UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one) | ||||||
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) | |||||
OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||
For the quarterly period ended September 30, 2011 | ||||||
OR
|
||||||
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) | |||||
OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||
For the transition period from to |
Commission file number: 1-8606
Verizon Communications Inc.
(Exact name of registrant as specified in its charter)
Delaware | 23-2259884 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
140 West Street New York, New York |
10007 | |
(Address of principal executive offices) |
(Zip Code) |
Registrants telephone number, including area code: (212) 395-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
x |
Accelerated filer ¨ | ||
Non-accelerated filer |
¨ (Do not check if a smaller reporting company) |
Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
At September 30, 2011, 2,831,090,656 shares of the registrants common stock were outstanding, after deducting 136,519,463 shares held in treasury.
Table of Contents |
Page | ||||||
PART I FINANCIAL INFORMATION | ||||||
Item 1. | Financial Statements (Unaudited) | |||||
Condensed Consolidated Statements of Income Three and nine months ended September 30, 2011 and September 30, 2010 |
2 | |||||
Condensed Consolidated Balance Sheets At September 30, 2011 and December 31, 2010 |
3 | |||||
Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2011 and 2010 |
4 | |||||
Notes to Condensed Consolidated Financial Statements | 5 | |||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 21 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 43 | ||||
Item 4. | Controls and Procedures | 43 | ||||
PART II OTHER INFORMATION | ||||||
Item 1. | Legal Proceedings | 43 | ||||
Item 1A. | Risk Factors | 43 | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 43 | ||||
Item 6. | Exhibits | 44 | ||||
Signature | 45 | |||||
Certifications |
Part I Financial Information |
Condensed Consolidated Statements of Income
Verizon Communications Inc. and Subsidiaries
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
(dollars in millions, except per share amounts) (unaudited) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Operating Revenues |
$ | 27,913 | $ | 26,484 | $ | 82,439 | $ | 80,170 | ||||||||
Operating Expenses |
||||||||||||||||
Cost of services and sales (exclusive of items shown below) |
11,398 | 10,671 | 33,785 | 33,539 | ||||||||||||
Selling, general and administrative expense |
7,689 | 8,407 | 22,346 | 26,075 | ||||||||||||
Depreciation and amortization expense |
4,179 | 4,023 | 12,316 | 12,322 | ||||||||||||
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|
|||||||||||||||
Total Operating Expenses |
23,266 | 23,101 | 68,447 | 71,936 | ||||||||||||
Operating Income |
4,647 | 3,383 | 13,992 | 8,234 | ||||||||||||
Equity in earnings of unconsolidated businesses |
125 | 141 | 347 | 395 | ||||||||||||
Other income and (expense), net |
24 | (51 | ) | 70 | 11 | |||||||||||
Interest expense |
(698 | ) | (597 | ) | (2,124 | ) | (1,956 | ) | ||||||||
|
|
|||||||||||||||
Income Before Provision For Income Taxes |
4,098 | 2,876 | 12,285 | 6,684 | ||||||||||||
Provision for income taxes |
(556 | ) | (178 | ) | (1,875 | ) | (1,115 | ) | ||||||||
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|
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Net Income |
$ | 3,542 | $ | 2,698 | $ | 10,410 | $ | 5,569 | ||||||||
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|||||||||||||||
Net income attributable to noncontrolling interest |
$ | 2,163 | $ | 2,039 | $ | 5,983 | $ | 5,659 | ||||||||
Net income (loss) attributable to Verizon |
1,379 | 659 | 4,427 | (90 | ) | |||||||||||
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Net Income |
$ | 3,542 | $ | 2,698 | $ | 10,410 | $ | 5,569 | ||||||||
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|
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Basic Earnings (Loss) Per Common Share |
||||||||||||||||
Net income (loss) attributable to Verizon |
$ | .49 | $ | .23 | $ | 1.56 | $ | (.03 | ) | |||||||
Weighted-average shares outstanding (in millions) |
2,834 | 2,829 | 2,832 | 2,830 | ||||||||||||
Diluted Earnings (Loss) Per Common Share |
||||||||||||||||
Net income (loss) attributable to Verizon |
$ | .49 | $ | .23 | $ | 1.56 | $ | (.03 | ) | |||||||
Weighted-average shares outstanding (in millions) |
2,839 | 2,830 | 2,838 | 2,830 | ||||||||||||
Dividends declared per common share |
$ | 0.5000 | $ | 0.4875 | $ | 1.4750 | $ | 1.4380 |
See Notes to Condensed Consolidated Financial Statements
2
Condensed Consolidated Balance Sheets
Verizon Communications Inc. and Subsidiaries
(dollars in millions, except per share amounts) (unaudited) | At September 30, 2011 |
At December 31, 2010 |
||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 10,324 | $ | 6,668 | ||||
Short-term investments |
534 | 545 | ||||||
Accounts receivable, net of allowances of $833 and $876 |
11,648 | 11,781 | ||||||
Inventories |
1,153 | 1,131 | ||||||
Prepaid expenses and other |
4,111 | 2,223 | ||||||
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|
|||||||
Total current assets |
27,770 | 22,348 | ||||||
|
|
|||||||
Plant, property and equipment |
214,798 | 211,655 | ||||||
Less accumulated depreciation |
125,955 | 123,944 | ||||||
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|
|||||||
88,843 | 87,711 | |||||||
|
|
|||||||
Investments in unconsolidated businesses |
3,461 | 3,497 | ||||||
Wireless licenses |
73,203 | 72,996 | ||||||
Goodwill |
23,541 | 21,988 | ||||||
Other intangible assets, net |
5,915 | 5,830 | ||||||
Other assets |
5,299 | 5,635 | ||||||
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|
|||||||
Total assets |
$ | 228,032 | $ | 220,005 | ||||
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|
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Liabilities and Equity |
||||||||
Current liabilities |
||||||||
Debt maturing within one year |
$ | 8,630 | $ | 7,542 | ||||
Accounts payable and accrued liabilities |
14,486 | 15,702 | ||||||
Other |
11,520 | 7,353 | ||||||
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|
|||||||
Total current liabilities |
34,636 | 30,597 | ||||||
|
|
|||||||
Long-term debt |
46,285 | 45,252 | ||||||
Employee benefit obligations |
27,705 | 28,164 | ||||||
Deferred income taxes |
26,412 | 22,818 | ||||||
Other liabilities |
5,479 | 6,262 | ||||||
Equity |
||||||||
Series preferred stock ($.10 par value; none issued) |
| | ||||||
Common stock ($.10 par value; 2,967,610,119 shares |
297 | 297 | ||||||
Contributed capital |
37,912 | 37,922 | ||||||
Reinvested earnings |
4,619 | 4,368 | ||||||
Accumulated other comprehensive income |
1,037 | 1,049 | ||||||
Common stock in treasury, at cost |
(5,112 | ) | (5,267 | ) | ||||
Deferred compensation employee stock ownership plans and other |
298 | 200 | ||||||
Noncontrolling interest |
48,464 | 48,343 | ||||||
|
|
|||||||
Total equity |
87,515 | 86,912 | ||||||
|
|
|||||||
Total liabilities and equity |
$ | 228,032 | $ | 220,005 | ||||
|
|
See Notes to Condensed Consolidated Financial Statements
3
Condensed Consolidated Statements of Cash Flows
Verizon Communications Inc. and Subsidiaries
Nine Months Ended September 30, |
||||||||
(dollars in millions) (unaudited) | 2011 | 2010 | ||||||
Cash Flows from Operating Activities |
||||||||
Net Income |
$ | 10,410 | $ | 5,569 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization expense |
12,316 | 12,322 | ||||||
Employee retirement benefits |
1,428 | 5,710 | ||||||
Deferred income taxes |
1,901 | 1,611 | ||||||
Provision for uncollectible accounts |
754 | 922 | ||||||
Equity in earnings of unconsolidated businesses, net of dividends received |
102 | 82 | ||||||
Changes in current assets and liabilities, net of |
(2,553 | ) | 640 | |||||
Other, net |
(2,846 | ) | (1,742 | ) | ||||
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|
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Net cash provided by operating activities |
21,512 | 25,114 | ||||||
|
|
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Cash Flows from Investing Activities |
||||||||
Capital expenditures (including capitalized software) |
(12,546 | ) | (11,744 | ) | ||||
Acquisitions of licenses, investments and businesses, net of cash acquired |
(1,854 | ) | (1,027 | ) | ||||
Proceeds from dispositions of businesses |
| 2,594 | ||||||
Net change in short-term investments |
43 | (34 | ) | |||||
Other, net |
945 | 151 | ||||||
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|||||||
Net cash used in investing activities |
(13,412 | ) | (10,060 | ) | ||||
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|
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Cash Flows from Financing Activities |
||||||||
Proceeds from long-term borrowings |
6,510 | | ||||||
Repayments of long-term borrowings and capital lease obligations |
(7,420 | ) | (7,941 | ) | ||||
Increase (decrease) in short-term obligations, excluding current maturities |
1,817 | (1,097 | ) | |||||
Dividends paid |
(4,139 | ) | (4,034 | ) | ||||
Proceeds from access line spin-off |
| 3,083 | ||||||
Proceeds from sale of common stock |
139 | | ||||||
Other, net |
(1,351 | ) | (1,680 | ) | ||||
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|||||||
Net cash used in financing activities |
(4,444 | ) | (11,669 | ) | ||||
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Increase in cash and cash equivalents |
3,656 | 3,385 | ||||||
Cash and cash equivalents, beginning of period |
6,668 | 2,009 | ||||||
|
|
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Cash and cash equivalents, end of period |
$ | 10,324 | $ | 5,394 | ||||
|
|
See Notes to Condensed Consolidated Financial Statements
4
Notes to Condensed Consolidated Financial Statements
Verizon Communications Inc. and Subsidiaries
(Unaudited)
1. | Basis of Presentation |
The accompanying unaudited condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements included in the Verizon Communications Inc. (Verizon or the Company) Annual Report on Form 10-K for the year ended December 31, 2010. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.
We have reclassified prior year amounts to conform to the current year presentation.
Recently Adopted Accounting Standards
Revenue Recognition Multiple Deliverable Arrangements
In both our Domestic Wireless and Wireline segments, we offer products and services to our customers through bundled arrangements. These arrangements involve multiple deliverables which may include products, services, or a combination of products and services.
On January 1, 2011, we prospectively adopted the accounting standard updates regarding revenue recognition for multiple deliverable arrangements, and arrangements that include software elements. These updates require a vendor to allocate revenue in an arrangement using its best estimate of selling price if neither vendor specific objective evidence (VSOE) nor third party evidence (TPE) of selling price exists. The residual method of revenue allocation is no longer permissible. These accounting standard updates do not change our units of accounting for bundled arrangements, nor do they materially change how we allocate arrangement consideration to our various products and services. Accordingly, the adoption of these standard updates did not have a significant impact on our consolidated financial statements. Additionally, we do not currently foresee any changes to our products, services or pricing practices that will have a significant effect on our consolidated financial statements in periods after the initial adoption, although this could change.
Domestic Wireless
Our Domestic Wireless segment earns revenue primarily by providing access to and usage of its network. In general, access revenue is billed one month in advance and recognized when earned. Usage revenue is generally billed in arrears and recognized when service is rendered. Equipment sales revenue associated with the sale of wireless handsets and accessories is recognized when the products are delivered to and accepted by the customer, as this is considered to be a separate earnings process from providing wireless services. For agreements involving the resale of third-party services in which we are considered the primary obligor in the arrangements, we record the revenue gross at the time of the sale.
Wireless bundled service plans primarily consist of wireless voice and data services. The bundling of a voice plan with a text messaging plan (Talk & Text), for example, creates a multiple deliverable arrangement consisting of a voice component and a data component in the form of text messaging. For these arrangements, revenue is allocated to each deliverable using a relative selling price method. Under this method, arrangement consideration is allocated to each separate deliverable based on our standalone selling price for each product or service, up to the amount that is not contingent upon providing additional services. For equipment sales, we currently subsidize the cost of wireless devices. The amount of this subsidy is generally contingent on the arrangement and terms selected by the customer. The equipment revenue is recognized up to the amount collected when the wireless device is sold.
Wireline
Our Wireline segment earns revenue based upon usage of its network and facilities and contract fees. In general, fixed monthly fees for voice, video, data and certain other services are billed one month in advance and recognized when earned. Revenue from services that are not fixed in amount and are based on usage is generally billed in arrears and recognized when service is rendered.
5
We sell each of the services offered in bundled arrangements (i.e., voice, video and data), as well as separately; therefore each product or service has a standalone selling price. For these arrangements revenue is allocated to each deliverable using a relative selling price method. Under this method, arrangement consideration is allocated to each separate deliverable based on our standalone selling price for each product or service. These services include FiOS services, individually or in bundles, and High Speed Internet.
When we bundle equipment with maintenance and monitoring services, we recognize equipment revenue when the equipment is installed in accordance with contractual specifications and ready for the customers use. The maintenance and monitoring services are recognized monthly over the term of the contract as we provide the services. Long-term contracts for network installation 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. For certain products and services, where neither VSOE nor TPE exists, we determine relative selling price based on our best estimate of the standalone selling price taking into consideration market conditions, as well as company specific factors such as geography, competitive landscape, internal costs and general pricing practices.
Leasing Arrangements
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, or internal credit risk grades, that take into account historical loss experience, the value of the underlying collateral, delinquency trends, industry and general economic conditions. The credit quality of our lessees primarily varies 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.
Earnings Per Common Share
Stock options and restricted stock units outstanding that were included in the computation of diluted earnings per common share totaled approximately 5 million and 6 million during the three and nine months ended September 30, 2011, respectively. Certain outstanding options to purchase shares 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 19 million weighted-average shares for the three and nine months ended September 30, 2011, respectively.
As a result of the Net loss attributable to Verizon for the nine months ended September 30, 2010, diluted earnings per share is the same as basic earnings per share. If there had been net income for the nine months ended September 30, 2010, there would have been a total of approximately 2 million stock options and restricted stock units outstanding included in the computation of diluted earnings per share. There were a total of approximately 2 million stock options and restricted stock units outstanding included in the computation of diluted earnings per common share for the three months ended September 30, 2010. Certain outstanding options to purchase shares 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 59 million weighted-average shares and 78 million weighted-average shares for the three and nine months ended September 30, 2010.
Recent Accounting Standards
In May 2011, an accounting standard update regarding fair value measurement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. This standard update also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. We will adopt this standard update during the first quarter of 2012. The adoption of this standard update is not expected to have a significant impact on our consolidated financial statements.
In June 2011, an accounting standard update regarding the presentation of comprehensive income was issued to increase the prominence of items reported in other comprehensive income. The update requires that all nonowner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or in two separate, but consecutive statements. This standard update is effective during the first quarter of 2012. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.
In September 2011, an accounting standard update regarding testing of goodwill for impairment was issued. This standard update gives companies the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This standard update is effective during the first quarter of 2012. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.
6
2. | Acquisitions and Divestitures |
Terremark Worldwide, Inc.
During April 2011, we acquired Terremark Worldwide, Inc. (Terremark), a global provider of information technology infrastructure and cloud services, for $19 per share in cash. Closing and other direct acquisition-related costs totaled approximately $13 million after-tax. The acquisition was completed via a tender offer and subsequent short-form merger under Delaware law through which Terremark became a wholly owned subsidiary of Verizon. The acquisition enhanced Verizons offerings to business and government customers globally.
The condensed consolidated financial statements include the results of Terremarks operations from the date the acquisition closed. Had this acquisition been consummated on January 1, 2011 or 2010, the results of Terremarks acquired operations would not have had a significant impact on the consolidated net income attributable to Verizon. The debt obligations of Terremark that were outstanding at the time of its acquisition by Verizon were repaid during May 2011.
The acquisition of Terremark has been accounted for as a business combination under the acquisition method. The cost of the acquisition was preliminarily allocated to the assets and liabilities acquired based on their fair values as of the close of the acquisition, with the excess amount being recorded as goodwill. The fair values of the assets and liabilities acquired were determined using the income and cost approaches. The income approach was primarily used to value the intangible assets, consisting primarily of customer relationships. The cost approach was used, as appropriate, for plant, property and equipment. The fair value of the majority of the long-term debt acquired was primarily valued based on redemption prices. As the values of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained. The valuations will be finalized within 12 months of the close of the acquisition. When the valuations are finalized, any changes to the preliminary valuation of assets and liabilities acquired may result in adjustments to the fair value of the identifiable intangible assets acquired and goodwill.
The following table summarizes the allocation of the acquisition cost to the assets acquired, including cash acquired of $0.1 billion, and liabilities acquired as of the acquisition date:
(dollars in millions) | Initial Purchase Price Allocation |
|||
Assets |
||||
Current assets |
$ | 154 | ||
Plant, property and equipment |
521 | |||
Goodwill |
1,404 | |||
Intangible assets subject to amortization |
410 | |||
Other assets |
12 | |||
|
|
|||
Total assets |
2,501 | |||
|
|
|||
Liabilities |
||||
Current liabilities |
152 | |||
Debt maturing within one year |
748 | |||
Deferred income taxes and other liabilities |
207 | |||
|
|
|||
Total liabilities |
1,107 | |||
|
|
|||
Net assets acquired |
$ | 1,394 | ||
|
|
Intangible assets subject to amortization include customer lists which are being amortized on a straight-line basis over 13 years, and other intangibles which are being amortized on a straight-line basis over a period of 5 years.
Telephone Access Line Spin-off
On July 1, 2010, we completed the spin-off of the shares of a newly formed subsidiary of Verizon (Spinco) to Verizon stockholders and the merger of Spinco with Frontier Communications Corporation (Frontier). Spinco held defined assets and liabilities that were used in Verizons local exchange businesses and related activities in 14 states. The total value of the transaction to Verizon and its stockholders was approximately $8.6 billion. The accompanying condensed consolidated financial statements for the nine months ended September 30, 2010 include these operations prior to the completion of the spin-off.
During the three and nine months ended September 30, 2010, we recorded pre-tax charges of $0.1 billion and $0.5 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.
7
Alltel Divestiture Markets
As a condition of the regulatory approvals to complete the acquisition of Alltel Corporation (Alltel) in January 2009, Verizon Wireless was required to divest overlapping properties in 105 operating markets in 24 states (Alltel Divestiture Markets). During the second quarter of 2010, AT&T Mobility acquired 79 of the 105 Alltel Divestiture Markets, including licenses and network assets, for approximately $2.4 billion in cash and Atlantic Tele-Network, Inc. acquired the remaining 26 Alltel Divestiture Markets, including licenses and network assets, for $0.2 billion in cash.
During the second quarter of 2010, we recorded a tax charge of approximately $0.2 billion for the taxable gain associated with the Alltel Divestiture Markets.
Other
During the nine months ended September 30, 2011, we acquired various wireless licenses and markets, as well as a provider of cloud software technology, for cash consideration that was not significant.
During the third quarter of 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. The purchase price allocation resulted in $0.1 billion of wireless licenses and $0.1 billion in goodwill.
During the three and nine months ended September 30, 2010, we recorded merger integration charges of $0.2 billion and $0.5 billion, respectively, for the Alltel acquisition primarily relating to handset conversions, the decommissioning of overlapping cell sites and trade name amortization.
3. | Wireless Licenses, Goodwill and Other Intangible Assets |
Wireless Licenses
Changes in the carrying amount of Wireless licenses are as follows:
(dollars in millions) | ||||
Balance at January 1, 2011 |
$ | 72,996 | ||
Acquisitions (Note 2) |
51 | |||
Capitalized interest on wireless licenses |
156 | |||
|
|
|||
Balance at September 30, 2011 |
$ | 73,203 | ||
|
|
During the year ended December 31, 2010, approximately $12.2 billion of wireless licenses were under development for commercial service for which we were capitalizing interest costs. In December 2010, a substantial portion of these licenses were placed in service in connection with our deployment of fourth-generation Long-Term Evolution technology services. As of September 30, 2011, approximately $2.8 billion of wireless licenses remained under development for commercial service.
Goodwill
Changes in the carrying amount of Goodwill are as follows:
(dollars in millions) | Domestic Wireless |
Wireline | Total | |||||||||
Balance at January 1, 2011 |
$ | 17,869 | $ | 4,119 | $ | 21,988 | ||||||
Acquisitions (Note 2) |
81 | 1,468 | 1,549 | |||||||||
Reclassifications, adjustments and other |
| 4 | 4 | |||||||||
|
|
|||||||||||
Balance at September 30, 2011 |
$ | 17,950 | $ | 5,591 | $ | 23,541 | ||||||
|
|
8
Other Intangible Assets
The following table displays the composition of Other intangible assets, net:
At September 30, 2011 |
At December 31, 2010 |
|||||||||||||||||||||||
|
|
|||||||||||||||||||||||
(dollars in millions) | Gross Amount |
Accumulated Amortization |
Net Amount |
Gross Amount |
Accumulated Amortization |
Net Amount |
||||||||||||||||||
Customer lists (6 to 13 years) |
$ | 3,532 | $ | (1,928 | ) | $ | 1,604 | $ | 3,150 | $ | (1,551 | ) | $ | 1,599 | ||||||||||
Non-network internal-use software (3 to 7 years) |
9,231 | (5,285 | ) | 3,946 | 8,446 | (4,614 | ) | 3,832 | ||||||||||||||||
Other (2 to 25 years) |
557 | (192 | ) | 365 | 885 | (486 | ) | 399 | ||||||||||||||||
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|
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Total |
$ | 13,320 | $ | (7,405 | ) | $ | 5,915 | $ | 12,481 | $ | (6,651 | ) | $ | 5,830 | ||||||||||
|
|
Customer lists and Other at September 30, 2011 include $0.4 billion related to the Terremark acquisition (see Note 2).
The amortization expense for other intangible assets was as follows:
(dollars in millions) | Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||
2011 |
$ | 377 | $ | 1,121 | ||||||||
2010 |
446 | 1,365 |
Estimated annual amortization expense for other intangible assets is as follows:
Years | (dollars in millions) | |||
2011 |
$ | 1,504 | ||
2012 |
1,351 | |||
2013 |
1,182 | |||
2014 |
871 | |||
2015 |
682 |
9
4. | Debt |
Changes to debt during the nine months ended September 30, 2011 are as follows:
(dollars in millions) | Debt Maturing within One Year |
Long-term Debt |
Total | |||||||||
Balance at January 1, 2011 |
$ | 7,542 | $ | 45,252 | $ | 52,794 | ||||||
Proceeds from long-term borrowings |
| 6,510 | 6,510 | |||||||||
Repayments of long-term borrowings and capital leases obligations |
(7,420 | ) | | (7,420 | ) | |||||||
Increase in short-term obligations, excluding current maturities |
1,817 | | 1,817 | |||||||||
Reclassifications of long-term debt |
5,650 | (5,650 | ) | | ||||||||
Debt acquired (Note 2) |
748 | | 748 | |||||||||
Other |
293 | 173 | 466 | |||||||||
|
|
|||||||||||
Balance at September 30, 2011 |
$ | 8,630 | $ | 46,285 | $ | 54,915 | ||||||
|
|
During March 2011, Verizon issued $6.25 billion aggregate principal amount of fixed and floating rate notes resulting in cash proceeds of approximately $6.19 billion, net of discounts and issuance costs. The net proceeds were used for the repayment of commercial paper, the retirement of certain outstanding notes issued by our telephone operating company subsidiaries and other general corporate purposes. The issuances consisted of the following: $1.0 billion Notes due 2014 that bear interest at a rate equal to three-month London Interbank Offered Rate (LIBOR) plus 0.61%, $1.5 billion 1.95% Notes due 2014, $1.25 billion 3.00% Notes due 2016, $1.5 billion 4.60% Notes due 2021 and $1.0 billion 6.00% Notes due 2041. In addition, during 2011, we utilized $0.3 billion under fixed rate vendor financing facilities.
During April 2011, we redeemed $1.0 billion of 5.65% Verizon Pennsylvania Inc. Debentures due November 15, 2011 at a redemption price of 102.9% of the principal amount of the debentures, plus accrued and unpaid interest through the date of redemption, and $1.0 billion of 6.50% Verizon New England Inc. Debentures due September 15, 2011 at a redemption price of 102.3% of the principal amount of the debentures, plus accrued and unpaid interest through the date of redemption. We also terminated the related interest rate swaps with a notional value totaling $1.0 billion. In addition, during 2011, $0.5 billion of 5.35% Verizon Communications Notes matured and were repaid.
The debt obligations of Terremark that were outstanding at the time of its acquisition by Verizon were repaid during May 2011.
Verizon Wireless
During May 2011, Verizon Wireless repaid $4.0 billion aggregate principal amount of two-year fixed and floating rate notes.
Guarantees
During June 2011, we guaranteed the debentures and first mortgage bonds of our operating telephone company subsidiaries. As of September 30, 2011, $8.2 billion principal amount of these obligations remain outstanding. Each guarantee will remain in place for the life of the obligation unless terminated pursuant to its terms, including the operating telephone company no longer being a wholly-owned subsidiary of Verizon.
We also guarantee the debt obligations of GTE Corporation that were issued and outstanding prior to July 1, 2003. As of September 30, 2011, $1.7 billion principal amount of these obligations remain outstanding.
Debt Covenants
We and our consolidated subsidiaries are in compliance with all of our debt covenants.
Credit Facility
As of September 30, 2011, the unused borrowing capacity under a $6.2 billion three-year credit facility with a group of major financial institutions was approximately $6.1 billion. On April 15, 2011, we amended this facility primarily to reduce fees and borrowing costs and extend the maturity date to October 15, 2014.
10
5. | Fair Value Measurements |
The following table presents the balances of assets measured at fair value on a recurring basis as of September 30, 2011:
(dollars in millions) | Level 1 (1) | Level 2 (2) | Level 3 (3) | Total | ||||||||||||
Assets: |
||||||||||||||||
Short-term investments: |
||||||||||||||||
Equity securities |
$ | 231 | $ | | $ | | $ | 231 | ||||||||
Fixed income securities |
2 | 301 | | 303 | ||||||||||||
Other Assets: |
||||||||||||||||
Fixed income securities |
217 | 752 | | 969 | ||||||||||||
Interest rate swaps |
| 649 | | 649 | ||||||||||||
Cross currency swaps |
| 99 | | 99 | ||||||||||||
|
|
|||||||||||||||
Total |
$ | 450 | $ | 1,801 | $ | | $ | 2,251 | ||||||||
|
|
(1)quoted prices in active markets for identical assets or liabilities
(2)observable inputs other than quoted prices in active markets for identical assets and liabilities
(3)no observable pricing inputs in the market
Equity securities consist of investments in common stock of domestic and international corporations 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 the nine months ended September 30, 2011.
Fair Value of Short-term and Long-term Debt
The fair value of our short-term and long-term debt, excluding capital leases, which is determined based on market quotes for similar terms and maturities or future cash flows discounted at current rates, was as follows:
At September 30, 2011 | At December 31, 2010 | |||||||||||||||
|
|
|||||||||||||||
(dollars in millions) | Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | ||||||||||||
Short- and long-term debt, excluding capital leases |
$ | 54,540 | $ | 63,225 | $ | 52,462 | $ | 59,020 |
Derivative Instruments
We enter into derivative transactions to manage our exposure to fluctuations in foreign currency exchange rates, interest rates, and 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. Changes in the fair values of derivative instruments not qualifying as hedges or any ineffective portion of hedges are recognized in earnings in the current period. Changes in the fair values of derivative instruments used effectively as fair value hedges are recognized in earnings, along with changes in the fair value of the hedged item. Changes in the fair value of the effective portions of cash flow hedges are reported in Other comprehensive income and recognized in earnings when the hedged item is recognized in earnings.
11
Interest Rate Swaps
We have entered into domestic interest rate swaps to achieve a targeted mix of fixed and variable rate debt. We principally receive fixed rates and pay variable rates based on LIBOR, resulting in a net increase or decrease to Interest expense. These swaps are designated as fair value hedges and hedge against changes in the fair value of our debt portfolio. We record the interest rate swaps at fair value on our condensed 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 $0.6 billion at September 30, 2011 and $0.3 billion at December 31, 2010, and is primarily included in Other assets and Long-term debt. As of September 30, 2011, the total notional amount of these interest rate swaps was $8.0 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 had designated these contracts as cash flow hedges. The fair value of these contracts was $0.1 billion at December 31, 2010 and the contracts were included in Other assets. On or before February 7, 2011, we 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 of British Pound Sterling and Euro-denominated debt into U.S. dollars and to fix our future interest and principal payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses. The fair value of these swaps, primarily included in Other assets, was approximately $0.1 billion at September 30, 2011 and December 31, 2010, respectively. During the three months ended September 30, 2011, a pretax loss of $0.2 billion was recognized in Other comprehensive income. During the nine months ended September 30, 2011, the pretax loss recognized in Other comprehensive income was not significant. During the three and nine months ended September 30, 2010, a pretax gain of $0.2 billion and a pretax loss of $0.2 billion, respectively, were recognized in Other comprehensive income. A portion of these gains and losses recognized in Other comprehensive income was reclassified to Other income and (expense), net to offset the related pretax foreign currency transaction gain or loss on the underlying debt obligations.
6. | Stock-Based Compensation |
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 the RSUs will be paid in Verizon common stock upon vesting. The RSU equity awards are measured using the grant date fair value of Verizon common stock and are not remeasured at the end of each reporting period. Dividend equivalent units are also paid to participants at the time the RSU award is paid, and in the same proportion as the RSU award.
Performance Stock Units
The Plan also provides for grants of Performance Stock Units (PSUs) that generally vest at the end of the third year after the grant. As defined by the Plan, the Human Resources Committee of the Board of Directors determines the number of PSUs a participant earns based on the extent to which the corresponding 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.
12
The following table summarizes the Restricted Stock Unit and Performance Stock Unit activity:
(shares in thousands) | Restricted Stock Units |
Performance Stock Units |
||||||
Outstanding, beginning of year |
20,923 | 32,380 | ||||||
Granted |
6,354 | 9,878 | ||||||
Payments |
(7,571 | ) | (12,137 | ) | ||||
Cancelled/Forfeited |
(121 | ) | (161 | ) | ||||
|
|
|||||||
Outstanding, September 30, 2011 |
19,585 | 29,960 | ||||||
|
|
As of September 30, 2011, unrecognized compensation expense related to the unvested portion of Verizons RSUs and PSUs was approximately $0.5 billion and is expected to be recognized over a weighted-average period of approximately two years.
The RSUs granted in 2011 and 2010, and classified as equity awards, have a weighted average grant date fair value of $36.38 and $28.63 per unit, respectively.
Stock Options
The Plan provides for grants of stock options to participants at an option price per share of no less than 100% of the fair market value of Verizon common stock on the date of grant. Each grant has a 10-year life, vesting equally over a three-year period, starting at the date of the grant. We have not granted new stock options since 2004.
The following table summarizes Verizons stock option activity:
(shares in thousands) | Stock Options | Weighted-Average Exercise Price |
||||||
Outstanding, beginning of year |
56,844 | $ | 44.25 | |||||
Exercised |
(3,869 | ) | 34.82 | |||||
Cancelled/Forfeited |
(20,314 | ) | 51.58 | |||||
|
|
|||||||
Outstanding, September 30, 2011 |
32,661 | 40.80 | ||||||
|
|
All stock options outstanding at September 30, 2011 were exercisable.
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 September 30, 2011, all VARs were fully vested. We have not granted new VARs since 2004.
The following table summarizes the Value Appreciation Rights activity:
(shares in thousands) | Value Appreciation Rights |
Weighted-Average Grant-Date Fair Value |
||||||
Outstanding, beginning of year |
11,569 | $ | 13.11 | |||||
Exercised |
(2,494 | ) | 15.02 | |||||
Cancelled/Forfeited |
(35 | ) | 14.93 | |||||
|
|
|||||||
Outstanding, September 30, 2011 |
9,040 | 12.57 | ||||||
|
|
13
7. | Employee Benefits |
We maintain non-contributory defined benefit pension plans for many of our employees. In addition, we maintain postretirement health care and life insurance plans for our retirees and their dependents, which are both contributory and non-contributory, and include a limit on our share of the cost for certain recent and future retirees. In accordance with our accounting policy for pension and other postretirement benefits, 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.
Net Periodic Benefit Cost
The following table summarizes the benefit cost related to our pension and postretirement health care and life insurance plans:
(dollars in millions) | Pension | Health Care and Life | ||||||||||||||
|
|
|||||||||||||||
Three Months Ended September 30, | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Service cost |
$ | 77 | $ | 85 | $ | 74 | $ | 75 | ||||||||
Amortization of prior service cost (credit) |
18 | 27 | (15 | ) | 94 | |||||||||||
|
|
|||||||||||||||
Subtotal |
95 | 112 | 59 | 169 | ||||||||||||
Expected return on plan assets |
(494 | ) | (537 | ) | (40 | ) | (63 | ) | ||||||||
Interest cost |
397 | 445 | 356 | 408 | ||||||||||||
|
|
|||||||||||||||
Subtotal |
(2 | ) | 20 | 375 | 514 | |||||||||||
Remeasurement loss, net |
329 | 1,188 | | | ||||||||||||
|
|
|||||||||||||||
Net periodic benefit cost |
$ | 327 | $ | 1,208 | $ | 375 | $ | 514 | ||||||||
|
|
|||||||||||||||
(dollars in millions) | Pension | Health Care and Life | ||||||||||||||
|
|
|||||||||||||||
Nine Months Ended September 30, | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Service cost |
$ | 230 | $ | 268 | $ | 224 | $ | 231 | ||||||||
Amortization of prior service cost (credit) |
54 | 82 | (43 | ) | 282 | |||||||||||
|
|
|||||||||||||||
Subtotal |
284 | 350 | 181 | 513 | ||||||||||||
Expected return on plan assets |
(1,482 | ) | (1,638 | ) | (122 | ) | (189 | ) | ||||||||
Interest cost |
1,192 | 1,352 | 1,066 | 1,231 | ||||||||||||
|
|
|||||||||||||||
Subtotal |
(6 | ) | 64 | 1,125 | 1,555 | |||||||||||
Remeasurement loss, net |
309 | 1,751 | | 1,100 | ||||||||||||
|
|
|||||||||||||||
Net periodic benefit cost |
303 | 1,815 | 1,125 | 2,655 | ||||||||||||
Curtailment and termination benefits |
| 854 | | 386 | ||||||||||||
|
|
|||||||||||||||
Total |
$ | 303 | $ | 2,669 | $ | 1,125 | $ | 3,041 | ||||||||
|
|
Severance, Pension and Benefit Charges
During the three and nine months ended September 30, 2011, we recorded net pre-tax severance, pension and benefits charges of $0.3 billion, including pension settlement losses, for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses upon a remeasurement event.
During the three and nine months ended September 30, 2010, we recorded net pre-tax severance, pension and benefits charges of $1.2 billion and $5.1 billion, respectively. The charges during the three and nine months ended September 30, 2010 included remeasurement losses of $1.2 billion and $2.9 billion, respectively, for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses upon a remeasurement event. 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. Additionally, during the nine months ended September 30, 2010, we reached an agreement 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, 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 $1.0 billion for severance for the 2010 separation programs mentioned above and a planned workforce reduction of approximately 2,500 employees in 2011. In addition, we recorded $1.2 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.
14
Severance Payments
During the three and nine months ended September 30, 2011, we paid severance benefits of $0.1 billion and $0.4 billion, respectively. At September 30, 2011, we had a remaining severance liability of $1.2 billion, a portion of which includes future contractual payments to employees separated as of September 30, 2011.
Employer Contributions
During the three months ended September 30, 2011, we contributed $25 million to our nonqualified pension plans and $0.4 billion to our other postretirement benefit plans. During the nine months ended September 30, 2011, we contributed $0.4 billion to our qualified pension trusts, $0.1 billion to our nonqualified pension plans and $1.1 billion to our other postretirement benefit plans. We do not expect to make additional qualified pension plan contributions during the remainder of 2011.
Medicare Part D Subsidy
Under 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), 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 are already reflected in Verizons 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.
8. | Equity and Comprehensive Income |
Equity
Changes in the components of Total equity were as follows:
Nine Months Ended September 30, 2011 |
||||||||||||
|
|
|||||||||||
(dollars in millions) | Attributable to Verizon |
Noncontrolling Interest |
Total Equity |
|||||||||
|
||||||||||||
Balance at beginning of period |
$ | 38,569 | $ | 48,343 | $ | 86,912 | ||||||
Net income |
4,427 | 5,983 | 10,410 | |||||||||
Other comprehensive loss |
(12 | ) | (3 | ) | (15 | ) | ||||||
|
|
|||||||||||
Comprehensive income |
4,415 | 5,980 | 10,395 | |||||||||
|
|
|||||||||||
Contributed capital |
(10 | ) | | (10 | ) | |||||||
Dividends declared |
(4,176 | ) | | (4,176 | ) | |||||||
Distributions declared |
| (4,500 | ) | (4,500 | ) | |||||||
Common stock in treasury |
155 | | 155 | |||||||||
Distributions and other |
98 | (1,359 | ) | (1,261 | ) | |||||||
|
|
|||||||||||
Balance at end of period |
$ | 39,051 | $ | 48,464 | $ | 87,515 | ||||||
|
|
Noncontrolling interests included in our condensed consolidated financial statements primarily consist of Vodafone Group Plcs 45% ownership interest in Verizon Wireless. On July 28, 2011, the Board of Representatives of Verizon Wireless declared a distribution to its owners, payable on January 31, 2012 in proportion to their partnership interests on that date, in the aggregate amount of $10 billion. As a result, based on current ownership interests in Verizon Wireless, we will receive a cash payment of $5.5 billion and Vodafone Group Plc will receive a cash payment of $4.5 billion on the distribution date, which is included in Other current liabilities on our condensed consolidated balance sheet.
15
Comprehensive Income
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 income tax expense (benefit), are described below.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
(dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Net Income |
$ | 3,542 | $ | 2,698 | $ | 10,410 | $ | 5,569 | ||||||||
Other comprehensive income (loss), net of taxes |
||||||||||||||||
Foreign currency translation adjustments |
(290 | ) | 350 | (16 | ) | (101 | ) | |||||||||
Net unrealized gain (loss) on cash flow hedges |
(1 | ) | | 27 | (22 | ) | ||||||||||
Net unrealized gain (loss) on marketable securities |
(28 | ) | 53 | (30 | ) | 34 | ||||||||||
Defined benefit pension and postretirement plans (Note 7) |
2 | 72 | 7 | 441 | ||||||||||||
|
|
|||||||||||||||
Other comprehensive income (loss) attributable to Verizon |
(317 | ) | 475 | (12 | ) | 352 | ||||||||||
Other comprehensive income (loss) attributable to noncontrolling interest |
1 | | (3 | ) | (32 | ) | ||||||||||
|
|
|||||||||||||||
Total Comprehensive Income |
$ | 3,226 | $ | 3,173 | $ | 10,395 | $ | 5,889 | ||||||||
|
|
|||||||||||||||
Comprehensive income attributable to noncontrolling interest |
$ | 2,164 | $ | 2,039 | $ | 5,980 | $ | 5,627 | ||||||||
Comprehensive income attributable to Verizon |
1,062 | 1,134 | 4,415 | 262 | ||||||||||||
|
|
|||||||||||||||
Total Comprehensive Income |
$ | 3,226 | $ | 3,173 | $ | 10,395 | $ | 5,889 | ||||||||
|
|
Other comprehensive income attributable to noncontrolling interest primarily reflects activity related to cross currency swaps (see Note 5).
Foreign Currency Translation Adjustments
The change in Foreign currency translation adjustments for the three months ended September 30, 2011 and the nine months ended September 30, 2010 was primarily due to the strengthening of the U.S. dollar against the Euro. The change for the three months ended September 30, 2010 was primarily due to the weakening of the U.S. dollar against the Euro.
Unrealized Gain (Loss) on Marketable Securities
Gross unrealized gains and losses on marketable securities for the three and nine months ended September 30, 2011 and 2010 were not significant.
The components of Accumulated other comprehensive income were as follows:
(dollars in millions) | At September 30, 2011 |
At December 31, 2010 |
||||||
Foreign currency translation adjustments |
$ | 827 | $ | 843 | ||||
Net unrealized gain on cash flow hedges |
153 | 126 | ||||||
Unrealized gain on marketable securities |
49 | 79 | ||||||
Defined benefit pension and postretirement plans |
8 | 1 | ||||||
|
|
|||||||
Accumulated Other Comprehensive Income |
$ | 1,037 | $ | 1,049 | ||||
|
|
16
9. | Segment Information |
Reportable Segments
We have two reportable segments, which we operate and manage as strategic business units and organize by products and services. We measure and evaluate our reportable segments based on segment operating income, consistent with the chief operating decision makers assessment of segment performance.
Corporate, eliminations and other includes unallocated corporate expenses, intersegment eliminations recorded in consolidation, the results of other businesses, such as our investments in unconsolidated businesses, pension and other employee benefit related costs, lease financing, as well as 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 makers assessment of segment performance.
Corporate, eliminations and other during the nine months ended September 30, 2010 includes a non-cash adjustment of $235 million, primarily to adjust wireless data revenues. This adjustment was recorded to properly defer previously recognized wireless data revenues that were earned and recognized in future periods.
Our segments and their principal activities consist of the following:
Segment | Description | |
Domestic Wireless | Domestic Wireless provides wireless voice and data services and equipment sales to consumer, business and government customers in the United States. | |
Wireline | Wirelines 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 United States, as well as to carriers, businesses and government customers both in the United States and in over 150 other countries around the world. |
17
The following table provides operating financial information for our two reportable segments:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
(dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
External Operating Revenues |
||||||||||||||||
Domestic Wireless |
||||||||||||||||
Retail service |
$ | 14,392 | $ | 13,460 | $ | 42,055 | $ | 39,771 | ||||||||
Other service |
626 | 689 | 1,952 | 1,641 | ||||||||||||
|
|
|||||||||||||||
Service revenue |
15,018 | 14,149 | 44,007 | 41,412 | ||||||||||||
Equipment |
1,797 | 1,275 | 5,234 | 3,289 | ||||||||||||
Other |
890 | 802 | 2,590 | 2,517 | ||||||||||||
|
|
|||||||||||||||
Total Domestic Wireless |
17,705 | 16,226 | 51,831 | 47,218 | ||||||||||||
Wireline |
||||||||||||||||
Consumer retail |
3,400 | 3,364 | 10,177 | 10,034 | ||||||||||||
Small business |
666 | 706 | 2,038 | 2,130 | ||||||||||||
|
|
|||||||||||||||
Mass Markets |
4,066 | 4,070 | 12,215 | 12,164 | ||||||||||||
Strategic services |
1,935 | 1,674 | 5,617 | 4,867 | ||||||||||||
Other |
1,984 | 2,168 | 6,078 | 6,572 | ||||||||||||
|
|
|||||||||||||||
Global Enterprise |
3,919 | 3,842 | 11,695 | 11,439 | ||||||||||||
Global Wholesale |
1,668 | 1,859 | 5,138 | 5,723 | ||||||||||||
Other |
185 | 202 | 558 | 641 | ||||||||||||
|
|
|||||||||||||||
Total Wireline |
9,838 | 9,973 | 29,606 | 29,967 | ||||||||||||
|
|
|||||||||||||||
Total segments |
27,543 | 26,199 | 81,437 | 77,185 | ||||||||||||
Corporate, eliminations and other |
370 | 285 | 1,002 | 2,985 | ||||||||||||
|
|
|||||||||||||||
Total consolidated reported |
$ | 27,913 | $ | 26,484 | $ | 82,439 | $ | 80,170 | ||||||||
|
|
|||||||||||||||
Intersegment Revenues |
||||||||||||||||
Domestic Wireless |
$ | 21 | $ | 24 | $ | 69 | $ | 41 | ||||||||
Wireline |
311 | 313 | 937 | 971 | ||||||||||||
|
|
|||||||||||||||
Total segments |
332 | 337 | 1,006 | 1,012 | ||||||||||||
Corporate, eliminations and other |
(332 | ) | (337 | ) | (1,006 | ) | (1,012 | ) | ||||||||
|
|
|||||||||||||||
Total consolidated reported |
$ | | $ | | $ | | $ | | ||||||||
|
|
|||||||||||||||
Total Operating Revenues |
||||||||||||||||
Domestic Wireless |
$ | 17,726 | $ | 16,250 | $ | 51,900 | $ | 47,259 | ||||||||
Wireline |
10,149 | 10,286 | 30,543 | 30,938 | ||||||||||||
|
|
|||||||||||||||
Total segments |
27,875 | 26,536 | 82,443 | 78,197 | ||||||||||||
Corporate, eliminations and other |
38 | (52 | ) | (4 | ) | 1,973 | ||||||||||
|
|
|||||||||||||||
Total consolidated reported |
$ | 27,913 | $ | 26,484 | $ | 82,439 | $ | 80,170 | ||||||||
|
|
|||||||||||||||
Operating Income |
||||||||||||||||
Domestic Wireless |
$ | 5,149 | $ | 4,854 | $ | 14,192 | $ | 13,870 | ||||||||
Wireline |
53 | 187 | 659 | 515 | ||||||||||||
|
|
|||||||||||||||
Total segments |
5,202 | 5,041 | 14,851 | 14,385 | ||||||||||||
Reconciling items |
(555 | ) | (1,658 | ) | (859 | ) | (6,151 | ) | ||||||||
|
|
|||||||||||||||
Total consolidated reported |
$ | 4,647 | $ | 3,383 | $ | 13,992 | $ | 8,234 | ||||||||
|
|
18
(dollars in millions) | At September 30, 2011 |
At December 31, 2010 |
||||||
Assets |
||||||||
Domestic Wireless |
$ | 144,508 | $ | 138,863 | ||||
Wireline |
88,486 | 83,849 | ||||||
|
|
|||||||
Total segments |
232,994 | 222,712 | ||||||
Reconciling items |
(4,962 | ) | (2,707 | ) | ||||
|
|
|||||||
Total consolidated reported |
$ | 228,032 | $ | 220,005 | ||||
|
|
A reconciliation of the segment operating revenues to consolidated operating revenues is as follows:
Three Months Ended September 30 |
Nine Months Ended September 30 |
|||||||||||||||
(dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Total segment operating revenues |
$ | 27,875 | $ | 26,536 | $ | 82,443 | $ | 78,197 | ||||||||
Deferred revenue adjustment |
| | | (235 | ) | |||||||||||
Impact of divested operations (Note 2) |
| | | 2,407 | ||||||||||||
Corporate, eliminations and other |
38 | (52 | ) | (4 | ) | (199 | ) | |||||||||
|
|
|||||||||||||||
Total consolidated operating revenues |
$ | 27,913 | $ | 26,484 | $ | 82,439 | $ | 80,170 | ||||||||
|
|
A reconciliation of the total of the reportable segments operating income to consolidated income before provision for income taxes is as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
(dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Total segment operating income |
$ | 5,202 | $ | 5,041 | $ | 14,851 | $ | 14,385 | ||||||||
Severance, pension and benefit charges (Note 7) |
(329 | ) | (1,188 | ) | (329 | ) | (5,084 | ) | ||||||||
Impact of divested operations (Note 2) |
| | | 755 | ||||||||||||
Deferred revenue adjustment |
| | | (235 | ) | |||||||||||
Merger integration and acquisition costs (Note 2) |
| (159 | ) | | (451 | ) | ||||||||||
Access line spin-off related charges (Note 2) |
| (67 | ) | | (407 | ) | ||||||||||
Corporate, eliminations and other |
(226 | ) | (244 | ) | (530 | ) | (729 | ) | ||||||||
|
|
|||||||||||||||
Total consolidated operating income |
4,647 | 3,383 | 13,992 | 8,234 | ||||||||||||
Equity in earnings of unconsolidated businesses |
125 | 141 | 347 | 395 | ||||||||||||
Other income and (expense), net |
24 | (51 | ) | 70 | 11 | |||||||||||
Interest expense |
(698 | ) | (597 | ) | (2,124 | ) | (1,956 | ) | ||||||||
|
|
|||||||||||||||
Income Before Provision For Income Taxes |
$ | 4,098 | $ | 2,876 | $ | 12,285 | $ | 6,684 | ||||||||
|
|
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 three and nine months ended September 30, 2011 and 2010.
19
10. | Commitments and Contingencies |
In the ordinary course of business Verizon is involved in various legal and regulatory proceedings at the state and federal level. Where it is determined, in consultation with counsel based on litigation and settlement risks, that a loss is probable and estimable in a given matter, the Company establishes an accrual for it. In none of the currently pending matters, including the Hicksville matter described below, is the amount of accrual material. An estimate of the reasonably possible loss or range of loss in excess of the amounts already accrued cannot be made at this time, due to various factors typical in contested proceedings, including (1) uncertain damage theories and demands; (2) a less than complete factual record; (3) uncertainty concerning legal theories and their resolution by courts or regulators; and (4) the unpredictable nature of the opposing party and its demands. We continuously monitor these proceedings as they develop and adjust any accrual or disclosure as needed. We do not expect that the ultimate resolution of any pending regulatory or legal matter in future periods, including the Hicksville matter, 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.
20
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview |
Verizon Communications Inc. (Verizon, or the Company), is one of the worlds 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 195,400 employees as of September 30, 2011.
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.
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 market, the broadband and video markets, and the provision of strategic services to business markets, rather than to the traditional wireline voice market. During the three months ended September 30, 2011, consolidated revenue increased 5.4% compared to the similar period in 2010 in part due to executing this strategy.
| In Domestic Wireless, during the three months ended September 30, 2011 compared to the similar period in 2010, strong customer growth coupled with strong demand for smartphones and internet data devices and increasing service revenue drove a total revenue increase of 9.1%. |
| In Wireline, during the three months ended September 30, 2011 compared to the similar period in 2010, revenues were positively impacted by a 15.6% increase in strategic services revenue, which now represents 49% of total Global Enterprise revenues, as well as the expansion of consumer and small business FiOS services. The increase in strategic services revenue was due in part to the acquisition of Terremark Worldwide, Inc. (Terremark), described below. |
The increase in revenues from our growth markets was partially offset by lower revenue resulting from a decline in total voice connections and decreased minutes of use (MOUs) in the Wireline segment. FiOS subscriber growth was lower in the third quarter than in prior quarters due to installation delays caused by storm conditions in the Mid-Atlantic and Northeast regions coupled with the work stoppage of our union-represented employees in August. Our union-represented employees are currently working under their previously existing labor contract as negotiations continue.
During April 2011, we acquired Terremark, a global provider of information technology infrastructure and cloud services. The acquisition improved Verizons competitive position in the managed hosting and cloud services space, enhanced our offerings to business and government customers globally and enabled us to grow consolidated revenues. During the third quarter of 2011, we acquired a provider of cloud software technology, which is expected to further enhance our offerings of cloud services.
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 of September 30, 2011, total connections increased 6.5% to 107.7 million compared to September 30, 2010. 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 smartphones and other data-capable devices. Data revenue now represents 40.6% of Verizon Wireless total service revenue and retail postpaid data average revenue per customer per month (ARPU) increased by 15.7% to $22.22. In 2010, we launched our fourth-generation (4G) Long-Term Evolution technology (LTE) mobile broadband network in 38 major markets, and as of October 20, 2011, we have launched 4G LTE in 165 markets covering more than 186 million people throughout the country. By the end of 2011, we expect LTE to be available in more than 175 markets.
In our wireline business, we continue to see improving trends and progress toward our goal of becoming the leading provider of communications products and services in each of the markets in which we operate.
21
During the three months ended September 30, 2011, in Wireline:
| revenue from our FiOS broadband and video products comprised a greater proportion of our revenue from growth markets as we added 20,000 net wireline broadband connections, including 138,000 net new FiOS Internet subscribers, for a total of 8.6 million connections, including 4.6 million FiOS Internet subscribers; and, |
| we added 131,000 net new FiOS TV subscribers, for a total of 4.0 million FiOS TV subscribers. |
As of September 30, 2011, we achieved penetration rates of 34.6% and 30.6% for FiOS Internet and FiOS TV, respectively. With FiOS, we have created the opportunity to increase revenue per customer as well as improve overall 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 expansion of strategic service offerings, including expansion of our Voice over Internet Protocol (VoIP) and international Ethernet capabilities, managed network and cloud services and security solutions.
Profitability Improvement Our goal is to increase operating income and margins. Strong wireless data and FiOS revenue growth continue to positively impact operating results. Although the recent economic recovery has positively impacted our revenues in the business market, renewed economic pressures could impact our revenue and profitability in future quarters. However, we remain focused on cost controls with the objective of driving efficiencies.
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 supply chain initiatives, 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.
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 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. In addition, we are focused on providing the highest network reliability and innovative products and services. Our 4G LTE network received numerous third-party accolades addressing the superior speed and performance of our network. During the nine months ended September 30, 2011, we invested $12.5 billion in capital expenditures.
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 Verizons 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 Verizons culture and a critical element of our competitive success.
Trends
There have been no significant changes to the information related to trends affecting our business that was disclosed in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010.
22
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 Segment Results of Operations, we review the performance of our two reportable segments.
Corporate, eliminations and other includes unallocated corporate expenses such as certain pension and other employee benefit related costs, intersegment eliminations recorded in consolidation, the results of other businesses such as our investments in unconsolidated businesses, lease financing and 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 makers 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.
Corporate, eliminations and other during the nine months ended September 30, 2010 included a one-time non-cash adjustment of $235 million, primarily to adjust wireless data revenues. This adjustment was recorded to properly defer previously recognized wireless data revenues that were earned and recognized in future periods. The adjustment was not material to the condensed consolidated financial statements (see Other Items). In addition, the results of operations related to the divestitures we completed in 2010 (see Acquisitions and Divestitures) included in Corporate, eliminations and other are as follows:
Nine Months Ended September 30, |
||||||||
(dollars in millions) | 2011 | 2010 | ||||||
Impact of Divested Operations |
||||||||
Operating revenues |
$ | | $ | 2,407 | ||||
Cost of services and sales |
| 574 | ||||||
Selling, general and administrative expense |
| 665 | ||||||
Depreciation and amortization expense |
| 413 |
Consolidated Revenues |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
(dollars in millions) | 2011 | 2010 | Increase/(Decrease) | 2011 | 2010 | Increase/(Decrease) | ||||||||||||||||||||||||||
Domestic Wireless |
||||||||||||||||||||||||||||||||
Service revenue |
$ | 15,033 | $ | 14,168 | $ | 865 | 6.1 | % | $ | 44,051 | $ | 41,436 | $ | 2,615 | 6.3 | % | ||||||||||||||||
Equipment and other |
2,693 | 2,082 | 611 | 29.3 | 7,849 | 5,823 | 2,026 | 34.8 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total |
17,726 | 16,250 | 1,476 | 9.1 | 51,900 | 47,259 | 4,641 | 9.8 | ||||||||||||||||||||||||
Wireline |
||||||||||||||||||||||||||||||||
Mass Markets |
4,070 | 4,073 | (3 | ) | (0.1 | ) | 12,224 | 12,171 | 53 | 0.4 | ||||||||||||||||||||||
Global Enterprise |
3,921 | 3,841 | 80 | 2.1 | 11,693 | 11,439 | 254 | 2.2 | ||||||||||||||||||||||||
Global Wholesale |
1,963 | 2,157 | (194 | ) | (9.0 | ) | 6,035 | 6,648 | (613 | ) | (9.2 | ) | ||||||||||||||||||||
Other |
195 | 215 | (20 | ) | (9.3 | ) | 591 | 680 | (89 | ) | (13.1 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total |
10,149 | 10,286 | (137 | ) | (1.3 | ) | 30,543 | 30,938 | (395 | ) | (1.3 | ) | ||||||||||||||||||||
Corporate, eliminations |
38 | (52 | ) | 90 | nm | (4 | ) | 1,973 | (1,977 | ) | nm | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Consolidated Revenues |
$ | 27,913 | $ | 26,484 | $ | 1,429 | 5.4 | $ | 82,439 | $ | 80,170 | $ | 2,269 | 2.8 | ||||||||||||||||||
|
|
|
|
|
|
|
|
nm not meaningful
The increase in consolidated revenues during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 was primarily due to higher revenues at Domestic Wireless, the expansion of FiOS services and growth in strategic services, which was in part due to the inclusion of the operating revenues of Terremark in our Wireline segment. Partially offsetting these increases were decreases in Global Wholesale revenues and total voice connections at our Wireline segment. In addition, the increase during the nine months ended September 30, 2011 was partially offset by the impact of divested operations.
23
Domestic Wireless revenues increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to growth in both service and equipment revenue. Service revenue increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to an increase in total connections since October 1, 2010, as well as continued growth in retail postpaid data ARPU, partially offset by a decline in retail postpaid voice ARPU. We expect that retail postpaid data ARPU will continue to grow as a larger proportion of our customer base uses smartphones and other data-capable devices. The rate of retail postpaid data ARPU growth during the three and nine months ended September 30, 2011 was positively affected by the larger proportion of our customer base using smartphones. However, we experienced dilution of our retail postpaid data ARPU for other data-capable devices due to customers optimizing the value of their data packages and we expect this trend to continue.
Wireless total data revenue was $6.1 billion and accounted for 40.6% of service revenue during the three months ended September 30, 2011 compared to $5.1 billion and 35.7% during the similar period in 2010. Wireless total data revenue was $17.4 billion and accounted for 39.4% of service revenue during the nine months ended September 30, 2011 compared to $14.3 billion and 34.5% during the similar period in 2010. Total data revenue continues to increase as a result of the increased penetration of data offerings, in particular to support web and e-mail services resulting from increased sales of smartphones and other data-capable devices. Voice revenue decreased as a result of continued declines in retail postpaid voice ARPU, partially offset by an increase in the number of customers.
Other service revenue decreased for the three months ended September 30, 2011 compared to the similar period in 2010 as a result of a decrease in third party roaming revenue as well as a decrease in revenues from our wholesale channel. Other service revenue increased for the nine months ended September 30, 2011 compared to the similar period in 2010 as a result of year-to-date growth in wholesale and other connections and higher data roaming revenue.
Equipment and other revenue increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 due to an increase in the sales volume to new and upgrading customers as well as an increase in the average revenue per unit for smartphones, including Apples iPhone 4, and other data-capable devices. Partially offsetting these increases was a decrease in the sales volume for basic phones in both periods.
Wirelines revenues decreased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily driven by declines in Global Wholesale revenues and total voice connections, partially offset by increased revenues from our growth markets as well as the impact of the operating revenues of Terremark. Wirelines revenues were also impacted by an increase in our FiOS order backlog as well as delays in provisioning certain services to enterprise customers in August and September of 2011.
Mass Markets revenues were essentially unchanged during the three months ended September 30, 2011 and increased slightly during the nine months ended September 30, 2011 compared to the similar periods in 2010. Mass Markets revenues were positively impacted by the expansion of consumer and small business FiOS services (voice, Internet and TV), partially offset by the decline of local exchange revenues. The decline in local exchange revenues was due to a decrease in total voice connections resulting primarily from competition and technology substitution. Mass Market revenues during the three and nine months ended September 30, 2011 were also impacted by FiOS installation delays as noted above.
Global Enterprise revenues increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to growth in strategic services, which was in part due to the inclusion of the operating revenues of Terremark, partially offset by lower local services and traditional circuit-based revenues.
Global Wholesale revenues decreased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to decreased MOUs in traditional voice products primarily as a result of increases in voice termination pricing on certain international routes, which negatively impacted volume, and continued rate compression due to competition in the marketplace.
Other revenues decreased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to reduced business volumes, including former MCI mass market customer losses.
Consolidated Operating Expenses |
Three Months Ended |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
(dollars in millions) | 2011 | 2010 | Increase/(Decrease) | 2011 | 2010 | Increase/(Decrease) | ||||||||||||||||||||||||||
Cost of services and sales |
$ | 11,398 | $ | 10,671 | $ | 727 | 6.8 | % | $ | 33,785 | $ | 33,539 | $ | 246 | 0.7 | % | ||||||||||||||||
Selling, general and |
7,689 | 8,407 | (718 | ) | (8.5 | ) | 22,346 | 26,075 | (3,729 | ) | (14.3 | ) | ||||||||||||||||||||
Depreciation and amortization |
4,179 | 4,023 | 156 | 3.9 | 12,316 | 12,322 | (6 | ) | | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Consolidated Operating |
$ | 23,266 | $ | 23,101 | $ | 165 | 0.7 | $ | 68,447 | $ | 71,936 | $ (3,489 | ) | (4.9 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
24
Consolidated operating expenses increased during the three months ended September 30, 2011 and decreased during the nine months ended September 30, 2011 compared to the similar periods in 2010. Consolidated operating expenses were positively impacted by lower non-operational charges and operating expenses at Wireline during the three and nine months ended September 30, 2011 compared to the similar periods in 2010. Partially offsetting these lower costs were higher operating expenses at Domestic Wireless and costs resulting from storm-related events. The change in consolidated operating expenses during the nine months ended September 30, 2011 was also partially attributable to the divested operations.
Cost of Services and Sales
Cost of services and sales increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to higher cost of equipment sales at our Domestic Wireless segment, an increase in content costs associated with FiOS subscriber growth, costs related to repair and maintenance expenses caused by storm-related events, and during the three months ended September 30, 2011, higher non-operational charges. Partially offsetting the increase during the three and nine months ended September 30, 2011 were a decrease in access costs and pension and postretirement benefit expenses at our Wireline segment. Additionally, during the nine months ended September 30, 2011, the increase was also partially offset by the impact of divested operations and lower non-operational charges.
Selling, General and Administrative Expense
Selling, general and administrative expense decreased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to a decrease in non-operational charges, pension and other postretirement benefits and compensation expense at our Wireline segment and, during the nine months ended September 30, 2011, the impact of divested operations. Partially offsetting these decreases were higher costs caused by storm-related events as well as higher sales commission expense at our Domestic Wireless segment.
Depreciation and Amortization Expense
Depreciation and amortization expense increased during the three months ended September 30, 2011 and was essentially unchanged during the nine months ended September 30, 2011 compared to the similar periods in 2010. Depreciation and amortization expense during the three and nine months ended September 30, 2011 was impacted by growth in depreciable assets and the acquisition of Terremark in the second quarter of 2011, partially offset by lower non-operational charges. The change in depreciation and amortization expense during the nine months ended September 30, 2010 was also partially attributable to the divested operations.
Non-operational Charges
Non-operational charges included in operating expenses were as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
(dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Merger Integration and Acquisition Related Charges |
$ | | $ | 159 | $ | | $ | 451 | ||||||||
Severance, Pension and Benefit Charges |
329 | 1,188 | 329 | 5,084 | ||||||||||||
Access Line Spin-off Related Charges |
| 67 | | 407 |
See Other Items for a description of other non-operational items.
25
Other Consolidated Results |
Equity in Earnings of Unconsolidated Businesses
Equity in earnings of unconsolidated businesses decreased $16 million, or 11.3%, and $48 million, or 12.2%, during the three and nine months ended September 30, 2011, respectively, compared to the similar periods in 2010. Equity in earnings of unconsolidated businesses primarily includes earnings from operations at Vodafone Omnitel N.V. and the related foreign exchange gains and losses due to movements of the Euro against the U.S. dollar.
Other Income and (Expense), Net
Additional information relating to Other income and (expense), net is as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
(dollars in millions) | 2011 | 2010 | Increase/(Decrease) | 2011 | 2010 | Increase/(Decrease) | ||||||||||||||||||||||||||
Interest income |
$ | 16 | $ | 17 | $ | (1 | ) | (5.9 | )% | $ | 51 | $ | 61 | $ | (10 | ) | (16.4 | )% | ||||||||||||||
Foreign exchange gains (losses), net |
1 | (17 | ) | 18 | nm | (22 | ) | 3 | (25 | ) | nm | |||||||||||||||||||||
Other, net |
7 | (51 | ) | 58 | nm | 41 | (53 | ) | 94 | nm | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total |
$ | 24 | $ | (51 | ) | $ | 75 | nm | $ | 70 | $ | 11 | $ | 59 | nm | |||||||||||||||||
|
|
|
|
|
|
|
|
nm - not meaningful
Other income and (expense), net increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily driven by lower fees incurred during 2011 related to the early extinguishment of debt. Other income and (expense), net during the nine months ended September 30, 2011 also includes gains on sales of short-term investments, partially offset by foreign exchange losses at our international wireline operations.
Interest Expense
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
(dollars in millions) | 2011 | 2010 | Increase/(Decrease) | 2011 | 2010 | Increase/(Decrease) | ||||||||||||||||||||||||||
Total interest costs on debt balances |
$ | 808 | $ | 834 | $ | (26 | ) | (3.1 | )% | $ | 2,465 | $ | 2,649 | $ | (184 | ) | (6.9 | )% | ||||||||||||||
Less capitalized interest costs |
110 | 237 | (127 | ) | (53.6 | ) | 341 | 693 | (352 | ) | (50.8 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total |
$ | 698 | $ | 597 | $ | 101 | 16.9 | $ | 2,124 | $ | 1,956 | $ | 168 | 8.6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Average debt outstanding |
$ | 54,746 | $ | 54,236 | $ | 55,632 | $ | 58,568 | ||||||||||||||||||||||||
Effective interest rate |
5.9 | % | 6.2 | % | 5.9 | % | 6.0 | % |
Total interest costs on debt balances decreased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010. The decrease in total interest costs on debt balances during the three months ended September 30, 2011 was primarily due to a lower effective interest rate, partially offset by a $0.5 billion increase in average debt. The decrease in total interest costs on debt balances during the nine months ended September 30, 2011 was primarily due to a $2.9 billion decline in average debt.
Total capitalized interest costs decreased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to a reduction in wireless licenses under development for commercial service. Capitalized interest costs will be significantly lower this year due to our ongoing deployment of the 4G LTE network.
26
Provision for Income Taxes
Three Months Ended September 30, |
Nine Months Ended September 30, |
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(dollars in millions) | 2011 | 2010 | Increase/(Decrease) | 2011 | 2010 | Increase/(Decrease) | ||||||||||||||||||||||||||
Provision for income taxes |
$ | 556 | $ | 178 | $ | 378 | nm | $ | 1,875 | $ | 1,115 | $ | 760 | 68.2 | % | |||||||||||||||||
Effective income tax rate |
13.6 | % | 6.2 | % | 15.3 | % | 16.7 | % |
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 annual effective tax rate is significantly lower than the statutory federal income tax rate due to the inclusion of income attributable to Vodafone Group Plcs (Vodafone) noncontrolling interest in the Verizon Wireless partnership within our income before the provision for income taxes, which resulted in our effective tax rate being 15.1% and 15.1% lower during the three months ended September 30, 2011 and 2010, respectively, and 14.5% and 92.1% lower during the nine months ended September 30, 2011 and 2010, respectively.
The increase in the effective income tax rate for the three months ended September 30, 2011 compared to the similar period in 2010 was primarily driven by lower income before provision for income taxes attributable to Verizon primarily as a result of the pension and benefit charges in the three months ended September 30, 2010.
The decrease in the effective income tax rate for the nine months ended September 30, 2011 compared to the similar period in 2010 was primarily due to a one-time, non-cash income tax charge of $1.0 billion recorded during the three months ended March 31, 2010 as 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 are already reflected in Verizons 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. This was partially offset by lower income before provision for income taxes attributable to Verizon primarily as a result of the severance, pension and benefit charges in the nine months ended September 30, 2010.
Unrecognized Tax Benefits
Unrecognized tax benefits were $2.7 billion at September 30, 2011 and $3.2 billion at December 31, 2010. Interest and penalties related to unrecognized tax benefits were $0.5 billion (after-tax) at September 30, 2011 and December 31, 2010. The decrease in unrecognized tax benefits was primarily due to the issuance of new Internal Revenue Service (IRS) Revenue Procedures in April 2011 that provided safe harbor elections for network asset maintenance costs and wireless depreciable lives which the Company has adopted. Additional decreases in unrecognized tax benefits resulted from the resolution of income tax examination issues.
As a large taxpayer, we are under audit by the IRS and multiple state and foreign jurisdictions on numerous open tax positions. The IRS completed its examination of the Companys U.S. income tax returns for tax years 2004 through 2006 in the third quarter of 2011. We are in the process of appealing certain tax adjustments proposed by the IRS related to the 2004 through 2006 examination period. Significant tax examinations and litigation are also ongoing in 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.
Net Income Attributable to Noncontrolling Interest
Three Months Ended September 30, |
Nine Months Ended September 30, |
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(dollars in millions) | 2011 | 2010 | Increase/(Decrease) | 2011 | 2010 | Increase/(Decrease) | ||||||||||||||||||||||||||
Net income attributable to |
$ | 2,163 | $ | 2,039 | $ | 124 | 6.1 | % | $ | 5,983 | $ | 5,659 | $ | 324 | 5.7 | % |
The increase in Net income attributable to noncontrolling interest during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 was due to higher earnings in our Domestic Wireless segment, which has a 45% noncontrolling partnership interest attributable to Vodafone.
27
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 makers 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 our 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 primarily exclude 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 managements intent to provide non-GAAP financial information to enhance the understanding of Verizons 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 9 to the condensed consolidated financial statements.
28
Domestic Wireless |
Our Domestic Wireless segment provides wireless voice and data services and equipment sales to consumer, business and government customers in 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 Verizon Wireless and Vodafone owns the remaining 45%. All financial results included in the tables below reflect the consolidated results of Verizon Wireless.
Operating Revenue and Selected Operating Statistics
(dollars in millions, except ARPU) |
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2011 | 2010 | Increase/(Decrease) | 2011 | 2010 | Increase/(Decrease) | |||||||||||||||||||||||||||
Retail service |
$ | 14,405 | $ | 13,479 | $ | 926 | 6.9 | % | $ | 42,098 | $ | 39,795 | $ | 2,303 | 5.8 | % | ||||||||||||||||
Other service |
628 | 689 | (61 | ) | (8.9 | ) | 1,953 | 1,641 | 312 | 19.0 | ||||||||||||||||||||||
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Service revenue |
15,033 | 14,168 | 865 | 6.1 | 44,051 | 41,436 | 2,615 | 6.3 | ||||||||||||||||||||||||
Equipment and other |
2,693 | 2,082 | 611 | 29.3 | 7,849 | 5,823 | 2,026 | 34.8 | ||||||||||||||||||||||||
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Total Operating Revenue |
$ | 17,726 | $ | 16,250 | $ | 1,476 | 9.1 | $ | 51,900 | $ | 47,259 | $ | 4,641 | 9.8 | ||||||||||||||||||
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Connections (000):(1) |
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Total connections |
107,695 | 101,095 | 6,600 | 6.5 | ||||||||||||||||||||||||||||
Retail customers |
90,708 | 86,734 | 3,974 | 4.6 | ||||||||||||||||||||||||||||
Retail postpaid customers |
86,175 | 82,257 | 3,918 | 4.8 | ||||||||||||||||||||||||||||
Net additions in period (000):(2) |
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Total connections |
1,335 | 1,248 | 87 | 7.0 | 5,319 | 4,376 | 943 | 21.5 | ||||||||||||||||||||||||
Retail customers |
968 | 447 | 521 | nm | 3,165 | 1,174 | 1,991 | nm | ||||||||||||||||||||||||
Retail postpaid customers |
882 | 584 | 298 | 51.0 | 3,045 | 1,657 | 1,388 | 83.8 | ||||||||||||||||||||||||
Churn Rate: |
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Retail customers |
1.26 | % | 1.43 | % | 1.27 | % | 1.39 | % | ||||||||||||||||||||||||
Retail postpaid customers |
0.94 | % | 1.07 | % | 0.95 | % | 1.02 | % | ||||||||||||||||||||||||
ARPU: |
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Retail service |
$ | 53.21 | $ | 51.95 | $ | 1.26 | 2.4 | $ | 52.53 | $ | 51.42 | $ | 1.11 | 2.2 | ||||||||||||||||||
Retail postpaid |
54.89 | 53.61 | 1.28 | 2.4 | 54.18 | 53.03 | 1.15 | 2.2 | ||||||||||||||||||||||||
Retail postpaid data |
22.22 | 19.21 | 3.01 | 15.7 | 21.34 | 18.39 | 2.95 | 16.0 |
nm not meaningful
(1) As of end of period
(2) Excluding acquisitions and adjustments
29
The increase in Domestic Wireless total operating revenue during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 was the result of growth in both service and equipment revenue.
Service Revenue
Service revenue increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to an increase in total connections since October 1, 2010, as well as continued growth in retail postpaid data ARPU, partially offset by a decline in retail postpaid voice ARPU.
The increase in retail and retail postpaid customer net additions during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 was due to an increase in retail postpaid customer gross additions as well as ongoing improvements in our retail customer churn rate, both of which we believe were primarily the result of device introductions during the first half of 2011 such as the Apple iPhone 4 and our 4G LTE capable devices. Retail (non-wholesale) customers are customers directly served and managed by Verizon Wireless and that use its branded services. Retail postpaid customers represent individual lines of service for which a customer pays in advance a monthly access charge in return for a monthly voice and/or data service allowance, and use of any services beyond the allowances is billed in arrears. Churn is the rate at which customers disconnect individual lines of service. We expect to continue to experience retail customer growth based on the strength of our product offerings and network service quality.
Total connection net additions increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 due to the above mentioned increases in retail and retail postpaid customer net additions, partially offset by a year over year decline in net additions from wholesale and other connections. Total connections represent the total of our retail customers and wholesale and other connections. Wholesale and other connections include customers from our reseller channel as well as connections from non-traditional wireless-enabled devices, such as those used to support vehicle tracking, telematics services and machine-to-machine connections.
Total data revenue was $6.1 billion and accounted for 40.6% of service revenue during the three months ended September 30, 2011 compared to $5.1 billion and 35.7% during the similar period in 2010. Total data revenue was $17.4 billion and accounted for 39.4% of service revenue during the nine months ended September 30, 2011 compared to $14.3 billion and 34.5% during the similar period in 2010. Total data revenue continues to increase as a result of the increased penetration of data offerings, in particular to support web and e-mail services resulting from increased sales of smartphones and other data-capable devices. Voice revenue decreased as a result of continued declines in retail postpaid voice ARPU, as discussed below, partially offset by an increase in the number of customers. We expect that total service revenue and total data revenue will continue to grow as we grow our customer base and increase the penetration of our data offerings as a larger proportion of our customer base uses smartphones and other data-capable devices.
The increases in retail service ARPU (the average revenue per user per month from retail customers), and retail postpaid ARPU (the average revenue per user per month from retail postpaid customers) for the three and nine months ended September 30, 2011 as compared to the similar periods in 2010 were due to a continued increase in our retail postpaid data ARPU, which more than offset a decline in our retail postpaid voice ARPU. Retail postpaid 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 smartphones and other data-capable devices. We expect that retail postpaid data ARPU will continue to grow as a larger proportion of our customer base uses smartphones and other data-capable devices. The rate of retail postpaid data ARPU growth during the three and nine months ended September 30, 2011 was positively affected by the larger proportion of our customer base using smartphones, which grew to 39.2% of our retail postpaid customers as of September 30, 2011 compared to 24.4% at September 30, 2010. However, we experienced dilution of our retail postpaid data ARPU for other data-capable devices due to customers optimizing the value of their data packages and we expect this trend to continue. Retail postpaid voice ARPU was $32.67 and $32.84 during the three and nine months ended September 30, 2011, respectively, representing declines of $1.73, or 5.0%, and $1.80, or 5.2%, compared to the similar periods in 2010 due to the ongoing impact of our retail customers seeking to optimize the value of our voice minute bundles.
Other service revenue includes revenue from wholesale and other connections as well as third party roaming revenue. Other service revenue decreased for the three months ended September 30, 2011 compared to the similar period in 2010 as a result of a decrease in third party roaming revenue as well as a decrease in revenues from our wholesale channel. Other service revenue increased for the nine months ended September 30, 2011 compared to the similar period in 2010 as a result of year-to-date growth in wholesale and other connections and higher data roaming revenue.
Equipment and Other Revenue
Equipment and other revenue increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 due to an increase in the sales volume to new and upgrading customers, as well as an increase in average revenue per unit, for smartphones including Apples iPhone 4, and other data-capable devices. Partially offsetting these increases was a decrease in the sales volume for basic phones in both periods.
30
Operating Expenses
Three Months Ended September 30, |
Nine Months Ended September 30, |
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(dollars in millions) | 2011 | 2010 | Increase/(Decrease) | 2011 | 2010 | Increase/(Decrease) | ||||||||||||||||||||||||||
Cost of services and sales |
$ | 5,670 | $ | 5,017 | $ | 653 | 13.0 | % | $ | 17,379 | $ | 14,428 | $ | 2,951 | 20.5 | % | ||||||||||||||||
Selling, general and |
4,867 | 4,543 | 324 | 7.1 | 14,412 | 13,486 | 926 | 6.9 | ||||||||||||||||||||||||
Depreciation and |
2,040 | 1,836 | 204 | 11.1 | 5,917 | 5,475 | 442 | 8.1 | ||||||||||||||||||||||||
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Total Operating Expenses |
$ | 12,577 | $ | 11,396 | $ | 1,181 | 10.4 | $ | 37,708 | $ | 33,389 | $ | 4,319 | 12.9 | ||||||||||||||||||
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Cost of Services and Sales
Cost of services and sales increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to higher costs of equipment sales. Cost of equipment sales increased by $0.7 billion and $2.8 billion for the three and nine months ended September 30, 2011 driven by increased sales of higher cost smartphones, including Apples iPhone 4, and other data-capable devices. Partially offsetting these increases were decreases in the volume sold and average cost per unit of basic phones. In addition, cost of services increased in the nine months ended September 30, 2011 due to higher wireless network costs resulting from an increase in local interconnection costs related to additional Evolution-Data Optimized (EV-DO) capacity to meet expected data usage demands as well as an increase in Ethernet facilities costs that support the 4G LTE network. The increase in cost of services was also impacted by higher roaming costs incurred in divested markets and increased data roaming. Partially offsetting these increases was a decrease in costs for long distance and data services and applications.
Selling, General and Administrative Expense
Selling, general and administrative expense increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to higher sales commission expense in our indirect channel. Indirect sales commission expense increased $0.2 billion and $0.8 billion during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 as a result of increases in the average commission per unit, as the mix of units continues to shift toward data devices and more customers activate data services, and increased contract renewals in connection with equipment upgrades.
Depreciation and Amortization Expense
Depreciation and amortization expense increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily driven by growth in depreciable assets.
Segment Operating Income and EBITDA
Three Months Ended September 30, |
Nine Months Ended September 30, |
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(dollars in millions) | 2011 | 2010 | Increase/(Decrease) | 2011 | 2010 | Increase/(Decrease) | ||||||||||||||||||||||||||
Segment Operating Income |
$ | 5,149 | $ | 4,854 | $ | 295 | 6.1 | % | $ | 14,192 | $ | 13,870 | $ | 322 | 2.3 | % | ||||||||||||||||
Add Depreciation and |
2,040 | 1,836 | 204 | 11.1 | 5,917 | 5,475 | 442 | 8.1 | ||||||||||||||||||||||||
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Segment EBITDA |
$ | 7,189 | $ | 6,690 | $ | 499 | 7.5 | $ | 20,109 | $ | 19,345 | $ | 764 | 3.9 | ||||||||||||||||||
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Segment operating income margin |
29.0 | % | 29.9 | % | 27.3 | % | 29.3 | % | ||||||||||||||||||||||||
Segment EBITDA service margin |
47.8 | % | 47.2 | % | 45.6 | % | 46.7 | % |
The changes in the table above during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 were primarily a result of the factors described in connection with operating revenues and operating expenses above.
31
Non-recurring or non-operational items excluded from Domestic Wireless Operating income were as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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(dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Merger integration and acquisition costs |
$ | | $ | 159 | $ | | $ | 451 | ||||||||
Impact of divested operations |
| | | (348 | ) | |||||||||||
Deferred revenue adjustment |
| | | 235 | ||||||||||||
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$ | | $ | 159 | $ | | $ | 338 | |||||||||
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Wireline |
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.
Operating Revenues and Selected Operating Statistics
Three Months Ended September 30, |
Nine Months Ended September 30, |
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(dollars in millions) | 2011 | 2010 | Increase/(Decrease) | 2011 | 2010 | Increase/(Decrease) | ||||||||||||||||||||||||||
Consumer retail |
$ | 3,400 | $ | 3,364 | $ | 36 | 1.1 | % | $ | 10,177 | $ | 10,034 | $ | 143 | 1.4 | % | ||||||||||||||||
Small business |
670 | 709 | (39 | ) | (5.5 | ) | 2,047 | 2,137 | (90 | ) | (4.2 | ) | ||||||||||||||||||||
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Mass Markets |
4,070 | 4,073 | (3 | ) | (0.1 | ) | 12,224 | 12,171 | 53 | 0.4 | ||||||||||||||||||||||
Strategic services |
1,935 | 1,674 | 261 | 15.6 | 5,617 | 4,867 | 750 | 15.4 | ||||||||||||||||||||||||
Other |
1,986 | 2,167 | (181 | ) | (8.4 | ) | 6,076 | 6,572 | (496 | ) | (7.5 | ) | ||||||||||||||||||||
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Global Enterprise |
3,921 | 3,841 | 80 | 2.1 | 11,693 | 11,439 | 254 | 2.2 | ||||||||||||||||||||||||
Global Wholesale |
1,963 | 2,157 | (194 | ) | (9.0 | ) | 6,035 | 6,648 | (613 | ) | (9.2 | ) | ||||||||||||||||||||
Other |
195 | 215 | (20 | ) | (9.3 | ) | 591 | 680 | (89 | ) | (13.1 | ) | ||||||||||||||||||||
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Total Operating Revenues |
$ | 10,149 | $ | 10,286 | $ | (137 | ) | (1.3 | ) | $ | 30,543 | $ | 30,938 | $ | (395 | ) | (1.3 | ) | ||||||||||||||
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Connections (000):(1) |
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Total voice connections |
24,519 | 26,544 | (2,025 | ) | (7.6 | ) | ||||||||||||||||||||||||||
Total Broadband connections |
8,572 | 8,340 | 232 | 2.8 | ||||||||||||||||||||||||||||
FiOS Internet subscribers |
4,616 | 3,885 | 731 | 18.8 | ||||||||||||||||||||||||||||
FiOS TV subscribers |
3,979 | 3,290 | 689 | 20.9 |
(1) As of end of period
32
Wirelines revenues decreased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily driven by declines in Global Wholesale revenues and total voice connections, partially offset by increased revenues from our growth markets as well as the impact of the operating revenues of Terremark. Wirelines revenues were also impacted by an increase in our FiOS order backlog as well as delays in provisioning certain services to enterprise customers in August and September of 2011.
Mass Markets
Mass Markets revenues 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.
Mass Markets revenues were essentially unchanged during the three months ended September 30, 2011 compared to the similar period in 2010. During the nine months ended September 30, 2011 compared to the similar period in 2010, Mass Markets revenues increased slightly primarily due to the expansion of consumer and small business FiOS services (voice, Internet and TV), partially offset by the decline of local exchange revenues.
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. As of September 30, 2011, we achieved penetration rates of 34.6% and 30.6% for FiOS Internet and FiOS TV, respectively, compared to penetration rates of 31.0% and 27.2% for FiOS Internet and FiOS TV, respectively, at September 30, 2010. During the third quarter of 2011, FiOS subscriber growth was lower than in prior quarters due to installation delays caused by storm conditions in the Mid-Atlantic and Northeast regions coupled with the work stoppage of our union-represented employees in August.
Mass Markets revenues were negatively impacted by the decline of local exchange revenues primarily due to a 7.6% decline in total voice connections resulting primarily from competition and technology substitution. Total voice connections include traditional switched access lines in service as well as FiOS digital voice connections. The majority of the decline in total voice connections was sustained in the residential retail market, which experienced an 8.0% voice connection loss primarily due to substituting traditional landline services with wireless, VoIP, broadband and cable services. There was also a 5.2% decline in small business retail voice connections, primarily reflecting challenging economic conditions, competition and a shift to both IP and high-speed circuits.
Global Enterprise
Global Enterprise offers voice, data and Internet communications services to medium and large business customers, multi-national corporations, and state and federal government customers. In addition to traditional voice and data services, such as private line, frame relay and asynchronous transfer mode (ATM) services, Global Enterprise offers strategic networking products and solutions including IP services, cloud services and value-added solutions that make communications more secure, reliable and efficient. Global Enterprise also provides strategic managed network services for customers that outsource all or portions of their communications and information processing operations and data 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, security and information technology service, managing a move to IP-based unified communications and providing application performance support.
Global Enterprise revenues increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily driven by higher strategic services revenues, in part due to the inclusion of the operating revenues of Terremark, partially offset by lower local services and traditional circuit-based revenues. Strategic services revenue increased $0.3 billion, or 15.6%, and $0.8 billion, or 15.4% during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to higher information technology, security solution and strategic networking revenues. Strategic services continues to be Global Enterprises 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 to migrate to next generation IP services.
33
Global Wholesale
Global Wholesale provides voice, data and value-added business services, as well as local service to long distance and other carriers. Voice services include switched access revenues generated from fixed and usage-based charges paid by carriers for access to our local network, interexchange wholesale traffic sold in the United States and internationally destined traffic that originates in the United States. In addition, special access revenues are generated from carriers that buy dedicated local exchange capacity to support their private networks. Data services include high-speed digital data offerings, such as Ethernet, Fast Packet and Synchronous Optical Network, as well as core data circuits, such as DS1/DS3 which aim to enhance wholesale customer networks and to provide connections to their end users and subscribers. Value-added business services include managed services, mobility and security services. Local wholesale revenues include unbundled network elements and interconnection revenues from competitive local exchange carriers and wireless carriers.
The decrease in Global Wholesale revenues during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 was primarily due to decreased MOUs in traditional voice products, primarily as a result of 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 connections declined by 8.4% as of September 30, 2011 compared to September 30, 2010 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 the three and nine months ended September 30, 2011 compared to the similar period in 2010. Partially offsetting the overall decrease in wholesale revenue was a continuing demand for high-speed digital data services primarily due to fiber-to-the-cell customers upgrading their core data circuits to Ethernet facilities. As a result, the number of DS1/DS3 circuits experienced a 5.0% decline as compared to the similar period in 2010.
Other
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 the three and nine months ended September 30, 2011 compared to the similar period in 2010 was primarily due to reduced business volumes, including former MCI mass market customer losses.
Operating Expenses
Three Months Ended September 30, |
Nine Months Ended September 30, |
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(dollars in millions) | 2011 | 2010 | Increase/(Decrease) | 2011 | 2010 | Increase/(Decrease) | ||||||||||||||||||||||||||
Cost of services and sales |
$ | 5,681 | $ | 5,658 | $ | 23 | 0.4 | % | $ | 16,647 | $ | 17,010 | $ | (363 | ) | (2.1 | )% | |||||||||||||||
Selling, general and |
2,296 | 2,296 | | | 6,894 | 7,105 | (211 | ) | (3.0 | ) | ||||||||||||||||||||||
Depreciation and |
2,119 | 2,145 | (26 | ) | (1.2 | ) | 6,343 | 6,308 | 35 | 0.6 | ||||||||||||||||||||||
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Total Operating Expenses |
$ | 10,096 | $ | 10,099 | $ | (3 | ) | | $ | 29,884 | $ | 30,423 | $ | (539 | ) | (1.8 | ) | |||||||||||||||
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Cost of Services and Sales
Cost of services and sales increased during the three months ended September 30, 2011 and decreased during the nine months ended September 30, 2011 compared to the similar periods in 2010. Cost of services and sales during the three and nine months ended September 30, 2011 was negatively impacted by higher costs related to repair and maintenance expenses caused by storm-related events during the third quarter of 2011, higher customer premise equipment costs and content costs associated with continued FiOS subscriber growth and the acquisition of Terremark in the second quarter of 2011. Cost of services and sales during the three and nine months ended September 30, 2011 was positively impacted by a decrease in access costs resulting primarily from management actions to reduce exposure to unprofitable international wholesale routes and declines in overall wholesale long distance volumes, as well as lower pension and postretirement benefit expenses.
Selling, General and Administrative Expense
Selling, general and administrative expense was unchanged during the three months ended September 30, 2011 and decreased during the nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to decreased pension and other postretirement benefits and compensation expense, partially offset by higher costs caused by storm-related events in the third quarter of 2011, as well as the acquisition of Terremark in the second quarter of 2011.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased during the three months ended September 30, 2011 compared to the similar period in 2010 due to a decrease in amortization expense. Depreciation and amortization expense increased during the nine months ended September 30, 2011 compared to the similar period in 2010 primarily due to the acquisition of Terremark in the second quarter of 2011.
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Segment Operating Income and EBITDA
Three Months Ended September 30, |
Nine Months Ended September 30, |
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(dollars in millions) | 2011 | 2010 | Increase/(Decrease) | 2011 | 2010 | Increase/(Decrease) | ||||||||||||||||||||||||||
Segment Operating |
$ | 53 | $ | 187 | $ | (134 | ) | (71.7 | )% | $ | 659 | $ | 515 | $ | 144 | 28.0 | % | |||||||||||||||
Add Depreciation and |
2,119 | 2,145 | (26 | ) | (1.2 | ) | 6,343 | 6,308 | 35 | 0.6 | ||||||||||||||||||||||
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Segment EBITDA |
$ | 2,172 | $ | 2,332 | $ | (160 | ) | (6.9 | ) | $ | 7,002 | $ | 6,823 | $ | 179 | 2.6 | ||||||||||||||||
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Segment operating income |
0.5 | % | 1.8 | % | 2.2 | % | 1.7 | % | ||||||||||||||||||||||||
Segment EBITDA margin |
21.4 | % | 22.7 | % | 22.9 | % | 22.1 | % |
The changes in the table above during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 were primarily a result of the factors described in connection with operating revenues and operating expenses above.
Non-recurring or non-operational items excluded from Wirelines Operating income were as follows:
Nine Months Ended September 30, |
||||||||
(dollars in millions) | 2011 | 2010 | ||||||
Access line spin-off and other charges |
$ | | $ | 79 | ||||
Severance, pension and benefit charges |
| 2,040 | ||||||
Impact of divested operations |
| (407 | ) | |||||
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$ | | $ | 1,712 | |||||
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Other Items |
Merger Integration and Acquisition Related Charges |
During the three and nine months ended September 30, 2010, we recorded merger integration charges of $0.2 billion and $0.5 billion, respectively, for the Alltel acquisition primarily relating to handset conversions, the decommissioning of overlapping cell sites and trade name amortization.
Severance, Pension and Benefit Charges |
During the three and nine months ended September 30, 2011, we recorded net pre-tax severance, pension and benefits charges of $0.3 billion, including pension settlement losses, for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses upon a remeasurement event.
During the three and nine months ended September 30, 2010, we recorded net pre-tax severance, pension and benefits charges of $1.2 billion and $5.1 billion, respectively. The charges during the three and nine months ended September 30, 2010 included remeasurement losses of $1.2 billion and $2.9 billion, respectively, for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses upon a remeasurement event. 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. Additionally, during the nine months ended September 30, 2010, we reached an agreement 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, 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 $1.0 billion for severance for the 2010 separation programs mentioned above and a planned workforce reduction of approximately 2,500 employees in 2011. In addition, we recorded $1.2 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.
Medicare Part D Subsidy Charges |
Under 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), 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 are already reflected in Verizons 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.
Dispositions |
Access Line-Spin-off Related Charges
During the three and nine months ended September 30, 2010, we recorded pre-tax charges of $0.1 billion and $0.5 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 Communications Corporation (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. (See Acquisitions and Divestitures.)
Alltel Divestiture Markets
During the three and nine months ended September 30, 2010, we recorded a tax charge of approximately $0.2 billion for the taxable gain associated with the Alltel Divestiture Markets. (See Acquisitions and Divestitures.)
Other |
Corporate, eliminations and other during the nine months ended September 30, 2010 includes a non-cash adjustment of $235 million, primarily to adjust wireless data revenues. This adjustment was recorded to properly defer previously recognized wireless data revenues that were earned and recognized in future periods.
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Consolidated Financial Condition |
Nine Months Ended September 30, |
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(dollars in millions) | 2011 | 2010 | Change | |||||||||
Cash Flows Provided By (Used In) |
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Operating activities |
$ | 21,512 | $ | 25,114 | $ | (3,602 | ) | |||||
Investing activities |
(13,412 | ) | (10,060 | ) | (3,352 | ) | ||||||
Financing activities |
(4,444 | ) | (11,669 | ) | 7,225 | |||||||
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Increase In Cash and Cash Equivalents |
$ | 3,656 | $ | 3,385 | $ | 271 | ||||||
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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 an appropriate capital structure to ensure our 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 $7.75 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 Provided By Operating Activities |
Our primary source of funds continues to be cash generated from operations. Net cash provided by operating activities during the nine months ended September 30, 2011 decreased by $3.6 billion compared to the similar period in 2010 primarily due to inventory purchases for wireless devices and higher pension plan contributions. In addition, net cash provided by operating activities during the nine months ended September 30, 2010 included cash flows from divested operations (see Acquisitions and Divestitures).
During the nine months ended September 30, 2011 and 2010, we received net distributions from Vodafone Omnitel of $0.4 billion.
Cash Flows Used In 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:
Nine Months Ended September 30, |
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(dollars in millions) | 2011 | 2010 | ||||||
Domestic Wireless |
$ | 7,186 | $ | 6,205 | ||||
Wireline |
4,767 | 5,098 | ||||||
Other |
593 | 441 | ||||||
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$ | 12,546 | $ | 11,744 | |||||
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Total as a percentage of revenue |
15.2 | % | 14.6 | % |
The increase in capital expenditures at Domestic Wireless during the nine months ended September 30, 2011 compared to the similar period in 2010 was primarily due to increased investment in the capacity of our wireless EV-DO networks and funding the build-out of our fourth-generation network based on LTE technology. The decrease in capital expenditures at Wireline during the nine months ended September 30, 2011 compared to the similar period in 2010 was primarily due to capital expenditures in 2010 related to the local exchange business and related landline activities that were spun-off to Frontier, as well as lower capital expenditures related to the build-out of FiOS. We expect 2011 consolidated capital expenditures to be similar to last years spending of $16.5 billion.
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Acquisitions
During the second quarter of 2011, we paid approximately $1.4 billion for the equity of Terremark, which was partially offset by $0.1 billion of cash acquired (see Acquisitions and Divestitures). Additionally, during the nine months ended September 30, 2011, we acquired various wireless licenses and markets, as well as a provider of cloud software technology, for cash consideration that was not significant.
During the third quarter of 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.
Dispositions
During 2010, we received cash proceeds of $2.6 billion in connection with the sale of the Alltel Divestiture Markets (see Acquisitions and Divestitures).
Other, net
During the nine months ended September 30, 2011, Other, net primarily included proceeds related to the sales of long-term investments, which were not significant to our condensed consolidated statements of income.
Cash Flows Used In Financing Activities |
During the nine months ended September 30, 2011 and 2010, net cash used in financing activities was $4.4 billion and $11.7 billion, respectively.
2011
During March 2011, Verizon issued $6.25 billion aggregate principal amount of fixed and floating rate notes resulting in cash proceeds of approximately $6.19 billion, net of discounts and issuance costs. The net proceeds were used for the repayment of commercial paper, the retirement of certain outstanding notes issued by our telephone operating company subsidiaries and other general corporate purposes. The issuances consisted of the following: $1.0 billion Notes due 2014 that bear interest at a rate equal to three-month London Interbank Offered Rate (LIBOR) plus 0.61%, $1.5 billion 1.95% Notes due 2014, $1.25 billion 3.00% Notes due 2016, $1.5 billion 4.60% Notes due 2021 and $1.0 billion 6.00% Notes due 2041. In addition, during 2011, we utilized $0.3 billion under fixed rate vendor financing facilities.
During April 2011, we redeemed $1.0 billion of 5.65% Verizon Pennsylvania Inc. Debentures due November 15, 2011 at a redemption price of 102.9% of the principal amount of the debentures, plus accrued and unpaid interest through the date of redemption, and $1.0 billion of 6.50% Verizon New England Inc. Debentures due September 15, 2011 at a redemption price of 102.3% of the principal amount of the debentures, plus accrued and unpaid interest through the date of redemption. We also terminated the related interest rate swaps with a notional value totaling $1.0 billion. In addition, during 2011, $0.5 billion of 5.35% Verizon Communications Notes matured and were repaid.
The debt obligations of Terremark that were outstanding at the time of its acquisition by Verizon were repaid during May 2011.
Verizon Wireless
During May 2011, Verizon Wireless repaid $4.0 billion aggregate principal amount of two-year fixed and floating rate notes.
2010
During the nine months ended September 30, 2010, $0.3 billion of 6.125% Verizon New York Inc. Debentures, $0.2 billion of 6.375% Verizon North Inc. Debentures and $0.2 billion of 6.30% Verizon Northwest Inc. Debentures matured and were repaid.
During July 2010, Verizon received approximately $3.1 billion in connection with the completion of the spin-off and merger of a newly formed subsidiary of Verizon with Frontier (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.
Verizon Wireless
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 the nine months ended September 30, 2010, Verizon Wireless repaid $4.0 billion of borrowings that were outstanding under a three-year term loan facility. No borrowings remain outstanding under this facility and this facility has been cancelled.
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Credit Facility and Shelf Registration
As of September 30, 2011, the unused borrowing capacity under a $6.2 billion three-year credit facility with a group of major financial institutions was approximately $6.1 billion. On April 15, 2011, we amended this facility primarily to reduce fees and borrowing costs and extend the maturity date to October 15, 2014. 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 $7.75 billion of additional unsecured debt or equity securities.
Verizons ratio of total debt divided by total debt plus Verizons equity was 58.4% at September 30, 2011 and 57.8% at December 31, 2010.
Distributions
As of July 28, 2011 Verizon owned 55% of the Verizon Wireless partnership, and Vodafone Group Plc owned 45% of the partnership. On July 28, 2011, the Board of Representatives of Verizon Wireless declared a distribution to its owners, payable on January 31, 2012 in proportion to their partnership interests on that date, in the aggregate amount of $10 billion. As a result, based on current ownership interests in Verizon Wireless, we will receive a cash payment of $5.5 billion and Vodafone Group Plc will receive a cash payment of $4.5 billion on the distribution date.
Dividends
As in prior periods, dividend payments are a significant use of capital resources. The Board of Directors of Verizon 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 2011, the Board increased our quarterly dividend payment 2.6% to $.50 per share from $.4875 per share in the same period of 2010.
During the nine months ended September 30, 2011 and 2010, we paid $4.1 billion and $4.0 billion in dividends, respectively.
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 In Cash and Cash Equivalents |
Our Cash and cash equivalents at September 30, 2011 totaled $10.3 billion, a $3.7 billion increase compared to Cash and cash equivalents at December 31, 2010 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 Verizons 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:
Nine Months Ended September 30, |
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(dollars in millions) | 2011 | 2010 | Change | |||||||||
Net cash provided by operating activities |
$ | 21,512 | $ | 25,114 | $ | (3,602 | ) | |||||
Less Capital expenditures (including capitalized software) |
12,546 | 11,744 | 802 | |||||||||
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Free cash flow |
$ | 8,966 | $ | 13,370 | $ | (4,404 | ) | |||||
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The change in free cash flow during the nine months ended September 30, 2011 compared to the similar period in 2010 was a result of the factors described in connection with net cash provided by operating activities and capital expenditures above.
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Market Risk |
We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, changes in investment, equity and commodity prices and changes in corporate tax rates. We employ risk management strategies, which may include the use of a variety of derivatives including cross currency swaps, foreign currency and prepaid forwards and collars, interest rate 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.
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 income in our condensed consolidated balance sheets. Gains and losses on foreign currency transactions are recorded in the condensed consolidated statements of income in Other income and (expense), net. At September 30, 2011, our primary foreign currency exposure was to the British Pound Sterling, the Euro and the Australian Dollar.
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 September 30, 2011, 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.
Interest Rate Swaps
We have entered into domestic interest rate swaps to achieve a targeted mix of fixed and variable rate debt. We principally receive fixed rates and pay variable rates based on LIBOR, resulting in a net increase or decrease to Interest expense. These swaps are designated as fair value hedges and hedge against changes in the fair value of our debt portfolio. We record the interest rate swaps at fair value on our condensed 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 $0.6 billion at September 30, 2011 and $0.3 billion at December 31, 2010, and is primarily included in Other assets and Long-term debt. As of September 30, 2011, the total notional amount of these interest rate swaps was $8.0 billion.
Cross Currency Swaps
Verizon Wireless has entered into cross currency swaps designated as cash flow hedges to exchange approximately $2.4 billion of British Pound Sterling and Euro-denominated debt into U.S. dollars and to fix our future interest and principal payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses. The fair value of these swaps, primarily included in Other assets, was approximately $0.1 billion at September 30, 2011 and December 31, 2010, respectively. During the three months ended September 30, 2011, a pretax loss of $0.2 billion was recognized in Other comprehensive income. During the nine months ended September 30, 2011, the pretax loss recognized in Other comprehensive income was not significant. During the three and nine months ended September 30, 2010, a pretax gain of $0.2 billion and a pretax loss of $0.2 billion, respectively, were recognized in Other comprehensive income. A portion of these gains and losses recognized in Other comprehensive income was reclassified to Other income and (expense), net to offset the related pretax foreign currency transaction gain or loss on the underlying debt obligations.
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Acquisitions and Divestitures |
Terremark Worldwide, Inc.
During April 2011, we acquired Terremark for $19 per share in cash. Closing and other direct acquisition-related costs totaled approximately $13 million after-tax. The acquisition was completed via a tender offer and subsequent short-form merger under Delaware law through which Terremark became a wholly owned subsidiary of Verizon. The acquisition enhanced Verizons offerings to business and government customers globally.
Telephone Access Line Spin-off
On July 1, 2010, we completed the spin-off of the shares of a newly formed subsidiary of Verizon (Spinco) to Verizon stockholders and the merger of Spinco with Frontier. Spinco held defined assets and liabilities that were used in Verizons local exchange businesses and related activities in 14 states. The total value of the transaction to Verizon and its stockholders was approximately $8.6 billion.
Alltel Divestiture Markets
As a condition of the regulatory approvals to complete the acquisition of Alltel Corporation in January 2009, Verizon Wireless was required to divest overlapping properties in 105 operating markets in 24 states (Alltel Divestiture Markets). During the second quarter of 2010, AT&T Mobility acquired 79 of the 105 Alltel Divestiture Markets, including licenses and network assets, for approximately $2.4 billion in cash and Atlantic Tele-Network, Inc. acquired the remaining 26 Alltel Divestiture Markets, including licenses and network assets, for $0.2 billion in cash.
Other Factors That May Affect Future Results |
Regulatory and Competitive Trends |
There have been no material changes to Regulatory and Competitive Trends as previously disclosed in Part II. Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2010.
Environmental Matters |
During 2003, under a government-approved plan, remediation commenced at the site of a former Sylvania facility in Hicksville, New York that processed nuclear fuel rods in the 1950s and 1960s. Remediation beyond original expectations proved to be necessary and a reassessment of the anticipated remediation costs was conducted. A reassessment of costs related to remediation efforts at several other former facilities was also undertaken. In September 2005, the Army Corps of Engineers (ACE) accepted the Hicksville site into the Formerly Utilized Sites Remedial Action Program. This may result in the ACE performing some or all of the remediation effort for the Hicksville site with a corresponding decrease in costs to Verizon. To the extent that the ACE assumes responsibility for remedial work at the Hicksville site, an adjustment to a reserve previously established for the remediation may be made. Adjustments to the reserve may also be made based upon actual conditions discovered during the remediation at this or any other site requiring remediation.
Recent Accounting Standards |
In May 2011, an accounting standard update regarding fair value measurement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. This standard update also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. We will adopt this standard update during the first quarter of 2012. The adoption of this standard update is not expected to have a significant impact on our consolidated financial statements.
In June 2011, an accounting standard update regarding the presentation of comprehensive income was issued to increase the prominence of items reported in other comprehensive income. The update requires that all nonowner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or in two separate, but consecutive statements. This standard update is effective during the first quarter of 2012. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.
In September 2011, an accounting standard update regarding testing of goodwill for impairment was issued. This standard update gives companies the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This standard update is effective during the first quarter of 2012. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.
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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 and those disclosed in Part 1, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010, could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements:
| the effects of adverse conditions in the U.S. and international economies; |
| the effects of competition in our markets; |
| materially adverse changes in labor matters, including labor negotiations, and any resulting financial and/or operational impact; |
| the effect of material changes in available technology; |
| any disruption of our key suppliers provisioning of products or services; |
| significant increases in benefit plan costs or lower investment returns on plan assets; |
| 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; |
| technology substitution; |
| an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations or adverse conditions in the credit markets impacting the cost, including interest rates, and/or availability of financing; |
| any changes in the regulatory environments in which we operate, including any increase in restrictions on our ability to operate our networks; |
| the timing, scope and financial impact of our deployment of broadband technology; |
| changes in our accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings; |
| our ability to complete acquisitions and dispositions; and |
| the inability to implement our business strategies. |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information relating to market risk is included in Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations under the caption Market Risk.
Item 4. Controls and Procedures
Our chief executive officer and chief financial officer have evaluated the effectiveness of the registrants disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934), as of the end of the period covered by this quarterly report. Based on this evaluation, our chief executive officer and chief financial officer have concluded that the registrants disclosure controls and procedures were effective as of September 30, 2011.
There were no changes in the registrants internal control over financial reporting during the third quarter of 2011 that have materially affected, or are reasonably likely to materially affect, the registrants internal control over financial reporting.
Part II - Other Information |
Verizon Communications Inc. (Verizon), and a number of other telecommunications companies, have been the subject of multiple class action suits concerning its alleged participation in intelligence-gathering activities allegedly carried out by the federal government, at the direction of the President of the United States, as part of the governments post-September 11 program to prevent terrorist attacks. Plaintiffs generally allege that Verizon has participated by permitting the government to gain access to the content of its subscribers telephone calls and/or records concerning those calls and that such action violates federal and/or state constitutional and statutory law. Relief sought in the cases includes injunctive relief, attorneys fees, and statutory and punitive damages. On August 9, 2006, the Judicial Panel on Multidistrict Litigation (Panel) ordered that these actions be transferred, consolidated and coordinated in the U.S. District Court for the Northern District of California. The Panel subsequently ordered that a number of tag along actions also be transferred to the Northern District of California. Verizon believes that these lawsuits are without merit. On July 10, 2008, the President signed into law the FISA Amendments Act of 2008, which provides for dismissal of these suits by the court based on submission by the Attorney General of the United States of a specified certification. On September 19, 2008, the Attorney General made such a submission in the consolidated proceedings. Based on this submission, the court ordered dismissal of the complaints on June 3, 2009. Plaintiffs have appealed this dismissal, and the appeal remains pending in the United States Court of Appeals for the Ninth Circuit.
On September 15, 2010, the U.S. Bank National Association (U.S. Bank), as Litigation Trustee for the Idearc, Inc. Litigation Trust (Litigation Trust), filed suit in U.S. District Court for the Northern District of Texas against Verizon and certain subsidiaries challenging the November 2006 spin-off of Verizons former directories business then known as Idearc Inc. U.S. Bank, which represents a group of creditors who filed claims in the Idearc, Inc. bankruptcy proceedings, alleges that Idearc Inc. was insolvent at the time of the spin-off or became insolvent shortly thereafter. The Litigation Trust seeks over $9 billion in damages.
There have been no material changes to our risk factors as previously disclosed in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Verizon did not repurchase any shares of Verizon common stock during the three months ended September 30, 2011. At September 30, 2011, the maximum number of shares that could be purchased by or on behalf of Verizon under our share buyback program was 100 million.
43
Exhibit |
Description | |
10 | Form of 2011 Special Performance Stock Unit Agreement pursuant to the 2009 Verizon Communications Inc. Long-Term Incentive Plan. | |
12 | Computation of Ratio of Earnings to Fixed Charges. | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Extension Schema Document. | |
101.PRE | XBRL Taxonomy Presentation Linkbase Document. | |
101.CAL | XBRL Taxonomy Calculation Linkbase Document. | |
101.LAB | XBRL Taxonomy Label Linkbase Document. | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
44
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VERIZON COMMUNICATIONS INC. | ||||||
Date: October 25, 2011 |
By |
/s/ Robert J. Barish | ||||
Robert J. Barish | ||||||
Senior Vice President and Controller | ||||||
(Principal Accounting Officer) |
45
Exhibit Index
Exhibit |
Description | |
10 | Form of 2011 Special Performance Stock Unit Agreement pursuant to the 2009 Verizon Communications Inc. Long-Term Incentive Plan. | |
12 | Computation of Ratio of Earnings to Fixed Charges. | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Extension Schema Document. | |
101.PRE | XBRL Taxonomy Presentation Linkbase Document. | |
101.CAL | XBRL Taxonomy Calculation Linkbase Document. | |
101.LAB | XBRL Taxonomy Label Linkbase Document. | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
46
Exhibit 10
FORM OF VERIZON COMMUNICATIONS INC. LONG-TERM INCENTIVE PLAN
2011 SPECIAL PERFORMANCE STOCK UNIT AGREEMENT
AGREEMENT between Verizon Communications Inc. (Verizon or the Company) and you (the Participant) and your heirs and beneficiaries.
1. Purpose of Agreement. The purpose of this Agreement is to provide a special grant of performance stock units (PSUs) to the Participant.
2. Agreement. This Agreement is entered into pursuant to the 2009 Verizon Communications Inc. Long-Term Incentive Plan (the Plan), and evidences the grant of a performance stock unit award in the form of PSUs pursuant to the Plan. In consideration of the benefits described in this Agreement, which Participant acknowledges are good, valuable and sufficient consideration, the Participant agrees to comply with the terms and conditions of this Agreement, including the participants obligations and restrictions set forth in Exhibit A to this Agreement (the Participants Obligations), which are incorporated into and are a part of the Agreement. The PSUs and this Agreement are subject to the terms and provisions of the Plan. By executing this Agreement, the Participant agrees to be bound by the terms and provisions of the Plan and this Agreement, including but not limited to the Participants Obligations. In addition, the Participant agrees to be bound by the actions of the Human Resources Committee of Verizon Communications Board of Directors or any successor thereto (the Committee), and any designee of the Committee (to the extent that such actions are exercised in accordance with the terms of the Plan and this Agreement). If there is a conflict between the terms of the Plan and the terms of this Agreement, the terms of this Agreement shall control.
3. Contingency. The grant of PSUs is contingent on the Participants timely acceptance of this Agreement and satisfaction of the other conditions contained in it. Acceptance shall be through execution of the Agreement as set forth in paragraph 21. If the Participant does not accept this Agreement by the close of business on September 30, 2011, the Participant shall not be entitled to this grant of PSUs regardless of the extent to which the requirements in paragraph 5 (Vesting) are satisfied.
4. Number of Units. The Participant is granted the number of PSUs as specified in the Participants account under the 2011 Special PSU grant, administered by Fidelity Investments or any successor thereto (Fidelity). A PSU is a hypothetical share of Verizons common stock. The value of a PSU on any given date shall be equal to the closing price of Verizons common stock on the New York Stock Exchange (NYSE) as of such date. A Dividend Equivalent Unit (DEU) or fraction thereof shall be added to each PSU each time that a dividend is paid on Verizons common stock. The amount of each DEU shall be equal to the corresponding dividend paid on a share of Verizons common stock. The DEU shall be converted into PSUs or fractions thereof based upon the closing price of Verizons common stock traded on the NYSE on the dividend payment date of each declared dividend on Verizons common stock, and such PSUs or fractions thereof shall be added to the Participants PSU balance. To the extent that Fidelity or the Company makes an error, including but not limited to an administrative error with respect to the number or value of the PSUs granted to the Participant under this Agreement, the DEUs credited to the Participants account or the amount of the final award payment, the Company or Fidelity specifically reserves the right to correct such error at any time and the Participant agrees that he or she shall be legally bound by any corrective action taken by the Company or Fidelity.
5. Vesting.
(a) General. The Participant shall vest in the PSUs to the extent provided in paragraph 5(b) (Performance Requirement) only if the Participant satisfies the requirements of paragraph 5(c) (Five-Year Continuous Employment Requirement), except as otherwise provided in paragraph 7 (Early Cancellation/Accelerated Vesting of PSUs).
(b) Performance Requirement.
(1) General. The PSUs shall become payable based on Verizons annual average Return on Equity during the five-year period beginning August 1, 2011, and ending at the close of business on July 31, 2016 (the Award Cycle). No PSUs shall become payable unless the Committee determines that certain threshold performance requirements have been satisfied. The formula for determining the total number of PSUs that may become payable (the Payout Formula) will equal the number of PSUs that the Participant is granted as described in paragraph 4 (plus any additional PSUs added with respect to DEUs credited over the Award Cycle) times the Verizon Vested Percentage (as defined below). For example, if (a) the Participant is granted 1,000 PSUs, and (b) those PSUs are credited with an additional 200 PSUs as a result of DEUs paid over the Award Cycle, and (c) the Verizon Vested Percentage is XX%, the Participant will vest in (1,000 PSUs + 200 PSUs from DEUs) times XX%, or XX PSUs, which shall be payable in shares of Verizon common stock as described in paragraph 6.
(2) Definitions. For purposes of the performance requirement and Payout Formula set forth in paragraph 5(b)(1)
(i) Verizon Vested Percentage shall be an amount (between 0% and 200%), which is based on Verizons annual average Return on Equity during the Award Cycle, as provided in the following table:
Verizon Return on Equity | Verizon Vested Percentage | |
20% or higher | 200% | |
Equal to XX% | XX% | |
Equal to XX% | XX% | |
Less than 10% | 0% |
(ii) The Committee shall have the discretion to determine the applicable Verizon Vested Percentage to the extent that Verizons average annual Return on Equity during the Award Cycle is greater than 10% but less than XX% or greater than XX% but less than 20%; provided that such Verizon Vested Percentage must be between XX% and XX% and XX% and 200%, respectively. If Verizons average annual Return on Equity during the Award Cycle does not equal or exceed 10%, then no Award will be payable under this Agreement. If Verizons average annual Return on Equity during the Award Cycle is 20% or higher, then the maximum Vested Percentage of 200% shall be payable.
(iii) Return on Equity shall have the same meaning as described in Section 2.20 of Verizons Short-Term Incentive Plan and, consistent with the terms of the plan, will not be impacted by pension accounting.
(c) Five-Year Continuous Employment Requirement. Except as otherwise determined by the Committee, or except as otherwise provided in paragraph 7 (Early Cancellation/Accelerated Vesting of PSUs), the PSUs shall vest only if the Participant is continuously employed by the Company or a Related Company (as defined in paragraph 13) from the date the PSUs are granted through the end of the Award Cycle.
(d) Effect of a Termination for Cause. Notwithstanding Section 5(b), Section 5(c) or Section 7, if the Participants employment by the Company or a Related Company is terminated by the Company or a Related Company for Cause at any time prior to the date that the PSUs are paid pursuant to Section 6, the PSUs (whether vested or not) shall automatically terminate and be cancelled as of the applicable termination date without payment of any consideration by the Company and without any other action by the Participant. For purposes of this Agreement, Cause means (i) grossly incompetent performance or substantial or continuing inattention to or neglect of the duties and responsibilities assigned to the Participant; fraud, misappropriation or embezzlement; or a material breach of the Verizon Code of Conduct (as may be amended) or any of the Participants Obligations, all as determined by the Executive Vice President Human Resources of Verizon (or his or her designee) in his or her discretion, or (ii) commission of any felony of which the Participant is finally adjudged guilty by a court of competent jurisdiction.
(e) Transfer. Transfer of employment from Verizon to a Related Company, from a Related Company to Verizon, or from one Related Company to another Related Company shall not constitute a separation from employment hereunder, and service with a Related Company shall be treated as service with the Company for purposes of the five-year continuous employment requirement in paragraph 5(c).
6. Payment. All payments under this Agreement shall be made in shares of Verizon common stock except for any fractional shares, which shall be paid in cash. Subject to Section 5(d), as soon as practicable after the end of the Award Cycle (but in no event later than October 15, 2016) the number of shares of the vested PSUs (minus any withholding for taxes) shall be paid to the Participant. The number of shares that shall be paid (plus withholding for taxes) shall equal the number of vested PSUs (as provided in paragraph 5(b)). If the Participant dies before any payment due hereunder is made, such payment shall be made to the Participants beneficiary, as designated under paragraph 11. Once a payment has been made with respect to a PSU, the PSU shall be canceled; however, all other terms of the Agreement, including but not limited to the Participants Obligations, shall remain in effect. Moreover, the Participant is required to hold all shares that are paid under the terms of this Agreement for a minimum of two years after the date the shares become vested. Thus, the Participant is required to hold all shares paid under this Agreement at least through July 31, 2018. Such restriction shall not apply if the Participant dies or becomes disabled at any time prior to the end of this two-year holding period.
7. Early Cancellation/Accelerated Vesting of PSUs. Subject to the provisions of paragraph 5, PSUs may vest or be forfeited before the end of the Award Cycle as follows:
(a) Voluntary Separation (including Retirement) On or Before July 31, 2016, or Other Separation Not Described in Section 7(b). If the Participant (i) voluntarily separates from employment on or before July 31, 2016 for any reason, including Retirement, or (ii) otherwise separates from employment on or before July 31, 2016 under circumstances not described in paragraph 7(b), all then-unvested PSUs shall automatically terminate and be cancelled as of the applicable termination date without payment of any consideration by the Company and without any other action by the Participant.
For purposes of this Agreement, Retire and Retirement means (i) to retire after having attained at least 15 years of vesting service (as defined under the applicable Verizon tax-qualified 401(k) savings plan) and a combination of age and years of vesting service that equals or exceeds 75 points, or (ii) retirement under any other circumstances determined in writing by the Executive Vice President Human Resources of Verizon (or his or her designee), provided that, in the case of either (i) or (ii) in this paragraph, the retirement was not occasioned by a discharge for Cause.
(b) Involuntary Termination Without Cause On or Before July 31, 2016, or Termination Due to Death or Disability On or Before July 31, 2016.
(1) This paragraph 7(b) shall apply if the Participant separates from employment by reason of an involuntary termination without Cause (as determined by the Executive Vice President Human Resources of Verizon (or his or her designee)), death, or Disability (as defined below) on or before July 31, 2016. Disability shall mean the total and permanent disability of the Participant as defined by, or determined under, the Companys long-term disability benefit plan.
(2) If the Participant separates from employment on or before July 31, 2016 under circumstances described in paragraph 7(b)(1), the Participants then-unvested PSUs shall be subject to the vesting provisions set forth in paragraph 5(a) (without prorating the award), except that the five-year continuous employment requirement set forth in paragraph 5(c) shall not apply, provided that the Participant has not and does not commit a material breach of any of the Participants Obligations and provided that the Participant executes, within the time prescribed by Verizon, a release satisfactory to Verizon waiving any claims he may have against Verizon and any Related Company.
(3) Any PSUs that vest pursuant to paragraph 7(b)(2) shall be payable as soon as practicable after the end of the Award Cycle (but in no event later than October 15, 2016).
(c) Change in Control. If a Participant is involuntarily terminated without Cause within twelve (12) months following the occurrence of a Change in Control of Verizon (as defined in the Plan), all then-unvested PSUs shall vest and become payable (without prorating the award) by applying a Verizon Vested Percentage of no less than 100% to all then-unvested PSUs without regard to the performance requirement in paragraph 5(b) or the five-year continuous employment requirement in paragraph 5(c); however, all other terms of the Agreement, including but not limited to the Participants Obligations, shall remain in effect. A Change in Control or an involuntary termination without Cause that occurs after the end of the Award Cycle shall have no effect on whether any PSUs vest or become payable under this paragraph 7(c). All payments provided in this paragraph 7(c) shall be made at their regularly scheduled time as specified in paragraph 6.
(d) Vesting Schedule. Except and to the extent provided in paragraphs 7(b) and (c), nothing in this paragraph 7 shall alter the vesting schedule prescribed by paragraph 5.
8. Shareholder Rights. The Participant shall have no rights as a shareholder with respect to the PSUs until the date on which the Participant becomes the holder of record with respect to any shares of Verizon common stock to which this grant relates. Except as provided in the Plan or in this Agreement, no adjustment shall be made for dividends or other rights for which the record date occurs while the PSUs are outstanding.
9. Amendment of Agreement. Except to the extent required by law or specifically contemplated under this Agreement, neither the Committee nor the Executive Vice President Human Resources of Verizon (or his or her designee) may, without the written consent of the Participant, change any term, condition or
provision affecting the PSUs if the change would have a material adverse effect upon the PSUs or the Participants rights thereto. Nothing in the preceding sentence shall preclude the Committee or the Executive Vice President Human Resources of Verizon (or his or her designee) from exercising administrative discretion with respect to the Plan or this Agreement, and the exercise of such discretion shall be final, conclusive and binding. This discretion includes, but is not limited to, corrections of any errors, including but not limited to any administrative errors, determining the total percentage of PSUs that become payable, and determining whether the Participant has been discharged for Cause, has a disability, has Retired, has breached any of the Participants Obligations or has satisfied the requirements for vesting and payment under paragraphs 5 and 7 of this Agreement.
10. Assignment. The PSUs shall not be assigned, pledged or transferred except by will or by the laws of descent and distribution.
11. Beneficiary. The Participant shall designate a beneficiary in writing and in such manner as is acceptable to the Executive Vice President Human Resources of Verizon (or his or her designee). If the Participant fails to so designate a beneficiary, or if no such designated beneficiary survives the Participant, the Participants beneficiary shall be the Participants estate.
12. Other Plans and Agreements. Any payment received by the Participant pursuant to this Agreement shall not be taken into account as compensation in the determination of the Participants benefits under any pension, savings, life insurance, severance or other benefit plan maintained by Verizon or a Related Company. The Participant acknowledges that this Agreement or any prior PSU agreement shall not entitle the Participant to any other benefits under the Plan or any other plans maintained by the Company or a Related Company.
13. Company and Related Company. For purposes of this Agreement, Company means Verizon Communications Inc. Related Company means (a) any corporation, partnership, joint venture, or other entity in which Verizon Communications Inc. holds a direct or indirect ownership or proprietary interest of 50 percent or more, or (b) any corporation, partnership, joint venture, or other entity in which Verizon Communications Inc. holds a direct or indirect ownership or other proprietary interest of less than 50 percent but which, in the discretion of the Committee, is treated as a Related Company for purposes of this Agreement.
14. Employment Status. The grant of the PSUs shall not be deemed to constitute a contract of employment for a particular term between the Company or a Related Company and the Participant, nor shall it constitute a right to remain in the employ of any such Company or Related Company.
15. Withholding. The Participant acknowledges that he or she shall be responsible for any taxes that arise in connection with this grant of PSUs, and the Company shall make such arrangements as it deems necessary for withholding of any taxes it determines are required to be withheld pursuant to any applicable law or regulation.
16. Securities Laws. The Company shall not be required to make payment with respect to any shares of common stock prior to the admission of such shares to listing on any stock exchange on which the stock may then be listed and the completion of any registration or qualification of such shares under any federal or state law or rulings or regulations of any government body that the Company, in its discretion, determines to be necessary or advisable.
17. Committee Authority. The Committee shall have complete discretion in the exercise of its rights, powers, and duties under this Agreement. Any interpretation or construction of any provision of, and the determination of any question arising under, this Agreement shall be made by the Committee in its
discretion, as described in paragraph 9. The Committee and the Audit Committee may designate any individual or individuals to perform any of its functions hereunder and utilize experts to assist in carrying out their duties hereunder.
18. Successors. This Agreement shall be binding upon, and inure to the benefit of, any successor or successors of the Company and the person or entity to whom the PSUs may have been transferred by will, the laws of descent and distribution, or beneficiary designation. All terms and conditions of this Agreement imposed upon the Participant shall, unless the context clearly indicates otherwise, be deemed, in the event of the Participants death, to refer to and be binding upon the Participants heirs and beneficiaries.
19. Construction. In the event that any provision of this Agreement is held invalid or unenforceable, such provision shall be considered separate and apart from the remainder of this Agreement, which shall remain in full force and effect. In the event that any provision, including any of the Participants Obligations, is held to be unenforceable for being unduly broad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and shall be enforced as amended.
20. Defined Terms. Except where the context clearly indicates otherwise, all capitalized terms used herein shall have the definitions ascribed to them by the Plan, and the terms of the Plan shall apply where appropriate.
21. Execution of Agreement. The Participant shall indicate his consent and acknowledgment to the terms of this Agreement (including the Participants Obligations) and the Plan by executing this Agreement pursuant to the instructions provided and otherwise shall comply with the requirements of paragraph 3. In addition, by consenting to the terms of this Agreement and the Participants Obligations, the Participant expressly agrees and acknowledges that Fidelity may deliver all documents, statements and notices associated with the Plan and this Agreement to the Participant in electronic form. The Participant and Verizon hereby expressly agree that the use of electronic media to indicate confirmation, consent, signature, acceptance, agreement and delivery shall be legally valid and have the same legal force and effect as if the Participant and Verizon executed this Agreement (including the Participants Obligations) in paper form.
22. Confidentiality. Except to the extent otherwise required by law, the Participant shall not disclose, in whole or in part, any of the terms of this Agreement. This paragraph 22 does not prevent the Participant from disclosing the terms of this Agreement to the Participants spouse or beneficiary or to the Participants legal, tax, or financial adviser, provided that the Participant take all reasonable measures to assure that the individual to whom disclosure is made does not disclose the terms of this Agreement to a third party except as otherwise required by law.
23. Applicable Law. The validity, construction, interpretation and effect of this Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflicts of laws provisions thereof.
24. Notice. Any notice to the Company provided for in this Agreement shall be addressed to the Company in care of the Executive Vice President Human Resources of Verizon at 140 West Street, 29th Floor, New York, New York 10007 and any notice to the Participant shall be addressed to the Participant at the current address shown on the payroll of the Company, or to such other address as the Participant may designate to the Company in writing. Any notice shall be delivered by hand, sent by telecopy, sent by overnight carrier, or enclosed in a properly sealed envelope as stated above, registered and deposited, postage prepaid, in a post office regularly maintained by the United States Postal Service.
25. Dispute Resolution.
(a) General. Except as otherwise provided in paragraph 26 below, all disputes arising under or related to the Plan or this Agreement and all claims in which a Participant seeks damages or other relief that relate in any way to PSUs or other benefits of the Plan are subject to the dispute resolution procedure described below in this paragraph 25.
(i) For purposes of this Agreement, the term Units Award Dispute shall mean any claim against the Company or a Related Company, other than Employment Claims described in paragraph (a)(ii) below, regarding (A) the interpretation of the Plan or this Agreement, (B) any of the terms or conditions of the PSUs issued under this Agreement, or (C) allegations of entitlement to PSUs or additional PSUs, or any other benefits, under the Plan or this Agreement; provided, however, that any dispute relating to the Participants Obligations or to the forfeiture of an award as a result of a breach of any of the Participants Obligations shall not be subject to the dispute resolution procedures provided for in this paragraph 25.
(ii) For purposes of this Agreement, the term Units Damages Dispute shall mean any claims between the Participant and the Company or a Related Company (or against the past or present directors, officers, employees, representatives, or agents of the Company or a Related Company, whether acting in their capacity as such or otherwise), that are related in any way to the Participants employment or former employment, including claims of alleged employment discrimination, wrongful termination, or violations of Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act, 42 U.S.C. § 1981, the Fair Labor Standards Act, the Family Medical Leave Act, the Sarbanes-Oxley Act, or any other U.S. federal, state or local law, statute, regulation, or ordinance relating to employment or any common law theories of recovery relating to employment, such as breach of contract, tort, or public policy claims (Employment Claims), in which the damages or other relief sought relate in any way to PSUs or other benefits of the Plan or this Agreement.
(b) Internal Dispute Resolution Procedure. All Units Award Disputes, and all Units Damages Dispute alleging breach of contract, tort, or public policy claims with respect to the Plan or this Agreement (collectively, Plan Disputes), shall be referred in the first instance to the Verizon Employee Benefits Committee (EB Committee) for resolution internally within Verizon. Except where otherwise prohibited by law, all Plan Disputes must be filed in writing with the EB Committee no later than one year from the date that the dispute accrues. Consistent with paragraph 25(c)(i) of this Agreement, all decisions relating to the enforceability of the limitations period contained herein shall be made by the arbitrator. To the fullest extent permitted by law, the EB Committee shall have full power, discretion, and authority to interpret the Plan and this Agreement and to decide all Plan Disputes brought under this Plan and Agreement. Determinations made by the EB Committee shall be final, conclusive and binding, subject only to review by arbitration pursuant to paragraph (c) below under the arbitrary and capricious standard of review.
(c) Arbitration. All appeals from determinations by the EB Committee as described in paragraph (b) above, and any Units Damages Dispute, shall be fully and finally settled by arbitration administered by the American Arbitration Association (AAA) on an individual basis (and not on a collective or class action basis) before a single arbitrator pursuant to the AAAs Commercial Arbitration Rules in effect at the time any such arbitration is initiated. Any such arbitration must be initiated in writing pursuant to the aforesaid rules of the AAA no later than one year from the date
that the claim accrues, except where a longer limitations period is required by applicable law. Decisions about the applicability of the limitations period contained herein shall be made by the arbitrator. A copy of the AAAs Commercial Arbitration Rules may be obtained from Human Resources. The Participant agrees that the arbitration shall be held at the office of the AAA nearest the place of the Participants most recent employment by the Company or a Related Company, unless the parties agree in writing to a different location. All claims by the Company or a Related Company against the Participant, except for breaches of any of the Participants Obligations, may also be raised in such arbitration proceedings.
(i) The arbitrator shall have the authority to determine whether any dispute submitted for arbitration hereunder is arbitrable. The arbitrator shall decide all issues submitted for arbitration according to the terms of the Plan, this Agreement (except for breaches of any of the Participants Obligations), existing Company policy, and applicable substantive New York State and U.S. federal law and shall have the authority to award any remedy or relief permitted by such laws. The final decision of the EB Committee with respect to a Plan Dispute shall be upheld unless such decision was arbitrary or capricious. The decision of the arbitrator shall be final, conclusive, not subject to appeal, and binding and enforceable in any applicable court.
(ii) The Participant understands and agrees that, pursuant to this Agreement, both the Participant and the Company or a Related Company waive any right to sue each other in a court of law or equity, to have a trial by jury, or to resolve disputes on a collective, or class, basis (except for breaches of any of the Participants Obligations), and that the sole forum available for the resolution of Units Award Disputes and Units Damages Disputes is arbitration as provided in this paragraph 25. If an arbitrator or court finds that the arbitration provisions of this Agreement are not enforceable, both Participant and the Company or a Related Company understand and agree to waive their right to trial by jury of any Units Award Dispute or Units Damages Dispute. This dispute resolution procedure shall not prevent either the Participant or the Company or a Related Company from commencing an action in any court of competent jurisdiction for the purpose of obtaining injunctive relief to prevent irreparable harm pending and in aid of arbitration hereunder; in such event, both the Participant and the Company or a Related Company agree that the party who commences the action may proceed without necessity of posting a bond.
(iii) In consideration of the Participants agreement in paragraph (ii) above, the Company or a Related Company will pay all filing, administrative and arbitrators fees incurred in connection with the arbitration proceedings. If the AAA requires the Participant to pay the initial filing fee, the Company or a Related Company will reimburse the Participant for that fee. All other fees incurred in connection with the arbitration proceedings, including but not limited to each partys attorneys fees, will be the responsibility of such party.
(iv) The parties intend that the arbitration procedure to which they hereby agree shall be the exclusive means for resolving all Units Award Disputes (subject to the mandatory EB Committee procedure provided for in paragraph 25(b) above) and Units Damages Disputes. Their agreement in this regard shall be interpreted as broadly and inclusively as reason permits to realize that intent.
(v) The Federal Arbitration Act (FAA) shall govern the enforceability of this paragraph 25. If for any reason the FAA is held not to apply, or if application of the FAA requires consideration of state law in any dispute arising under this Agreement or subject to this dispute resolution provision, the laws of the State of New York shall apply without giving effect to the conflicts of laws provisions thereof.
(vi) To the extent an arbitrator determines that the Participant was not terminated for Cause and is entitled to the PSUs or any other benefits under the Plan pursuant to the provisions applicable to an involuntary termination without Cause, the Participants obligation to execute a release satisfactory to Verizon as provided under paragraph 7(b)(2) shall remain applicable in order to receive the benefit of any PSUs pursuant to this Agreement.
26. Additional Remedies. Notwithstanding the dispute resolution procedures, including arbitration, of paragraph 25 of this Agreement, and in addition to any other rights or remedies, whether legal, equitable, or otherwise, that each of the parties to this Agreement may have (including the right of the Company to terminate the Participant for Cause or to involuntarily terminate the Participant without Cause), the Participant acknowledges that
(a) The Participants Obligations are essential to the continued goodwill and profitability of the Company and any Related Company;
(b) The Participant has broad-based skills that will serve as the basis for other employment opportunities that are not prohibited by the Participants Obligations;
(c) When the Participants employment with the Company or any Related Company terminates, the Participant shall be able to earn a livelihood without violating any of the Participants Obligations;
(d) Irreparable damage to the Company or any Related Company shall result in the event that the Participants Obligations are not specifically enforced and that monetary damages will not adequately protect the Company or any Related Company from a breach of these Participants Obligations;
(e) If any dispute arises concerning the violation or anticipated or threatened violation by the Participant of any of the Participants Obligations, an injunction may be issued restraining such violation pending the determination of such controversy, and no bond or other security shall be required in connection therewith;
(f) The Participants Obligations shall continue to apply after any expiration, termination, or cancellation of this Agreement;
(g) The Participants breach of any of the Participants Obligations shall result in the Participants immediate forfeiture of all rights and benefits, including all PSUs and DEUs, under this Agreement; and
(h) All disputes relating to the Participants Obligations, including their interpretation and enforceability and any damages (including but not limited to damages resulting in the forfeiture of an award or benefits under this Agreement) that may result from the breach of such Participants Obligations shall not be subject to the dispute resolution procedures, including arbitration, of paragraph 25 of this Agreement, but shall instead be determined in a court of competent jurisdiction.
Exhibit A - Participants Obligations |
As part of the Agreement to which this Exhibit A is attached, you, the Participant, agree to the following obligations:
1. Noncompetition
(a) Prohibited Conduct During the period of your employment with the Company or any Related Company, and for a period ending twenty-four (24) months following a termination of your employment for any reason with the Company or any Related Company, you shall not, without the prior written consent of the Executive Vice President Human Resources of Verizon (or his or her designee):
(1) personally engage in Competitive Activities (as defined below); or
(2) work for, own, manage, operate, control, or participate in the ownership, management, operation, or control of, or provide consulting or advisory services to, any person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, or any company or person affiliated with such person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities; provided that your purchase or holding, for investment purposes, of securities of a publicly traded company shall not constitute ownership or participation in the ownership for purposes of this paragraph so long as your equity interest in any such company is less than a controlling interest;
provided that this paragraph (a) shall not prohibit you from (i) being employed by, or providing services to, a consulting firm, provided that you do not personally engage in Competitive Activities or provide consulting or advisory services to any person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, or any person or entity affiliated with such person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, or (ii) engaging in the practice of law as an in-house counsel, sole practitioner or as a partner in (or as an employee of or counsel to) a corporation or law firm in accordance with applicable legal and professional standards. Exception (ii), however, does not apply to any Participant that may be engaging in Competitive Activities or providing services to any person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, wherein such engagement or services being provided are not primarily the practice of law.
(b) Competitive Activities For purposes of the Agreement, to which this Exhibit A is attached, Competitive Activities means any activities relating to products or services of the same or similar type as the products or services (1) which were or are sold (or, pursuant to an existing business plan, will be sold) to paying customers of the Company or any Related Company, and (2) for which you have any direct or indirect responsibility or any involvement to plan, develop, manage, market, sell, oversee, support, implement or perform, or had any such responsibility or involvement within your most recent 24 months of employment with the Company or any Related Company. Notwithstanding the previous sentence, an activity shall not be treated as a Competitive Activity if the geographic marketing area of such same or similar products or services does not overlap with the geographic marketing area for the applicable products and services of the Company or any Related Company.
2. Interference With Business Relations During the period of your employment with the Company or any Related Company, and for a period ending twenty-four (24) months following a termination of
your employment for any reason with the Company or any Related Company, you shall not, without the prior written consent of the Executive Vice President Human Resources of Verizon (or his or her designee):
(a) recruit, induce or solicit, directly or indirectly, any employee of the Company or Related Company for employment or for retention as a consultant or service provider to any person or entity;
(b) hire or participate (with another person or entity) in the process of recruiting, soliciting or hiring , directly or indirectly, (other than for the Company or any Related Company) any person who is then an employee of the Company or any Related Company, or provide , directly or indirectly, names or other information about any employees of the Company or Related Company to any person or entity (other than to the Company or any Related Company) under circumstances that could lead to the use of any such information for purposes of recruiting, soliciting or hiring any such employee for any person or entity;
(c) interfere, or attempt to interfere, directly or indirectly, with any relationship of the Company or any Related Company with any of its employees, agents, or representatives;
(d) solicit or induce, or in any manner attempt to solicit or induce, directly or indirectly, any client, customer, or prospect of the Company or any Related Company (1) to cease being, or not to become, a customer of the Company or any Related Company, or (2) to divert any business of such customer or prospect from the Company or any Related Company; or
(e) otherwise interfere with, disrupt, or attempt to interfere with or disrupt, directly or indirectly, the relationship, contractual or otherwise, between the Company or any Related Company and any of its customers, clients, prospects, suppliers, consultants, employees, agents, or representatives.
3. Effect of a Material Restatement of Financial Results; Recoupment
(a) General. Notwithstanding anything in this Agreement to the contrary, you agree that, with respect to all PSUs granted to you on or after January 1, 2007 and all short-term incentive awards made to you on or after January 1, 2007, to the extent the Company or any Related Company is required to materially restate any financial results based upon your willful misconduct or gross negligence while employed by the Company or any Related Company (and where such restatement would have resulted in a lower payment being made to you), you will be required to repay all previously paid or deferred (i) PSUs and (ii) short-term incentive awards that were provided to you during the performance periods that are the subject of the restated financial results, plus a reasonable rate of interest. For purposes of this paragraph, willful misconduct and gross negligence shall be as determined by the Committee. The Audit Committee of the Verizon Board of Directors shall determine whether a material restatement of financial results has occurred. If you do not repay the entire amount required under this paragraph, the Company may, to the extent permitted by applicable law, offset your obligation to repay against any source of income available to it, including but not limited to any money you may have in your nonqualified deferral accounts.
(b) Requirements of Recoupment Policy or Applicable Law. The repayment rights contained in paragraph 3(a) of Exhibit A shall be in addition to, and shall not limit, any other rights or remedies that the Company may have under law or in equity, including, without limitation, (i) any right that the Company may have under any Company recoupment policy that may apply to you, or (ii) any right or obligation that the Company may have regarding the clawback of incentive-based compensation under Section 10D of the Securities Exchange Act of 1934, as amended (as determined by the applicable rules and regulations promulgated thereunder from time to time by the U.S. Securities and
Exchange Commission) or under any other applicable law. By accepting this award of PSUs, you agree and consent to the Companys application, implementation and enforcement of any such Company recoupment policy (as it may be in effect from time to time) that may apply to you and any provision of applicable law relating to cancellation, rescission, payback or recoupment of compensation and expressly agree that the Company may take such actions as are permitted under any such policy (as applicable to you) or applicable law, such as the cancellation of PSUs and repayment of amounts previously paid or deferred with respect to any previously granted PSUs or short-term incentive awards, without further consent or action being required by you.
4. Return Of Company Property; Ownership of Intellectual Property Rights You agree that on or before termination of your employment for any reason with the Company or any Related Company, you shall return to the Company all property owned by the Company or any Related Company or in which the Company or any Related Company has an interest or to which the Company or any Related Company has any obligation, including any and all files, documents, data, records and any other non-public information (whether on paper or in tapes, disks, memory devices, or other machine-readable form), office equipment, credit cards, and employee identification cards. You acknowledge that the Company (or, as applicable, a Related Company) is the rightful owner of, and you hereby do grant and assign, all right, title and interest in and to any programs; ideas, inventions and discoveries (patentable or unpatentable); works of authorship, data, information, and other copyrightable material; and trademarks that you may have originated , created or developed, or assisted or participated in originating, creating or developing, during your period of employment with the Company or a Related Company, including all intellectual property rights in or based on the foregoing, where any such origination , creation or development (a) involved any use of Company or Related Company time, information or resources, (b) was made in the exercise of any of your duties or responsibilities for or on behalf of the Company or a Related Company, or (c) was related to (i) the Companys or a Related Companys past, present or future business, or (ii) the Companys or a Related Companys actual or demonstrably anticipated research, development or procurement activities. You shall at all times, both before and after termination of your employment, cooperate with the Company (or, as applicable, any Related Company) and its representatives in executing and delivering documents requested by the Company or a Related Company, and taking any other actions, that are necessary or requested by the Company or a Related Company to assist the Company or any Related Company in patenting, copyrighting, protecting, registering , or enforcing any programs; ideas, inventions and discoveries (patentable or unpatentable); works of authorship, data, information, and other copyrightable material; trademarks; or other intellectual property rights, and to vest title thereto solely in the Company (or, as applicable, a Related Company).
5. Proprietary And Confidential Information You shall at all times, including after any termination of your employment with the Company or any Related Company, preserve the confidentiality of all Proprietary Information (defined below) and trade secrets of the Company or any Related Company, and you shall not use for the benefit of yourself or any person, other than the Company or a Related Company, or disclose to any person, except and to the extent that disclosure of such information is legally required, any Proprietary Information or trade secrets of the Company or any Related Company. Proprietary Information means any information or data related to the Company or any Related Company, including information entrusted to the Company or a Related Company by others, which has not been fully disclosed to the public by the Company or a Related Company, which is treated as confidential or otherwise protected within the Company or any Related Company or is of value to competitors, such as strategic or tactical business plans; undisclosed business, operational or financial data; ideas, processes, methods, techniques, systems, models, devices, programs, computer software, or related information; documents relating to regulatory matters or correspondence with governmental entities; information concerning any past, pending, or threatened legal dispute; pricing or cost data; the identity, reports or analyses of business prospects; business transactions (including those that are contemplated or planned); research data; personnel information or data; identities of suppliers to the
Company or any Related Company or users or purchasers of the Companys or Related Companys products or services; the Agreement to which this Exhibit A is attached; and any other non-public information pertaining to or known by the Company or a Related Company, including confidential or non-public information of a third party that you know or should know the Company or a Related Company is obligated to protect.
6. Definitions Except where clearly provided to the contrary or as otherwise defined in this Exhibit A, all capitalized terms used in this Exhibit A shall have the definitions given to those terms in the Agreement to which this Exhibit A is attached.
7. Agreement to Participants Obligations You shall indicate your agreement to these Participants Obligations in accordance with the instructions provided in the Agreement, and your acceptance of the Agreement shall include your acceptance of these Participants Obligations. As stated in paragraph 21 of the Agreement, you and Verizon hereby expressly agree that the use of electronic media to indicate confirmation, consent, signature, acceptance, agreement and delivery shall be legally valid and have the same legal force and effect as if you and Verizon executed these Participants Obligations in paper form.
EXHIBIT 12
Computation of Ratio of Earnings to Fixed Charges
Verizon Communications Inc. and Subsidiaries
(dollars in millions) | Nine Months Ended September 30, 2011 |
|||
Earnings: |
||||
Income before provision for income taxes |
$ | 12,285 | ||
Equity in earnings of unconsolidated businesses |
(347 | ) | ||
Dividends from unconsolidated businesses |
449 | |||
Interest expense (1) |
2,124 | |||
Portion of rent expense representing interest |
607 | |||
Amortization of capitalized interest |
115 | |||
|
|
|||
Earnings, as adjusted |
$ | 15,233 | ||
|
|
|||
Fixed Charges: |
||||
Interest expense (1) |
$ | 2,124 | ||
Portion of rent expense representing interest |
607 | |||
Capitalized interest |
341 | |||
|
|
|||
Fixed Charges |
$ | 3,072 | ||
|
|
|||
Ratio of earnings to fixed charges |
4.96 | |||
|
|
(1) | We classify interest expense recognized on uncertain tax positions as income tax expense and therefore such interest expense is not included in the Ratio of Earnings to Fixed Charges. |
I, Lowell C. McAdam, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Verizon Communications Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: October 25, 2011 |
/s/ Lowell C. McAdam | |
Lowell C. McAdam | ||
President and Chief Executive Officer |
EXHIBIT 31.2
I, Francis J. Shammo, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Verizon Communications Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: October 25, 2011 |
/s/ Francis J. Shammo | |
Francis J. Shammo | ||
Executive Vice President and Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE
I, Lowell C. McAdam, President and Chief Executive Officer of Verizon Communications Inc. (the Company), certify that:
(1) | the report of the Company on Form 10-Q for the quarterly period ending September 30, 2011 (the Report) fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (the Exchange Act); and |
(2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods referred to in the Report. |
Date: October 25, 2011 |
/s/ Lowell C. McAdam | |
Lowell C. McAdam | ||
President and Chief Executive Officer |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Verizon Communications Inc. and will be retained by Verizon Communications Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE
I, Francis J. Shammo, Executive Vice President and Chief Financial Officer of Verizon Communications Inc. (the Company), certify that:
(1) | the report of the Company on Form 10-Q for the quarterly period ending September 30, 2011 (the Report) fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (the Exchange Act); and |
(2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods referred to in the Report. |
Date: October 25, 2011 |
/s/ Francis J. Shammo | |
Francis J. Shammo | ||
Executive Vice President and Chief Financial Officer |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Verizon Communications Inc. and will be retained by Verizon Communications Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Segment Information (Reconciliation Of Total Reportable Segments Operating Revenues To Consolidated Operating Revenues) (Details) (USD $) In Millions | 3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |
Segment reporting information, revenue | $ 27,875 | $ 26,536 | $ 82,443 | $ 78,197 |
Deferred revenue adjustment | (235) | |||
Operating revenues | 27,913 | 26,484 | 82,439 | 80,170 |
Revenue Generated by Assets Sold [Member] | ||||
Operating revenues | 2,407 | |||
Corporate and Other [Member] | ||||
Segment reporting information, revenue | $ 38 | $ (52) | $ (4) | $ (199) |
Condensed Consolidated Balance Sheet (Parenthetical) (USD $) In Millions, except Share data | Sep. 30, 2011 | Dec. 31, 2010 |
---|---|---|
Condensed Consolidated Balance Sheet | ||
Accounts receivable, allowances | $ 833 | $ 876 |
Series preferred stock, par value | $ 0.1 | $ 0.1 |
Series preferred stock, shares issued | 0 | 0 |
Common stock, par value | $ 0.1 | $ 0.1 |
Common stock, shares issued | 2,967,610,119 | 2,967,610,119 |
Segment Information (Tables) | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Information | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating Financial Information For Reportable Segments |
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Reconciliation Of Assets From Segment To Consolidated |
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Reconciliation Of Total Reportable Segments Operating Revenues To Consolidated Operating Revenues |
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Reconciliation Of Total Reportable Segments Operating Income To Consolidated Income Before (Provision) Benefit For Income Taxes |
|
Document And Entity Information | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Document And Entity Information | |
Document Type | 10-Q |
Amendment Flag | false |
Document Period End Date | Sep. 30, 2011 |
Document Fiscal Year Focus | 2011 |
Document Fiscal Period Focus | Q3 |
Entity Registrant Name | VERIZON COMMUNICATIONS INC |
Entity Central Index Key | 0000732712 |
Current Fiscal Year End Date | --12-31 |
Trading Symbol | VZ |
Entity Filer Category | Large Accelerated Filer |
Entity Common Stock, Shares Outstanding | 2,831,090,656 |
Segment Information (Narrative) (Details) (USD $) In Millions, unless otherwise specified | 3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |
Non-cash adjustments to wireless date revenues | $ 235 | |||
Number of customers individually accounting for more than ten percent of total operating revenues | 0 | 0 | 0 | 0 |
Wireline [Member] | ||||
Number of countries outside the United States of America to which our Wireline segment provides products and services | 150 | 150 |
Equity And Comprehensive Income (Schedule Of Components In Accumulated Other Comprehensive Income) (Details) (USD $) In Millions | Sep. 30, 2011 | Dec. 31, 2010 |
---|---|---|
Equity And Comprehensive Income | ||
Foreign currency translation adjustments | $ 827 | $ 843 |
Net unrealized gain on cash flow hedges | 153 | 126 |
Unrealized gain on marketable securities | 49 | 79 |
Defined benefit pension and postretirement plans | 8 | 1 |
Accumulated Other Comprehensive Income | $ 1,037 | $ 1,049 |
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Employee Benefits | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Employee Benefits | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Employee Benefits |
We maintain non-contributory defined benefit pension plans for many of our employees. In addition, we maintain postretirement health care and life insurance plans for our retirees and their dependents, which are both contributory and non-contributory, and include a limit on our share of the cost for certain recent and future retirees. In accordance with our accounting policy for pension and other postretirement benefits, 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. Net Periodic Benefit Cost The following table summarizes the benefit cost related to our pension and postretirement health care and life insurance plans:
Severance, Pension and Benefit Charges During the three and nine months ended September 30, 2011, we recorded net pre-tax severance, pension and benefits charges of $0.3 billion, including pension settlement losses, for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses upon a remeasurement event. During the three and nine months ended September 30, 2010, we recorded net pre-tax severance, pension and benefits charges of $1.2 billion and $5.1 billion, respectively. The charges during the three and nine months ended September 30, 2010 included remeasurement losses of $1.2 billion and $2.9 billion, respectively, for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses upon a remeasurement event. 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. Additionally, during the nine months ended September 30, 2010, we reached an agreement 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, 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 $1.0 billion for severance for the 2010 separation programs mentioned above and a planned workforce reduction of approximately 2,500 employees in 2011. In addition, we recorded $1.2 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.
Severance Payments During the three and nine months ended September 30, 2011, we paid severance benefits of $0.1 billion and $0.4 billion, respectively. At September 30, 2011, we had a remaining severance liability of $1.2 billion, a portion of which includes future contractual payments to employees separated as of September 30, 2011. Employer Contributions During the three months ended September 30, 2011, we contributed $25 million to our nonqualified pension plans and $0.4 billion to our other postretirement benefit plans. During the nine months ended September 30, 2011, we contributed $0.4 billion to our qualified pension trusts, $0.1 billion to our nonqualified pension plans and $1.1 billion to our other postretirement benefit plans. We do not expect to make additional qualified pension plan contributions during the remainder of 2011. Medicare Part D Subsidy Under 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), 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 are 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. |
Wireless Licenses, Goodwill And Other Intangible Assets (Narrative) (Details) (USD $) | Sep. 30, 2011 | Dec. 31, 2010 |
---|---|---|
Gross Amount | $ 13,320,000,000 | $ 12,481,000,000 |
Wireless Licenses [Member] | ||
Wireless licenses under development | 2,800,000,000 | 12,200,000,000 |
Terremark [Member] | ||
Gross Amount | $ 400,000,000 |
Employee Benefits (Benefit Or Income Cost Related To Pension And Postretirement Health Care And Life Insurance) (Details) (USD $) In Millions | 3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |
Remeasurement loss, net | $ 1,200 | $ 2,900 | ||
Pension Plans, Defined Benefit [Member] | ||||
Service cost | 77 | 85 | 230 | 268 |
Amortization of prior service cost (credit) | 18 | 27 | 54 | 82 |
Subtotal | 95 | 112 | 284 | 350 |
Expected return on plan assets | (494) | (537) | (1,482) | (1,638) |
Interest cost | 397 | 445 | 1,192 | 1,352 |
Subtotal | (2) | 20 | (6) | 64 |
Remeasurement loss, net | 329 | 1,188 | 309 | 1,751 |
Net periodic benefit cost | 303 | 1,815 | ||
Curtailment and termination benefits | 854 | |||
Total | 327 | 1,208 | 303 | 2,669 |
Health Care And Life [Member] | ||||
Service cost | 74 | 75 | 224 | 231 |
Amortization of prior service cost (credit) | (15) | 94 | (43) | 282 |
Subtotal | 59 | 169 | 181 | 513 |
Expected return on plan assets | (40) | (63) | (122) | (189) |
Interest cost | 356 | 408 | 1,066 | 1,231 |
Subtotal | 375 | 514 | 1,125 | 1,555 |
Remeasurement loss, net | 1,100 | |||
Net periodic benefit cost | 1,125 | 2,655 | ||
Curtailment and termination benefits | 386 | |||
Total | $ 375 | $ 514 | $ 1,125 | $ 3,041 |
Stock-Based Compensation (Narrative) (Details) (USD $) In Billions, except Share data in Millions, unless otherwise specified | 9 Months Ended | |||
---|---|---|---|---|
Sep. 30, 2011 | Sep. 30, 2011
Restricted Stock Units and Performance Stock Units [Member] | Sep. 30, 2011
Restricted Stock Units [Member] | Sep. 30, 2010
Restricted Stock Units [Member] | |
Maximum number of shares available for awards under the Long-Term Incentive Plan | 119.6 | |||
Unrecognized compensation expense related to the unvested portion of Verizon's RSUs and PSUs | $ 0.5 | |||
Weighted-average period of unrecognized compensation expense related to the unvested portion of Verizon's RSUs and PSUs (in years) | 2 | |||
Weighted-average grant date fair value per unit | $ 36.38 | $ 28.63 | ||
Percentage of fair market value of Verizon common stock on the grant date | 100.00% | |||
Period of stock option life following date of grant, in years | 10 | |||
Vesting period of stock options, in years | three |
Acquisitions And Divestitures (Narrative) (Details) (USD $) | 1 Months Ended | 3 Months Ended | 9 Months Ended | 9 Months Ended | 3 Months Ended | 3 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Apr. 30, 2011 | Sep. 30, 2010 | Jun. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | Dec. 31, 2010 | Jul. 31, 2010 | Sep. 30, 2011
Acquired Customer Relationships | Sep. 30, 2011
Acquired Other Intangible Assets
years | Jan. 31, 2009
States With Operating Markets Divested as Regulatory Condition [Member]
Alltel Divestiture Markets [Member] | Sep. 30, 2010
AT&T [Member] | Aug. 23, 2010
AT&T [Member] | Jun. 30, 2010
AT&T Mobility [Member]
Alltel Divestiture Markets [Member] | Apr. 30, 2011
Terremark Acquisition Cash Paid Per Share [Member] | Sep. 30, 2010
Spinco [Member] | Sep. 30, 2010
Spinco [Member] | Jan. 31, 2009
Alltel Divestiture Markets [Member] | Jun. 30, 2010
ATN Divestiture [Member] | Sep. 30, 2010
Alltel Acquisition [Member] | Sep. 30, 2010
Alltel Acquisition [Member] | Jul. 31, 2010
Verizon Stockholder Interests Following Merger Between Frontier and Spinco [Member] | |
Cost related to acquisition | $ 19 | ||||||||||||||||||||
Cash acquired from acquisition | 100,000,000 | ||||||||||||||||||||
Amortization period for acquired customer relationships - years | 13 | ||||||||||||||||||||
Amortization period for acquired other intangibles - years | 5 | ||||||||||||||||||||
Costs incurred related to the separation of the wireline facilities and operations in the markets that were divested to operate on a stand-alone basis subsequent to the closing of the transaction with Frontier | 100,000,000 | 500,000,000 | |||||||||||||||||||
Number of operating markets divested as regulatory condition of acquisition | 105 | ||||||||||||||||||||
Number of states with certain local exchange and related landline assets that were spun off | 14 | ||||||||||||||||||||
Number of states with operating markets divested as regulatory condition of acquisition | 24 | ||||||||||||||||||||
Total value of the Spinco transaction to Verizon and its stockholders | 8,600,000,000 | ||||||||||||||||||||
Number of operating markets divested | 79 | 26 | |||||||||||||||||||
Number of operating markets acquired | 6 | ||||||||||||||||||||
Cash amount paid to Verizon for licenses and network assets related to Alltel divestiture markets | 2,594,000,000 | 2,400,000,000 | 200,000,000 | ||||||||||||||||||
Approximate tax charge for the taxable gain on the excess of book over tax basis of the goodwill associated with the Alltel Divestiture Markets | 200,000,000 | ||||||||||||||||||||
Acquisitions | 200,000,000 | ||||||||||||||||||||
Wireless licenses | 73,203,000,000 | 72,996,000,000 | 100,000,000 | ||||||||||||||||||
Goodwill acquired | 1,549,000,000 | 100,000,000 | |||||||||||||||||||
Merger integration and acquisition related charges | $ 13,000,000 | $ 159,000,000 | $ 451,000,000 | $ 200,000,000 | $ 500,000,000 |
Wireless Licenses, Goodwill And Other Intangible Assets (Tables) | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Wireless Licenses, Goodwill And Other Intangible Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes In The Carrying Amount Of Wireless Licenses |
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Changes In The Carrying Amount Of Goodwill |
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Composition Of Other Intangible Assets, Net |
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Amortization Expense For Other Intangible Assets |
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Estimated Annual Amortization Expense For Other Intangible Assets |
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Wireless Licenses, Goodwill And Other Intangible Assets | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Wireless Licenses, Goodwill And Other Intangible Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Wireless Licenses, Goodwill And Other Intangible Assets |
Wireless Licenses Changes in the carrying amount of Wireless licenses are as follows:
During the year ended December 31, 2010, approximately $12.2 billion of wireless licenses were under development for commercial service for which we were capitalizing interest costs. In December 2010, a substantial portion of these licenses were placed in service in connection with our deployment of fourth-generation Long-Term Evolution technology services. As of September 30, 2011, approximately $2.8 billion of wireless licenses remained under development for commercial service. Goodwill Changes in the carrying amount of Goodwill are as follows:
Other Intangible Assets The following table displays the composition of Other intangible assets, net:
Customer lists and Other at September 30, 2011 include $0.4 billion related to the Terremark acquisition (see Note 2). The amortization expense for other intangible assets was as follows:
Estimated annual amortization expense for other intangible assets is as follows:
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Fair Value Measurements (Narrative) (Details) (USD $) | 3 Months Ended | 9 Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2011 | Apr. 30, 2011 | Dec. 31, 2010 | Dec. 31, 2010
Forward Interest Rate Swaps [Member] | Sep. 30, 2011
Interest Rate Swap [Member] | Dec. 31, 2010
Interest Rate Swap [Member] | Sep. 30, 2011
Cross Currency Swap [Member] | Sep. 30, 2010
Cross Currency Swap [Member] | Sep. 30, 2011
Cross Currency Swap [Member] | Sep. 30, 2010
Cross Currency Swap [Member] | |
Interest rate fair value hedge liability at fair value | $ 100,000,000 | $ 600,000,000 | $ 300,000,000 | |||||||
Notional amount of interest rate fair value hedge derivatives | 1,000,000,000 | 1,400,000,000 | 8,000,000,000 | |||||||
Proceeds from other debt | 2,400,000,000 | |||||||||
Fair value of cross currency swaps designated as cash flow hedges | 100,000,000 | 100,000,000 | ||||||||
Other comprehensive income, unrealized gain (loss) on derivatives arising during period, before tax | $ (200,000,000) | $ 200,000,000 | $ (200,000,000) |
Segment Information | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Information | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Information |
Reportable Segments We have two reportable segments, which we operate and manage as strategic business units and organize by products and services. We measure and evaluate our reportable segments based on segment operating income, consistent with the chief operating decision maker's assessment of segment performance. Corporate, eliminations and other includes unallocated corporate expenses, intersegment eliminations recorded in consolidation, the results of other businesses, such as our investments in unconsolidated businesses, pension and other employee benefit related costs, lease financing, as well as 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. Corporate, eliminations and other during the nine months ended September 30, 2010 includes a non-cash adjustment of $235 million, primarily to adjust wireless data revenues. This adjustment was recorded to properly defer previously recognized wireless data revenues that were earned and recognized in future periods. Our segments and their principal activities consist of the following:
The following table provides operating financial information for our two reportable segments:
A reconciliation of the segment operating revenues to consolidated operating revenues is as follows:
A reconciliation of the total of the reportable segments' operating income to consolidated income before provision for income taxes is as follows:
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 three and nine months ended September 30, 2011 and 2010. |
Fair Value Measurements (Tables) | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Assets Measured At Fair Value On A Recurring Basis |
(1)quoted prices in active markets for identical assets or liabilities (2)observable inputs other than quoted prices in active markets for identical assets and liabilities (3)no observable pricing inputs in the market | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Fair Value Of Short-Term And Long-Term Debt, Excluding Capital Leases |
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Fair Value and Carrying Value of Short-term and Long-term Debt, Excluding Capital Leases [Member] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Fair Value Of Short-Term And Long-Term Debt, Excluding Capital Leases |
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Commitments And Contingencies | 9 Months Ended | ||
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Sep. 30, 2011 | |||
Commitments And Contingencies | |||
Commitments And Contingencies |
In the ordinary course of business Verizon is involved in various legal and regulatory proceedings at the state and federal level. Where it is determined, in consultation with counsel based on litigation and settlement risks, that a loss is probable and estimable in a given matter, the Company establishes an accrual for it. In none of the currently pending matters, including the Hicksville matter described below, is the amount of accrual material. An estimate of the reasonably possible loss or range of loss in excess of the amounts already accrued cannot be made at this time, due to various factors typical in contested proceedings, including (1) uncertain damage theories and demands; (2) a less than complete factual record; (3) uncertainty concerning legal theories and their resolution by courts or regulators; and (4) the unpredictable nature of the opposing party and its demands. We continuously monitor these proceedings as they develop and adjust any accrual or disclosure as needed. We do not expect that the ultimate resolution of any pending regulatory or legal matter in future periods, including the Hicksville matter, 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. |
Wireless Licenses, Goodwill And Other Intangible Assets (Estimated Annual Amortization Expense For Other Intangible Assets Table) (Details) (USD $) In Millions | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Wireless Licenses, Goodwill And Other Intangible Assets | |
2011 | $ 1,504 |
2012 | 1,351 |
2013 | 1,182 |
2014 | 871 |
2015 | $ 682 |
Equity And Comprehensive Income | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Equity And Comprehensive Income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity And Comprehensive Income |
Equity Changes in the components of Total equity were as follows:
Noncontrolling interests included in our condensed consolidated financial statements primarily consist of Vodafone Group Plc's 45% ownership interest in Verizon Wireless. On July 28, 2011, the Board of Representatives of Verizon Wireless declared a distribution to its owners, payable on January 31, 2012 in proportion to their partnership interests on that date, in the aggregate amount of $10 billion. As a result, based on current ownership interests in Verizon Wireless, we will receive a cash payment of $5.5 billion and Vodafone Group Plc will receive a cash payment of $4.5 billion on the distribution date, which is included in Other current liabilities on our condensed consolidated balance sheet.
Comprehensive Income 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 income tax expense (benefit), are described below.
Other comprehensive income attributable to noncontrolling interest primarily reflects activity related to cross currency swaps (see Note 5). Foreign Currency Translation Adjustments The change in Foreign currency translation adjustments for the three months ended September 30, 2011 and the nine months ended September 30, 2010 was primarily due to the strengthening of the U.S. dollar against the Euro. The change for the three months ended September 30, 2010 was primarily due to the weakening of the U.S. dollar against the Euro. Unrealized Gain (Loss) on Marketable Securities Gross unrealized gains and losses on marketable securities for the three and nine months ended September 30, 2011 and 2010 were not significant. The components of Accumulated other comprehensive income were as follows:
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Commitments And Contingencies (Details) | 12 Months Ended |
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Dec. 31, 2001 | |
Commitments And Contingencies | |
Guarantee obligations, term, number of years | 30 |
Basis Of Presentation | 9 Months Ended | ||
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Sep. 30, 2011 | |||
Basis Of Presentation | |||
Basis Of Presentation |
The accompanying unaudited condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements included in the Verizon Communications Inc. (Verizon or the Company) Annual Report on Form 10-K for the year ended December 31, 2010. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year. We have reclassified prior year amounts to conform to the current year presentation. Recently Adopted Accounting Standards Revenue Recognition – Multiple Deliverable Arrangements In both our Domestic Wireless and Wireline segments, we offer products and services to our customers through bundled arrangements. These arrangements involve multiple deliverables which may include products, services, or a combination of products and services. On January 1, 2011, we prospectively adopted the accounting standard updates regarding revenue recognition for multiple deliverable arrangements, and arrangements that include software elements. These updates require a vendor to allocate revenue in an arrangement using its best estimate of selling price if neither vendor specific objective evidence (VSOE) nor third party evidence (TPE) of selling price exists. The residual method of revenue allocation is no longer permissible. These accounting standard updates do not change our units of accounting for bundled arrangements, nor do they materially change how we allocate arrangement consideration to our various products and services. Accordingly, the adoption of these standard updates did not have a significant impact on our consolidated financial statements. Additionally, we do not currently foresee any changes to our products, services or pricing practices that will have a significant effect on our consolidated financial statements in periods after the initial adoption, although this could change. Domestic Wireless Our Domestic Wireless segment earns revenue primarily by providing access to and usage of its network. In general, access revenue is billed one month in advance and recognized when earned. Usage revenue is generally billed in arrears and recognized when service is rendered. Equipment sales revenue associated with the sale of wireless handsets and accessories is recognized when the products are delivered to and accepted by the customer, as this is considered to be a separate earnings process from providing wireless services. For agreements involving the resale of third-party services in which we are considered the primary obligor in the arrangements, we record the revenue gross at the time of the sale. Wireless bundled service plans primarily consist of wireless voice and data services. The bundling of a voice plan with a text messaging plan ("Talk & Text"), for example, creates a multiple deliverable arrangement consisting of a voice component and a data component in the form of text messaging. For these arrangements, revenue is allocated to each deliverable using a relative selling price method. Under this method, arrangement consideration is allocated to each separate deliverable based on our standalone selling price for each product or service, up to the amount that is not contingent upon providing additional services. For equipment sales, we currently subsidize the cost of wireless devices. The amount of this subsidy is generally contingent on the arrangement and terms selected by the customer. The equipment revenue is recognized up to the amount collected when the wireless device is sold. Wireline Our Wireline segment earns revenue based upon usage of its network and facilities and contract fees. In general, fixed monthly fees for voice, video, data and certain other services are billed one month in advance and recognized when earned. Revenue from services that are not fixed in amount and are based on usage is generally billed in arrears and recognized when service is rendered.
We sell each of the services offered in bundled arrangements (i.e., voice, video and data), as well as separately; therefore each product or service has a standalone selling price. For these arrangements revenue is allocated to each deliverable using a relative selling price method. Under this method, arrangement consideration is allocated to each separate deliverable based on our standalone selling price for each product or service. These services include FiOS services, individually or in bundles, and High Speed Internet. When we bundle equipment with maintenance and monitoring services, we recognize equipment revenue when the equipment is installed in accordance with contractual specifications and ready for the customer's use. The maintenance and monitoring services are recognized monthly over the term of the contract as we provide the services. Long-term contracts for network installation 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. For certain products and services, where neither VSOE nor TPE exists, we determine relative selling price based on our best estimate of the standalone selling price taking into consideration market conditions, as well as company specific factors such as geography, competitive landscape, internal costs and general pricing practices. Leasing Arrangements 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, or internal credit risk grades, that take into account historical loss experience, the value of the underlying collateral, delinquency trends, industry and general economic conditions. The credit quality of our lessees primarily varies 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. Earnings Per Common Share Stock options and restricted stock units outstanding that were included in the computation of diluted earnings per common share totaled approximately 5 million and 6 million during the three and nine months ended September 30, 2011, respectively. Certain outstanding options to purchase shares 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 19 million weighted-average shares for the three and nine months ended September 30, 2011, respectively. As a result of the Net loss attributable to Verizon for the nine months ended September 30, 2010, diluted earnings per share is the same as basic earnings per share. If there had been net income for the nine months ended September 30, 2010, there would have been a total of approximately 2 million stock options and restricted stock units outstanding included in the computation of diluted earnings per share. There were a total of approximately 2 million stock options and restricted stock units outstanding included in the computation of diluted earnings per common share for the three months ended September 30, 2010. Certain outstanding options to purchase shares 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 59 million weighted-average shares and 78 million weighted-average shares for the three and nine months ended September 30, 2010. Recent Accounting Standards In May 2011, an accounting standard update regarding fair value measurement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. This standard update also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. We will adopt this standard update during the first quarter of 2012. The adoption of this standard update is not expected to have a significant impact on our consolidated financial statements. In June 2011, an accounting standard update regarding the presentation of comprehensive income was issued to increase the prominence of items reported in other comprehensive income. The update requires that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate, but consecutive statements. This standard update is effective during the first quarter of 2012. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements. In September 2011, an accounting standard update regarding testing of goodwill for impairment was issued. This standard update gives companies the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This standard update is effective during the first quarter of 2012. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements. |
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Debt | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt |
Changes to debt during the nine months ended September 30, 2011 are as follows:
During March 2011, Verizon issued $6.25 billion aggregate principal amount of fixed and floating rate notes resulting in cash proceeds of approximately $6.19 billion, net of discounts and issuance costs. The net proceeds were used for the repayment of commercial paper, the retirement of certain outstanding notes issued by our telephone operating company subsidiaries and other general corporate purposes. The issuances consisted of the following: $1.0 billion Notes due 2014 that bear interest at a rate equal to three-month London Interbank Offered Rate (LIBOR) plus 0.61%, $1.5 billion 1.95% Notes due 2014, $1.25 billion 3.00% Notes due 2016, $1.5 billion 4.60% Notes due 2021 and $1.0 billion 6.00% Notes due 2041. In addition, during 2011, we utilized $0.3 billion under fixed rate vendor financing facilities. During April 2011, we redeemed $1.0 billion of 5.65% Verizon Pennsylvania Inc. Debentures due November 15, 2011 at a redemption price of 102.9% of the principal amount of the debentures, plus accrued and unpaid interest through the date of redemption, and $1.0 billion of 6.50% Verizon New England Inc. Debentures due September 15, 2011 at a redemption price of 102.3% of the principal amount of the debentures, plus accrued and unpaid interest through the date of redemption. We also terminated the related interest rate swaps with a notional value totaling $1.0 billion. In addition, during 2011, $0.5 billion of 5.35% Verizon Communications Notes matured and were repaid. The debt obligations of Terremark that were outstanding at the time of its acquisition by Verizon were repaid during May 2011. Verizon Wireless During May 2011, Verizon Wireless repaid $4.0 billion aggregate principal amount of two-year fixed and floating rate notes. Guarantees During June 2011, we guaranteed the debentures and first mortgage bonds of our operating telephone company subsidiaries. As of September 30, 2011, $8.2 billion principal amount of these obligations remain outstanding. Each guarantee will remain in place for the life of the obligation unless terminated pursuant to its terms, including the operating telephone company no longer being a wholly-owned subsidiary of Verizon. We also guarantee the debt obligations of GTE Corporation that were issued and outstanding prior to July 1, 2003. As of September 30, 2011, $1.7 billion principal amount of these obligations remain outstanding. Debt Covenants We and our consolidated subsidiaries are in compliance with all of our debt covenants. Credit Facility As of September 30, 2011, the unused borrowing capacity under a $6.2 billion three-year credit facility with a group of major financial institutions was approximately $6.1 billion. On April 15, 2011, we amended this facility primarily to reduce fees and borrowing costs and extend the maturity date to October 15, 2014. |
Stock-Based Compensation (Schedule Of Stock Option Activity) (Details) (USD $) In Thousands, except Per Share data | 9 Months Ended |
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Sep. 30, 2011 | |
Stock Options [Member] | |
Outstanding, beginning of year | 56,844 |
Exercised | (3,869) |
Cancelled/Forfeited | (20,314) |
Outstanding, September 30, 2011 | 32,661 |
Weighted-Average Exercise Price Stock Options [Member] | |
Outstanding, beginning of year | 44.25 |
Exercised | 34.82 |
Cancelled/Forfeited | 51.58 |
Outstanding, September 30, 2011 | 40.80 |
Wireless Licenses, Goodwill And Other Intangible Assets (Amortization Expense For Other Intangible Assets Table) (Details) (USD $) In Millions | 3 Months Ended | 9 Months Ended | ||
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Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |
Wireless Licenses, Goodwill And Other Intangible Assets | ||||
Amortization expense for other intangible assets | $ 377 | $ 446 | $ 1,121 | $ 1,365 |
Segment Information (Reconciliation Of Total Reportable Segments Operating Income To Consolidated Income Before (Provision) Benefit For Income Taxes) (Details) (USD $) In Millions | 1 Months Ended | 3 Months Ended | 9 Months Ended | ||
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Apr. 30, 2011 | Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |
Total segment operating income | $ 4,647 | $ 3,383 | $ 13,992 | $ 8,234 | |
Severance, pension and benefit charges | (329) | (1,188) | (329) | (5,084) | |
Deferred revenue adjustment | (235) | ||||
Merger integration and acquisition related charges | (13) | (159) | (451) | ||
Access line spin-off and other charges | (67) | (407) | |||
Equity in earnings of unconsolidated businesses | 125 | 141 | 347 | 395 | |
Other income and (expense), net | 24 | (51) | 70 | 11 | |
Interest expense | (698) | (597) | (2,124) | (1,956) | |
Income Before Provision For Income Taxes | 4,098 | 2,876 | 12,285 | 6,684 | |
Total Segments [Member] | |||||
Total segment operating income | 5,202 | 5,041 | 14,851 | 14,385 | |
Operating Income Generated By Assets Sold [Member] | |||||
Total segment operating income | 755 | ||||
Operating Income (Loss) Generated By Corporate And Other [Member] | |||||
Total segment operating income | $ (226) | $ (244) | $ (530) | $ (729) |
Fair Value Measurements | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Fair Value Measurements |
The following table presents the balances of assets measured at fair value on a recurring basis as of September 30, 2011:
(1)quoted prices in active markets for identical assets or liabilities (2)observable inputs other than quoted prices in active markets for identical assets and liabilities (3)no observable pricing inputs in the market
Equity securities consist of investments in common stock of domestic and international corporations 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 the nine months ended September 30, 2011. Fair Value of Short-term and Long-term Debt The fair value of our short-term and long-term debt, excluding capital leases, which is determined based on market quotes for similar terms and maturities or future cash flows discounted at current rates, was as follows:
Derivative Instruments We enter into derivative transactions to manage our exposure to fluctuations in foreign currency exchange rates, interest rates, and 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. Changes in the fair values of derivative instruments not qualifying as hedges or any ineffective portion of hedges are recognized in earnings in the current period. Changes in the fair values of derivative instruments used effectively as fair value hedges are recognized in earnings, along with changes in the fair value of the hedged item. Changes in the fair value of the effective portions of cash flow hedges are reported in Other comprehensive income and recognized in earnings when the hedged item is recognized in earnings.
Interest Rate Swaps We have entered into domestic interest rate swaps to achieve a targeted mix of fixed and variable rate debt. We principally receive fixed rates and pay variable rates based on LIBOR, resulting in a net increase or decrease to Interest expense. These swaps are designated as fair value hedges and hedge against changes in the fair value of our debt portfolio. We record the interest rate swaps at fair value on our condensed 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 $0.6 billion at September 30, 2011 and $0.3 billion at December 31, 2010, and is primarily included in Other assets and Long-term debt. As of September 30, 2011, the total notional amount of these interest rate swaps was $8.0 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 had designated these contracts as cash flow hedges. The fair value of these contracts was $0.1 billion at December 31, 2010 and the contracts were included in Other assets. On or before February 7, 2011, we 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 of British Pound Sterling and Euro-denominated debt into U.S. dollars and to fix our future interest and principal payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses. The fair value of these swaps, primarily included in Other assets, was approximately $0.1 billion at September 30, 2011 and December 31, 2010, respectively. During the three months ended September 30, 2011, a pretax loss of $0.2 billion was recognized in Other comprehensive income. During the nine months ended September 30, 2011, the pretax loss recognized in Other comprehensive income was not significant. During the three and nine months ended September 30, 2010, a pretax gain of $0.2 billion and a pretax loss of $0.2 billion, respectively, were recognized in Other comprehensive income. A portion of these gains and losses recognized in Other comprehensive income was reclassified to Other income and (expense), net to offset the related pretax foreign currency transaction gain or loss on the underlying debt obligations. |
Employee Benefits (Narrative) (Details) (USD $) | 3 Months Ended | 9 Months Ended | 12 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | ||
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Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | Dec. 31, 2011 | Sep. 30, 2011
Qualified Pension Plans [Member] | Sep. 30, 2011
Nonqualified Pension Plans [Member] | Sep. 30, 2011
Nonqualified Pension Plans [Member] | Sep. 30, 2011
Other Postretirement Benefit Plans [Member] | Sep. 30, 2011
Other Postretirement Benefit Plans [Member] | Mar. 31, 2010
Health Care Act [Member] | |
Severance, pension and benefit charges | $ 329,000,000 | $ 1,188,000,000 | $ 329,000,000 | $ 5,084,000,000 | |||||||
Remeasurement loss | 1,200,000,000 | 2,900,000,000 | |||||||||
Pension settlement gain (loss) | (100,000,000) | ||||||||||
Severance costs | 1,000,000,000 | ||||||||||
Number of employees included in planned workforce reductions | 11,900 | 2,500 | |||||||||
Pension and postretirement curtailment losses and special termination benefits | 1,200,000,000 | 1,200,000,000 | |||||||||
Amount paid in severance benefits over the period | 100,000,000 | 400,000,000 | |||||||||
Postemployment benefits liability | 1,200,000,000 | 1,200,000,000 | |||||||||
Defined benefit plan contributions by employer | 400,000,000 | 25,000,000 | 100,000,000 | 400,000,000 | 1,100,000,000 | ||||||
Health care act one time tax | $ 1,000,000,000 |
Wireless Licenses, Goodwill And Other Intangible Assets (Changes In The Carrying Amount Of Wireless Licenses) (Details) (USD $) In Millions | 9 Months Ended | ||
---|---|---|---|
Sep. 30, 2011 | Dec. 31, 2010 | Sep. 30, 2011
Wireless Licenses [Member] | |
Balance at January 1, 2011 | $ 73,203 | $ 72,996 | $ 72,996 |
Acquisitions (Note 2) | 51 | ||
Capitalized interest on wireless licenses | 156 | ||
Balance at September 30, 2011 | $ 73,203 | $ 72,996 | $ 73,203 |
Debt (Narrative) (Details) (USD $) | 3 Months Ended | 9 Months Ended | 3 Months Ended | 1 Months Ended | 3 Months Ended | 1 Months Ended | 0 Months Ended | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2011 | Sep. 30, 2011 | Apr. 30, 2011 | Dec. 31, 2010 | Sep. 30, 2011
Verizon Communications 5.35% Notes [Member] | Mar. 31, 2011
Three-Month LIBOR Plus 0.61% [Member] | Mar. 31, 2011
1.95% Notes [Member] | Mar. 31, 2011
3.00% Notes [Member] | Mar. 31, 2011
4.60% Notes [Member] | Apr. 30, 2011
Verizon Pennsylvania 5.65% Debentures [Member] | Mar. 31, 2011
6.00% Notes [Member] | Apr. 30, 2011
Verizon New England 6.50% Debentures [Member] | May 31, 2011
Verizon Wireless Notes [Member] | Sep. 30, 2011
Guarantee Of Indebtedness Of Certain Telephone Subsidiaries [Member] | Sep. 30, 2011
Guarantee Of Indebtedness Of Others [Member] | Apr. 15, 2011
Verizon $6.2 Billion Three-Year Credit Facility [Member] | Sep. 30, 2011
Verizon $6.2 Billion Three-Year Credit Facility [Member] | |
Aggregate principal amount | $ 6,250,000,000 | $ 1,000,000,000 | $ 1,500,000,000 | $ 1,250,000,000 | $ 1,500,000,000 | $ 1,000,000,000 | |||||||||||
Cash proceeds from debt | 6,190,000,000 | ||||||||||||||||
Debt instrument maturity date | 2014 | 2014 | 2016 | 2021 | November 15, 2011 | 2041 | September 15, 2011 | ||||||||||
Stated interest rate on debt instrument | 5.35% | 0.61% | 1.95% | 3.00% | 4.60% | 5.65% | 6.00% | 6.50% | |||||||||
Debt instrument, description of variable rate basis | LIBOR plus 0.61% | ||||||||||||||||
Amount of notes repaid | 500,000,000 | ||||||||||||||||
Amount of vendor financing facility repaid | 300,000,000 | ||||||||||||||||
Repayment of notes | 1,000,000,000 | 1,000,000,000 | 4,000,000,000 | ||||||||||||||
Principal amount outstanding in connection with the guarantee of debt obligations | 54,915,000,000 | 52,794,000,000 | 8,200,000,000 | 1,700,000,000 | |||||||||||||
Redemption price of notes percentage | 102.90% | 102.30% | |||||||||||||||
Notional amount of interest rate fair value hedge derivatives | 1,000,000,000 | ||||||||||||||||
Amount of borrowing capacity on three-year credit facility | 6,200,000,000 | ||||||||||||||||
Amount of unused borrowing capacity on three-year credit facility | $ 6,100,000,000 | ||||||||||||||||
Maturity date | October 15, 2014 |
Stock-Based Compensation (Schedule Of Value Appreciation Rights Activity) (Details) (USD $) In Thousands, except Per Share data | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Value Appreciation Rights [Member] | |
Outstanding, beginning of year | 11,569 |
Exercised | (2,494) |
Cancelled/Forfeited | (35) |
Outstanding, September 30, 2011 | 9,040 |
Weighted-Average Exercise Price Value Appreciation Rights [Member] | |
Outstanding, beginning of year | 13.11 |
Exercised | 15.02 |
Cancelled/Forfeited | 14.93 |
Outstanding, September 30, 2011 | 12.57 |
Wireless Licenses, Goodwill And Other Intangible Assets (Composition Of Other Intangible Assets, Net) (Details) (USD $) In Millions, unless otherwise specified | 9 Months Ended | |
---|---|---|
Sep. 30, 2011
years | Dec. 31, 2010 | |
Gross Amount | $ 13,320 | $ 12,481 |
Accumulated Amortization | (7,405) | (6,651) |
Net Amount | 5,915 | 5,830 |
Customer Lists (6 To 13 years) [Member] | ||
Gross Amount | 3,532 | 3,150 |
Accumulated Amortization | (1,928) | (1,551) |
Net Amount | 1,604 | 1,599 |
Minimum useful life for finite-lived intangible assets | 6 | |
Maximum useful life for finite-lived intangible assets | 13 | |
Non-Network Internal-Use Software (3 to 7 years) [Member] | ||
Gross Amount | 9,231 | 8,446 |
Accumulated Amortization | (5,285) | (4,614) |
Net Amount | 3,946 | 3,832 |
Minimum useful life for finite-lived intangible assets | 3 | |
Maximum useful life for finite-lived intangible assets | 7 | |
Other (2 To 25 years) [Member] | ||
Gross Amount | 557 | 885 |
Accumulated Amortization | (192) | (486) |
Net Amount | $ 365 | $ 399 |
Minimum useful life for finite-lived intangible assets | 2 | |
Maximum useful life for finite-lived intangible assets | 25 |
Debt (Tables) | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Combined Schedule Of Current And Noncurrent Debt And Capital Lease Obligations |
|
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