Verizon Wireless 2014 Annual Report Download

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2014 ANNUAL REPORT

Table of contents

  • Page 1
    2014 ANNUAL REPORT

  • Page 2
    ... interest rates, and/or availability of further financing; 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 investment returns on plan assets; changes in tax laws...

  • Page 3
    ...: New entrants are disrupting the wireless and broadband space. Competition is putting pressure on prices and margins. Customers are restless and confused about the avalanche of competing claims and pricing plans. All of this suggests to investors that growth will be more challenging going forward...

  • Page 4
    ... with a year-end total of 102.1 million, and are focused on moving more of these loyal, high-value customers to devices that take advantage of our 4G LTE network leadership. Smartphones now account for 79 percent of our retail postpaid phone base, up from 70 percent at the end of 2013, and we ended...

  • Page 5
    ... equipment sales. We continue to transform these segments around enterprise-grade network, cloud, security, managed services and other business solutions that help enterprise customers adapt to the challenges of an all-digital world. While overall revenues from Enterprise fell by 3.5 percent in 2014...

  • Page 6
    ... and san Francisco areas, were created to help entrepreneurs and inventors connect their new devices and software to the verizon network. advances in wireless technology are fueling a wave of innovation that's connecting people, places and things in meaningful new ways-changing the way we live, work...

  • Page 7
    ...1,500 content companies deliver their services in digital form to any screen or device, anywhere in the world. We continually add features and functionality to our FiOS TV service, and later this year we expect to launch our own mobile-first video product, leveraging our 4G LTE wireless network and...

  • Page 8
    ... the company with the best quality networks, the most robust slate of video and data services, and the cash ï¬,ows to invest and participate in the growth markets of the future. For these reasons, we remain confident in our long-term financial position and ability to create value for shareholders...

  • Page 9
    ... of our Board, the efforts of our leadership team and the hard work of our more than 177,000 employees-remain one of the very few companies built for long-term success in this dynamic industry. Lowell McAdam Chairman and Chief Executive Officer Verizon Communications Inc. The Verizon Innovative...

  • Page 10
    ...24/7 Internet access, helping to close the digital divide. SUSTAINABILITY We're unrelenting in our efforts to create a greener planet, from the way we run our network and business operations, to the energy-saving solutions we offer our customers. Providing Products to Cut Emissions Verizon's smart...

  • Page 11
    ... revenues operating income Net income attributable to Verizon Per common share - basic Per common share - diluted cash dividends declared per common share Net income attributable to noncontrolling interests Financial Position Total assets Debt maturing within one year Long-term debt employee benefit...

  • Page 12
    ...with Frontier Communications Corporation (Frontier) pursuant to which Verizon will sell its local exchange business and related landline activities in California, Florida, and Texas, including FiOS Internet and Video customers, switched and special access lines and high-speed Internet service...

  • Page 13
    ... domestic unlimited voice minutes, unlimited domestic and international text, video and picture messaging, cloud storage and a single data allowance that can be shared among multiple devices connected to the Verizon Wireless network. As of December 31, 2014, More Everything accounts represented...

  • Page 14
    .... In 2015, we expect the rate at which customers activate devices on Verizon edge to increase. as more customers adopt Verizon edge, we expect equipment and other revenue to be positively impacted, while we expect retail postpaid average revenue per account (ARPA) and service revenue, in...

  • Page 15
    ...selling, general and administrative expense $ 2014 256 239 5 $ 2013 599 531 25 $ 2012 835 756 23 Consolidated Revenues (dollars in millions) Years ended December 31, Wireless service revenue equipment and other Total Wireline Mass Markets Global enterprise Global Wholesale other Total corporate...

  • Page 16
    ... exchange revenues. Global enterprise revenues decreased $0.5 billion, or 3.5%, during 2014 compared to 2013 primarily due to lower voice services and data networking revenues, the contraction of market rates due to competition and a decline in core customer premise equipment revenues. This decrease...

  • Page 17
    ...increase in depreciable assets at our Wireless segment. 2013 Compared to 2012 Cost of Services and Sales cost of services and sales decreased during 2013 compared to 2012 primarily due to a decrease in cost of equipment sales, decreased data roaming, a decline in cost of data services and a decrease...

  • Page 18
    ... interest rate (see "Consolidated Financial Condition"). Capitalized interest costs were lower in 2014 primarily due to a decrease in wireless licenses that are currently under development, which was due to the deployment of aWs licenses for commercial service during 2014. Total interest costs on...

  • Page 19
    ...of severance, pension and benefit credits recorded during 2013 compared to lower income before income taxes as a result of severance, pension and benefit charges as well as early debt redemption costs recorded during 2012. to Vodafone's noncontrolling interest in the Verizon Wireless partnership in...

  • Page 20
    ...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 for a monthly network service...

  • Page 21
    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Service Revenue service revenue, which does not include recurring equipment installment billings related to Verizon edge, increased by $3.6 billion, or 5.2%, during 2014 compared to 2013 primarily driven ...

  • Page 22
    ... of new devices. cost of services and sales decreased during 2013 compared to 2012 primarily due to a decrease in cost of equipment sales of $0.4 billion, which was partially due to a decline in postpaid upgrades, decreased data roaming, a decline in cost of data services and a decrease in network...

  • Page 23
    ... 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 competition and a continuing shift to both IP and high-speed circuits. 2013 Compared to 2012 Mass Markets revenues increased...

  • Page 24
    ... customer premise equipment revenues. This decrease was partially offset by an increase in strategic services revenues of $0.2 billion, or 2.3%, primarily due to growth in our application services, such as our cloud and data center offerings and contact center solutions. 2013 Compared to 2012 Global...

  • Page 25
    ... continued FiOS subscriber growth and programming license fee increases. cost of services and sales decreased during 2013 compared to 2012, primarily due to a decrease in costs related to customer premise equipment which reflected our focus on improving margins by de-emphasizing sales of equipment...

  • Page 26
    ... actual 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. The consolidated adjusted...

  • Page 27
    ... costs presented above. COnsOlIdATed fInAnCIAl COndITIOn (dollars in millions) Years ended December 31, Cash Flows Provided By (Used In) operating activities Investing activities Financing activities Increase (Decrease) In Cash and Cash Equivalents 2014 $ 30,631 (15,856) (57,705) $ (42,930) 2013...

  • Page 28
    ... to the consolidated financial statements for additional information regarding the term loan agreement. In February 2014, Verizon acquired a business dedicated to the development of IP television for cash consideration that was not significant. During the fourth quarter of 2013, Verizon acquired an...

  • Page 29
    ... $.515 per share in the same period of 2012. as in prior periods, dividend payments were a significant use of capital resources. Special Distributions In May 2013, the Board of Representatives of Verizon Wireless declared a distribution to its owners, which was paid in the second quarter of 2013 in...

  • Page 30
    ... 2012. In addition to the previously authorized three-year share buyback program, in February 2015, the Verizon Board of Directors authorized Verizon to enter into an accelerated share repurchase (ASR) agreement to repurchase $5.0 billion of the Company's common stock. The total number of shares...

  • Page 31
    ... of Verizon Wireless. The completion of the Wireless Transaction resulted in an increase in income tax payments as well as an increase in interest payments, which reduced our net cash provided by operating activities (see "Cash Flows Provided by Operating Activities"). Employee Benefit Plan Funded...

  • Page 32
    ...to the consolidated financial statements. (3) The purchase obligations reflected above are primarily commitments to purchase programming and network services, equipment, software, handsets and peripherals, and marketing activities, which will be used or sold in the ordinary course of business. These...

  • Page 33
    ...as assets and liabilities. During the second quarter of 2013, interest rate swaps with a notional value of $1.25 billion matured and the impact to our consolidated financial statements was not material. During the third quarter of 2013, we entered into interest rate swaps with a total notional value...

  • Page 34
    ... economic conditions, current and 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 represented our estimate of the weighted-average cost of capital...

  • Page 35
    ... result in higher 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...

  • Page 36
    ... Frontier pursuant to which Verizon will sell its local exchange business and related landline activities in california, Florida, and Texas, including FiOS Internet and Video customers, switched and special access lines and high-speed Internet service and long distance voice accounts...

  • Page 37
    ... rates, and/or availability of further financing; • 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 investment returns on plan assets; • changes in tax...

  • Page 38
    ... 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 of Directors and...

  • 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, 2014 and 2013, and the related consolidated statements of income, comprehensive income, cash flows and changes in equity for each of the...

  • Page 40
    ...i e s CONSOLIDATED 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...

  • Page 41
    ... (loss) on cash flow hedges Unrealized gain (loss) on marketable securities Defined benefit pension and postretirement plans other comprehensive income (loss) attributable to Verizon other comprehensive income (loss) attributable to noncontrolling interests Total Comprehensive Income comprehensive...

  • Page 42
    ... SHEETS (dollars in millions, except per share amounts) at December 31, Assets current assets cash and cash equivalents short-term investments accounts receivable, net of allowances of $739 and $645 Inventories Prepaid expenses and other Total current assets Plant, property and equipment Less...

  • Page 43
    ... Net cash used in investing activities Cash Flows from Financing Activities Proceeds from long-term borrowings Repayments of long-term borrowings and capital lease obligations Decrease in short-term obligations, excluding current maturities Dividends paid Proceeds from sale of common stock Purchase...

  • Page 44
    ...gains (losses) on cash flow hedges Unrealized gains (losses) on marketable securities Defined benefit pension and postretirement plans other comprehensive income (loss) balance at end of year attributable to Verizon Treasury Stock balance at beginning of year shares purchased employee plans (Note 16...

  • Page 45
    ... device payments, trading in their handset in good working condition and signing a new contract with Verizon. Upon upgrade, the outstanding balance of the equipment installment plan is exchanged for the used handset. This trade-in right is accounted for as a guarantee obligation. Verizon Edge...

  • Page 46
    ... FINANCIAL STATEMENTS continued agreements under the current program is not material. The guarantee liability may increase after initial recognition as a result of changes in facts or assumptions and we will account for any increase in the guarantee liability with a corresponding decrease to revenue...

  • Page 47
    ... and average 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...

  • Page 48
    ... are reported 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...

  • Page 49
    ... during the first quarter of 2015. We are currently evaluating the impact that this standard update will have on our consolidated financial statements. In May 2014, the accounting standard update related to the recognition of revenue from contracts with customers was issued. This standard update...

  • Page 50
    ... a number of intra-market swaps that we expect will enable Verizon Wireless to make more efficient use of the AWS band. As a result of these exchanges, we received an aggregate $0.5 billion of AWS licenses at fair value and recorded an immaterial gain. • During the third quarter of 2013, after...

  • Page 51
    ... with frontier communications corporation (frontier) pursuant to which Verizon will sell its local exchange business and related landline activities in california, florida, and Texas, including fios Internet and Video customers, switched and special access lines and high-speed Internet service and...

  • Page 52
    ... 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, 2013 acquisitions (Note 2) Dispositions (Note 2) capitalized...

  • Page 53
    ...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 of verizon Wireless declared a distribution to its owners, which was paid in the second quarter...

  • Page 54
    ... nonrecourse loan payments related to leveraged leases and allowances for doubtful accounts, along with expected receipts relating to operating leases for the periods shown at December 31, 2014, are as follows: (dollars in millions) Years 2015 2016 2017 2018 2019 Thereafter Total $ Capital Leases...

  • Page 55
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued As Lessee We lease certain facilities and equipment for use in our operations under both capital and operating leases. Total rent expense under operating leases amounted to $2.7 billion in 2014, $2.6 billion in 2013 and $2.5 billion in 2012, ...

  • Page 56
    ...proceeds not used to finance the Wireless Transaction were used for general corporate purposes. also, during february 2014, we issued $0.5 billion aggregate principal amount of 5.90% Notes due 2054 resulting in cash proceeds of approximately $0.5 billion, net of discounts and issuance costs. The net...

  • Page 57
    ... Ratings Services, respectively. Tender Offer On March 10, 2014, we announced the commencement of a tender offer (the Tender Offer) to purchase for cash any and all of the series of notes listed in the following table: (dollars in millions, except for Purchase Price) Verizon Communications Interest...

  • Page 58
    ...) Verizon Communications Maturity 2043 2038 2038 $ 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 59
    ...primarily of network equipment. at December 31, 2014, $0.7 billion of these financing arrangements remained outstanding. These purchases are non-cash financing activities and therefore not reflected within capital expenditures on our consolidated statements of cash flows. Guarantees We guarantee the...

  • Page 60
    ... to upgrade their handset after a minimum of 30 days, subject to certain conditions, including making a stated portion of the required device payments, trading in their handset in good working condition and signing a new contract with Verizon. The gross guarantee liability related to this program...

  • Page 61
    ...designated these contracts as cash flow hedges. During the fourth quarter of 2014, we settled $2.8 billion of forward interest rate swaps and the pre-tax loss was not material. The fair value of these contracts was $0.2 billion, which was included within other liabilities on our consolidated balance...

  • Page 62
    ...the Wireless Plan, Value appreciation rights (Vars) were granted to eligible employees. We have not granted new Vars since 2004. as of December 31, 2014, there are no Vars that remain outstanding. Stock-Based Compensation Expense after-tax compensation expense for stock-based compensation related to...

  • Page 63
    ... net benefits paid curtailment and termination benefits settlements paid end of year Change in Plan Assets beginning of year actual return on plan assets company contributions benefits paid settlements paid end of year Funded Status end of year 2014 Pension 2013 Health Care and Life 2014 2013 at...

  • Page 64
    ... rate expected return on plan assets rate of compensation increases 2014 5.00 % 7.25 3.00 2013 4.20 % 7.50 3.00 Pension 2012 5.00 % 7.50 3.00 2014 5.00 % 5.50 N/A 2013 Health Care and Life 2012 5.00 % 7.00 N/a 4.20 % 5.60 N/a In order to project the long-term target investment return for the total...

  • Page 65
    ...2014 6.50 % 4.75 2022 Health Care and Life 2013 2012 6.50 % 4.75 2020 7.00 % 5.00 2016 Pension Plans The fair values for the pension plans by asset category at December 31, 2014 are as follows: (dollars in millions) Asset Category Cash and cash equivalents Equity securities Fixed income securities...

  • Page 66
    ...6,375 $ $ $ $ $ $ $ $ Health Care and Life Plans The fair values for the other postretirement benefit plans by asset category at December 31, 2014 are as follows: (dollars in millions) equity securities are investments in common stock of domestic and international corporations in a variety...

  • Page 67
    ... TO CONSOLIDATED FINANCIAL STATEMENTS continued Estimated Future Benefit Payments The benefit payments to retirees are expected to be paid as follows: (dollars in millions) Year 2015 2016 2017 2018 2019 2020-2024 Pension Benefits $ 2,855 2,024 1,937 1,427 1,396 6,890 Health Care and Life $ 1,481...

  • Page 68
    ... a result of severance, pension and benefit charges as well as early debt redemption costs recorded during 2012. The amounts of cash taxes paid are as follows: (dollars in millions) Years Ended December 31, Income taxes, net of amounts refunded Employment taxes Property and other taxes Total 2014...

  • Page 69
    ... 2013 (dollars in millions) $ 169 274 The decrease in unrecognized tax benefits was primarily due to the resolution of issues with the Internal Revenue Service (IRS) involving tax years 2007 through 2009, and was partially offset by an increase in unrecognized tax benefits related to the Wireless...

  • Page 70
    ... and equipment sales, which are provided to consumer, business and government customers across the United States. Wireline's voice, data and video communications products and enhanced services include broadband video and data, corporate networking solutions, data center and cloud services, security...

  • Page 71
    ...TO CONSOLIDATED FINANCIAL STATEMENTS continued (dollars in millions) 2013 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 72
    ...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 73
    ... of cash and cash equivalents which were used to complete the Wireless Transaction on february 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...

  • Page 74
    ...unconsolidated businesses on our consolidated statement of income and are a result of the completion of the Omnitel transaction. See Note 2 for additional details. For the year ended December 31, 2014, the amounts reclassified to net income related to defined benefit pension and postretirement plans...

  • Page 75
    ... Liabilities advance billings and customer deposits Dividends payable other $ $ $ 3,125 2,307 3,217 8,649 $ $ 2,829 1,539 2,296 6,664 Cash Flow Information (dollars in millions) Years ended December 31, Cash Paid Interest, net of amounts capitalized $ 2014 4,429 $ 2013 2,122 $ 2012...

  • Page 76
    ...executed in the normal course of business and support several financing arrangements and payment obligations to third parties, were outstanding. We have several commitments primarily to purchase programming and network services, equipment, software, handsets and peripherals, and marketing activities...

  • Page 77
    ...-tax costs attributable to Verizon related to the Wireless Transaction. • Results of operations for the fourth quarter of 2013 include 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...

  • Page 78
    ...Chief Executive Officer The Procter & Gamble Company M. Frances Keeth Retired Executive Vice President Royal Dutch Shell plc Lowell C. McAdam Chairman and Chief Executive Officer Verizon Communications Inc. Donald T. Nicolaisen Former Chief Accountant United States Securities and Exchange Commission...

  • Page 79
    ...Service - Verizon offers an electronic 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...

  • Page 80
    Verizon Communications Inc. 1095 Avenue of the Americas New York, New York 10036 212 395-1000 verizon.com © 2015. Verizon. All Rights Reserved. 002CSN49B3 3.EPCP74448125.101