Verizon Wireless 2008 Annual Report Download

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Verizon Communications
2008 Annual Report

Table of contents

  • Page 1
    Verizon Communications 2008 Annual Report

  • Page 2
    ... exchange and related business assets in Maine, New Hampshire and Vermont in March 2008. These reclassifications were determined using specific information where available and allocations where data is not maintained on a state-specific basis within the Company's books and records. Verizon's 2006...

  • Page 3
    ...wireless฀voice฀and฀data;฀high-speed฀consumer฀broadband฀and฀ video฀services;฀and฀Internet฀Protocol฀(IP)฀networks,฀applications฀and฀professional฀services฀for฀ global฀businesses.฀Each฀of฀these฀gained฀market฀share฀and฀attracted฀new฀customers...

  • Page 4
    ... growth that will come from a new generation of broadband devices, applications and services that will use our wireless and fiber networks to deliver advances in entertainment, education, commerce and health care. 2 One of the biggest challenges for customers is bringing together all their digital...

  • Page 5
    ... will support a new wave of productivity-enhancing applications like secure global transactions, electronic supply chains and manufacturing processes, and virtual-reality videoconferencing. Verizon is doing much more than simply connecting individuals. We're developing innovative network services...

  • Page 6
    ...fixed-line฀telephone฀business฀continues฀to฀decline฀as฀customers฀ disconnect฀their฀wired฀phones฀and฀shift฀to฀wireless,฀cable฀and฀other฀newer฀technologies.฀In฀ addition,฀the฀faltering฀economy฀depressed฀volumes฀in฀the฀large-business฀market...

  • Page 7
    ... VERIZON BUSINESS STRATEGIC SERVICES REVENUE (billions) $6.0 $5.2 $4.1 strong฀dividend฀-฀to฀translate฀the฀strength฀of฀our฀company฀into฀excellence฀for฀our฀customers฀and฀ value฀for฀our฀investors. I฀want฀to฀express฀my฀appreciation฀to฀our฀employees...

  • Page 8
    ... this new round of innovation, Verizon Wireless is providing network options for using wireless devices, software and applications provided by third-party developers. Our Open Development Initiative is part of our strategy to expand the wireless market and offer our customers more wireless choices...

  • Page 9
    ... years. In addition, Alltel's customers will reap the benefits of Verizon Wireless' Open Development initiative, which welcomes third-party devices and services on the Verizon Wireless network. The acquisition also provides opportunities for enhanced value for our shareowners. Both companies use...

  • Page 10
    ... usage. Verizon's advanced technology and superior services have made FiOS the top-rated broadband service in America. Thanks to its unique architecture, Verizon's all-fiber network has virtually unlimited capacity, which delivers faster two-way speeds and better picture quality than cable companies...

  • Page 11
    ... and information services has given Verizon new opportunities for growth in the broadband market. As Internet and high-definition video use continues to grow, consumers are demanding more capacity, speed and interactivity to send and receive bandwidth-intensive videos, photo albums and music files...

  • Page 12
    ...that Verizon Business offers worldwide. Strategic services include security and IT solutions as well as a full spectrum of professional and managed IP services that help customers make the most of IP communications, infrastructure and technology. The ongoing strong demand for these advanced services...

  • Page 13
    ... to become a leading provider of global communications, IT and security solutions with the world's most connected public IP network. As a founding member of the Trans-Pacific Express (TPE) Cable Consortium, Verizon Business has played a key role in helping to design, engineer and build the...

  • Page 14
    ... economic times, we remain committed to using our signature programs to help create a better quality of life for the neighborhoods we live in and serve. The Verizon Foundation connects our financial, technological and human resources with critical social issues that affect our employees, customers...

  • Page 15
    ... the cumulative total returns of Verizon, the S&P 500 Telecommunications Services Index, and the S&P 500 Stock Index over a five-year period, adjusted for the spin-off of our local exchange and related business assets in Maine, New Hampshire and Vermont and our domestic print and Internet yellow...

  • Page 16
    ... Our wireline business provides communications services, including voice, broadband data and video services, network access, nationwide long-distance and other communications products and services, and also owns and operates one of the most expansive end-to-end global Internet Protocol (IP) networks...

  • Page 17
    ... related to the acquisition of Alltel, to be lower than 2008 capital expenditures. Operational Efficiency - While focusing resources on revenue growth and market share gains, we are continually challenging our management team to lower expenses, particularly through technology-assisted productivity...

  • Page 18
    ... wireless and VoIP. Revenues at Verizon Business increased primarily due to higher demand for Internetrelated product offerings, specifically Private IP products and the impact of foreign currency exchange rates on services billed in local currencies, partially offset by lower voice revenues...

  • Page 19
    ..., pension and benefits charges (see "Other Items"), $150 million for merger integration costs, primarily comprised of Wireline systems integration activities related to businesses acquired and $87 million related to the spin-off of local exchange and related business assets in Maine, New Hampshire...

  • Page 20
    ...see "Other Items"), $146 million for merger integration costs, primarily comprised of Wireline systems integration activities related to businesses acquired and $84 million related to the spin-off of local exchange and related business assets in Maine, New Hampshire and Vermont. In addition, during...

  • Page 21
    ... liability for awards granted to Domestic Wireless employees at fair value utilizing a Black-Scholes model. SEgMENT rESULTS OF OpErATiONS We have two reportable segments, Domestic Wireless and Wireline, which we operate and manage as strategic business units and organize by products and services...

  • Page 22
    Management's Discussion and Analysis of Financial Condition and Results of Operations continued Domestic Wireless Our Domestic Wireless segment provides wireless voice and data services, other value-added services and equipment sales across the United States. This segment primarily represents the ...

  • Page 23
    ...access, long distance, and other services to residential and small business customers and carriers, and Verizon Business, which provides voice, data and Internet communications services as well as next-generation IP network services to medium and large business customers, multi-national corporations...

  • Page 24
    ... expense includes salaries, wages and benefits not directly attributable to a service or product, bad debt charges, taxes other than income, advertising and sales commission costs, customer billing, call center and information technology costs, professional service fees and rent for administrative...

  • Page 25
    ...severance and other related charges, costs incurred related to network, non-network software, and other activities in connection with the spin-off of local exchange assets in Maine, New Hampshire and Vermont, as well as costs associated with merger integration initiatives, principally related to the...

  • Page 26
    ... and sale of select non-strategic assets, a cash payment of $0.2 billion in connection with the settlement of foreign currency forward contracts and $0.1 billion receivable from a money market fund managed by a third party, which is in the process of being liquidated and returned to Verizon. Other...

  • Page 27
    ... the 364-Day Credit Agreement was repaid using proceeds from the Three-Year Term Loan Facility; the remainder of the borrowings under the 364-Day Credit Agreement was also repaid during 2008. • On February 4, 2009, Verizon Wireless and Verizon Wireless Capital LLC co-issued in a private placement...

  • Page 28
    .... Moody's Investors Service (Moody's) assigns an 'A3' long-term debt rating and a 'P-2' short-term debt rating to Verizon Communications. In June 2008 Moody's placed Verizon on "Review for Possible Downgrade" following the announcement of the agreement to acquire Alltel. In October 2008 Moody...

  • Page 29
    ... and Analysis of Financial Condition and Results of Operations continued tors as long-term growth opportunities, internal cash requirements and the expectations of our shareowners. During the third quarter of 2008, Verizon's Board of Directors increased the Company's quarterly dividend payments...

  • Page 30
    ... the fair values of our commercial paper and bank loans, if any, because they are not significantly affected by changes in market interest rates. (dollars in millions) Alltel Interest Rate Swaps In connection with the Alltel acquisition (see "Recent Developments"), Verizon Wireless acquired seven...

  • Page 31
    ... future pension plan expense. Other postretirement benefit plans have larger benefit obligations than plan assets, resulting in expense. Significant benefit plan assumptions, including the discount rate used, the long-term rate of return on plan assets and health care trend rates are periodically...

  • Page 32
    ...to close in the first half of 2009. Telephone Access Lines Spin-off On January 16, 2007, we announced a definitive agreement with FairPoint Communications, Inc. (FairPoint) providing for Verizon to establish a separate entity for its local exchange and related business assets in Maine, New Hampshire...

  • Page 33
    ... largely deregulated information services. The same order also concluded that telephone companies may offer the underlying broadband transmission services that are used as an input to Internet access services through private carriage arrangements on negotiated commercial terms. The order was upheld...

  • Page 34
    ... However, in its November 4, 2008 order approving Verizon Wireless's acquisition of Alltel, the FCC required Verizon Wireless to phase out the high-cost support the merged company receives from the universal service fund by 20 percent during the first year following completion of the acquisition and...

  • Page 35
    ...rules. Adoption of new laws or rules may raise the cost of providing service or require modification of Verizon Wireless's business plans or operations. To use the radio frequency spectrum, wireless communications systems must be licensed by the FCC to operate the wireless network and mobile devices...

  • Page 36
    ... legislatures and state public utility commissions to regulate the industry in ways that may impose additional costs on Verizon Wireless. The Communications Act generally preempts regulation by state and local governments of the entry of, or the rates charged by, wireless carriers. Although a state...

  • Page 37
    ... the accounting rules or their application, which could result in an impact on earnings; • our ability to successfully integrate Alltel Corporation into Verizon Wireless's business and achieve anticipated benefits of the acquisition; and • the inability to implement our business strategies. 35

  • Page 38
    ...31, 2008. In connection with this assessment, there were no material weaknesses in the company's internal control over financial reporting identified by management. The company's financial statements included in this annual report have been audited by Ernst & Young LLP, independent registered public...

  • Page 39
    ...of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Verizon as of December 31, 2008 and 2007, and the related consolidated statements of income, cash flows and changes in shareowners' investment for each of the three years in the period ended December...

  • Page 40
    ... of Income (dollars in millions, except per share amounts) Years Ended December 31, Operating Revenues Operating Expenses Cost of services and sales (exclusive of items shown below) Selling, general and administrative expense Depreciation and amortization expense Total Operating Expenses Operating...

  • Page 41
    ... one year Accounts payable and accrued liabilities Other Total current liabilities Long-term debt Employee benefit obligations Deferred income taxes Other liabilities Minority interest Shareowners' investment Series preferred stock ($.10 par value; none issued) Common stock ($.10 par value; 2,967...

  • Page 42
    ... from long-term borrowings Repayments of long-term borrowings and capital lease obligations Increase (decrease) in short-term obligations, excluding current maturities Dividends paid Proceeds from sale of common stock Purchase of common stock for treasury Other, net Net cash provided by (used in...

  • Page 43
    ... local exchange businesses in Maine, New Hampshire and Vermont (see Note 3) Adjusted balance at beginning of year Foreign currency translation adjustments Unrealized gains (losses) on marketable securities Unrealized gains (losses) on cash flow hedges Defined benefit pension and postretirement plans...

  • Page 44
    ... business customers. Our Wireline segment provides communications services, including voice, broadband video and data, network access, nationwide long-distance and other communications products and services, and also owns and operates one of the most expansive end-to-end global Internet Protocol (IP...

  • Page 45
    ... all highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates market value and include amounts held in money market funds. Prior to the close of the acquisition of Alltel Corporation (Alltel) we...

  • Page 46
    ... of Wireless licenses. The capitalization period ends when the development is completed and the licenses are placed in commercial service. Intangible Assets Subject to Amortization Our intangible assets that do not have indefinite lives (primarily customer lists and non-network internal-use software...

  • Page 47
    ... 157-2 related to the measurement of fair value used when evaluating goodwill, other intangible assets, wireless licenses and other long-lived assets for impairment and valuing asset retirement obligations and liabilities for exit or disposal activities. On October 10, 2008, the FASB issued FSP 157...

  • Page 48
    ... plan assets is determined by applying the return on assets assumption to the market-related value of assets. As of July 1, 2006, Verizon management employees no longer earn pension benefits or earn service towards the company retiree medical subsidy (see Note 15). In September 2006, the FASB issued...

  • Page 49
    ... in Southern Minnesota and Western Kansas that were acquired from Rural Cellular Corporation (Rural Cellular). As a result of these divestiture requirements, Verizon Wireless has placed the licenses and assets in the Alltel Divestiture Markets in a management trust that will continue to operate the...

  • Page 50
    ... was redeemed on September 5, 2008, using proceeds from new debt borrowings by Verizon Wireless (see Note 10). The aggregate value of the net assets acquired was $1.3 billion based on the cash consideration, as well as closing and other direct acquisition-related costs of approximately $12 million...

  • Page 51
    ... managed information security services to large business and government customers worldwide. This acquisition was integrated into the Wireline segment. In connection with the 2006 acquisition of MCI, Inc. (MCI), we recorded certain severance and severance-related costs and contract termination costs...

  • Page 52
    ... taxes of $38 million. Other Dispositions Telephone Access Lines Spin-off On January 16, 2007, we announced a definitive agreement with FairPoint Communications, Inc. (FairPoint) providing for Verizon to establish a separate entity for its local exchange and related business assets in Maine, New...

  • Page 53
    ... tax bases of acquired assets and liabilities during 2008 and 2007. Other Intangible Assets The following table displays the details of other intangible assets: (dollars in millions) Gross Amount Finite-lived intangible assets: Customer lists (3 to 10 years) Non-network internal-use software...

  • Page 54
    ...7) Other assets $ 362 $ Gains 2 $ Losses (5) $ Fair Value 359 Verizon Center Relocation, Net During 2006, we recorded pretax charges of $184 million ($118 million after-tax) in connection with the relocation of employees and business operations to Verizon Center located in Basking Ridge, New Jersey...

  • Page 55
    ...East LP (VZ East), is controlled and managed by Verizon Wireless. In exchange for its contributed assets, Price received a limited partnership interest in VZ East which was exchangeable into the common stock of Verizon Wireless if an initial public offering of that stock occurred, or into the common...

  • Page 56
    ... in plant, property and equipment are as follows: (dollars in millions) At December 31, Capital leases Accumulated amortization Total $ $ 2008 298 (97) 201 $ $ 2007 329 (153) 176 Years Ended December 31, Pretax lease income Income tax expense Investment tax credits $ 2008 74 30 4 $ 2007 78...

  • Page 57
    ...) 28,203 Verizon Wireless - notes payable and other Telephone subsidiaries - debentures Other subsidiaries - debentures and other Employee stock ownership plan loans - NYNEx debentures Capital lease obligations (average rate 6.2% and 6.8%) Unamortized discount, net of premium Total long-term debt...

  • Page 58
    ... into U.S. dollars (see Note 11). The cash proceeds of $2,410 million, net of discounts and issuance costs were used in connection with the Alltel acquisition on January 9, 2009 (see Note 2). On November 21, 2008, Verizon Wireless and Verizon Wireless Capital LLC co-issued a private placement of...

  • Page 59
    ...included in Other assets and Long-term debt was $415 million. Foreign Exchange Risk Management During 2008, we entered into cross currency swaps designated as cash flow hedges to exchange the net proceeds from the December 18, 2008 Verizon Wireless and Verizon Wireless Capital LLC offering (see Note...

  • Page 60
    .... 157, we use mid-market pricing for fair value measurements of our derivative instruments. The fair value of our short-term and long-term debt, excluding capital leases, is determined based on market quotes for similar terms and maturities or future cash flows discounted at current rates. The fair...

  • Page 61
    ... by the Human Resources Committee. The PSUs are classified as liability awards because the PSU awards are paid in cash upon vesting. The PSU award liability is measured at its fair value at the end of each reporting period and, therefore, will fluctuate based on the price of Verizon's stock as well...

  • Page 62
    ... used in the model during 2008: Ranges Risk-free rate Expected term (in years) Expected volatility 0.6% - 3.3% 1.2 - 3.0 33.9% - 58.5% Stock Options The Verizon Long Term Incentive Plan provides for grants of stock options to employees at an option price per share of 100% of the fair market value...

  • Page 63
    ... with pension and postretirement health care and life insurance benefit plans: Obligations and Funded Status (dollars in millions) At December 31, Change in Benefit Obligations Beginning of year Service cost Interest cost Plan amendments Actuarial (gain) loss, net Benefits paid Termination benefits...

  • Page 64
    ...minimum pension liability. In prior years, as a result of changes in interest rates and changes in investment returns, an adjustment to the additional minimum pension liability was required for a number of plans, as indicated below. The adjustment in the liability was recorded as a charge or (credit...

  • Page 65
    ...: Years Ended December 31, Discount rate Expected return on plan assets Rate of compensation increase 2008 6.50% 8.50 4.00 2007 6.00% 8.50 4.00 Pension 2006 5.75% 8.50 4.00 2008 6.50% 8.25 4.00 Health Care and Life 2007 2006 6.00% 8.25 4.00 5.75% 8.25 4.00 In order to project the long-term target...

  • Page 66
    ... benefit plans in 2009. Estimated Future Benefit Payments The benefit payments to retirees, which reflect expected future service, are expected to be paid as follows: (dollars in millions) Pension Benefits 2009 2010 2011 2012 2013 2014 - 2018 $ 4,101 3,110 2,769 2,324 2,338 11,292 Health Care...

  • Page 67
    ... components of the provision for income taxes from continuing operations are as follows: (dollars in millions) Years Ended December 31, Current Federal Foreign State and local Deferred Federal Foreign State and local Investment tax credits Total income tax expense $ 2008 365 240 543 1,148 $ 2007...

  • Page 68
    ...wireless voice, data services and other value-added services and equipment sales across the United States. Wireline's communications services include voice, Internet access, broadband video and data, next generation Internet Protocol network services, network access, long distance and other services...

  • Page 69
    ... information for our two reportable segments: (dollars in millions) 2008 External revenues Intersegment revenues Total operating revenues Cost of services and sales Selling, general & administrative expense Depreciation & amortization expense Total operating expenses Operating income Assets...

  • Page 70
    ... revenues - reported Operating Expenses Total reportable segments Reconciling items: Merger integration costs (see Note 2) Access line spin-off related charges (see Note 3) Taxes on foreign distributions (see Note 7) Verizon Center relocation (see Note 6) Severance, pension and benefit charges, net...

  • Page 71
    ... after-tax) in connection with the spin-off of our local exchange and related business assets in Maine, New Hampshire and Vermont. Net Unrealized Gains (Losses) on Cash Flow Hedges The changes in Unrealized Gains (Losses) on Cash Flow Hedges were as follows: (dollars in millions) Years Ended...

  • Page 72
    ... 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...

  • Page 73
    ...pension and benefit charges. Results of operations for the fourth quarter of 2008 include after-tax charges of $35 million for merger integration costs, $31 million investment related charges attributable to an other-thantemporary decline in the fair value of our investments in marketable securities...

  • Page 74
    ...General Counsel Marc C. Reed Executive Vice President - Human Resources Virginia P. Ruesterholz President - Verizon Services Operations John G. Stratton Executive Vice President and Chief Marketing Officer Thomas J. Tauke Executive Vice President - Public Affairs, Policy and Communications Catherine...

  • Page 75
    ... of the chief executive officer regarding compliance by Verizon with the corporate governance listing standards of the New York Stock Exchange was submitted without qualification following the 2008 annual meeting of shareholders. Equal Opportunity Policy Verizon maintains a long-standing commitment...

  • Page 76
    Verizon Communications inc. 140 West Street New york, New york 10007 212 395-1000 verizon.com ©2009. Verizon. All Rights Reserved. c4 002CS18035 Cert no. SCS-COC-00648