Verizon Wireless 2012 Annual Report Download

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THE
WORLD’S BIGGEST CH A L L E N GES
DESERVE EVEN BIGGER SOLUTIONS.
{ POWERFUL ANSWERS }
2012 ANNUAL REPORT
FINANCIAL AND CORPORATE RESPONSIBILITY PERFORMANCE

Table of contents

  • Page 1
    FinAnciAl And coRpoRAte Responsibility peRFoRmAnce 2012 AnnuAl RepoRt THE WORLD'S BIGGEST CHALLENGES DESERVE EVEN BIGGER SOLUTIONS. { P OWERF UL ANSW ERS }

  • Page 2
    ...revenue • 6.3% growth in Enterprise Strategic Services revenue Note: Prior-period amounts have been reclassified to reflect comparable results. See www.verizon.com/investor for reconciliations to U.S. generally accepted accounting principles (GAAP) for the non-GAAP financial measures included in...

  • Page 3
    ... core of our growth strategy is our commitment to using our technology to address the world's big challenges. How can we improve the lives of our customers? How can technology make businesses more efficient? How will innovation in healthcare, education and energy management transform society for the...

  • Page 4
    ...we're systematically upgrading customers from copper to the fiber platform 87.5 92.2 98.2 WIRELESS RETAIL CONNECTIONS (millions) that provides better service for them and lower costs for us. $144.04 $125.75 $134.51 % 2012 TOTAL RETURN VeRiZon s&p 500 % . % . % WIRELESS RETAIL POSTPAID ARPA...

  • Page 5
    ... our center of gravity toward growth markets. Meeting customer demand for wireless data and smartphones, we launched dozens of 4G LTE phones and Internet devices. We revolutionized wireless pricing with our new "Share Everything" plans, which allow customers to share text, talk and data among...

  • Page 6
    ...and public safety. We believe that using our talent and technology to address society's biggest challenges will both grow our business and change the world for the better. We call this strategy "Shared Success," an integrated approach to growth that drives both our business development and corporate...

  • Page 7
    ... implemented Verizon Lean Six Sigma, a rigorous process improvement model, to identify areas where we can streamline how we work and eliminate internal barriers that impede productivity and service excellence. In just the last 18 months, we have removed $4 billion from our cost structure. Our 2012...

  • Page 8
    ... accelerate growth, we're using Verizon's Innovation Centers to inspire, enable and showcase new wireless solutions. By connecting innovators with technology in state-of-the-art lab environments, we're bringing amazing new products to the marketplace - changing the way we live, work and play. From...

  • Page 9
    ... average home today has seven connected devices, such as computers, high-definition TVs, game players and DVRs, and that number is increasing. Our FiOS network is able to handle bandwidth-intensive applications such as 3D video, high-capacity telework, smart-energy management, security monitors and...

  • Page 10
    ... local-or wide-area network requirements. faSteSt commercial SpeedS availaBle Verizon's global backbone network continues to grow to meet our customers' evolving needs. During the past three years, we have connected most of the major cities in the U.S. with speeds of 100 Gbps, and we're upgrading...

  • Page 11
    ... new businesses and services in the cloud on a global scale. Verizon Terremark cloud services allow businesses to move applications, processing and storage that previously existed on the customer's network into our securely managed network servers. These services allow users to access the same data...

  • Page 12
    ... our wireless and broadband services to help our communities grow. This creates a sustainable long-term growth strategy - one that opens new markets for Verizon, provides value for shareowners and 10 helps solve community problems. Our goal is to take our corporate responsibility to a higher level...

  • Page 13
    ... strategy parallels the corporate strategy of our Innovation Program. Verizon's LTE Innovation Centers provide a wide range of companies with opportunities to generate new ideas, refine concepts and bring breakthrough products to market through a process that stimulates innovation and change...

  • Page 14
    ... have a partnership with a company called NantWorks that uses a combination of connected supercomputers, genetic analysis and mobile technology to put the tools for advanced cancer diagnosis and treatment in the hands of physicians everywhere. eNaBliNg moBile healthcare Verizon has redesigned the...

  • Page 15
    ... to finding new healthcare solutions, visit our Corporate Responsibility site at http://responsibility.verizon.com. InMotion Technology worked with the Verizon Innovation Center to develop the first 4G LTE wireless mobile router, which allows secure transmission of patient data from ambulance...

  • Page 16
    ...help businesses monitor their company vehicles and decrease fuel consumption. IS THERE A BETTER WAY TO MANAGE ouR eneRgy usAge? From smart homes to connected cars, Verizon technology is giving our customers innovative tools to address many of our long-term energy challenges. We see a growing market...

  • Page 17
    ... is working with Networkfleet, a Verizon company. We provide a wireless fleet-management solution that connects directly to a vehicle engine's onboard diagnostic unit, letting fleet managers remotely monitor engine diagnostics, fault codes and emission control status. Our solution has already helped...

  • Page 18
    ..., mobile devices, learning systems and cloud computing into their college curriculum. 16 iNNovative learNiNg SchoolS Last year we launched the Verizon Innovative Learning School program in 12 schools in underserved areas across America. Teachers received extensive training on innovative ways to use...

  • Page 19
    ... about how Verizon is committed to finding new education solutions, visit our Corporate Responsibility site at http://responsibility.verizon.com. Verizon Thinkfinity.org is an online educational resource with free materials designed to help teachers use technology to increase student engagement...

  • Page 20
    ...that links location-based services with the on-board monitoring systems of our vehicles. Information gathered with this system is transmitted to desktops, tablets or smartphones and analyzed. This information includes details on individual vehicle mileage and emissions and allows Verizon managers to...

  • Page 21
    ... costs throughout the industry. The agreement calls for participating companies to ensure that at least 90 percent of all new set-top boxes purchased and deployed on or after January 1, 2014, will meet Energy Star 3.0 efficiency levels. Verizon Wireless gives customers the opportunity to purchase...

  • Page 22
    ...2020 431 205 5,642 381 200 388 125 Vehicle Fuels Building and Other Fuels 5,427 5,061 5,343 Electricity CO2 / TERABYTE (montHly AVeRAge) 20 METRIC TONS (tHousAnds) To view our complete set of Corporate Responsibility Key Performance Indicators online, go to responsibility.verizon.com/2012.

  • Page 23
    ...2009 and 2008 data includes severance, pension and benefit charges, merger integration and acquisition costs, dispositions and other items. Stock Performance Graph Comparison of Five-Year Total Return Among Verizon, S&P 500 Telecommunications Services Index and S&P 500 Stock Index Verizon $160 $140...

  • Page 24
    ...an additional monthly access fee, our customers have the option of sharing long distance and roaming minutes among their devices for calls from the United States to, and calls while within, Canada and Mexico. The Share Everything plans also include the Mobile Hotspot service on our smartphones at...

  • Page 25
    ...an increase in the sale and usage of innovative wireless smartphones and other data-capable devices in addition to our new pricing structure that will encourage customers to continue adding data-enabled devices onto existing accounts. During 2012, we experienced an increase in Wireless equipment and...

  • Page 26
    ... to create long-term value for our shareholders. We will continue to look for investment opportunities that will help us to grow the business. When appropriate, we will also use our cash to reduce our debt levels and to buy back shares of our outstanding common stock, and Verizon Wireless may make...

  • Page 27
    ... Strategic services. Mass Markets revenues increased during 2012 compared to 2011 due to the expansion of FiOS services (Voice, Internet and Video) as well as changes in our pricing strategy adopted in 2012, partially offset by the continued decline of local exchange revenues. Global Enterprise...

  • Page 28
    ...and benefit charges and costs caused by storm-related events as well as higher sales commission expense at our Verizon Wireless segment. Partially offsetting the increase was the absence of merger integration and acquisition related charges and access line spin-off charges during 2011 and a decrease...

  • Page 29
    ..." for additional details regarding these non-operational items and the impact of divested operations. Operating expenses include pension and benefit related charges based on actuarial assumptions, including projected discount rates and an estimated return on plan assets. These estimates are updated...

  • Page 30
    ...Income Taxes Years Ended December 31, Provision (Benefit) for income taxes Effective income tax rate nm - not meaningful Total interest costs on debt balances decreased during 2011 compared to 2010 primarily due to a $1.6 billion decrease in average debt (see "Consolidated Financial Condition") and...

  • Page 31
    ... services and equipment sales to consumer, business and government customers in the United States on a postpaid and prepaid basis. Postpaid connections represent individual lines of service for which a customer is billed in advance a monthly access charge in return for a monthly network service...

  • Page 32
    ...Retail (non-wholesale) postpaid accounts represent retail customers under contract with Verizon Wireless that are directly served and managed by Verizon Wireless and use its branded services. Accounts include single connection plans, family plans, Share Everything plans and corporate accounts...

  • Page 33
    ...and 4S and other data-capable devices. In addition, cost of services increased during 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...

  • Page 34
    ... with wireless, VoIP, broadband and cable services. Total voice connections include traditional switched access lines in service as well as FiOS digital voice connections. There was also a decline in Small business retail voice connections, primarily reflecting challenging economic conditions...

  • Page 35
    ... improving margins by continuing to deemphasize sales of equipment that is not part of an overall enterprise solutions bundle. This decrease was partially offset by higher Strategic services revenues. Strategic services revenues increased $0.5 billion, or 6.3% during 2012 compared to 2011 primarily...

  • Page 36
    ... wholesale long distance volumes. Costs related to customer premise equipment also decreased, which reflects our focus on improving margins by de-emphasizing sales of equipment that are not part of an overall enterprise solutions bundle. Cost of services and sales decreased during 2011 compared...

  • Page 37
    ...return on assets of 10% ($0.7 billion). As part of this charge, we also recorded $1.0 billion related to the annuitization of pension liabilities (see "Employee Benefit Plan Funded Status and Contributions"), as well as severance charges of $0.4 billion primarily for approximately 4,000 management...

  • Page 38
    ...reflected in Verizon's financial statements, this change in law 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...

  • Page 39
    ...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 2012, we received cash consideration that was not significant related to the sale of...

  • Page 40
    ... used from time to time to satisfy some of the funding requirements of employee and shareowner plans, including 24.6 million common shares issued from Treasury stock during 2012, related to dividend payments, which had an aggregate value of $1.0 billion. On February 3, 2011, the Board of Directors...

  • Page 41
    ... October 17, 2012, we, along with our subsidiary Verizon Investment Management Corp., and Fiduciary Counselors Inc., as independent fiduciary of the Verizon Management Pension Plan (the Plan), entered into a definitive purchase agreement with The Prudential Insurance Company of America (Prudential...

  • Page 42
    ... statements). (5) Other long-term liabilities include estimated postretirement benefit and qualified pension plan contributions (see Note 11 to the consolidated financial statements). Guarantees In connection with the execution of agreements for the sale of businesses and investments, Verizon...

  • Page 43
    ... 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...

  • Page 44
    ... economic conditions as of the valuation date. The terminal value growth rate represents our estimate of the marketplace's long-term growth rate. Goodwill At December 31, 2012, the balance of our goodwill was approximately $24.1 billion, of which $18.2 billion was in our Verizon Wireless segment...

  • Page 45
    ... of changes in these assumptions on the benefit obligations and expense (income) recorded, as well as on the funded status due to an increase or a decrease in the actual versus expected return on plan assets as of December 31, 2012 and for the year then ended pertaining to Verizon's pension and...

  • Page 46
    ... acquired AWS spectrum in separate transactions with SpectrumCo and Cox TMI Wireless, LLC for which it paid an aggregate of $3.9 billion at the time of the closings. Verizon Wireless has also recorded a liability of $0.4 billion related to a three-year service obligation to SpectrumCo's members...

  • Page 47
    ...and Intercarrier Compensation In 2011, the FCC issued a broad order changing the framework for the interstate and intrastate switched access per-minute rates that carriers charge each other for the exchange of voice traffic. The new rules will gradually reduce to zero the rates that Verizon pays to...

  • Page 48
    ... service or require modification of Verizon Wireless' business plans or operations. To use the radio frequency spectrum, wireless communications systems must be licensed by the FCC to operate the wireless network and mobile devices in assigned spectrum segments. Verizon Wireless holds...

  • Page 49
    ...; material adverse changes in labor matters, including labor negotiations, and any resulting financial and/or operational impact; significant increases in benefit plan costs or lower investments returns on plan assets; and the inability to implement our business strategies. • • • • 47

  • Page 50
    ... of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Lowell C. McAdam Chairman and Chief...

  • Page 51
    ... of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. 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 52
    ... stAtements 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...

  • Page 53
    ... flow hedges Unrealized gain (loss) on marketable securities Defined benefit pension and postretirement plans Other comprehensive income attributable to Verizon Other comprehensive income (loss) attributable to noncontrolling interest Total Comprehensive Income Comprehensive income attributable to...

  • Page 54
    ...Investments in unconsolidated businesses Wireless licenses Goodwill Other intangible assets, net Other assets Total assets Liabilities and Equity Current liabilities Debt maturing within one year Accounts payable and accrued liabilities Other Total current liabilities Long-term debt Employee benefit...

  • Page 55
    ... expense Employee retirement benefits Deferred income taxes Provision for uncollectible accounts Equity in earnings of unconsolidated businesses, net of dividends received Changes in current assets and liabilities, net of effects from acquisition/disposition of businesses Accounts receivable...

  • Page 56
    ...marketable securities Defined benefit pension and postretirement plans Other comprehensive income Balance at end of year attributable to Verizon Treasury Stock Balance at beginning of year Employee plans (Note 15) Shareowner plans (Note 15) Other (Note 9) Balance at end of year Deferred Compensation...

  • Page 57
    ... tax benefits, valuation allowances on tax assets, accrued expenses, pension and postretirement benefit assumptions, contingencies and allocation of purchase prices in connection with business combinations. Revenue Recognition Multiple Deliverable Arrangements In both our Verizon Wireless...

  • Page 58
    ...as part of the cost of the network-related assets. In connection with our ongoing review of the estimated remaining average useful lives of plant, property and equipment at our local telephone operations, we determined that there were no changes necessary for average useful lives for 2012, 2011, and...

  • Page 59
    ... useful lives of our other acquired intangible assets, see Note 3. Fair Value Measurements Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly...

  • Page 60
    ...31 or upon a remeasurement event. Verizon management employees no longer earn pension benefits or earn service towards the company retiree medical subsidy (see Note 11). We recognize a pension or a postretirement plan's funded status as either an asset or liability on the consolidated balance sheets...

  • Page 61
    ..., transferred certain AWS licenses to T-Mobile and a 700 megahertz (MHz) lower A block license to Leap Wireless, and recorded an immaterial gain. During 2011, Verizon Wireless entered into commercial agreements, modified in 2012, with affiliates of Comcast Corporation, Time Warner Cable, Bright...

  • Page 62
    ... held defined assets and liabilities that were used in Verizon's 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 consolidated financial statements for the year ended...

  • Page 63
    ... was 6.1 years as of December 31, 2012 (see Note 1, Goodwill and Other Intangible Assets - Intangible Assets Not Subject to Amortization). Goodwill Changes in the carrying amount of Goodwill are as follows: (dollars in millions) Verizon Wireless Balance at January 1, 2011 Acquisitions (Note...

  • Page 64
    ...31, Land Buildings and equipment Central office and other network equipment Cable, poles and conduit Leasehold improvements Work in progress Furniture, vehicles and other Less accumulated depreciation Total Lives (years) - 15 - 45 3 - 15 11 - 50 5 - 20 - 3 - 20 $ 2012 859 22,909 $ 2011 862 21,969...

  • Page 65
    ... statements of income. Capital lease amounts included in Plant, property and equipment are as follows: (dollars in millions) Years Ended December 31, Pretax income Income tax expense $ 2012 30 12 $ 2011 61 24 $ 2010 74 32 At December 31, Capital leases Less accumulated amortization Total...

  • Page 66
    ...,303 Verizon Wireless - notes payable and other Verizon Wireless - Alltel assumed notes Telephone subsidiaries - debentures Other subsidiaries - debentures and other Capital lease obligations (average rate of 6.3% in 2012 and 2011, respectively) Unamortized discount, net of premium Total long-term...

  • Page 67
    ... "Telephone and Other Subsidiary Debt" below), as well as for the repayment of commercial paper and other general corporate purposes. Any accrued and unpaid interest was paid to the date of redemption. In addition, we settled the interest rate swap with a notional value totaling $1.0 billion related...

  • Page 68
    ...% Verizon New York Inc. Debentures due April 2012. Guarantees We guarantee the debentures and first mortgage bonds of our operating telephone company subsidiaries. As of December 31, 2012, $4.3 billion principal amount of these obligations remain outstanding. Each guarantee will remain in place for...

  • Page 69
    ... 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 measured using quoted prices in active markets. Fixed income securities consist...

  • Page 70
    .... During 2012, 2011 and 2010, we paid $0.6 billion, $0.7 billion and $0.7 billion, respectively, to settle RSUs and PSUs classified as liability awards. Verizon Wireless' Long-Term Incentive Plan The Verizon Wireless Long-Term Incentive Plan (the Wireless Plan) provides compensation opportunities to...

  • Page 71
    ... in 2010. There was no stock option expense for 2012, 2011 and 2010. During 2012, 2011 and 2010, we paid $0.1 billion, respectively, to settle VARs classified as liability awards. Stock-Based Compensation Expense After-tax compensation expense for stock-based compensation related to RSUs, PSUs, and...

  • Page 72
    ... to time, and we may also periodically amend the benefits in the management plans. The following tables summarize benefit costs, as well as the benefit obligations, plan assets, funded status and rate assumptions associated with pension and postretirement health care and life insurance benefit plans...

  • Page 73
    ... Rate Rate of compensation increases 2012 4.20% 3.00 Pension 2011 5.00% 3.00 2012 Health Care and Life 2011 5.00% N/A 4.20% N/A The weighted-average assumptions used in determining net periodic cost follow: At December 31, Discount Rate Expected return on plan assets Rate of compensation increases...

  • Page 74
    ... service and interest cost Effect on postretirement benefit obligation as of December 31, 2012 Increase $ 232 3,251 Decrease $ (187) (2,669) Plan Assets Historically, our portfolio strategy emphasized a long-term equity orientation, significant global diversification, and the use of both public...

  • Page 75
    ..., financial conditions, local market conditions and the status of the capital markets, and thus are classified within Level 3. Private equity investments include those in limited partnerships that invest in operating companies that are not publicly traded on a stock exchange. Investment strategies...

  • Page 76
    ...share computations. Total savings plan costs were $0.7 billion in 2012, 2011 and 2010, respectively. Pension Annuitization On October 17, 2012, we, along with our subsidiary Verizon Investment Management Corp., and Fiduciary Counselors Inc., as independent fiduciary of the Verizon Management Pension...

  • Page 77
    ... redemption costs recorded in the current year. The effective income tax rate in 2011 decreased to 2.7% from 19.4% in 2010. This decrease was primarily driven by lower income before provision for income taxes as a result of higher pension and benefit charges recorded in 2011 as well as tax benefits...

  • Page 78
    ... Service (IRS) and multiple state and foreign jurisdictions for various open tax years. The IRS commenced its examination of the Company's U.S. income tax returns for tax years 2007-2009 in the third quarter of 2012. Significant tax examinations are ongoing in Italy and New York City for tax years...

  • Page 79
    ... and government customers across the United States. Wireline's voice, data and video communications products and enhanced services include local and long distance voice, broadband Internet access and video, corporate networking solutions, data center and cloud services and security and managed...

  • Page 80
    ...Retail service Other service Service revenue Equipment Other Consumer retail Small business Mass Markets Strategic services Core Global Enterprise Global Wholesale Other Intersegment revenues Total operating revenues Cost of services and sales Selling, general and administrative expense Depreciation...

  • Page 81
    ... 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, 2012, 2011 and 2010. International operating revenues and long-lived assets...

  • Page 82
    ... Securities During 2012, 2011 and 2010, reclassification adjustments on marketable securities for gains (losses) realized in net income were not significant. Defined Benefit Pension and Postretirement Plans The change in Defined benefit pension and postretirement plans of $0.9 billion, net of taxes...

  • Page 83
    ...Cash Paid Interest, net of amounts capitalized $ 2012 1,971 $ 2011 2,629 $ 2010 2,433 Common stock has been used from time to time to satisfy some of the funding requirements of employee and shareowner plans, including 24.6 million common shares issued from Treasury stock during 2012, related to...

  • Page 84
    ... charge of $0.4 billion in the third quarter of 2012 and will pay and recognize over the next six years an additional $0.2 billion. In connection with the execution of agreements for the sales of businesses and investments, Verizon ordinarily provides representations and warranties to the purchasers...

  • Page 85
    ... for the fourth quarter of 2011 include after-tax charges attributable to Verizon of $3.5 billion relat ed to severance, pension and benefit charges and costs related to the early redemption of debt. (1) Net income (loss) attributable to Verizon per common share is computed independently for each...

  • Page 86
    ... Business Markets Marc C. Reed Executive Vice President and Chief Administrative Officer Shane A. Sanders Senior Vice President - Internal Auditing Michael T. Stefanski Senior Vice President - Investor Relations John G. Stratton Executive Vice President and President - Verizon Enterprise Solutions...

  • Page 87
    ... funds transfer service to registered shareowners wishing to deposit dividends directly into savings or checking accounts on dividend payment dates. Direct Invest Stock Purchase and Ownership Plan - Verizon offers a direct stock purchase and share ownership plan. The plan allows current and new...

  • Page 88
    Verizon Communications Inc. 140 West Street New York, New York 10007 212 395-1000 verizon.com © 2013. Verizon. All Rights Reserved. 002CSN8269v