Verizon Wireless 2010 Annual Report Download

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Verizon Communications
2010 Annual Report

Table of contents

  • Page 1
    Verizon Communications 2010 Annual Report

  • Page 2
    ... in cash flow from operations • 16.4% increase in free cash flow • 4.8 million new wireless customers • 25.6% growth in wireless data revenue • 796,000 new FiOS Internet connections • 722,000 new FiOS TV connections • 31.9% growth in FiOS revenue • 23.1% total shareholder return...

  • Page 3
    ..., chairman and chief executive officer of Verizon, delivering the opening keynote speech at the 2011 International Consumer Electronics Show. Dear Shareowner, One question lies at the heart of America's challenge to regain its leadership after years of economic turmoil: What's the key to growth and...

  • Page 4
    ... straight year of positive revenue growth in a very sluggish economy. Our growth was propelled by strong performance in wireless, broadband and strategic business services, and our results improved in the second half of the year, giving us good momentum entering 2011. Our cash-flow performance was...

  • Page 5
    ... of video-on-demand content; a new service called FlexView that lets subscribers watch FiOS video content on their TV, PC or smartphone; and a "connected home" solution coming in 2011 for managing energy, security and entertainment needs from remote locations. 2010 Total Return Verizon % S&P 500...

  • Page 6
    ... secured a number of significant customer wins in 2010. And we are working with partners to develop our capabilities in high-growth segments like health care, smart grids, financial services and security. I am pleased to report that our stock rebounded strongly in 2010. Total return for the year was...

  • Page 7
    ... in the second half of 2011. The Board also named a new chief financial officer, Fran Shammo, following the retirement of John Killian after 31 years of distinguished service. Fran is one of our most talented and experienced executives, having held both operating and finance jobs and worked in all...

  • Page 8
    ... Verizon's high-IQ networks. Teens and young adults, who have never known a world without mobile connectivity, have built complex social networks centered on a continuous flow of personal digital information. Their desire for fast access to information and entertainment is driving growth of advanced...

  • Page 9
    ...T In 2010, Verizon and Apple teamed up to offer the iPadâ„¢, giving users a new way to browse the Internet, enjoy photos, watch HD videos, listen to music, play games, read ebooks and much more. products, including our successful Droid lineup of smartphones. We've also added Apple's popular iPhone...

  • Page 10
    ... dramatically change the way we communicate. Setting up a connected home begins with a superior home network. Verizon's FiOS service lets users stream content from their PCs to their FiOS-connected TVs, including digital photos, music files, Internet radio stations, home movies and Internet videos...

  • Page 11
    ... of the Internet. We offer resources that allow families to create a safe and secure digital experience whether they're interacting online, watching TV or connecting on a mobile phone. Verizon's Parental Controls Center offers access to a complete line-up of services from Verizon Safeguards to help...

  • Page 12
    ...Verizon's cloud strategy delivers highly secure, on-demand solutions to business and government customers anywhere, anytime over our advanced global IP network. IP INNOVATION, the people we interact with every day could be in the next town or on the next continent. They may be working in an office...

  • Page 13
    ..., and unify our account teams to better serve enterprise and multinational corporations. With the talent and resources of our two companies, there are tremendous opportunities to deliver superior services for global customers, expand into high-growth vertical markets and deliver greater value...

  • Page 14
    ...N.Y. T VERIZON , we use our technology, financial resources, employees and partnerships to help solve critical social issues. Our approach is motivated by our deep commitment to doing business in a way that contributes to the prosperity of our shareowners, our employees and the communities we serve...

  • Page 15
    ... changed our method of accounting for benefit plans as described in Note 1 to the consolidated financial statements. As a result, all prior periods have been adjusted. Stock Performance Graph Comparison of Five-Year Total Return Among Verizon, S&P 500 Telecommunications Services Index...

  • Page 16
    ...access line losses and decreased minutes of use (MOUs), partially offset by higher revenues in our growth markets. We continue to develop and market innovative product bundles to include local, long distance, wireless, broadband data and video services for consumer, business and government customers...

  • Page 17
    ... on expanding the penetration of our data services, offering innovative wireless devices for both consumer and business customers, and increasing the number of ways that our customers can connect with our network and services. In recent years, we have experienced continuing access line losses...

  • Page 18
    ... in our growth businesses. Capital Expenditures Our 2011 capital program includes capital to fund advanced networks and services, including FiOS and LTE, the continued expansion of our core networks, including our IP and wireless Evolution-Data Optimized (EV-DO) networks, maintenance and support for...

  • Page 19
    ... of Financial Condition and Results of Operations - As Adjusted continued Consolidated Revenues (dollars in millions) Years Ended December 31, Domestic Wireless Service revenue Equipment and other Total Wireline Mass Markets Global Enterprise Global Wholesale Other Total Corporate, eliminations...

  • Page 20
    ... of FiOS services (Voice, Internet and TV), partially offset by a decline in local exchange revenues principally due to switched access line losses. Consolidated Operating Expenses (dollars in millions) Years Ended December 31, Cost of services and sales Selling, general and administrative...

  • Page 21
    ... in operating expenses were as follows: (dollars in millions) Years Ended December 31, Merger Integration and Acquisition Related Charges Cost of services and sales Selling, general and administrative expense Depreciation and amortization expense Total Access Line Spin-off Related Charges Cost of...

  • Page 22
    ...debt outstanding compared to 2008 was primarily driven by borrowings to finance the acquisition of Alltel. The increase in capitalized interest costs during 2009 primarily related to capitalization of interest on wireless licenses under development for commercial service (see "Consolidated Financial...

  • Page 23
    ... received. Because future anticipated retiree prescription drug plan liabilities and related subsidies were already reflected in Verizon's financial statements, this change required Verizon to reduce the value of the related tax benefits recognized in its financial statements in the period during...

  • Page 24
    ... differently by other companies. You can find additional information about our segments in Note 14 to the consolidated financial statements. Domestic Wireless Our Domestic Wireless segment provides wireless voice and data services and equipment sales across the United States. This segment primarily...

  • Page 25
    ... in part from increased sales of smartphone and other data-capable devices. Voice revenue decreased as a result of continued declines in our voice ARPU, as discussed below, partially offset by an increase in the number of customers. We expect that total service revenue and data revenue will...

  • Page 26
    ... of the acquisition of Alltel. This increase included network usage for voice and data services, use of data services and applications such as e-mail and messaging provided by third party vendors, operating lease expense related to a larger number of cell sites, as well as salary and benefits as...

  • Page 27
    ... value-added solutions that make communications more secure, reliable and efficient. Global Enterprise also provides managed network services for customers that outsource all or portions of their communications and information processing operations and data services such as private IP, private line...

  • Page 28
    ... federal access rates, universal service and certain broadband services. Other Revenues Other revenues include such services as local exchange and long distance services from former MCI mass market customers, operator services, pay phone, card services and supply sales. The decrease in revenues...

  • Page 29
    ... lower long distance MOUs and customer premise equipment costs, as well as favorable foreign exchange movements. Partially offsetting these decreases were higher content and customer acquisition costs associated with continued subscriber growth. Our FiOS TV and FiOS Internet cost of acquisition per...

  • Page 30
    ...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...

  • Page 31
    ... of Operations - As Adjusted continued CONSOLIDATED FINANCIAL CONDITION (dollars in millions) Cash Flows From Investing Activities Capital Expenditures Capital expenditures continue to be our primary use of capital resources as they facilitate the introduction of new products and services, enhance...

  • Page 32
    ... offer to exchange the privately placed notes issued in November 2008, and February and May 2009, for new notes with similar terms. 2008 In December 2008, Verizon Wireless and Verizon Wireless Capital LLC coissued â,¬0.7 billion of 7.625% notes due 2011, â,¬0.5 billion of 8.750% notes due 2015...

  • Page 33
    ... non-GAAP financial measure that management believes is useful to investors and other users of Verizon's financial information in evaluating cash available to pay debt and dividends. Free cash flow is calculated by subtracting capital expenditures from net cash provided by operating activities. The...

  • Page 34
    ... statements). (4) Other long-term liabilities include estimated postretirement benefit and qualified pension plan contributions (see Note 12 to the consolidated financial statements). Guarantees In connection with the execution of agreements for the sale of businesses and investments, Verizon...

  • Page 35
    Management's Discussion and Analysis of Financial Condition and Results of Operations - As Adjusted continued MARKET RISK We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, ...

  • Page 36
    ... expected availability of wireless network technology and infrastructure and related equipment and the costs thereof as well as other relevant factors in estimating future cash flows. The discount rate represents our estimate of the weighted average cost of capital (or expected return, "WACC") that...

  • Page 37
    ... of changes in these assumptions on the benefit obligations and expense (income) recorded, as well as the on the funded status due to an increase or a decrease in the actual versus expected return on plan assets as of December 31, 2010 and for the year then ended pertaining to Verizon's pension...

  • Page 38
    ...including Internet access and long distance services and broadband video provided to designated customers in those areas. The transactions did not involve any assets or liabilities of Verizon Wireless. The merger resulted in Frontier acquiring approximately 4 million access lines and certain related...

  • Page 39
    ... rural health care. The FCC's rules require tele communications companies including Verizon to pay into the Universal Service Fund (USF), which then makes distributions in support of the programs. Certain of the FCC's rules for support to high-cost areas served by larger "non-rural" local telephone...

  • Page 40
    ...laws and rules. Adoption of new laws or rules may raise the cost of providing service or require modification of Verizon Wireless' business plans or operations. To use the radio frequency spectrum, wireless communications systems must be licensed by the FCC to operate the wireless network and mobile...

  • Page 41
    ... 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...

  • Page 42
    ... express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable...

  • Page 43
    ...of expected returns on plan assets for all pension and other postretirement benefit plans during the fourth quarter of 2010. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Verizon's internal control over financial reporting as...

  • Page 44
    ...M U N I C AT I O N S I N C . A N D S U B S I D I A R I E S Consolidated Statements of Income - As Adjusted (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...

  • Page 45
    ... within one year Accounts payable and accrued liabilities Other Total current liabilities Long-term debt Employee benefit obligations Deferred income taxes Other liabilities Equity Series preferred stock ($.10 par value; none issued) Common stock ($.10 par value; 2,967,610,119 shares issued in both...

  • Page 46
    ... S Consolidated Statements of Cash Flows - As Adjusted (dollars in millions) Years Ended December 31, Cash Flows from Operating Activities Net Income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense Employee retirement benefits...

  • Page 47
    ... to Verizon Spin-off of local exchange businesses and related landline activities (Note 3) Benefit plan accounting changes (Note 1) Adjusted balance at beginning of year Foreign currency translation adjustments Unrealized gains (losses) on marketable securities Unrealized gains (losses) on cash flow...

  • Page 48
    ... 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 49
    ... company-specific evaluations. In the event of a determination that a decline in market value is other-than-temporary, a charge to earnings is recorded for the loss, and a new cost basis in the investment is established. Inventories Inventory consists of wireless and wireline equipment held for sale...

  • Page 50
    ...provide our wireless operations with the exclusive right to utilize designated radio frequency spectrum to provide cellular communication services. While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the Federal Communications Commission (FCC...

  • Page 51
    ... in income. Employee Benefit Plans Pension and postretirement health care and life insurance benefits earned during the year as well as interest on projected benefit obligations are accrued currently. Prior service costs and credits resulting from changes in plan benefits are generally amortized...

  • Page 52
    ... loss. The significant effects of the change in accounting for benefit plans on our consolidated statements of income and consolidated balance sheet for the periods presented were as follows: (dollars in millions, except per share amounts) Years ended December 31, 2010 Recognized Recognized...

  • Page 53
    ... with Alltel Corporation (Alltel), a provider of wireless voice and data services to consumer and business customers in 34 states, and its controlling stockholder, Atlantis Holdings LLC, an affiliate of private investment firms TPG Capital and GS Capital Partners, to acquire, in an all-cash merger...

  • Page 54
    ... the trade name of "Unicel," focusing primarily on rural markets in the United States. As part of its regulatory approval for the Rural Cellular acquisition, the FCC and DOJ required the divestiture of six operating markets. On December 22, 2008, we exchanged assets acquired from Rural Cellular and...

  • Page 55
    ... cash proceeds from the offering were released to Verizon. These proceeds are reflected in the consolidated statement of cash flows as Proceeds from access line spin-off. Verizon received a ruling from the Internal Revenue Service confirming that both the spin-off and the merger qualify as tax-free...

  • Page 56
    ... Wireless during 2009 relate to the finalization of the Rural Cellular purchase accounting. Other Intangible Assets The following table displays the composition of other intangible assets: (dollars in millions) Gross Amount Other intangible assets: Customer lists (6 to 8 years) Non-network internal...

  • Page 57
    ... and equipment, which is stated at cost: (dollars in millions) Summarized Financial Information Summarized financial information for our equity investees is as follows: Balance Sheet (dollars in millions) At December 31, Current assets Noncurrent assets Total assets Current liabilities Noncurrent...

  • Page 58
    ... costs Present value of minimum lease payments Less current installments Long-term obligation at December 31, 2010 $ Capital Leases 97 74 70 54 42 81 418 86 332 75 257 Operating Leases $ 1,898 1,720 1,471 1,255 1,012 5,277 $ 12,633 Years 2011 2012 2013 2014 2015 Thereafter Total $ Capital...

  • Page 59
    ... and other Verizon Wireless - Alltel assumed notes Telephone subsidiaries - debentures Other subsidiaries - debentures and other Employee stock ownership plan loans Capital lease obligations (average rates of 6.8% and 6.3%, respectively) Unamortized discount, net of premium Total long-term debt...

  • Page 60
    ... 2011 (Three-Year Term Loan Facility). No borrowings remain outstanding under this facility as of December 31, 2010 and this facility has been cancelled. 2009 During November 2009, Verizon Wireless and Verizon Wireless Capital LLC completed an exchange offer to exchange privately placed notes issued...

  • Page 61
    ... operations or financial condition. 59 $ - 766 278 108 101 $ 1,558 $ 285 971 278 108 101 $ 2,337 Equity securities consist of investments in common stock of domestic and international corporations in a variety of industry sectors and are generally measured using quoted prices in active markets...

  • Page 62
    ... Consolidated Financial Statements continued NOTE 11 ST OCK-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...

  • Page 63
    ... to Consolidated Financial Statements continued The following table summarizes the assumptions used in the BlackScholes model during 2010: Ranges Risk-free rate Expected term (in years) Expected volatility 0.14% - 0.88% 0.03 - 2.00 31.05% - 47.56% Stock Options The Plan provides for grants of stock...

  • Page 64
    ... of year Change in Plan Assets Beginning of year Actual return on plan assets Company contributions Benefits paid Settlements paid Acquisitions and divestitures, net End of year Funded Status End of year 2010 Pension 2009 Health Care and Life 2010 2009 Beginning in 2013, as a result of federal...

  • Page 65
    ... to Consolidated Financial Statements continued Net Periodic Cost The following table summarizes the benefit (income) cost related to our pension and postretirement health care and life insurance plans: (dollars in millions) Years Ended December 31, Service cost Amortization of prior service cost...

  • Page 66
    ... life plans assets include Verizon common stock of $0.1 billion at December 31, 2010 and 2009. Asset Category Cash and cash equivalents Equity securities Fixed income securities U.S. Treasuries and agencies Corporate bonds International bonds Other Real estate Other Private equity Hedge funds Total...

  • Page 67
    ... and capitalization rates, financial conditions, local market conditions and the status of the capital markets, and thus are classified within Level 3. Private equity investments include those in limited partnerships that invest in operating companies that are not publicly traded on a stock exchange...

  • Page 68
    ...) Year 2011 2012 2013 2014 2015 2016 - 2020 Health Care and Life Prior to Medicare Expected Medicare Prescription Prescription Pension Benefits Drug Subsidy Drug Subsidy $ 3,114 2,339 2,273 2,225 2,188 10,536 $ 2,126 2,142 1,951 1,931 1,873 8,452 $ 107 120 - - - - Savings Plan and Employee Stock...

  • Page 69
    ... received. Because future anticipated retiree prescription drug plan liabilities and related subsidies were already reflected in Verizon's financial statements, this change required Verizon to reduce the value of the related tax benefits recognized in its financial statements in the period during...

  • Page 70
    ... in millions) $ 527 552 Verizon and/or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state, local and foreign jurisdictions. The Internal Revenue Service (IRS) is currently examining the Company's U.S. income tax returns for the years 2004 through 2006. As...

  • Page 71
    ... operating financial information for our two reportable segments: (dollars in millions) 2010 External Operating Revenues Service revenue Equipment and other Mass Markets Global Enterprise Global Wholesale Other Intersegment revenues Total operating revenues Cost of services and sales Selling...

  • Page 72
    Notes to Consolidated Financial Statements continued (dollars in millions) 2009 External Operating Revenues Service revenue Equipment and other Mass Markets Global Enterprise Global Wholesale Other Intersegment revenues Total operating revenues Cost of services and sales Selling, general and ...

  • Page 73
    ... account for intersegment sales of products and services and asset transfers at current market prices. No single customer accounted for more than 10% of our total operating revenues during the years ended December 31, 2010, 2009 and 2008. International operating revenues and long-lived assets...

  • Page 74
    ... the company to be eligible for greater Medicare Part D plan subsidies over time and was also impacted by the curtailment losses associated with the voluntary incentive program for union-represented employees recorded in the second quarter of 2010 (see Note 12). The change in Defined benefit pension...

  • Page 75
    ... 1,444 15,223 $ Other Current Liabilities Advance billings and customer deposits Dividends payable Other $ $ $ 3,091 1,402 2,860 7,353 $ $ 2,644 1,372 2,692 6,708 Cash Flow Information (dollars in millions) Years Ended December 31, Cash Paid Income taxes, net of amounts refunded Interest...

  • Page 76
    ... increase our costs, decrease our operating efficiencies and have a material adverse effect on our business, results of operations and financial condition. We have several commitments primarily to purchase equipment, software, programming and network services, and marketing activities, which will...

  • Page 77
    ...of 2010 include after-tax charges attributable to Verizon of $2.8 billion related to severance, pension and benefit charges, merger integration and acquisition costs, access line spin-off charges, and a one-time non-cash adjustment to wireless data revenues. • Results of operations for the third...

  • Page 78
    ... Advisory Services LLC Joseph Neubauer Chairman and Chief Executive Officer ARAMARK Holdings Corporation Donald T. Nicolaisen Former Chief Accountant United States Securities and Exchange Commission Thomas H. O'Brien** Retired Chairman and Chief Executive Officer The PNC Financial Services Group...

  • Page 79
    ... directly into savings or checking accounts on dividend payment dates. For more information, contact Computershare. Direct Invest Stock Purchase and Ownership Plan - Verizon offers a direct stock purchase and share ownership plan. The plan allows current and new investors to purchase common stock...

  • Page 80
    Verizon Communications Inc. 140 West Street New York, New York 10007 212 395-1000 verizon.com © 2011. Verizon. All Rights Reserved. 002CSI1008 Cert no. SGSNA-COC-000072 Printed with inks containing soy and/or vegetable oils