Verizon Wireless 2013 Annual Report Download

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2013 ANNUAL REPORT
THE
WORLD’S BIGGEST CH A L L E N GES
DESERVE EVEN BIGGER SOLUTIONS.
{ POWERFUL ANSWERS }

Table of contents

  • Page 1
    THE WORLD'S BIGGEST CHALLENGES DESERVE EVEN BIGGER SOLUTIONS. { P O W E R FUL AN SWER S } 2013 ANNUAL REPORT

  • Page 2
    ... that result from changes in the accounting rules or their application, which could result in an impact on earnings; significant increases in benefit plan costs or lower investment returns on plan assets; and the inability to implement our business strategies. In keeping with Verizon's commitment to...

  • Page 3
    ... agreement to purchase the portion of Verizon Wireless owned by Vodafone, which gives us 100 percent ownership of the crown jewel of the global wireless industry. We also strengthened our portfolio of enterprise strategic services with a reinvented cloud product suite, the launch of a mobile health...

  • Page 4
    ...television, phone and Internet in 2013; Frost & Sullivan recognized the quality of our enterprise managed security services; and for the third year in a row, Fortune magazine has ranked Verizon No. 1 in the telecommunications sector of the publication's list of the World's Most Admired Companies. We...

  • Page 5
    ... meet the increasingly complex requirements of our customers. Through Verizon Terremark, we operate some of the world's most advanced data centers and provide stateof-the-art cloud services for enterprise customers. We provide the vital security services that are so critical to the future of mobile...

  • Page 6
    ... of Verizon's FiOS network will help future-proof our world. Located in the Boston and San Francisco areas, the Verizon Innovation Centers were created to help a wide range of entrepreneurs and inventors connect their new devices and software to the Verizon Wireless 4G LTE network. Each company...

  • Page 7
    ..., remote diagnostics and cloud computing in combination with wireless connectivity to provide new tools for managing large vehicle fleets efficiently. We have deployed 18,000 such devices in our own fleet and field operations, generating substantial savings in time and fuel costs. The connected car...

  • Page 8
    ... a smartphone and help people with chronic conditions manage their medication; crowd-sourcing and social networking solutions to mobilize communities and fund clean energy projects. We look forward to working with the winners as they bring their products to market. We have also focused the Verizon...

  • Page 9
    ... to be a globally connected solutions provider. But to succeed as a market leader in 2014, we need to do what we did in 2013: deliver consistent results and great service ...every day, every month, every quarter. In the end, building an enduring company all comes back to customers, which is why-no...

  • Page 10
    ... and services with minority, women, and service-disabled veteran business enterprises (MWSDVBE)-the highest total in company history and nearly a 20% increase compared to 2012. +20% To view our complete set of Corporate Responsibility Key Performance Indicators online, go to responsibility.verizon...

  • Page 11
    ... charges. Stock Performance Graph Comparison of Five-Year Total Return Among Verizon, S&P 500 Telecommunications Services Index and S&P 500 Stock Index Verizon $240 $220 $200 $180 Dollars $160 $140 $120 $100 $80 $60 2008 2009 2010 2011 2012 2013 S&P 500 Telecom Services S&P 500 Data Points...

  • Page 12
    ...connected to the Verizon Wireless network. Customers with Verizon Edge, which provides a device payment plan option, also will 10 receive discounted monthly access fees on More Everything plans. As of December 31, 2013, Share Everything accounts represented approximately 46% of our retail postpaid...

  • Page 13
    ... postpaid customers, capitalizing on demand for data services and bringing our customers new ways of using wireless services in their daily lives. We expect that future connection growth will continue as we introduce new smartphones, Internet devices such as tablets and our suite of 4G LTE devices...

  • Page 14
    ... AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Capital Expenditures Our 2014 capital program includes capital to fund advanced networks and services, including 4G LTE and FiOS, the continued expansion of our core networks, including our IP and data center...

  • Page 15
    ... an increase in advanced services, such as contact center solutions, IP communications, and our cloud and data center offerings as well as revenue from a telematics services business that we acquired in the third quarter of 2012. Global Wholesale revenues decreased $0.5 billion, or 7.3%, during 2013...

  • Page 16
    ...: salaries and wages and benefits not directly attributable to a service or product; bad debt charges; taxes other than income taxes; advertising and sales commission costs; customer billing; call center and information technology costs; regulatory fees; professional service fees; and rent and...

  • Page 17
    ... include pension and benefit related credits and/ or charges based on actuarial assumptions, including projected discount rates and an estimated return on plan assets. These estimates are updated in the fourth quarter to reflect actual return on plan assets and Other Consolidated Results...

  • Page 18
    ... average debt (see "Consolidated Financial Condition") and a lower effective interest rate. Capitalized interest costs were lower in 2012 primarily due to our ongoing deployment of the 4G LTE network. (dollars in millions) 2013 $ 5,730 19.6 % $ 2012 (660) (6.7) % $ 2011 285 2.7 % 2013 vs. 2012...

  • Page 19
    ... Verizon Wireless. We provide these 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...

  • Page 20
    ... other Internet devices. Additionally, during 2013, postpaid smartphone activations represented 86% of phones activated compared to 77% during 2012. Other service revenue increased during 2013 compared to 2012 due to growth in wholesale connections, partially offset by a decrease in revenue related...

  • Page 21
    ...additions and upgrades, as well as the average commission per unit, as the mix of units continues to shift toward smartphones and more customers activate data services. Selling, general and administrative expense increased during 2012 compared to 2011 primarily due to higher sales commission expense...

  • Page 22
    ... business retail voice connections, primarily reflecting competition and a shift to both IP and high-speed circuits. 2012 Compared to 2011 Mass Markets revenues increased during 2012 compared to 2011 primarily due to the expansion of FiOS services (Voice, Internet and Video) as well as changes...

  • Page 23
    ... public sector customers. This decrease was partially offset by growth in Strategic services revenues, which increased $0.4 billion, or 4.6%, during 2013 compared to 2012 primarily due to growth in advanced services, such as contact center solutions, IP communications and our cloud and data center...

  • Page 24
    ... rate increases and increased expenses related to our cloud and data center offerings. Cost of services and sales was also impacted by higher costs related to FiOS installation, as well as higher repair and maintenance expenses caused by storm-related events in 2012 compared to 2011. The increases...

  • Page 25
    ... 2013, as a result of the Wireless Transaction, we recorded costs of $0.9 billion primarily for interest expense of $0.7 billion related to the issuance of the new notes, as well as $0.2 billion in fees primarily in connection with the bridge credit agreement (see "Consolidated Financial Condition...

  • Page 26
    ...and privately-placed capital market 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. In addition, during 2013, we entered into a $2.0 billion 364-day revolving credit agreement...

  • Page 27
    ... changes in market conditions. During 2013, 2012 and 2011, net cash provided by (used in) financing activities was $26.5 billion, $(21.3) billion and $(5.8) billion, respectively. 2013 During March 2013, we issued $0.5 billion aggregate principal amount of floating rate Notes due 2015 in a private...

  • Page 28
    ... the related cross currency swap was settled. During May 2011, $4.0 billion Verizon Wireless two-year fixed and floating rate notes matured and were repaid. Special Distributions In May 2013, the Board of Representatives of Verizon Wireless declared a distribution to its owners, which was paid in...

  • Page 29
    ... and 2011 were a result of the factors described in connection with net cash provided by operating activities and capital expenditures. Employee Benefit Plan Funded Status and Contributions Pension Annuitization On October 17, 2012, we, along with our subsidiary Verizon Investment Management Corp...

  • Page 30
    ...(4) Other long-term liabilities include estimated postretirement benefit and qualified pension plan contributions (see Note 11 to the consolidated financial statements). We are not able to make a reliable estimate of when the unrecognized tax benefits balance of $2.1 billion and related interest and...

  • Page 31
    ...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 consolidated balance sheets as assets and liabilities. During 2012, interest rate...

  • Page 32
    ... factors including the business enterprise value of Wireless, macroeconomic conditions (including changes in interest rates and discount rates), industry and market considerations (including industry revenue and EBITDA margin projections), the projected financial performance of Wireless, as well as...

  • Page 33
    ... the uncertain tax position is disallowed. We will adopt this standard update during the first quarter of 2014. We are currently evaluating the consolidated balance sheet impact related to this standard update. (dollars in millions) Pension plans discount rate Rate of return on pension plan assets...

  • Page 34
    ... $130 billion. On February 21, 2014, pursuant to the terms and subject to the conditions set forth in the Stock Purchase Agreement, Verizon acquired (the Wireless Transaction) from Seller all of the issued and outstanding capital stock (the Transferred Shares) of Vodafone Americas Finance 1 Inc...

  • Page 35
    .... The consolidated financial statements include the results of the operations of each of these acquisitions from the date each acquisition closed. On January 21, 2014, Verizon announced an agreement to acquire a business dedicated to the development of cloud television products and services for cash...

  • Page 36
    ... national security and law enforcement-related obligations on the ways in which Verizon Wireless stores information and otherwise conducts its business. Intercarrier Compensation and Network Access The FCC regulates some of the rates that carriers pay each other for the exchange voice traffic...

  • Page 37
    ... the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings; • significant increases in benefit plan costs or lower investment returns on plan assets; and • the inability to implement our business strategies. 35

  • Page 38
    ... by management. The company's financial statements included in this Annual Report have been audited by Ernst & Young LLP, independent registered public accounting firm. Ernst & Young LLP has also provided an attestation report on the company's internal control over financial reporting. To The Board...

  • Page 39
    ..., in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Verizon as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, cash flows and changes in equity for each of the...

  • Page 40
    ... income attributable to Verizon Weighted-average shares outstanding (in millions) Diluted Earnings Per Common Share Net income attributable to Verizon Weighted-average shares outstanding (in millions) See Notes to Consolidated Financial Statements 2013 $ 120,550 2012 $ 115,846 2011 $ 110,875 44...

  • Page 41
    ... interests Comprehensive income attributable to Verizon Total Comprehensive Income See Notes to Consolidated Financial Statements 2013 $ 23,547 60 25 16 22 123 (15) $ 23,655 12,035 11,620 $ 23,655 $ 2012 10,557 69 (68) 29 936 966 10 11,533 9,692 1,841 11,533 $ 2011 10,198 (119) 30 (7) 316...

  • Page 42
    ...(Accumulated deficit) Accumulated other comprehensive income Common stock in treasury, at cost Deferred compensation - employee stock ownership plans and other Noncontrolling interests Total equity Total liabilities and equity See Notes to Consolidated Financial Statements 3,432 75,747 24,634 5,800...

  • Page 43
    ...by operating activities: Depreciation and amortization 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...

  • Page 44
    ... gains (losses) on 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 Shares purchased Employee plans (Note 15) Shareowner plans (Note 15) Balance at end of year...

  • Page 45
    ... 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 Wireless and Wireline segments, we offer products and services...

  • Page 46
    ...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 2013, 2012 and 2011. In...

  • Page 47
    ... 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. Also, we...

  • Page 48
    ... $130 billion. On February 21, 2014, pursuant to the terms and subject to the conditions set forth in the Stock Purchase Agreement, Verizon acquired (the Wireless Transaction) from Seller all of the issued and outstanding capital stock (the Transferred Shares) of Vodafone Americas Finance 1 Inc...

  • Page 49
    ... 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 pursuant to commercial agreements executed concurrently with the SpectrumCo transaction. Verizon Wireless completed license purchase and exchange...

  • Page 50
    .... The consolidated financial statements include the results of the operations of each of these acquisitions from the date each acquisition closed. On January 21, 2014, Verizon announced an agreement to acquire a business dedicated to the development of cloud television products and services for cash...

  • Page 51
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued NOTE 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, 2012 Acquisitions (Note 2) Capitalized interest on ...

  • Page 52
    ... controlling 55% interest in Verizon Wireless and Vodafone owned the remaining 45%. On February 21, 2014, Verizon completed the Wireless Transaction and acquired 100% ownership of Verizon Wireless. See Note 2 for additional information. Special Distributions In May 2013, the Board of Representatives...

  • Page 53
    ... Depreciation and amortization expense in the consolidated statements of income. Capital lease amounts included in Plant, property and equipment are as follows: (dollars in millions) Years Ended December 31, Pre-tax income Income tax expense $ 2013 34 12 $ 2012 30 12 $ 2011 61 24 At December 31...

  • Page 54
    ... TO CONSOLIDATED FINANCIAL STATEMENTS continued NOTE 8 DEBT Changes to debt during 2013 are as follows: (dollars in millions) Debt Maturing within One Year Balance at January 1, 2013 Proceeds from long-term borrowings Repayments of long-term borrowings and capital leases obligations Decrease in...

  • Page 55
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued 2013 During March 2013, we issued $0.5 billion aggregate principal amount of floating rate Notes due 2015 in a private placement resulting in cash proceeds of approximately $0.5 billion, net of discounts and issuance costs. The proceeds were used ...

  • Page 56
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued Verizon Wireless - Notes Payable and Other Verizon Wireless Capital LLC, a wholly-owned subsidiary of Verizon Wireless, is a limited liability company formed under the laws of Delaware on December 7, 2001 as a special purpose finance subsidiary to...

  • Page 57
    ... Total Level 2(2) Level 3(3) Total 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 consolidated balance sheets as assets and liabilities. During 2012...

  • Page 58
    .... During 2013, 2012 and 2011, we paid $1.1 billion, $0.6 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 59
    ... (3) 2,847 Range of Exercise Prices $ 30.00-39.99 40.00-49.99 Total During 2013, 2012 and 2011, 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 60
    ... 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...

  • Page 61
    ...return on plan assets Rate of compensation increases 2013 4.20% 7.50 3.00 2012 5.00% 7.50 3.00 Pension 2011 5.75% 8.00 3.00 2013 4.20% 5.60 N/A 2012 Health Care and Life 2011 5.75% 6.00 N/A 5.00% 7.00 N/A In order to project the long-term target investment return for the total portfolio, estimates...

  • Page 62
    ...trend rate gradually declines Year the rate reaches the level it is assumed to remain thereafter 2013 6.50% 4.75 2020 Health Care and Life 2012 2011 7.00% 5.00 2016 7.50% 5.00 2016 Pension Plans The fair values for the pension plans by asset category at December 31, 2013 are as follows: (dollars in...

  • Page 63
    ... 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 64
    .... All leveraged ESOP shares are included in earnings per share computations. Total savings plan costs were $1.0 billion in 2013 and $0.7 billion in 2012 and 2011, respectively. Pension Annuitization On October 17, 2012, we, along with our subsidiary Verizon Investment Management Corp., and Fiduciary...

  • Page 65
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued NOTE 12 TAXES The components of income before (provision) benefit for income taxes are as follows: (dollars in millions) Years Ended December 31, Domestic Foreign Total 2013 $ 28,833 444 $ 29,277 $ $ 2012 9,316 581 9,897 $ 2011 9,724 759 $ 10,...

  • Page 66
    ... 2013 activity is primarily related to state and foreign tax losses and credit carry forwards. $ 33 82 60 The after-tax accruals for the payment of interest and penalties in the consolidated balance sheets are as follows: At December 31, 2013 2012 (dollars in millions) $ 274 386 The decrease...

  • Page 67
    .... Our segments and their principal activities consist of the following: Segment Wireless Description Wireless' communications products and services include wireless voice and data services and equipment sales, which are provided to consumer, business and government customers across the United States...

  • Page 68
    ...TO CONSOLIDATED FINANCIAL STATEMENTS continued (dollars in millions) 2012 External Operating Revenues 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...

  • Page 69
    ... 21, 2014. 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 years ended December 31, 2013, 2012 and 2011. International operating revenues...

  • Page 70
    ... on our consolidated statements of income. Foreign Currency Translation Adjustments The change in Foreign currency translation adjustments during 2013, 2012 and 2011 was primarily related to our investment in Vodafone Omnitel N.V. and was primarily driven by the movements of the U.S. dollar against...

  • Page 71
    ... amounts capitalized $ 2013 2,122 $ 2012 1,971 $ 2011 2,629 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 dividend payments, which...

  • Page 72
    ... in the third quarter of 2012 and will pay and recognize over the following 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 pertaining to...

  • Page 73
    ... after-tax credits attributable to Verizon of $3.7 billion related to severance, pension and benefit credits, as well as after-tax costs attributable to Verizon of $0.5 billion related to the Wireless Transaction. • Results of operations for the third quarter of 2012 include after-tax charges...

  • Page 74
    ... Company Lowell C. McAdam Chairman and Chief Executive Officer Verizon Communications Inc. Sandra O. Moose** President Strategic Advisory Services LLC Joseph Neubauer** Chairman ARAMARK Holdings Corporation Donald T. Nicolaisen Former Chief Accountant United States Securities and Exchange Commission...

  • Page 75
    ... 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 76
    Verizon Communications Inc. 140 West Street New York, New York 10007 212 395-1000 verizon.com © 2014. Verizon. All Rights Reserved. 002CSN34DE 3.EPCP74448125.100.