Verizon Wireless 2007 Annual Report Download - page 25

The effective income tax rate is calculated by dividing the provision for
income taxes by income from continuing operations before the provi-
sion for income taxes. The effective income tax rate in 2007 compared
to 2006 was higher primarily due to recording $610 million of foreign
and domestic taxes and expenses specifically relating to our share of
Vodafone Omnitel distributable earnings. Verizon received a net distri-
bution from Vodafone Omnitel in December 2007 of approximately $2.1
billion and anticipates that it may receive an additional distribution from
Vodafone Omnitel within the next twelve months. The 2007 rate was
also increased due to higher state taxes in 2007 as compared to 2006,
as well as greater benefits from foreign operations in 2006 compared to
2007. These increases were partially offset by lower expenses recorded for
unrecognized tax benefits in 2007 as compared to 2006.
Our effective income tax rate in 2006 was higher than 2005 primarily
as a result of favorable tax settlements and the recognition of capital
loss carry forwards in 2005. These increases were partially offset by tax
benefits from foreign operations and lower state taxes in 2006 compared
to 2005.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate for each period is included in Note 16 to the consoli-
dated financial statements.
Discontinued Operations
In accordance with Statement of Financial Accounting Standard (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we
haveclassifiedTELPRI,VerizonDominicanaandourformerdomesticprint
and Internet yellow pages directories publishing operations as discon-
tinued operations in the consolidated financial statements for all periods
presented through the date of the spin-off or divestiture.
On March 30, 2007, after receiving Federal Communications Commission
approval,we completed the sale of our 52% interest inTELPRI and
received gross proceeds of approximately $980 million. The sale resulted
in a pretax gain of $120 million ($70 million after-tax, or $.02 per diluted
share). Additionally, $100 million of the proceeds were contributed to the
Verizon Foundation.
The sale of Verizon Dominicana closed in December 2006, and primarily
due to taxes on previously unremitted earnings, a pretax gain of $30 mil-
lion resulted in an after-tax loss of $541 million (or $.18 per diluted share).
We completed the spin-off of our domestic print and Internet yellow
pages directories business to our shareowners on November 17, 2006,
which resulted in an $8,695 million increase to contributed capital in
shareowner’s investment. In addition, we recorded pretax charges of
$117 million ($101 million after-tax, or $.03 per diluted share) for costs
related to this spin-off. These costs primarily consisted of debt retirement
costs, costs associated with accumulated vested benefits of employees,
investment banking fees and other transaction costs related to the spin-
off, which are included in discontinued operations.
Income from discontinued operations, net of tax, decreased by $617
million, or 81.3% in 2007 compared to 2006. The decrease was primarily
driven by the assets disposed of in 2006, partially offset by the after-tax
gainrecordedin2007onthesaleofTELPRI.Incomefromdiscontinued
operations, net of tax, decreased by $611 million, or 44.6% in 2006
compared to 2005. This decrease was primarily due to the after-tax loss
recorded in 2006 on the sale of Verizon Dominicana, partially offset by the
cessation of depreciation on fixed assets held for sale.
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Management’s Discussion and Analysis
ofFinancialConditionandResultsofOperations continued
Extraordinary Item
In January 2007, theBolivarian Republic ofVenezuela(theRepublic)
declared its intent to nationalize certain companies, including CANTV. On
February 12, 2007, we entered into a Memorandum of Understanding
(MOU)with the Republic,which providedthat the Republic offer to
purchase all of the equity securities of CANTV, including our 28.5%
interest, through public tender offers in Venezuela and the United States.
Under the terms of the MOU, the prices in the tender offers would
be adjusted downward to reflect any dividends declared and paid
subsequent to February 12, 2007. During the second quarter of 2007,
the tender offers were completed and Verizon received an aggregate
amount of approximately $572 million, which included $476 million from
the tender offers as well as $96 million of dividends declared and paid
subsequent to the MOU. Based upon our investment balance in CANTV,
we recorded an extraordinary loss of $131 million, including taxes of $38
million, or $.05 per diluted share.
Cumulative Effect of Accounting Change
Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based
Payments, utilizing the modified prospective method. The impact to
Verizon primarily resulted from Domestic Wireless, for which we recorded
a $42 million ($.01 per diluted share) cumulative effect of accounting
change, net of taxes and after minority interest, to recognize the effect of
initially measuring the outstanding liability for awards granted to Domestic
Wireless employees at fair value utilizing a Black-Scholes model.
SEGMENT RESULTS OF OPERATIONS
We have two reportable segments, which we operate and manage as
strategic business units and organize by products and services. Our
segments are Wireline and Domestic Wireless. You can find additional
information about our segments in Note 17 to the consolidated financial
statements.
We measure and evaluate our reportable segments based on segment
income. Corporate, eliminations and other includes unallocated cor-
porate expenses, intersegment eliminations recorded in consolidation,
the results of other businesses such as our wholly-owned insurance and
leasing subsidiaries, the results of investments in unconsolidated busi-
nesses, primarily Vodafone Omnitel, and other adjustments that are not
allocated in assessing segment performance. These adjustments also
include transactions that the chief operating decision makers exclude in
assessing business unit performance due primarily to their non-recurring
and/or non-operational nature. Although such transactions are excluded
from the business segment results, they are included in reported consoli-
dated earnings. Gains and losses that are not individually significant are
included in all segment results, since these items are included in the chief
operating decision makers’ assessment of unit performance.
Wireline
The Wireline segment consists of the operations of Verizon Telecom, a
provider of communication services, including voice, broadband video
and data, network access, long distance, and other services to residential
and small business customers and carriers, and Verizon Business, which
provides next-generation IP network services to medium and large busi-
nesses and government customers globally. Operating results shown for
2006 exclude the results of the former MCI prior to the date of the merger
(January 6, 2006).