,950
|
|
|
Wireless partnerships
|
|
|
786
|
|
|
|
811
|
|
|
|
|
|
|
|
|
|
|
$
|
48,343
|
|
|
$
|
42,761
|
|
|
|
|
|
|
|
Wireless Joint Venture
Our Domestic Wireless segment, Cellco Partnership doing business as Verizon Wireless (Verizon Wireless) is a joint venture formed in April 2000 by the combination of the U.S. wireless operations and
interests of Verizon and Vodafone. Verizon owns a controlling 55% interest in Verizon Wireless and Vodafone owns the remaining 45%.
As Lessor
We are the lessor in leveraged and direct financing lease
agreements for commercial aircraft, power generating facilities, telecommunications equipment, real estate property and other equipment. These leases have remaining terms of up to 40 years as of December 31, 2010. 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 holds a senior security interest in the leased equipment and rentals, the related principal and interest have been offset against the minimum lease payments receivable in accordance with GAAP. All recourse debt is
reflected in our consolidated balance sheets.
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, industry and general economic conditions. The credit quality of our lessees vary from AAA to B-. All accounts are current as of the end of this reporting period. 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. Currently there are no impaired leases.
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)
|
|
|
At December 31,
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
Leveraged
Leases
|
|
|
Direct
Finance
Leases
|
|
|
Total
|
|
|
Leveraged
Leases
|
|
|
Direct
Finance
Leases
|
|
|
Total
|
|
|
|
|
|
|
|
|
Minimum lease payments receivable
|
|
$
|
2,360
|
|
|
$
|
155
|
|
|
$
|
2,515
|
|
|
$
|
2,504
|
|
|
$
|
166
|
|
|
$
|
2,670
|
|
|
Estimated residual value
|
|
|
1,305
|
|
|
|
7
|
|
|
|
1,312
|
|
|
|
1,410
|
|
|
|
12
|
|
|
|
1,422
|
|
|
Unearned income
|
|
|
(1,140)
|
|
|
|
(20)
|
|
|
|
(1,160)
|
|
|
|
(1,251
|
)
|
|
|
(19)
|
|
|
|
(1,270)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,525
|
|
|
$
|
142
|
|
|
$
|
2,667
|
|
|
$
|
2,663
|
|
|
$
|
159
|
|
|
$
|
2,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
(152)
|
|
|
|
|
|
|
|
|
|
|
|
(158)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease receivables, net
|
|
|
|
|
|
|
|
|
|
$
|
2,515
|
|
|
|
|
|
|
|
|
|
|
$
|
2,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other
|
|
|
|
|
|
|
|
|
|
$
|
59
|
|
|
|
|
|
|
|
|
|
|
$
|
72
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
2,456
|
|
|
|
|
|
|
|
|
|
|
|
2,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,515
|
|
|
|
|
|
|
|
|
|
|
$
|
2,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deferred taxes arising from leveraged leases, which are included in Deferred income taxes,
amounted to $2.0 billion at December 31, 2010 and $2.1 billion at December 31, 2009.
The following table is a summary of the
components of income from leveraged leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Pretax income
|
|
$
|
74
|
|
|
$
|
83
|
|
|
$
|
74
|
|
|
Income tax expense
|
|
|
32
|
|
|
|
34
|
|
|
|
30
|
|
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 payments relating to operating leases for the periods shown at December 31, 2010, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years
|
|
Capital Leases
|
|
|
Operating Leases
|
|
|
2011
|
|
$
|
194
|
|
|
$
|
109
|
|
|
2012
|
|
|
156
|
|
|
|
89
|
|
|
2013
|
|
|
151
|
|
|
|
71
|
|
|
2014
|
|
|
129
|
|
|
|
51
|
|
|
2015
|
|
|
85
|
|
|
|
26
|
|
|
Thereafter
|
|
|
1,800
|
|
|
|
40
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,515
|
|
|
$
|
386
|
|
|
|
|
|
|
|
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 $2.5 billion in 2010 and 2009, and $2.2
billion in 2008.
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)
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
Capital leases
|
|
$
|
321
|
|
|
$
|
357
|
|
|
Less accumulated amortization
|
|
|
79
|
|
|
|
126
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
242
|
|
|
$
|
231
|
|
|
|
|
|
|
|
The aggregate minimum rental commitments under noncancelable leases for the periods shown at
December 31, 2010, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years
|
|
Capital Leases
|
|
|
Operating Leases
|
|
|
2011
|
|
$
|
97
|
|
|
$
|
1,898
|
|
|
2012
|
|
|
74
|
|
|
|
1,720
|
|
|
2013
|
|
|
70
|
|
|
|
1,471
|
|
|
2014
|
|
|
54
|
|
|
|
1,255
|
|
|
2015
|
|
|
42
|
|
|
|
1,012
|
|
|
Thereafter
|
|
|
81
|
|
|
|
5,277
|
|
|
|
|
|
|
|
|
Total minimum rental commitments
|
|
|
418
|
|
|
$
|
12,633
|
|
|
|
|
|
|
|
|
|
|
|
|
Less interest and executory costs
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
332
|
|
|
|
|
|
|
Less current installments
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligation at December 31, 2010
|
|
$
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the total minimum sublease rentals to be received in the future
under noncancelable operating subleases was not significant.
Changes to debt during 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Debt Maturing
within One Year
|
|
|
Long-term
Debt
|
|
|
Total
|
|
|
Balance at January 1, 2010
|
|
$
|
7,205
|
|
|
$
|
55,051
|
|
|
$
|
62,256
|
|
|
Repayments of long-term borrowings and capital lease obligations
|
|
|
(6,118)
|
|
|
|
(2,018)
|
|
|
|
(8,136)
|
|
|
Decrease in short-term obligations, excluding current maturities
|
|
|
(1,097)
|
|
|
|
–
|
|
|
|
(1,097)
|
|
|
Reclassifications of long-term debt
|
|
|
7,362
|
|
|
|
(7,362)
|
|
|
|
–
|
|
|
Other
|
|
|
190
|
|
|
|
(419)
|
|
|
|
(229)
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
7,542
|
|
|
$
|
45,252
|
|
|
$
|
52,794
|
|
|
|
|
|
|
|
Debt maturing within one year is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
Long-term debt maturing within one year
|
|
$
|
7,542
|
|
|
$
|
6,105
|
|
|
Commercial paper
|
|
|
–
|
|
|
|
1,100
|
|
|
|
|
|
|
|
|
Total debt maturing within one year
|
|
$
|
7,542
|
|
|
$
|
7,205
|
|
|
|
|
|
|
|
At December 31, 2010, there was no commercial paper outstanding. The weighted average interest rate for
our commercial paper outstanding at December 31, 2009 was 0.7%.
Capital expenditures (primarily acquisition and
construction of network assets) are partially financed pending long-term financing through bank loans and the issuance of commercial paper payable within 12 months.
On April 14, 2010, we terminated all commitments under our previous $5.3 billion 364-day credit facility with a syndicate of lenders and entered into a new $6.2 billion three-year credit facility
with a group of major financial institutions. As of December 31, 2010, the unused borrowing capacity under the three-year credit facility was approximately $6.1 billion.
Long
-
Term Debt
Outstanding long-term debt obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
At December 31,
|
|
Interest Rates %
|
|
|
Maturities
|
|
|
2010
|
|
|
2009
|
|
|
Verizon Communications – notes payable and other
|
|
|
4.35 – 5.50
|
|
|
|
2011 – 2018
|
|
|
$
|
6,062
|
|
|
$
|
6,196
|
|
|
|
|
|
5.55 – 6.90
|
|
|
|
2012 – 2038
|
|
|
|
10,441
|
|
|
|
10,386
|
|
|
|
|
|
7.35 – 8.95
|
|
|
|
2012 – 2039
|
|
|
|
7,677
|
|
|
|
9,671
|
|
|
|
|
|
|
|
|
Verizon Wireless – notes payable and other
|
|
|
3.75 – 5.55
|
|
|
|
2011 – 2014
|
|
|
|
7,000
|
|
|
|
7,000
|
|
|
|
|
|
7.38 – 8.88
|
|
|
|
2011 – 2018
|
|
|
|
5,975
|
|
|
|
6,118
|
|
|
|
|
|
Floating
|
|
|
|
2011
|
|
|
|
1,250
|
|
|
|
6,246
|
|
|
|
|
|
|
|
|
Verizon Wireless – Alltel assumed notes
|
|
|
6.50 – 7.88
|
|
|
|
2012 – 2032
|
|
|
|
2,315
|
|
|
|
2,334
|
|
|
|
|
|
|
|
|
Telephone subsidiaries – debentures
|
|
|
4.63 – 7.00
|
|
|
|
2011 – 2033
|
|
|
|
7,937
|
|
|
|
8,797
|
|
|
|
|
|
7.15 – 7.88
|
|
|
|
2012 – 2032
|
|
|
|
1,449
|
|
|
|
1,449
|
|
|
|
|
|
8.00 – 8.75
|
|
|
|
2011 – 2031
|
|
|
|
880
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
Other subsidiaries – debentures and other
|
|
|
6.84 – 8.75
|
|
|
|
2018 – 2028
|
|
|
|
1,700
|
|
|
|
1,700
|
|
|
|
|
|
|
|
|
Employee stock ownership plan loans
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
23
|
|
|
|
|
|
|
|
|
Capital lease obligations
(average rates of 6.8% and 6.3%, respectively)
|
|
|
|
|
|
|
|
|
|
|
332
|
|
|
|
397
|
|
|
Unamortized discount, net of premium
|
|
|
|
|
|
|
|
|
|
|
(224
|
)
|
|
|
(241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, including current maturities
|
|
|
|
|
|
|
|
|
|
|
52,794
|
|
|
|
61,156
|
|
|
Less long-term debt maturing within one year
|
|
|
|
|
|
|
|
|
|
|
7,542
|
|
|
|
6,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
|
|
|
|
|
|
|
$
|
45,252
|
|
|
$
|
55,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable and Other
2010
During July 2010, Verizon received approximately $3.1 billion in cash
in connection with the completion of the spin-off and merger of Spinco (see Note 3). This special cash payment was subsequently used to redeem $2.0 billion of 7.25% Verizon Communications Notes due December 2010 at a redemption price of 102.7% of
the principal amount of the notes, plus accrued and unpaid interest through the date of redemption, as well as other short-term borrowings. In addition, during 2010 Verizon repaid $0.2 billion of floating rate vendor financing debt.
During 2011, $0.5 billion of 5.35% Verizon Communications notes matured and were repaid and Verizon utilized $0.3 billion of a fixed rate
vendor financing facility.
2009
During 2009, Verizon issued $1.8 billion of 6.35% notes due 2019 and $1.0 billion of 7.35% Notes due 2039, resulting in cash proceeds of $2.7 billion, net of discounts and issuance costs, which was used
to reduce our commercial paper borrowings, repay maturing debt and for general corporate purposes. In January 2009, Verizon utilized a $0.2 billion floating rate vendor financing facility. In addition, during 2009 $0.5 billion of floating rate Notes
due 2009 and $0.1 billion of 8.23% Verizon Notes matured and were repaid.
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, as indicated below.
2010
On June 28, 2010, Verizon Wireless exercised its right to redeem the outstanding $1.0 billion of aggregate floating rate notes due June 2011 at a redemption price of 100% of the principal amount of
the notes, plus accrued and unpaid interest through the date of redemption. In addition, during 2010, Verizon Wireless repaid the remaining $4.0 billion of borrowings that were outstanding under a $4.4 billion Three-Year Term Loan Facility Agreement
with a maturity date of September 2011 (Three-Year Term Loan Facility). No borrowings remain outstanding under this facility as of December 31, 2010 and this facility has been cancelled.
2009
During November 2009, Verizon Wireless and Verizon Wireless Capital
LLC completed an exchange offer to exchange privately placed notes issued in November 2008, and February and May 2009 for new notes with similar terms.
In June 2009, Verizon Wireless issued $1.0 billion aggregate principal amount of floating rate notes due 2011.
In May 2009, Verizon Wireless and Verizon Wireless Capital LLC co-issued $4.0 billion aggregate principal amount of two-year fixed and floating rate notes in a private placement resulting in cash proceeds
of approximately $4.0 billion, net of discounts and issuance costs. In February 2009, Verizon Wireless and Verizon Wireless Capital LLC co-issued $4.3 billion aggregate principal amount of three and five-year fixed rate notes in a private placement
resulting in cash proceeds of $4.2 billion, net of discounts and issuance costs.
In August 2009, Verizon Wireless repaid $0.4
billion of borrowings that were outstanding under the Three-Year Term Loan Facility, reducing the outstanding borrowings under this facility to $4.0 billion as of December 31, 2009.
Telephone and Other Subsidiary Debt
During 2010, $0.3 billion of 6.125%
and $0.2 billion of 8.625% Verizon New York Inc. Debentures, $0.2 billion of 6.375% Verizon North Inc. Debentures and $0.2 billion of 6.3% Verizon Northwest Inc. Debentures matured and were repaid. During 2009, we redeemed $0.1 billion of 6.8%
Verizon New Jersey Inc. Debentures, $0.3 billion of 6.7% Debentures and $0.2 billion of 5.5% Verizon California Inc. Debentures and $0.2 billion of 5.875% Verizon New England Inc. Debentures. In April 2009, we redeemed $0.5 billion of 7.51% GTE
Corporation Debentures.
Guarantees
We guarantee the debt obligations of GTE Corporation (but not the debt of its subsidiary or affiliate companies) that were issued and outstanding prior to July 1, 2003. As of December 31, 2010,
$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,
2010 are as follows:
|
|
|
|
|
|
|
Years
|
|
(dollars in millions)
|
|
|
2011
|
|
$
|
7,542
|
|
|
2012
|
|
|
5,902
|
|
|
2013
|
|
|
5,915
|
|
|
2014
|
|
|
3,529
|
|
|
2015
|
|
|
1,201
|
|
|
Thereafter
|
|
|
28,705
|
|
|
|
|
Fair Value Measurements and Financial
Instruments
|
The following table presents the balances of assets measured at fair value on a recurring basis as of
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
281
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
281
|
|
|
Fixed income securities
|
|
|
8
|
|
|
|
256
|
|
|
|
–
|
|
|
|
264
|
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
–
|
|
|
|
42
|
|
|
|
–
|
|
|
|
42
|
|
|
Cross currency swaps
|
|
|
–
|
|
|
|
7
|
|
|
|
–
|
|
|
|
7
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
285
|
|
|
|
–
|
|
|
|
–
|
|
|
|
285
|
|
|
Fixed income securities
|
|
|
205
|
|
|
|
766
|
|
|
|
–
|
|
|
|
971
|
|
|
Interest rate swaps
|
|
|
–
|
|
|
|
278
|
|
|
|
–
|
|
|
|
278
|
|
|
Forward interest rate swaps
|
|
|
–
|
|
|
|
108
|
|
|
|
–
|
|
|
|
108
|
|
|
Cross currency swaps
|
|
|
–
|
|
|
|
101
|
|
|
|
–
|
|
|
|
101
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
779
|
|
|
$
|
1,558
|
|
|
$
|
–
|
|
|
$
|
2,337
|
|
|
|
|
|
|
|
Equity securities consist of investments in common stock of domestic and international corporations in a
variety of industry sectors and are generally measured using quoted prices in active markets and are classified as Level 1.
Fixed income securities consist primarily of investments in U.S. Treasuries and agencies, 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 as a
practical expedient 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.
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 2010.
Fair Value of Short-term and Long-term Debt
The fair value of our short-term and long-term debt, excluding capital leases, is determined based on market quotes for similar terms and
maturities or future cash flows discounted at current rates. The fair value of our short-term and long-term debt, excluding capital leases, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
At December 31,
|
|
|
|
|
2010
|
|
|
|
|
|
2009
|
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Short and long-term debt, excluding capital leases
|
|
$
|
52,462
|
|
|
$
|
59,020
|
|
|
$
|
61,859
|
|
|
$
|
67,359
|
|
Derivatives
Interest Rate Swaps
We
have entered into domestic interest rate swaps to achieve a targeted mix of fixed and variable rate debt, where we principally receive fixed rates and pay variable rates based on London Interbank Offered Rate (LIBOR). These swaps are designated as
fair value hedges and hedge against changes in the fair value of our debt portfolio. We record the interest rate swaps at fair value on our consolidated balance sheets as assets and liabilities. Changes in the fair value of the interest rate swaps
are recorded to Interest expense, which are offset by changes in the fair value of the debt due to changes in interest rates. The fair value of these contracts was $0.3 billion and $0.2 billion at December 31, 2010 and December 31, 2009,
respectively, and are primarily included in Other assets and Long-term debt. As of December 31, 2010, the total notional amount of these interest rate swaps was $6.0 billion. During February 2011, we entered into interest rate swaps, designated
as fair value hedges, with a notional amount of approximately $3.0 billion.
Forward Interest Rate Swaps
In order to manage our exposure to future interest rate changes, during 2010, we entered into forward interest rate swaps with a total notional value of $1.4 billion. We have designated these
contracts as cash flow hedges. The fair value of these contracts was $0.1 billion at December 31, 2010 and the contracts are included in Other assets. On or before February 7, 2011, Verizon terminated these forward interest rate swaps.
Cross Currency Swaps
Verizon Wireless has entered into cross currency swaps designated as cash flow hedges to exchange approximately $2.4 billion 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 mitigate the impact of foreign currency transaction gains or losses. The fair value of these swaps included primarily in Other assets was approximately $0.1 billion and $0.3
billion at December 31, 2010 and December 31, 2009, respectively. During 2010 and 2009, a pre-tax loss of $0.2 billion and a pre-tax gain of $0.3 billion, respectively, was recognized in Other comprehensive income, a portion of which was
reclassified to Other income and (expense), net to offset the related pre-tax foreign currency transaction gain on the underlying debt obligations.
Prepaid Forward Agreement
During the first quarter of 2009, we entered
into a privately negotiated prepaid forward agreement for 14 million shares of Verizon common stock at a cost of approximately $0.4 billion. We terminated the prepaid forward agreement with respect to 5 million of the shares during the
fourth quarter of 2009 and 9 million of the shares during the first quarter of 2010, which resulted in the delivery of those shares to Verizon.
Alltel Interest Rate Swaps
As a result of the Alltel acquisition, Verizon
Wireless acquired seven interest rate swap agreements with a notional value of $9.5 billion that paid fixed and received variable rates based on three-month and one-month LIBOR with maturities ranging from 2009 to 2013. During 2009, we settled all
of these agreements for a gain that was not significant. Changes in the fair value of these swaps were recorded in earnings through settlement.
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk consist primarily of temporary cash investments, short-term and long-term investments, trade receivables, certain notes receivable,
including lease receivables, and derivative contracts. Our policy is to deposit our temporary cash investments with major financial institutions. Counterparties to our derivative contracts are also major financial institutions. The financial
institutions have all been accorded high ratings by primary rating agencies. We limit the dollar amount of contracts entered into with any one financial institution and monitor our counterparties’ credit ratings. We generally do not give or
receive collateral on swap agreements due to our credit rating and those of our counterparties. While we may be exposed to credit losses due to the nonperformance of our 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.
Verizon Communications Long-Term Incentive Plan
The 2009 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
granted prior to January 1, 2010 are classified as liability awards because the RSUs will be paid in cash upon vesting. The RSU award liability is measured at its fair value at the end of each reporting period and, therefore, will fluctuate
based on the performance of Verizon common stock. The RSUs granted subsequent to January 1, 2010 are classified as equity awards because these 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 goal has been achieved over the three-year performance cycle. All payments are subject to approval by the Human Resources Committee. The
PSUs are classified as liability awards because the PSU awards are paid in cash upon vesting. The PSU award liability is measured at its fair value at the end of each reporting period and, therefore, will fluctuate based on the price of Verizon
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 following table summarizes Verizon’s Restricted Stock Unit and Performance Stock Unit activity:
|
|
|
|
|
|
|
|
|
|
|
(shares in thousands)
|
|
Restricted Stock
Units
|
|
|
Performance Stock
Units
|
|
|
Outstanding January 1, 2008
|
|
|
21,573
|
|
|
|
32,135
|
|
|
Granted
|
|
|
7,277
|
|
|
|
11,194
|
|
|
Payments
|
|
|
(6,869
|
)
|
|
|
(7,597
|
)
|
|
Cancelled/Forfeited
|
|
|
(161
|
)
|
|
|
(2,518
|
)
|
|
|
|
|
|
|
|
Outstanding December 31, 2008
|
|
|
21,820
|
|
|
|
33,214
|
|
|
Granted
|
|
|
7,101
|
|
|
|
14,079
|
|
|
Payments
|
|
|
(9,357
|
)
|
|
|
(17,141
|
)
|
|
Cancelled/Forfeited
|
|
|
(121
|
)
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
Outstanding December 31, 2009
|
|
|
19,443
|
|
|
|
29,895
|
|
|
Granted
|
|
|
8,422
|
|
|
|
17,311
|
|
|
Payments
|
|
|
(6,788
|
)
|
|
|
(14,364
|
)
|
|
Cancelled/Forfeited
|
|
|
(154
|
)
|
|
|
(462
|
)
|
|
|
|
|
|
|
|
Outstanding December 31, 2010
|
|
|
20,923
|
|
|
|
32,380
|
|
|
|
|
|
|
|
As of December 31, 2010, unrecognized compensation expense related to the unvested portion of
Verizon’s RSUs and PSUs was approximately $0.3 billion and is expected to be recognized over a weighted-average period of approximately two years.
The RSUs granted in 2010, and classified as equity awards, have a weighted average grant date fair value of $28.63. During 2010, 2009 and 2008, we paid $0.7 billion, $0.9 billion and $0.6 billion,
respectively, to settle RSUs and PSUs classified as liability awards.
Verizon Wireless’ Long-Term Incentive Plan
The 2000 Verizon Wireless Long-Term Incentive Plan (the Wireless Plan) provides compensation opportunities to eligible employees of
Verizon Wireless (the Partnership). The Wireless Plan provides rewards that are tied to the long-term performance of the Partnership. Under the Wireless Plan, Value Appreciation Rights (VARs) were granted to eligible employees. As of
December 31, 2010, 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. VARs are fully exercisable three years from the date of grant, with 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 Black-Scholes model during 2010:
|
|
|
|
|
|
|
Ranges
|
|
Risk-free rate
|
|
0.14% - 0.88%
|
|
Expected term (in years)
|
|
0.03 - 2.00
|
|
Expected volatility
|
|
31.05% - 47.56%
|
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.
The following table summarizes the Value
Appreciation Rights activity:
|
|
|
|
|
|
|
|
|
|
|
(shares in thousands)
|
|
VARs
|
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
|
Outstanding rights, January 1, 2008
|
|
|
60,412
|
|
|
$
|
17.58
|
|
|
Exercised
|
|
|
(31,817
|
)
|
|
|
18.47
|
|
|
Cancelled/Forfeited
|
|
|
(351
|
)
|
|
|
19.01
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding rights, December 31, 2008
|
|
|
28,244
|
|
|
|
16.54
|
|
|
Exercised
|
|
|
(11,442
|
)
|
|
|
16.53
|
|
|
Cancelled/Forfeited
|
|
|
(211
|
)
|
|
|
17.63
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding rights, December 31, 2009
|
|
|
16,591
|
|
|
|
16.54
|
|
|
Exercised
|
|
|
(4,947
|
)
|
|
|
24.47
|
|
|
Cancelled/Forfeited
|
|
|
(75
|
)
|
|
|
22.72
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding rights, December 31, 2010
|
|
|
11,569
|
|
|
|
13.11
|
|
|
|
|
|
|
|
|
|
|
|
During 2010, 2009 and 2008, we paid $0.1 billion, $0.2 billion and $0.6 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 $0.5 billion, $0.5 billion and $0.4 billion for 2010, 2009 and 2008, respectively.
Stock Options
The Plan provides for grants of stock options to participants at an option price per share of 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)
|
|
Stock Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Outstanding, January 1, 2008
|
|
|
181,858
|
|
|
$
|
45.94
|
|
|
Exercised
|
|
|
(227
|
)
|
|
|
36.54
|
|
|
Cancelled/Forfeited
|
|
|
(41,473
|
)
|
|
|
46.28
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008
|
|
|
140,158
|
|
|
|
45.86
|
|
|
Exercised
|
|
|
(2
|
)
|
|
|
25.32
|
|
|
Cancelled/Forfeited
|
|
|
(32,391
|
)
|
|
|
50.31
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
|
107,765
|
|
|
|
44.52
|
|
|
Exercised
|
|
|
(372
|
)
|
|
|
34.51
|
|
|
Cancelled/Forfeited
|
|
|
(50,549
|
)
|
|
|
44.90
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2010
|
|
|
56,844
|
|
|
|
44.25
|
|
|
|
|
|
|
|
|
|
|
|
All stock options outstanding at December 31, 2010, 2009 and 2008 were exercisable.
The following table summarizes information about Verizon’s stock options outstanding as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Stock Options
(in thousands)
|
|
|
Weighted-Average
Remaining Life
(years)
|
|
|
Weighted-Average
Exercise Price
|
|
|
$ 20.00-29.99
|
|
|
34
|
|
|
|
1.7
|
|
|
$
|
27.91
|
|
|
30.00-39.99
|
|
|
18,146
|
|
|
|
2.6
|
|
|
|
35.02
|
|
|
40.00-49.99
|
|
|
19,973
|
|
|
|
1.1
|
|
|
|
45.21
|
|
|
50.00-59.99
|
|
|
18,691
|
|
|
|
0.1
|
|
|
|
52.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
56,844
|
|
|
|
1.2
|
|
|
|
44.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value for stock options outstanding and stock options exercised, and the
after-tax compensation expense for stock options was not significant as of and for the years ended December 31, 2010, 2009 and 2008, respectively.
We maintain non-contributory defined benefit pension plans for many of our employees. In addition, we maintain postretirement health care and life insurance plans for our retirees and their dependents,
which are both contributory and non-contributory, and include a limit on the Company’s share of the cost for certain recent and future retirees. We also sponsor defined contribution savings plans to provide opportunities for eligible employees
to save for retirement on a tax-deferred basis. We use a measurement date of December 31 for our pension and postretirement health care and life insurance plans. See Note 1 regarding the change in accounting for benefit plans.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Pension
|
|
|
Health Care and Life
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Change in Benefit Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
31,818
|
|
|
$
|
30,394
|
|
|
$
|
27,337
|
|
|
$
|
27,096
|
|
|
Service cost
|
|
|
353
|
|
|
|
384
|
|
|
|
305
|
|
|
|
311
|
|
|
Interest cost
|
|
|
1,797
|
|
|
|
1,924
|
|
|
|
1,639
|
|
|
|
1,766
|
|
|
Plan amendments
|
|
|
(212
|
)
|
|
|
–
|
|
|
|
(2,580
|
)
|
|
|
(5)
|
|
|
Actuarial (gain) loss, net
|
|
|
748
|
|
|
|
2,056
|
|
|
|
826
|
|
|
|
(469)
|
|
|
Benefits paid
|
|
|
(1,996
|
)
|
|
|
(2,565
|
)
|
|
|
(1,675
|
)
|
|
|
(1,740)
|
|
|
Termination benefits
|
|
|
687
|
|
|
|
75
|
|
|
|
–
|
|
|
|
18
|
|
|
Curtailment (gain) loss, net
|
|
|
61
|
|
|
|
1,245
|
|
|
|
132
|
|
|
|
352
|
|
|
Acquisitions and divestitures, net
|
|
|
(581
|
)
|
|
|
192
|
|
|
|
(266
|
)
|
|
|
8
|
|
|
Settlements paid
|
|
|
(3,458
|
)
|
|
|
(1,887
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
29,217
|
|
|
$
|
31,818
|
|
|
$
|
25,718
|
|
|
$
|
27,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
28,592
|
|
|
$
|
27,791
|
|
|
$
|
3,091
|
|
|
$
|
2,555
|
|
|
Actual return on plan assets
|
|
|
3,089
|
|
|
|
4,793
|
|
|
|
319
|
|
|
|
638
|
|
|
Company contributions
|
|
|
138
|
|
|
|
337
|
|
|
|
1,210
|
|
|
|
1,638
|
|
|
Benefits paid
|
|
|
(1,996
|
)
|
|
|
(2,565
|
)
|
|
|
(1,675
|
)
|
|
|
(1,740)
|
|
|
Settlements paid
|
|
|
(3,458
|
)
|
|
|
(1,887
|
)
|
|
|
–
|
|
|
|
–
|
|
|
Acquisitions and divestitures, net
|
|
|
(551
|
)
|
|
|
123
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
25,814
|
|
|
$
|
28,592
|
|
|
$
|
2,945
|
|
|
$
|
3,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
(3,403
|
)
|
|
$
|
(3,226
|
)
|
|
$
|
(22,773
|
)
|
|
$
|
(24,246)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Pension
|
|
|
Health Care and Life
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Amounts recognized on the balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
398
|
|
|
$
|
3,141
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
Current liabilities
|
|
|
(146
|
)
|
|
|
(139
|
)
|
|
|
(581
|
)
|
|
|
(542)
|
|
|
Noncurrent liabilities
|
|
|
(3,655
|
)
|
|
|
(6,228
|
)
|
|
|
(22,192
|
)
|
|
|
(23,704
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3,403
|
)
|
|
$
|
(3,226
|
)
|
|
$
|
(22,773
|
)
|
|
$
|
(24,246
|
)
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated Other
Comprehensive Loss (Pretax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
554
|
|
|
$
|
999
|
|
|
$
|
(567
|
)
|
|
$
|
2,667
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
554
|
|
|
$
|
999
|
|
|
$
|
(567
|
)
|
|
$
|
2,667
|
|
|
|
|
|
|
|
Beginning in 2013, as a result of federal health care reform, Verizon will no longer file for the
Retiree Drug Subsidy (RDS) and will instead contract with a Medicare Part D plan on a group basis to provide prescription drug benefits to Medicare eligible retirees. This change to our Medicare Part D strategy, resulted in the
adoption of plan amendments during the fourth quarter of 2010, which will allow the company to be eligible for greater Medicare Part D plan subsidies over time.
The accumulated benefit obligation for all defined benefit pension plans was $28.5 billion and $30.8 billion at December 31, 2010 and 2009, respectively.
Information for pension plans with an accumulated benefit obligation in excess of plan assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
Projected benefit obligation
|
|
$
|
28,329
|
|
|
$
|
28,719
|
|
|
Accumulated benefit obligation
|
|
|
27,752
|
|
|
|
28,128
|
|
|
Fair value of plan assets
|
|
|
24,529
|
|
|
|
22,352
|
|
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)
|
|
|
|
|
Pension
|
|
|
Health Care and Life
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Service cost
|
|
$
|
353
|
|
|
$
|
384
|
|
|
$
|
382
|
|
|
$
|
305
|
|
|
$
|
311
|
|
|
$
|
306
|
|
|
Amortization of prior service cost
|
|
|
109
|
|
|
|
112
|
|
|
|
62
|
|
|
|
375
|
|
|
|
401
|
|
|
|
395
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
462
|
|
|
|
496
|
|
|
|
444
|
|
|
|
680
|
|
|
|
712
|
|
|
|
701
|
|
|
Expected return on plan assets
|
|
|
(2,176
|
)
|
|
|
(2,216
|
)
|
|
|
(3,444
|
)
|
|
|
(252
|
)
|
|
|
(205
|
)
|
|
|
(331
|
)
|
|
Interest cost
|
|
|
1,797
|
|
|
|
1,924
|
|
|
|
1,966
|
|
|
|
1,639
|
|
|
|
1,766
|
|
|
|
1,663
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
83
|
|
|
|
204
|
|
|
|
(1,034
|
)
|
|
|
2,067
|
|
|
|
2,273
|
|
|
|
2,033
|
|
|
Remeasurement (gain) loss, net
|
|
|
(166
|
)
|
|
|
(515
|
)
|
|
|
13,946
|
|
|
|
758
|
|
|
|
(901
|
)
|
|
|
1,069
|
|
|
|
|
|
|
|
|
Net periodic benefit (income) cost
|
|
|
(83
|
)
|
|
|
(311
|
)
|
|
|
12,912
|
|
|
|
2,825
|
|
|
|
1,372
|
|
|
|
3,102
|
|
|
Curtailment and termination benefits
|
|
|
860
|
|
|
|
1,371
|
|
|
|
32
|
|
|
|
386
|
|
|
|
532
|
|
|
|
31
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
777
|
|
|
$
|
1,060
|
|
|
$
|
12,944
|
|
|
$
|
3,211
|
|
|
$
|
1,904
|
|
|
$
|
3,133
|
|
|
|
|
|
|
|
Other pre-tax changes in plan assets and benefit obligations recognized in other comprehensive (income) loss
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Pension
|
|
|
Health Care and Life
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Prior service cost
|
|
$
|
(336)
|
|
|
$
|
(51)
|
|
|
$
|
(2,859)
|
|
|
$
|
(167)
|
|
|
Reversal of amortization items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
(109)
|
|
|
|
(112)
|
|
|
|
(375)
|
|
|
|
(401)
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive (income) loss (pretax)
|
|
$
|
(445)
|
|
|
$
|
(163)
|
|
|
$
|
(3,234)
|
|
|
$
|
(568)
|
|
|
|
|
|
|
|
The estimated prior service cost for the defined benefit pension plans that will be amortized from
Accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $0.1 billion. The estimated prior service cost for the defined benefit postretirement plans that will be amortized from Accumulated other
comprehensive loss into net periodic benefit cost over the next fiscal year is ($0.1 billion).
Assumptions
The weighted-average assumptions used in determining benefit obligations follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Health Care and Life
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
6.25
|
%
|
|
|
5.75
|
%
|
|
|
6.25 %
|
|
|
Rate of compensation increases
|
|
|
3.00
|
|
|
|
4.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
The weighted-average assumptions used
in determining net periodic cost follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Health Care and Life
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Discount rate
|
|
|
6.25
|
%
|
|
|
6.75
|
%
|
|
|
6.50
|
%
|
|
|
6.25
|
%
|
|
|
6.75
|
%
|
|
|
6.50%
|
|
|
Expected return on plan assets
|
|
|
8.50
|
|
|
|
8.50
|
|
|
|
8.50
|
|
|
|
8.25
|
|
|
|
8.25
|
|
|
|
8.25
|
|
|
Rate of compensation increase
|
|
|
4.00
|
|
|
|
4.00
|
|
|
|
4.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
4.00
|
|
In order to project
the long-term target investment return for the total portfolio, estimates are prepared for the total return of each major asset class over the subsequent 10-year period, or longer. Those estimates are based on a combination of factors including the
current market interest rates and valuation levels, consensus earnings expectations, historical long-term risk premiums and value-added. To determine the aggregate return for the pension trust, the projected return of each individual asset class is
then weighted according to the allocation to that investment area in the trust’s long-term asset allocation policy.
The assumed Health
Care Cost Trend Rates follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care and Life
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Healthcare cost trend rate assumed for next year
|
|
|
7.75
|
%
|
|
|
8.00
|
%
|
|
|
9.00%
|
|
|
Rate to which cost trend rate gradually declines
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
5.00
|
|
|
Year the rate reaches level it is assumed to remain thereafter
|
|
|
2016
|
|
|
|
2014
|
|
|
|
2014
|
|
A one-percentage-point change in the
assumed health care cost trend rate would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
One-Percentage-Point
|
|
Increase
|
|
|
Decrease
|
|
|
Effect on 2010 service and interest cost
|
|
$
|
232
|
|
|
$
|
(191
|
)
|
|
Effect on postretirement benefit obligation as of December 31, 2010
|
|
|
2,788
|
|
|
|
(2,303
|
)
|
Plan Assets
Our portfolio strategy emphasizes a long-term equity orientation, significant global diversification, the use of both public and private
investments and financial and operational risk controls. Our diversification and risk control processes serve to minimize the concentration of risk. Assets are allocated according to long-term risk and return estimates. Both active and passive
management approaches are used depending on perceived market efficiencies and various other factors.
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 target allocations for plan
assets are currently 46% public equity, 32% fixed income, 14% private equity, 6% real estate and 2% cash. Our target policies are revisited periodically to ensure they are in line with fund objectives. There are no significant concentrations of
risk, in terms of sector, industry, geography or company names.
Pension and healthcare and life plans assets include Verizon common stock of
$0.1 billion at December 31, 2010 and 2009.
Pension Plans
The fair values for the pension plans by asset category at December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Asset Category
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Cash and cash equivalents
|
|
$
|
2,175
|
|
|
$
|
2,126
|
|
|
$
|
49
|
|
|
$
|
–
|
|
|
Equity securities
|
|
|
10,158
|
|
|
|
9,052
|
|
|
|
1,106
|
|
|
|
–
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries and agencies
|
|
|
599
|
|
|
|
141
|
|
|
|
458
|
|
|
|
–
|
|
|
Corporate bonds
|
|
|
1,615
|
|
|
|
233
|
|
|
|
1,202
|
|
|
|
180
|
|
|
International bonds
|
|
|
910
|
|
|
|
20
|
|
|
|
890
|
|
|
|
–
|
|
|
Other
|
|
|
502
|
|
|
|
–
|
|
|
|
502
|
|
|
|
–
|
|
|
Real estate
|
|
|
1,769
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,769
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity
|
|
|
5,889
|
|
|
|
–
|
|
|
|
40
|
|
|
|
5,849
|
|
|
Hedge funds
|
|
|
2,197
|
|
|
|
–
|
|
|
|
1,481
|
|
|
|
716
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,814
|
|
|
$
|
11,572
|
|
|
$
|
5,728
|
|
|
$
|
8,514
|
|
|
|
|
|
|
|
The fair values for the pension plans by asset category at December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Asset Category
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Cash and cash equivalents
|
|
$
|
2,299
|
|
|
$
|
2,288
|
|
|
$
|
11
|
|
|
$
|
–
|
|
|
Equity securities
|
|
|
12,691
|
|
|
|
11,533
|
|
|
|
1,158
|
|
|
|
–
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries and agencies
|
|
|
1,095
|
|
|
|
428
|
|
|
|
667
|
|
|
|
–
|
|
|
Corporate bonds
|
|
|
2,531
|
|
|
|
73
|
|
|
|
2,321
|
|
|
|
137
|
|
|
International bonds
|
|
|
1,112
|
|
|
|
768
|
|
|
|
344
|
|
|
|
–
|
|
|
Other
|
|
|
646
|
|
|
|
–
|
|
|
|
646
|
|
|
|
–
|
|
|
Real estate
|
|
|
1,541
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,541
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity
|
|
|
5,362
|
|
|
|
–
|
|
|
|
26
|
|
|
|
5,336
|
|
|
Hedge funds
|
|
|
1,315
|
|
|
|
–
|
|
|
|
1,315
|
|
|
|
–
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,592
|
|
|
$
|
15,090
|
|
|
$
|
6,488
|
|
|
$
|
7,014
|
|
|
|
|
|
|
|
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
|
|
|
Real Estate
|
|
|
Private
Equity
|
|
|
Hedge Funds
|
|
|
Total
|
|
|
Balance at December 31, 2008
|
|
$
|
23
|
|
|
$
|
1,665
|
|
|
$
|
5,101
|
|
|
$
|
–
|
|
|
$
|
6,789
|
|
|
Actual gain (loss) on plan assets
|
|
|
26
|
|
|
|
(455)
|
|
|
|
(5)
|
|
|
|
–
|
|
|
|
(434)
|
|
|
Purchases and sales
|
|
|
84
|
|
|
|
331
|
|
|
|
263
|
|
|
|
–
|
|
|
|
678
|
|
|
Transfers in and/or out of Level 3
|
|
|
4
|
|
|
|
–
|
|
|
|
(23)
|
|
|
|
–
|
|
|
|
(19)
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
137
|
|
|
$
|
1,541
|
|
|
$
|
5,336
|
|
|
$
|
–
|
|
|
$
|
7,014
|
|
|
Actual gain (loss) on plan assets
|
|
|
3
|
|
|
|
(49)
|
|
|
|
518
|
|
|
|
24
|
|
|
|
496
|
|
|
Purchases and sales
|
|
|
37
|
|
|
|
294
|
|
|
|
(5)
|
|
|
|
109
|
|
|
|
435
|
|
|
Transfers in and/or out of Level 3
|
|
|
3
|
|
|
|
(17)
|
|
|
|
–
|
|
|
|
583
|
|
|
|
569
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
180
|
|
|
$
|
1,769
|
|
|
$
|
5,849
|
|
|
$
|
716
|
|
|
$
|
8,514
|
|
|
|
|
|
|
|
Health Care and Life Plans
The fair values for the other postretirement benefit plans by asset category at December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Asset Category
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Cash and cash equivalents
|
|
$
|
394
|
|
|
$
|
21
|
|
|
$
|
373
|
|
|
$
|
–
|
|
|
Equity securities
|
|
|
1,919
|
|
|
|
1,202
|
|
|
|
717
|
|
|
|
–
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries and agencies
|
|
|
80
|
|
|
|
47
|
|
|
|
33
|
|
|
|
–
|
|
|
Corporate bonds
|
|
|
173
|
|
|
|
58
|
|
|
|
115
|
|
|
|
–
|
|
|
International bonds
|
|
|
125
|
|
|
|
8
|
|
|
|
117
|
|
|
|
–
|
|
|
Other
|
|
|
198
|
|
|
|
–
|
|
|
|
198
|
|
|
|
–
|
|
|
Other
|
|
|
56
|
|
|
|
–
|
|
|
|
56
|
|
|
|
–
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,945
|
|
|
$
|
1,336
|
|
|
$
|
1,609
|
|
|
$
|
–
|
|
|
|
|
|
|
|
The fair values for the other postretirement benefit plans by asset category at December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Asset Category
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Cash and cash equivalents
|
|
$
|
166
|
|
|
$
|
27
|
|
|
$
|
139
|
|
|
$
|
–
|
|
|
Equity securities
|
|
|
2,240
|
|
|
|
1,681
|
|
|
|
559
|
|
|
|
–
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries and agencies
|
|
|
61
|
|
|
|
36
|
|
|
|
25
|
|
|
|
–
|
|
|
Corporate bonds
|
|
|
275
|
|
|
|
42
|
|
|
|
233
|
|
|
|
–
|
|
|
International bonds
|
|
|
81
|
|
|
|
13
|
|
|
|
68
|
|
|
|
–
|
|
|
Other
|
|
|
231
|
|
|
|
–
|
|
|
|
231
|
|
|
|
–
|
|
|
Other
|
|
|
37
|
|
|
|
–
|
|
|
|
37
|
|
|
|
–
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,091
|
|
|
$
|
1,799
|
|
|
$
|
1,292
|
|
|
$
|
–
|
|
|
|
|
|
|
|
Plan assets are recognized and measured at fair value in accordance with the accounting standards regarding
fair value measurements. 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.
Fixed income securities include U.S. Treasuries and agencies, debt obligations of foreign governments and debt obligations in corporations of domestic and foreign issuers. Fixed income also includes
investments in asset backed securities such as collateralized mortgage obligations, mortgage backed securities and interest rate swaps. The fair value of fixed income securities are 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 are 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 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 2010, contributions to our qualified pension plans were not significant. In 2010, we contributed $0.1 billion to our nonqualified
pension plans and $1.2 billion to our other postretirement benefit plans. During January 2011, we contributed approximately $0.4 billion to our qualified pension plans. We do not expect to make additional qualified pension plan contributions during
the remainder of 2011. We anticipate approximately $0.1 billion in contributions to our non-qualified pension plans and $1.5 billion to our other postretirement benefit plans in 2011.
Estimated Future Benefit Payments
The benefit payments to retirees are expected to be paid
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Year
|
|
Pension
Benefits
|
|
|
Health Care and
Life Prior to
Medicare
Prescription
Drug Subsidy
|
|
|
Expected
Medicare
Prescription
Drug Subsidy
|
|
|
2011
|
|
$
|
3,114
|
|
|
$
|
2,126
|
|
|
$
|
107
|
|
|
2012
|
|
|
2,339
|
|
|
|
2,142
|
|
|
|
120
|
|
|
2013
|
|
|
2,273
|
|
|
|
1,951
|
|
|
|
–
|
|
|
2014
|
|
|
2,225
|
|
|
|
1,931
|
|
|
|
–
|
|
|
2015
|
|
|
2,188
|
|
|
|
1,873
|
|
|
|
–
|
|
|
2016-2020
|
|
|
10,536
|
|
|
|
8,452
|
|
|
|
–
|
|
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, 2010, the number of unallocated and allocated shares of common stock in
this ESOP were 2 million and 66 million, respectively. All leveraged ESOP shares are included in earnings per share computations.
Total savings plan costs were $0.7 billion in 2010, 2009 and 2008.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Beginning of Year
|
|
|
Charged to
Expense
|
|
|
Payments
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
Other
|
|
|
End of Year
|
|
|
2008
|
|
$
|
1,024
|
|
|
$
|
512
|
|
|
$
|
(509
|
)
|
|
$
|
77
|
|
|
$
|
1,104
|
|
|
2009
|
|
|
1,104
|
|
|
|
950
|
|
|
|
(522
|
)
|
|
|
106
|
|
|
|
1,638
|
|
|
2010
|
|
|
1,638
|
|
|
|
1,217
|
|
|
|
(1,307
|
)
|
|
|
21
|
|
|
|
1,569
|
|
Charged to
expense includes the impact of the activities described below. Other primarily includes the expense incurred related to our ongoing severance plans.
Severance, Pension and Benefit Charges
During 2010, we recorded net
pre-tax severance, pension and benefits charges of $3.1 billion primarily in connection with an agreement we reached with certain unions on temporary enhancements to the separation programs contained in their existing collective bargaining
agreements. These temporary enhancements were intended to help address a previously declared surplus of employees and to help reduce the need for layoffs. Accordingly, during 2010, we recorded severance, pension and benefits charges associated with
the approximately 11,900 union-represented employees who volunteered for the incentive offer. These charges included $1.2 billion for severance for the 2010 programs mentioned above and a planned workforce reduction of approximately 2,500 employees
in 2011. In addition, we recorded $1.3 billion for pension and postretirement curtailment losses and special termination benefits that were due to the workforce reductions, which caused the elimination of a significant amount of future service.
Also, we recorded remeasurement losses of $0.6 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 remeasurement losses included $0.1
billion of pension settlement losses related to employees that received lump sum distributions, primarily resulting from our previously announced separation plans.
During 2009, we recorded net pre-tax severance, pension and benefits charges of $1.4 billion primarily for pension and postretirement curtailment losses and special termination benefits of $1.9 billion as
workforce reductions caused the elimination of a significant amount of future service requiring us to recognize a portion of the prior service costs. These charges also included $0.9 billion for workforce reductions of approximately 17,600
employees; 4,200 of whom were separated during late 2009 and the remainder in 2010. Also, we recorded remeasurement gains of $1.4 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.
During 2008, we recorded net pre-tax severance, pension and benefits charges of
$15.6 billion primarily due to remeasurement losses of $15.0 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. These remeasurement
losses included $0.5 billion of pension settlement losses related to employees that received lump sum distributions, primarily resulting from our previously announced separation plans. These severance, pension and benefit charges also included $0.5
billion for workforce reductions in connection with the separation of approximately 8,600 employees and related charges; 3,500 of whom were separated in the second half of 2008 and the remainder in 2009 and $0.1 billion for pension and
postretirement curtailment losses and special termination benefits, that were due to the workforce reductions, which caused the elimination of a significant amount of future service.
The components of income before provision (benefit) for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Domestic
|
|
$
|
11,921
|
|
|
$
|
12,625
|
|
|
$
|
722
|
|
|
Foreign
|
|
|
763
|
|
|
|
895
|
|
|
|
921
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,684
|
|
|
$
|
13,520
|
|
|
$
|
1,643
|
|
|
|
|
|
|
|
The components of the provision (benefit) for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(705
|
)
|
|
$
|
(611
|
)
|
|
$
|
365
|
|
|
Foreign
|
|
|
(19
|
)
|
|
|
73
|
|
|
|
240
|
|
|
State and Local
|
|
|
(42
|
)
|
|
|
364
|
|
|
|
544
|
|
|
|
|
|
|
|
|
Total
|
|
|
(766
|
)
|
|
|
(174
|
)
|
|
|
1,149
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
2,945
|
|
|
|
1,616
|
|
|
|
(2,411
|
)
|
|
Foreign
|
|
|
(24
|
)
|
|
|
(35
|
)
|
|
|
(91
|
)
|
|
State and Local
|
|
|
316
|
|
|
|
518
|
|
|
|
(960
|
)
|
|
|
|
|
|
|
|
Total
|
|
|
3,237
|
|
|
|
2,099
|
|
|
|
(3,462
|
)
|
|
Investment tax credits
|
|
|
(4
|
)
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
Total income tax provision (benefit)
|
|
$
|
2,467
|
|
|
$
|
1,919
|
|
|
$
|
(2,319
|
)
|
|
|
|
|
|
|
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,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
State and local income tax rate, net of federal tax benefits
|
|
|
1.4
|
|
|
|
1.5
|
|
|
|
(16.5
|
)
|
|
Distributions from foreign investments
|
|
|
–
|
|
|
|
–
|
|
|
|
(4.3
|
)
|
|
Medicare Part D subsidy charge
|
|
|
6.9
|
|
|
|
–
|
|
|
|
–
|
|
|
Equity in earnings from unconsolidated businesses
|
|
|
(1.6
|
)
|
|
|
(1.6
|
)
|
|
|
(14.0
|
)
|
|
Noncontrolling interest
|
|
|
(19.5
|
)
|
|
|
(16.0
|
)
|
|
|
(119.4
|
)
|
|
Other, net
|
|
|
(2.8
|
)
|
|
|
(4.7
|
)
|
|
|
(22.0
|
)
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
19.4
|
%
|
|
|
14.2
|
%
|
|
|
(141.2
|
)%
|
|
|
|
|
|
|
The effective income tax rate in 2010 increased to 19.4% from 14.2% in 2009. The increase was primarily
driven by a one-time, non-cash income tax charge of $1.0 billion. The one-time non-cash income tax charge was a result of the enactment of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010,
both of which became law in March 2010 (collectively the Health Care Act). Under the Health Care Act, beginning in 2013, Verizon and other companies that receive a subsidy under Medicare Part D to provide retiree prescription drug coverage will no
longer receive a federal income tax deduction for the expenses incurred in connection with providing the subsidized coverage to the extent of the subsidy received. Because future anticipated retiree prescription drug plan liabilities and related
subsidies were already reflected in Verizon’s financial statements, this change required Verizon to reduce the value of the related tax benefits recognized in its financial statements in the period during which the Health Care Act was enacted.
The increase was partially offset by higher earnings attributable to the noncontrolling interest.
During 2008, we recorded a
pension and postretirement benefit plan remeasurement loss rendering the 2008 effective tax rate not meaningful. Excluding the tax impact of this actuarial loss in 2008, the effective income tax rate decreased in 2009 primarily driven by higher
earnings attributable to the noncontrolling interest. Included within the (4.7)% ‘Other net’ above is the impact of lower federal taxes, net of higher state taxes attributable to prior year adjustments to tax balances that were not
material to the overall effective income tax rate.
Excluding the tax impact of the actuarial loss in 2008, the state and
local income tax rate decreased due to tax benefits recognized after statutes of limitations in multiple jurisdictions lapsed and the impact of earnings attributable to the noncontrolling interest.
Deferred taxes arise because of differences in the book and tax bases of certain assets and
liabilities. Significant components of deferred taxes are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
Employee benefits
|
|
$
|
11,499
|
|
|
$
|
13,204
|
|
|
Tax loss and credit carry forwards
|
|
|
3,907
|
|
|
|
2,786
|
|
|
Uncollectible accounts receivable
|
|
|
248
|
|
|
|
303
|
|
|
Other - assets
|
|
|
951
|
|
|
|
1,269
|
|
|
|
|
|
|
|
|
|
|
|
16,605
|
|
|
|
17,562
|
|
|
Valuation allowances
|
|
|
(3,421
|
)
|
|
|
(2,942
|
)
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
13,184
|
|
|
|
14,620
|
|
|
|
|
|
|
|
|
|
|
|
|
Former MCI intercompany accounts receivable basis difference
|
|
|
1,489
|
|
|
|
1,633
|
|
|
Depreciation
|
|
|
11,758
|
|
|
|
10,296
|
|
|
Leasing activity
|
|
|
1,980
|
|
|
|
2,081
|
|
|
Wireless joint venture including wireless licenses
|
|
|
19,514
|
|
|
|
18,249
|
|
|
Other - liabilities
|
|
|
1,152
|
|
|
|
1,012
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
35,893
|
|
|
|
33,271
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
22,709
|
|
|
$
|
18,651
|
|
|
|
|
|
|
|
At December 31, 2010, undistributed earnings of our foreign subsidiaries indefinitely invested outside
of the United States amounted to approximately $1.2 billion. We have not provided deferred taxes on these earnings because we intend that they will remain indefinitely invested outside of the United States. Determination of the amount of
unrecognized deferred taxes related to these undistributed earnings is not practical.
At December 31, 2010, we had net
after tax loss and credit carry forwards for income tax purposes of approximately $4.2 billion. Of these net after tax loss and credit carry forwards, approximately $3.5 billion will expire between 2011 and 2030 and approximately $0.7 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 $0.6 billion at December 31, 2010 and 2009, due to federal and state tax law
limitations on utilization of net operating losses.
During 2010, the valuation allowance increased approximately $0.5
billion. The balance at December 31, 2010 and the 2010 activity is primarily related to state and foreign tax losses and credit carry forwards.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending balance of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Balance at January 1,
|
|
$
|
3,400
|
|
|
$
|
2,622
|
|
|
$
|
2,883
|
|
|
Additions based on tax positions related to the current year
|
|
|
231
|
|
|
|
288
|
|
|
|
251
|
|
|
Additions for tax positions of prior years
|
|
|
476
|
|
|
|
1,128
|
|
|
|
344
|
|
|
Reductions for tax positions of prior years
|
|
|
(569
|
)
|
|
|
(477
|
)
|
|
|
(651
|
)
|
|
Settlements
|
|
|
(256
|
)
|
|
|
(27
|
)
|
|
|
(126
|
)
|
|
Lapses of statutes of limitations
|
|
|
(40
|
)
|
|
|
(134
|
)
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
3,242
|
|
|
$
|
3,400
|
|
|
$
|
2,622
|
|
|
|
|
|
|
|
Included in the total unrecognized tax benefits at December 31, 2010, 2009 and 2008 is $2.1 billion,
$2.1 billion and $1.6 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,
|
|
(dollars in millions)
|
|
|
2010
|
|
$
|
29
|
|
|
2009
|
|
|
14
|
|
|
2008
|
|
|
55
|
|
The after-tax accrual for the payment of interest and penalties in the balance sheets are as follows:
|
|
|
|
|
|
|
At December 31,
|
|
(dollars in millions)
|
|
|
2010
|
|
$
|
527
|
|
|
2009
|
|
|
552
|
|
Verizon and/or its
subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state, local and foreign jurisdictions. The Internal Revenue Service (IRS) is currently examining the Company’s U.S. income tax returns for the years 2004
through 2006. As a large taxpayer, we are under continual audit by the IRS and multiple state and foreign jurisdictions on numerous open tax positions. Significant tax examinations and litigation are ongoing in Massachusetts, New York, Canada,
Australia and Italy for tax years as early as 2002. It is reasonably possible that the amount of the liability for unrecognized tax benefits could change by a significant amount during the next twelve-month period. An estimate of the range of the
possible change cannot be made until issues are further developed or examinations close.
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 the historical results of divested operations 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 individually significant are included in all segment results as these items are included in the chief operating decision maker’s assessment of segment performance.
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 non-operational nature.
During the fourth quarter of 2010, Verizon changed its method of accounting for benefit plans as described in Note 1, as a
result, all prior periods have been adjusted. As part of this change to its method of accounting, the service cost and the amortization of prior service costs, which are representative of the benefits earned by active employees during the period,
will continue to be allocated to the segment in which the employee is employed, while interest cost and expected return on assets will now be recorded at the Corporate level. The recognition of actuarial gains and losses will also be recorded at the
Corporate level.
In order to comply with regulatory conditions related to the acquisition of Alltel in January 2009, Verizon
Wireless divested overlapping properties in 105 operating markets in 24 states during the first half of 2010. In addition, on July 1, 2010, certain of Verizon’s local exchange business and related landline activities in 14 states were spun
off (see Note 3). Furthermore, in 2008, we completed the spin-off of our local exchange and related business assets in Maine, New Hampshire and Vermont. Accordingly, the historical Domestic Wireless and Wireline results for these operations have
been reclassified to Corporate and Other to reflect comparable segment operating results.
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
|
|
Domestic Wireless
|
|
Domestic Wireless’ communications products and services include wireless voice and data services and equipment sales across the U.S.
|
|
|
|
|
Wireline
|
|
Wireline’s communications products and services include voice, Internet access, broadband video and data, Internet protocol network services, network
access, long distance and other services. We provide these products and services to consumers in the U.S., as well as to carriers, businesses and government customers both in the U.S. and in over 150 other countries around the
world.
|
The following table provides operating financial information for our two reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
2010
|
|
Domestic Wireless
|
|
|
Wireline
|
|
|
Total Segments
|
|
|
External Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
55,588
|
|
|
$
|
–
|
|
|
$
|
55,588
|
|
|
Equipment and other
|
|
|
7,753
|
|
|
|
–
|
|
|
|
7,753
|
|
|
Mass Markets
|
|
|
–
|
|
|
|
16,247
|
|
|
|
16,247
|
|
|
Global Enterprise
|
|
|
–
|
|
|
|
15,667
|
|
|
|
15,667
|
|
|
Global Wholesale
|
|
|
–
|
|
|
|
7,173
|
|
|
|
7,173
|
|
|
Other
|
|
|
–
|
|
|
|
858
|
|
|
|
858
|
|
|
Intersegment revenues
|
|
|
66
|
|
|
|
1,282
|
|
|
|
1,348
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
63,407
|
|
|
|
41,227
|
|
|
|
104,634
|
|
|
Cost of services and sales
|
|
|
19,245
|
|
|
|
22,618
|
|
|
|
41,863
|
|
|
Selling, general and administrative expense
|
|
|
18,082
|
|
|
|
9,372
|
|
|
|
27,454
|
|
|
Depreciation and amortization expense
|
|
|
7,356
|
|
|
|
8,469
|
|
|
|
15,825
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
44,683
|
|
|
|
40,459
|
|
|
|
85,142
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
18,724
|
|
|
$
|
768
|
|
|
$
|
19,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
138,863
|
|
|
$
|
83,849
|
|
|
$
|
222,712
|
|
|
Plant, property and equipment, net
|
|
|
32,253
|
|
|
|
54,594
|
|
|
|
86,847
|
|
|
Capital expenditures
|
|
|
8,438
|
|
|
|
7,269
|
|
|
|
15,707
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
2009
|
|
Domestic Wireless
|
|
|
Wireline
|
|
|
Total Segments
|
|
|
External Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
51,975
|
|
|
$
|
–
|
|
|
$
|
51,975
|
|
|
Equipment and other
|
|
|
8,250
|
|
|
|
–
|
|
|
|
8,250
|
|
|
Mass Markets
|
|
|
–
|
|
|
|
16,109
|
|
|
|
16,109
|
|
|
Global Enterprise
|
|
|
–
|
|
|
|
15,666
|
|
|
|
15,666
|
|
|
Global Wholesale
|
|
|
–
|
|
|
|
7,958
|
|
|
|
7,958
|
|
|
Other
|
|
|
–
|
|
|
|
1,443
|
|
|
|
1,443
|
|
|
Intersegment revenues
|
|
|
100
|
|
|
|
1,275
|
|
|
|
1,375
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
60,325
|
|
|
|
42,451
|
|
|
|
102,776
|
|
|
Cost of services and sales
|
|
|
19,348
|
|
|
|
22,693
|
|
|
|
42,041
|
|
|
Selling, general and administrative expense
|
|
|
17,309
|
|
|
|
9,947
|
|
|
|
27,256
|
|
|
Depreciation and amortization expense
|
|
|
7,030
|
|
|
|
8,238
|
|
|
|
15,268
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
43,687
|
|
|
|
40,878
|
|
|
|
84,565
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
16,638
|
|
|
$
|
1,573
|
|
|
$
|
18,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
135,162
|
|
|
$
|
91,778
|
|
|
$
|
226,940
|
|
|
Plant, property and equipment, net
|
|
|
30,849
|
|
|
|
59,373
|
|
|
|
90,222
|
|
|
Capital expenditures
|
|
|
7,152
|
|
|
|
8,892
|
|
|
|
16,044
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
2008
|
|
Domestic Wireless
|
|
|
Wireline
|
|
|
Total Segments
|
|
|
External Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
42,527
|
|
|
$
|
–
|
|
|
$
|
42,527
|
|
|
Equipment and other
|
|
|
6,665
|
|
|
|
–
|
|
|
|
6,665
|
|
|
Mass Markets
|
|
|
–
|
|
|
|
15,823
|
|
|
|
15,823
|
|
|
Global Enterprise
|
|
|
–
|
|
|
|
16,599
|
|
|
|
16,599
|
|
|
Global Wholesale
|
|
|
–
|
|
|
|
8,770
|
|
|
|
8,770
|
|
|
Other
|
|
|
–
|
|
|
|
1,959
|
|
|
|
1,959
|
|
|
Intersegment revenues
|
|
|
106
|
|
|
|
1,172
|
|
|
|
1,278
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
49,298
|
|
|
|
44,323
|
|
|
|
93,621
|
|
|
Cost of services and sales
|
|
|
15,660
|
|
|
|
22,890
|
|
|
|
38,550
|
|
|
Selling, general and administrative expense
|
|
|
14,273
|
|
|
|
10,169
|
|
|
|
24,442
|
|
|
Depreciation and amortization expense
|
|
|
5,405
|
|
|
|
8,174
|
|
|
|
13,579
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
35,338
|
|
|
|
41,233
|
|
|
|
76,571
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
13,960
|
|
|
$
|
3,090
|
|
|
$
|
17,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
111,979
|
|
|
$
|
90,386
|
|
|
$
|
202,365
|
|
|
Plant, property and equipment, net
|
|
|
27,136
|
|
|
|
58,287
|
|
|
|
85,423
|
|
|
Capital expenditures
|
|
|
6,510
|
|
|
|
9,797
|
|
|
|
16,307
|
|
Reconciliation to Consolidated Financial Information
A reconciliation of the segment operating revenues to consolidated operating revenues is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segments
|
|
$
|
104,634
|
|
|
$
|
102,776
|
|
|
$
|
93,621
|
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue adjustment (see Note 1)
|
|
|
(235
|
)
|
|
|
78
|
|
|
|
34
|
|
|
Impact of divested operations
|
|
|
2,407
|
|
|
|
5,297
|
|
|
|
4,084
|
|
|
Corporate, eliminations and other
|
|
|
(241
|
)
|
|
|
(343
|
)
|
|
|
(385)
|
|
|
|
|
|
|
|
|
Consolidated operating revenues
|
|
$
|
106,565
|
|
|
$
|
107,808
|
|
|
$
|
97,354
|
|
|
|
|
|
|
|
A reconciliation of the total of the reportable segments’ operating income to consolidated Income
before provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
19,492
|
|
|
$
|
18,211
|
|
|
$
|
17,050
|
|
|
Merger integration and acquisition costs (see Note 2)
|
|
|
(867
|
)
|
|
|
(954)
|
|
|
|
(174)
|
|
|
Access line spin-off and other charges (see Note 3)
|
|
|
(407
|
)
|
|
|
(453)
|
|
|
|
(103)
|
|
|
Severance, pension and benefit charges (see Note 12)
|
|
|
(3,054
|
)
|
|
|
(1,440)
|
|
|
|
(15,602)
|
|
|
Deferred revenue adjustment (see Note 1)
|
|
|
(235
|
)
|
|
|
78
|
|
|
|
34
|
|
|
Impact of divested operations (see Note 3)
|
|
|
755
|
|
|
|
1,769
|
|
|
|
1,197
|
|
|
Corporate, eliminations and other
|
|
|
(1,039
|
)
|
|
|
(1,233)
|
|
|
|
210
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
$
|
14,645
|
|
|
$
|
15,978
|
|
|
$
|
2,612
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated businesses
|
|
|
508
|
|
|
|
553
|
|
|
|
567
|
|
|
Other income (expense), net
|
|
|
54
|
|
|
|
91
|
|
|
|
283
|
|
|
Interest expense
|
|
|
(2,523
|
)
|
|
|
(3,102)
|
|
|
|
(1,819)
|
|
|
|
|
|
|
|
|
Income Before (Provision) Benefit for Income Taxes
|
|
$
|
12,684
|
|
|
$
|
13,520
|
|
|
$
|
1,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segments
|
|
$
|
222,712
|
|
|
$
|
226,940
|
|
|
|
|
|
|
Corporate, eliminations and other
|
|
|
(2,707
|
)
|
|
|
(33)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
220,005
|
|
|
$
|
226,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010, 2009 and 2008. International operating revenues and long-lived assets are not significant.
Comprehensive income consists of net income and other gains and losses affecting equity that, under generally accepted accounting
principles, are excluded from net income. Significant changes in the components of Other comprehensive income (loss), net of (provision) benefit for income taxes are described below.
Foreign Currency Translation
The changes in Foreign currency translation adjustments were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Vodafone Omnitel
|
|
$
|
(119
|
)
|
|
$
|
49
|
|
|
$
|
(119
|
)
|
|
Other international operations
|
|
|
(52
|
)
|
|
|
29
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
$
|
(171
|
)
|
|
$
|
78
|
|
|
$
|
(231
|
)
|
|
|
|
|
|
|
Net Unrealized Gains (Losses) on Cash Flow Hedges
The changes in Unrealized gains (losses) on cash flow hedges were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Unrealized gains (losses)
|
|
$
|
38
|
|
|
$
|
112
|
|
|
$
|
(43
|
)
|
|
Less reclassification adjustments for gains (losses) realized in net income
|
|
|
(51
|
)
|
|
|
25
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on cash flow hedges
|
|
$
|
89
|
|
|
$
|
87
|
|
|
$
|
(40
|
)
|
|
|
|
|
|
|
Unrealized Gains (Losses) on Marketable Securities
The changes in Unrealized gains (losses) on marketable securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Unrealized gains (losses)
|
|
$
|
37
|
|
|
$
|
95
|
|
|
$
|
(142
|
)
|
|
Less reclassification adjustments for gains (losses) realized in net income
|
|
|
8
|
|
|
|
8
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on marketable securities
|
|
$
|
29
|
|
|
$
|
87
|
|
|
$
|
(97
|
)
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
The change in Foreign currency translation adjustments during 2010 was primarily driven by the devaluation of the Euro versus the U.S. dollar. The change in Foreign currency translation adjustments during
2009 was primarily driven by the devaluation of the U.S. dollar versus the Euro. The change in Foreign currency translation adjustments during 2008 was primarily driven by the settlement of the foreign currency forward contracts, which hedged a
portion of our net investment in Vodafone Omnitel and the devaluation of the Euro versus the U.S. dollar.
Net Unrealized Gains (Losses) on
Cash Flow Hedges
During 2010, 2009 and 2008, Unrealized gains (losses) on cash flow hedges included in Other comprehensive
income attributable to noncontrolling interest, primarily reflects activity related to a cross currency swap (see Note 10).
Defined
Benefit Pension and Postretirement Plans
The change in Defined benefit pension and postretirement plans of $2.5 billion,
net of taxes of $1.2 billion at December 31, 2010 was attributable to the change in prior service cost. The change was impacted by a change to our Medicare Part D strategy, resulting in the adoption of plan amendments during the fourth quarter
of 2010, which will allow the company to be eligible for greater Medicare Part D plan subsidies over time and was also impacted by the curtailment losses associated with the voluntary incentive program for union-represented employees recorded in the
second quarter of 2010 (see Note 12). The change in Defined benefit pension and postretirement plans of $0.3 billion, net of taxes of $0.4 billion at December 31, 2009 was attributable to a change in prior service cost.
Accumulated Other Comprehensive Income (Loss)
The components of Accumulated other comprehensive income (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
Foreign currency translation adjustments
|
|
$
|
843
|
|
|
$
|
1,014
|
|
|
Net unrealized gain on cash flow hedges
|
|
|
126
|
|
|
|
37
|
|
|
Unrealized gain on marketable securities
|
|
|
79
|
|
|
|
50
|
|
|
Defined benefit pension and postretirement plans
|
|
|
1
|
|
|
|
(2,473)
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
$
|
1,049
|
|
|
$
|
(1,372)
|
|
|
|
|
|
|
|
|
|
|
Additional Financial Information
|
The tables that follow provide additional financial information related to our consolidated financial statements:
Income Statement Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Depreciation expense
|
|
$
|
14,593
|
|
|
$
|
14,564
|
|
|
$
|
13,227
|
|
|
Interest incurred
|
|
|
3,487
|
|
|
|
4,029
|
|
|
|
2,566
|
|
|
Interest capitalized
|
|
|
(964
|
)
|
|
|
(927
|
)
|
|
|
(747)
|
|
|
Advertising expense
|
|
|
2,451
|
|
|
|
3,020
|
|
|
|
2,754
|
|
|
|
|
|
|
|
Balance Sheet Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Accounts Payable and Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
$
|
3,936
|
|
|
$
|
4,337
|
|
|
Accrued expenses
|
|
|
|
|
|
|
4,110
|
|
|
|
3,486
|
|
|
Accrued vacation, salaries and wages
|
|
|
|
|
|
|
5,686
|
|
|
|
5,084
|
|
|
Interest payable
|
|
|
|
|
|
|
813
|
|
|
|
872
|
|
|
Taxes payable
|
|
|
|
|
|
|
1,157
|
|
|
|
1,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,702
|
|
|
$
|
15,223
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance billings and customer deposits
|
|
|
|
|
|
$
|
3,091
|
|
|
$
|
2,644
|
|
|
Dividends payable
|
|
|
|
|
|
|
1,402
|
|
|
|
1,372
|
|
|
Other
|
|
|
|
|
|
|
2,860
|
|
|
|
2,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,353
|
|
|
$
|
6,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes, net of amounts refunded
|
|
$
|
430
|
|
|
$
|
158
|
|
|
$
|
1,206
|
|
|
Interest, net of amounts capitalized
|
|
|
2,433
|
|
|
|
2,573
|
|
|
|
1,664
|
|
|
|
|
Commitments and Contingencies
|
We are currently involved in certain legal proceedings and, as required, have accrued estimates of the probable and estimable losses for
the resolution of these claims that, individually or in the aggregate, were not significant. These estimates have been developed in consultation with outside counsel and are based upon an analysis of potential results, assuming a combination of
litigation and settlement strategies. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions or the effectiveness of our strategies related
to these proceedings.
Several state and federal regulatory proceedings may require our telephone operations to pay penalties
or to refund to customers a portion of the revenues collected in the current and prior periods. There are also various legal actions pending to which we are a party and claims that, if asserted, may lead to other legal actions. We have established
reserves for specific liabilities in connection with regulatory and legal actions, including environmental matters that we currently deem to be probable and estimable. We do not expect that the ultimate resolution of pending regulatory and legal
matters in future periods, including the Hicksville matter described below, will have a material effect on our financial condition, but it could have a material effect on our results of operations for a given reporting period.
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.
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.
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, 2010, letters of credit totaling approximately $0.1 billion were executed in the normal course of business, which support several financing arrangements and payment obligations to
third parties.
We depend on various key suppliers and vendors to provide us, directly or through other suppliers, with
equipment and services, such as switch and network equipment, handsets and other devices and equipment, that we need in order to operate our business and provide products to our customers. For example, our handset and other device suppliers often
rely on one vendor for the manufacture and supply of critical components, such as chipsets, used in their devices. If any of our key suppliers, or other suppliers, fail to provide equipment or services on a timely basis or fail to meet our
performance expectations, we may be unable to provide services to our customers in a competitive manner or continue to maintain and upgrade our network. Any such disruption could increase our costs, decrease our operating efficiencies and have a
material adverse effect on our business, results of operations and financial condition.
We have several commitments primarily
to purchase 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 $57.3 billion. Of this total amount, we expect to
purchase $17.9 billion in 2011, $36.8 billion in 2012 through 2013, $2.1 billion in 2014 through 2015 and $0.5 billion thereafter. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for
which we are contractually committed. Our commitments are generally determined based on the noncancelable quantities or termination amounts. 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, 2010, and applicable rates stipulated in the contracts in effect at that time. We also purchase products and services as needed with
no firm commitment.
|
|
|
Quarterly Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) attributable to Verizon
(1)
|
|
|
|
|
|
Quarter Ended
|
|
Operating
Revenues
|
|
|
Operating
Income
|
|
|
Amount
|
|
|
Per Share-
Basic
|
|
|
Per Share-
Diluted
|
|
|
Net Income
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
26,913
|
|
|
$
|
4,441
|
|
|
$
|
443
|
|
|
$
|
.16
|
|
|
$
|
.16
|
|
|
$
|
2,318
|
|
|
June 30
|
|
|
26,773
|
|
|
|
410
|
|
|
|
(1,192
|
)
|
|
|
(.42
|
)
|
|
|
(.42
|
)
|
|
|
553
|
|
|
September 30
|
|
|
26,484
|
|
|
|
3,383
|
|
|
|
659
|
|
|
|
.23
|
|
|
|
.23
|
|
|
|
2,698
|
|
|
December 31
|
|
|
26,395
|
|
|
|
6,411
|
|
|
|
2,639
|
|
|
|
.93
|
|
|
|
.93
|
|
|
|
4,648
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
26,591
|
|
|
$
|
4,530
|
|
|
$
|
1,521
|
|
|
$
|
.54
|
|
|
$
|
.54
|
|
|
$
|
3,086
|
|
|
June 30
|
|
|
26,861
|
|
|
|
4,672
|
|
|
|
1,658
|
|
|
|
.58
|
|
|
|
.58
|
|
|
|
3,335
|
|
|
September 30
|
|
|
27,265
|
|
|
|
3,823
|
|
|
|
1,098
|
|
|
|
.39
|
|
|
|
.39
|
|
|
|
2,809
|
|
|
December 31
|
|
|
27,091
|
|
|
|
2,953
|
|
|
|
617
|
|
|
|
.22
|
|
|
|
.22
|
|
|
|
2,371
|
|
|
•
|
|
Results of operations for the first quarter of 2010 include after-tax charges attributable to Verizon of $1.1 billion related to Medicare Part D
subsidy, access line spin-off charges, merger integration and acquisition costs, and severance, pension and benefit charges.
|
|
•
|
|
Results of operations for the second quarter of 2010 include after-tax charges attributable to Verizon of $2.8 billion related to severance, pension
and benefit charges, merger integration and acquisition costs, access line spin-off charges, and a one-time non-cash adjustment to wireless data revenues.
|
|
•
|
|
Results of operations for the third quarter of 2010 include after-tax charges attributable to Verizon of $0.9 billion primarily related to
severance, pension and benefit charges, access line spin-off charges, and merger integration costs.
|
|
•
|
|
Results of operations for the fourth quarter of 2010 include net after-tax gain attributable to Verizon of $1.1 billion related to severance,
pension and benefit charges and merger integration and acquisition costs.
|
|
•
|
|
Results of operations for the first quarter of 2009 include after-tax charges attributable to Verizon of $0.1 billion related to acquisition related
charges, and merger integration costs.
|
|
•
|
|
Results of operations for the second quarter of 2009 include after-tax charges attributable to Verizon of $0.1 billion of merger integration costs,
acquisition related charges, and severance, pension and benefits charges.
|
|
•
|
|
Results of operations for the third quarter of 2009 include after-tax charges attributable to Verizon of $0.5 billion primarily related to, merger
integration and acquisition costs, access line spin-off and other charges and severance, pension and benefits charges.
|
|
•
|
|
Results of operations for the fourth quarter of 2009 include after-tax charges attributable to Verizon of $0.8 billion for severance, pension and
benefits charges, wireline cost reduction initiatives, access line spin-off and other charges and merger integration and acquisition 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.
|