Verizon Communications Inc. -- Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

  (Mark one)    
  x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  
    OF THE SECURITIES EXCHANGE ACT OF 1934  
    For the quarterly period ended September 30, 2011  
   

 

OR

 

 
  ¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  
    OF THE SECURITIES EXCHANGE ACT OF 1934  
    For the transition period from              to               

Commission file number: 1-8606

 

Verizon Communications Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   23-2259884

(State or other jurisdiction

of incorporation or organization)

  (I.R.S. Employer Identification No.)

140 West Street

New York, New York

  10007

(Address of principal executive offices)

  (Zip Code)

Registrant’s telephone number, including area code: (212) 395-1000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

  

Accelerated filer  ¨

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes  x No

At September 30, 2011, 2,831,090,656 shares of the registrant’s common stock were outstanding, after deducting 136,519,463 shares held in treasury.

 

 

 


Table of Contents
Table of Contents

 

         Page  
PART I – FINANCIAL INFORMATION   
Item 1.   Financial Statements (Unaudited)   
 

Condensed Consolidated Statements of Income

Three and nine months ended September 30, 2011 and September 30, 2010

     2   
 

Condensed Consolidated Balance Sheets

At September 30, 2011 and December 31, 2010

     3   
 

Condensed Consolidated Statements of Cash Flows

Nine months ended September 30, 2011 and 2010

     4   
  Notes to Condensed Consolidated Financial Statements      5   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      21   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      43   
Item 4.   Controls and Procedures      43   
PART II – OTHER INFORMATION   
Item 1.   Legal Proceedings      43   
Item 1A.   Risk Factors      43   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      43   
Item 6.   Exhibits      44   
Signature      45   
Certifications   


Table of Contents
Part I – Financial Information

Item 1. Financial Statements

Condensed Consolidated Statements of Income

Verizon Communications Inc. and Subsidiaries

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
(dollars in millions, except per share amounts) (unaudited)    2011     2010     2011     2010  

Operating Revenues

   $ 27,913     $ 26,484     $ 82,439     $ 80,170  

Operating Expenses

        

Cost of services and sales (exclusive of items shown below)

     11,398       10,671       33,785       33,539  

Selling, general and administrative expense

     7,689       8,407       22,346       26,075  

Depreciation and amortization expense

     4,179       4,023       12,316       12,322  
  

 

 

 

Total Operating Expenses

     23,266       23,101       68,447       71,936  

Operating Income

     4,647       3,383       13,992       8,234  

Equity in earnings of unconsolidated businesses

     125       141       347       395  

Other income and (expense), net

     24       (51     70       11  

Interest expense

     (698     (597     (2,124     (1,956
  

 

 

 

Income Before Provision For Income Taxes

     4,098       2,876       12,285       6,684  

Provision for income taxes

     (556     (178     (1,875     (1,115
  

 

 

 

Net Income

   $ 3,542     $ 2,698     $ 10,410     $ 5,569  
  

 

 

 

Net income attributable to noncontrolling interest

   $ 2,163     $ 2,039     $ 5,983     $ 5,659  

Net income (loss) attributable to Verizon

     1,379       659       4,427       (90
  

 

 

 

Net Income

   $ 3,542     $ 2,698     $ 10,410     $ 5,569  
  

 

 

 

Basic Earnings (Loss) Per Common Share

        

Net income (loss) attributable to Verizon

   $ .49      $ .23     $ 1.56      $ (.03

Weighted-average shares outstanding (in millions)

     2,834        2,829       2,832        2,830  

Diluted Earnings (Loss) Per Common Share

        

Net income (loss) attributable to Verizon

   $ .49      $ .23     $ 1.56      $ (.03

Weighted-average shares outstanding (in millions)

     2,839        2,830       2,838        2,830  

Dividends declared per common share

   $ 0.5000      $ 0.4875     $ 1.4750      $ 1.4380  

See Notes to Condensed Consolidated Financial Statements

 

2


Table of Contents

Condensed Consolidated Balance Sheets

Verizon Communications Inc. and Subsidiaries

 

(dollars in millions, except per share amounts) (unaudited)    At September 30,
2011
    At December 31,
2010
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 10,324     $ 6,668  

Short-term investments

     534       545  

Accounts receivable, net of allowances of $833 and $876

     11,648       11,781  

Inventories

     1,153       1,131  

Prepaid expenses and other

     4,111       2,223  
  

 

 

 

Total current assets

     27,770       22,348  
  

 

 

 

Plant, property and equipment

     214,798       211,655  

Less accumulated depreciation

     125,955       123,944  
  

 

 

 
     88,843       87,711  
  

 

 

 

Investments in unconsolidated businesses

     3,461       3,497  

Wireless licenses

     73,203       72,996  

Goodwill

     23,541       21,988  

Other intangible assets, net

     5,915       5,830  

Other assets

     5,299       5,635  
  

 

 

 

Total assets

   $ 228,032     $ 220,005  
  

 

 

 

Liabilities and Equity

    

Current liabilities

    

Debt maturing within one year

   $ 8,630     $ 7,542  

Accounts payable and accrued liabilities

     14,486       15,702  

Other

     11,520       7,353  
  

 

 

 

Total current liabilities

     34,636       30,597  
  

 

 

 

Long-term debt

     46,285       45,252  

Employee benefit obligations

     27,705       28,164  

Deferred income taxes

     26,412       22,818  

Other liabilities

     5,479       6,262  

Equity

    

Series preferred stock ($.10 par value; none issued)

              

Common stock ($.10 par value; 2,967,610,119 shares
issued in both periods)

     297       297  

Contributed capital

     37,912       37,922  

Reinvested earnings

     4,619       4,368  

Accumulated other comprehensive income

     1,037       1,049  

Common stock in treasury, at cost

     (5,112     (5,267

Deferred compensation – employee stock ownership plans and other

     298       200  

Noncontrolling interest

     48,464       48,343  
  

 

 

 

Total equity

     87,515       86,912  
  

 

 

 

Total liabilities and equity

   $ 228,032     $ 220,005  
  

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

3


Table of Contents

Condensed Consolidated Statements of Cash Flows

Verizon Communications Inc. and Subsidiaries

 

    

Nine Months Ended

September 30,

 
(dollars in millions) (unaudited)    2011     2010  

Cash Flows from Operating Activities

    

Net Income

   $ 10,410     $ 5,569  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization expense

     12,316       12,322  

Employee retirement benefits

     1,428       5,710  

Deferred income taxes

     1,901       1,611  

Provision for uncollectible accounts

     754       922  

Equity in earnings of unconsolidated businesses, net of dividends received

     102       82  

Changes in current assets and liabilities, net of
effects from acquisition/disposition of businesses

     (2,553     640  

Other, net

     (2,846     (1,742
  

 

 

 

Net cash provided by operating activities

     21,512       25,114  
  

 

 

 

Cash Flows from Investing Activities

    

Capital expenditures (including capitalized software)

     (12,546     (11,744

Acquisitions of licenses, investments and businesses, net of cash acquired

     (1,854     (1,027

Proceeds from dispositions of businesses

            2,594  

Net change in short-term investments

     43       (34

Other, net

     945       151  
  

 

 

 

Net cash used in investing activities

     (13,412     (10,060
  

 

 

 

Cash Flows from Financing Activities

    

Proceeds from long-term borrowings

     6,510         

Repayments of long-term borrowings and capital lease obligations

     (7,420     (7,941

Increase (decrease) in short-term obligations, excluding current maturities

     1,817       (1,097

Dividends paid

     (4,139     (4,034

Proceeds from access line spin-off

            3,083  

Proceeds from sale of common stock

     139         

Other, net

     (1,351     (1,680
  

 

 

 

Net cash used in financing activities

     (4,444     (11,669
  

 

 

 

Increase in cash and cash equivalents

     3,656       3,385  

Cash and cash equivalents, beginning of period

     6,668       2,009  
  

 

 

 

Cash and cash equivalents, end of period

   $ 10,324     $ 5,394  
  

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

4


Table of Contents

Notes to Condensed Consolidated Financial Statements

Verizon Communications Inc. and Subsidiaries

(Unaudited)

 

1.

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements included in the Verizon Communications Inc. (Verizon or the Company) Annual Report on Form 10-K for the year ended December 31, 2010. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.

We have reclassified prior year amounts to conform to the current year presentation.

Recently Adopted Accounting Standards

Revenue Recognition – Multiple Deliverable Arrangements

In both our Domestic Wireless and Wireline segments, we offer products and services to our customers through bundled arrangements. These arrangements involve multiple deliverables which may include products, services, or a combination of products and services.

On January 1, 2011, we prospectively adopted the accounting standard updates regarding revenue recognition for multiple deliverable arrangements, and arrangements that include software elements. These updates require a vendor to allocate revenue in an arrangement using its best estimate of selling price if neither vendor specific objective evidence (VSOE) nor third party evidence (TPE) of selling price exists. The residual method of revenue allocation is no longer permissible. These accounting standard updates do not change our units of accounting for bundled arrangements, nor do they materially change how we allocate arrangement consideration to our various products and services. Accordingly, the adoption of these standard updates did not have a significant impact on our consolidated financial statements. Additionally, we do not currently foresee any changes to our products, services or pricing practices that will have a significant effect on our consolidated financial statements in periods after the initial adoption, although this could change.

Domestic Wireless

Our Domestic Wireless segment earns revenue primarily by providing access to and usage of its network. In general, access revenue is billed one month in advance and recognized when earned. Usage revenue is generally billed in arrears and recognized when service is rendered. Equipment sales revenue associated with the sale of wireless handsets and accessories is recognized when the products are delivered to and accepted by the customer, as this is considered to be a separate earnings process from providing wireless services. For agreements involving the resale of third-party services in which we are considered the primary obligor in the arrangements, we record the revenue gross at the time of the sale.

Wireless bundled service plans primarily consist of wireless voice and data services. The bundling of a voice plan with a text messaging plan (“Talk & Text”), for example, creates a multiple deliverable arrangement consisting of a voice component and a data component in the form of text messaging. For these arrangements, revenue is allocated to each deliverable using a relative selling price method. Under this method, arrangement consideration is allocated to each separate deliverable based on our standalone selling price for each product or service, up to the amount that is not contingent upon providing additional services. For equipment sales, we currently subsidize the cost of wireless devices. The amount of this subsidy is generally contingent on the arrangement and terms selected by the customer. The equipment revenue is recognized up to the amount collected when the wireless device is sold.

Wireline

Our Wireline segment earns revenue based upon usage of its network and facilities and contract fees. In general, fixed monthly fees for voice, video, data and certain other services are billed one month in advance and recognized when earned. Revenue from services that are not fixed in amount and are based on usage is generally billed in arrears and recognized when service is rendered.

 

5


Table of Contents

We sell each of the services offered in bundled arrangements (i.e., voice, video and data), as well as separately; therefore each product or service has a standalone selling price. For these arrangements revenue is allocated to each deliverable using a relative selling price method. Under this method, arrangement consideration is allocated to each separate deliverable based on our standalone selling price for each product or service. These services include FiOS services, individually or in bundles, and High Speed Internet.

When we bundle equipment with maintenance and monitoring services, we recognize equipment revenue when the equipment is installed in accordance with contractual specifications and ready for the customer’s use. The maintenance and monitoring services are recognized monthly over the term of the contract as we provide the services. Long-term contracts for network installation are accounted for using the percentage of completion method. We use the completed contract method if we cannot estimate the costs with a reasonable degree of reliability. For certain products and services, where neither VSOE nor TPE exists, we determine relative selling price based on our best estimate of the standalone selling price taking into consideration market conditions, as well as company specific factors such as geography, competitive landscape, internal costs and general pricing practices.

Leasing Arrangements

At each reporting period, we monitor the credit quality of the various lessees in our portfolios. Regarding the leveraged lease portfolio, external credit reports are used where available, and, where not available, we use internally developed indicators, or internal credit risk grades, that take into account historical loss experience, the value of the underlying collateral, delinquency trends, industry and general economic conditions. The credit quality of our lessees primarily varies from AAA to B-. All accounts are current as of the end of this reporting period. For each reporting period the leveraged leases within the portfolio are reviewed for indicators of impairment where it is probable the rent due according to the contractual terms of the lease will not be collected.

Earnings Per Common Share

Stock options and restricted stock units outstanding that were included in the computation of diluted earnings per common share totaled approximately 5 million and 6 million during the three and nine months ended September 30, 2011, respectively. Certain outstanding options to purchase shares were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive for the period, including approximately 19 million weighted-average shares for the three and nine months ended September 30, 2011, respectively.

As a result of the Net loss attributable to Verizon for the nine months ended September 30, 2010, diluted earnings per share is the same as basic earnings per share. If there had been net income for the nine months ended September 30, 2010, there would have been a total of approximately 2 million stock options and restricted stock units outstanding included in the computation of diluted earnings per share. There were a total of approximately 2 million stock options and restricted stock units outstanding included in the computation of diluted earnings per common share for the three months ended September 30, 2010. Certain outstanding options to purchase shares were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive for the period, including approximately 59 million weighted-average shares and 78 million weighted-average shares for the three and nine months ended September 30, 2010.

Recent Accounting Standards

In May 2011, an accounting standard update regarding fair value measurement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. This standard update also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. We will adopt this standard update during the first quarter of 2012. The adoption of this standard update is not expected to have a significant impact on our consolidated financial statements.

In June 2011, an accounting standard update regarding the presentation of comprehensive income was issued to increase the prominence of items reported in other comprehensive income. The update requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate, but consecutive statements. This standard update is effective during the first quarter of 2012. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.

In September 2011, an accounting standard update regarding testing of goodwill for impairment was issued. This standard update gives companies the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This standard update is effective during the first quarter of 2012. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.

 

6


Table of Contents
2.

Acquisitions and Divestitures

 

Terremark Worldwide, Inc.

During April 2011, we acquired Terremark Worldwide, Inc. (Terremark), a global provider of information technology infrastructure and cloud services, for $19 per share in cash. Closing and other direct acquisition-related costs totaled approximately $13 million after-tax. The acquisition was completed via a tender offer and subsequent “short-form” merger under Delaware law through which Terremark became a wholly owned subsidiary of Verizon. The acquisition enhanced Verizon’s offerings to business and government customers globally.

The condensed consolidated financial statements include the results of Terremark’s operations from the date the acquisition closed. Had this acquisition been consummated on January 1, 2011 or 2010, the results of Terremark’s acquired operations would not have had a significant impact on the consolidated net income attributable to Verizon. The debt obligations of Terremark that were outstanding at the time of its acquisition by Verizon were repaid during May 2011.

The acquisition of Terremark has been accounted for as a business combination under the acquisition method. The cost of the acquisition was preliminarily allocated to the assets and liabilities acquired based on their fair values as of the close of the acquisition, with the excess amount being recorded as goodwill. The fair values of the assets and liabilities acquired were determined using the income and cost approaches. The income approach was primarily used to value the intangible assets, consisting primarily of customer relationships. The cost approach was used, as appropriate, for plant, property and equipment. The fair value of the majority of the long-term debt acquired was primarily valued based on redemption prices. As the values of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained. The valuations will be finalized within 12 months of the close of the acquisition. When the valuations are finalized, any changes to the preliminary valuation of assets and liabilities acquired may result in adjustments to the fair value of the identifiable intangible assets acquired and goodwill.

The following table summarizes the allocation of the acquisition cost to the assets acquired, including cash acquired of $0.1 billion, and liabilities acquired as of the acquisition date:

 

(dollars in millions)    Initial Purchase
Price Allocation
 

Assets

  

Current assets

   $ 154  

Plant, property and equipment

     521  

Goodwill

     1,404  

Intangible assets subject to amortization

     410  

Other assets

     12  
  

 

 

 

Total assets

     2,501  
  

 

 

 

Liabilities

  

Current liabilities

     152  

Debt maturing within one year

     748  

Deferred income taxes and other liabilities

     207  
  

 

 

 

Total liabilities

     1,107  
  

 

 

 

Net assets acquired

   $   1,394  
  

 

 

 

Intangible assets subject to amortization include customer lists which are being amortized on a straight-line basis over 13 years, and other intangibles which are being amortized on a straight-line basis over a period of 5 years.

Telephone Access Line Spin-off

On July 1, 2010, we completed the spin-off of the shares of a newly formed subsidiary of Verizon (Spinco) to Verizon stockholders and the merger of Spinco with Frontier Communications Corporation (Frontier). Spinco 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 condensed consolidated financial statements for the nine months ended September 30, 2010 include these operations prior to the completion of the spin-off.

During the three and nine months ended September 30, 2010, we recorded pre-tax charges of $0.1 billion and $0.5 billion, respectively, primarily for costs incurred related to network, non-network software and other activities to enable the divested markets in the transaction with Frontier to operate on a stand-alone basis subsequent to the closing of the transaction, and professional advisory and legal fees in connection with this transaction.

 

7


Table of Contents

Alltel Divestiture Markets

As a condition of the regulatory approvals to complete the acquisition of Alltel Corporation (Alltel) in January 2009, Verizon Wireless was required to divest overlapping properties in 105 operating markets in 24 states (Alltel Divestiture Markets). During the second quarter of 2010, AT&T Mobility acquired 79 of the 105 Alltel Divestiture Markets, including licenses and network assets, for approximately $2.4 billion in cash and Atlantic Tele-Network, Inc. acquired the remaining 26 Alltel Divestiture Markets, including licenses and network assets, for $0.2 billion in cash.

During the second quarter of 2010, we recorded a tax charge of approximately $0.2 billion for the taxable gain associated with the Alltel Divestiture Markets.

Other

During the nine months ended September 30, 2011, we acquired various wireless licenses and markets, as well as a provider of cloud software technology, for cash consideration that was not significant.

During the third quarter of 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. The purchase price allocation resulted in $0.1 billion of wireless licenses and $0.1 billion in goodwill.

During the three and nine months ended September 30, 2010, we recorded merger integration charges of $0.2 billion and $0.5 billion, respectively, for the Alltel acquisition primarily relating to handset conversions, the decommissioning of overlapping cell sites and trade name amortization.

 

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, 2011

   $ 72,996  

Acquisitions (Note 2)

     51  

Capitalized interest on wireless licenses

     156  
  

 

 

 

Balance at September 30, 2011

   $   73,203  
  

 

 

 

During the year ended December 31, 2010, approximately $12.2 billion of wireless licenses were under development for commercial service for which we were capitalizing interest costs. In December 2010, a substantial portion of these licenses were placed in service in connection with our deployment of fourth-generation Long-Term Evolution technology services. As of September 30, 2011, approximately $2.8 billion of wireless licenses remained under development for commercial service.

Goodwill

Changes in the carrying amount of Goodwill are as follows:

 

(dollars in millions)    Domestic
Wireless
     Wireline      Total  

Balance at January 1, 2011

   $   17,869      $   4,119      $   21,988  

Acquisitions (Note 2)

     81        1,468        1,549  

Reclassifications, adjustments and other

             4        4  
  

 

 

 

Balance at September 30, 2011

   $ 17,950      $ 5,591      $ 23,541  
  

 

 

 

 

8


Table of Contents

Other Intangible Assets

The following table displays the composition of Other intangible assets, net:

 

    

At September 30, 2011

    

At December 31, 2010

 
  

 

 

 
(dollars in millions)    Gross
Amount
     Accumulated
Amortization
    Net
Amount
     Gross
Amount
     Accumulated
Amortization
    Net
Amount
 

Customer lists (6 to 13 years)

   $ 3,532      $ (1,928   $ 1,604      $ 3,150      $ (1,551   $ 1,599  

Non-network internal-use software (3 to 7 years)

     9,231        (5,285     3,946        8,446        (4,614     3,832  

Other (2 to 25 years)

     557        (192     365        885        (486     399  
  

 

 

 

Total

   $   13,320      $   (7,405   $   5,915      $   12,481      $   (6,651   $   5,830  
  

 

 

 

Customer lists and Other at September 30, 2011 include $0.4 billion related to the Terremark acquisition (see Note 2).

The amortization expense for other intangible assets was as follows:

 

(dollars in millions)    Three Months Ended
September 30,
    

Nine Months Ended

September 30,

 

2011

      $   377         $   1,121  

2010

        446           1,365  

Estimated annual amortization expense for other intangible assets is as follows:

 

Years    (dollars in millions)  

2011

   $ 1,504  

2012

     1,351  

2013

     1,182  

2014

     871  

2015

     682  

 

9


Table of Contents
4.

Debt

 

Changes to debt during the nine months ended September 30, 2011 are as follows:

 

(dollars in millions)    Debt Maturing
within One Year
    Long-term
Debt
    Total  

Balance at January 1, 2011

   $     7,542     $   45,252     $   52,794  

Proceeds from long-term borrowings

            6,510       6,510  

Repayments of long-term borrowings and capital leases obligations

     (7,420            (7,420

Increase in short-term obligations, excluding current maturities

     1,817              1,817  

Reclassifications of long-term debt

     5,650       (5,650       

Debt acquired (Note 2)

     748              748  

Other

     293       173       466  
  

 

 

 

Balance at September 30, 2011

   $ 8,630     $ 46,285     $ 54,915  
  

 

 

 

During March 2011, Verizon issued $6.25 billion aggregate principal amount of fixed and floating rate notes resulting in cash proceeds of approximately $6.19 billion, net of discounts and issuance costs. The net proceeds were used for the repayment of commercial paper, the retirement of certain outstanding notes issued by our telephone operating company subsidiaries and other general corporate purposes. The issuances consisted of the following: $1.0 billion Notes due 2014 that bear interest at a rate equal to three-month London Interbank Offered Rate (LIBOR) plus 0.61%, $1.5 billion 1.95% Notes due 2014, $1.25 billion 3.00% Notes due 2016, $1.5 billion 4.60% Notes due 2021 and $1.0 billion 6.00% Notes due 2041. In addition, during 2011, we utilized $0.3 billion under fixed rate vendor financing facilities.

During April 2011, we redeemed $1.0 billion of 5.65% Verizon Pennsylvania Inc. Debentures due November 15, 2011 at a redemption price of 102.9% of the principal amount of the debentures, plus accrued and unpaid interest through the date of redemption, and $1.0 billion of 6.50% Verizon New England Inc. Debentures due September 15, 2011 at a redemption price of 102.3% of the principal amount of the debentures, plus accrued and unpaid interest through the date of redemption. We also terminated the related interest rate swaps with a notional value totaling $1.0 billion. In addition, during 2011, $0.5 billion of 5.35% Verizon Communications Notes matured and were repaid.

The debt obligations of Terremark that were outstanding at the time of its acquisition by Verizon were repaid during May 2011.

Verizon Wireless

During May 2011, Verizon Wireless repaid $4.0 billion aggregate principal amount of two-year fixed and floating rate notes.

Guarantees

During June 2011, we guaranteed the debentures and first mortgage bonds of our operating telephone company subsidiaries. As of September 30, 2011, $8.2 billion principal amount of these obligations remain outstanding. Each guarantee will remain in place for the life of the obligation unless terminated pursuant to its terms, including the operating telephone company no longer being a wholly-owned subsidiary of Verizon.

We also guarantee the debt obligations of GTE Corporation that were issued and outstanding prior to July 1, 2003. As of September 30, 2011, $1.7 billion principal amount of these obligations remain outstanding.

Debt Covenants

We and our consolidated subsidiaries are in compliance with all of our debt covenants.

Credit Facility

As of September 30, 2011, the unused borrowing capacity under a $6.2 billion three-year credit facility with a group of major financial institutions was approximately $6.1 billion. On April 15, 2011, we amended this facility primarily to reduce fees and borrowing costs and extend the maturity date to October 15, 2014.

 

10


Table of Contents
5.

Fair Value Measurements

 

The following table presents the balances of assets measured at fair value on a recurring basis as of September 30, 2011:

 

(dollars in millions)    Level 1 (1)     Level 2 (2)     Level 3 (3)     Total  

Assets:

        

Short-term investments:

        

Equity securities

   $   231      $      $      $ 231  

Fixed income securities

     2        301               303  

Other Assets:

        

Fixed income securities

     217        752               969  

Interest rate swaps

            649               649  

Cross currency swaps

            99               99  
  

 

 

 

Total

   $ 450      $   1,801      $   –      $   2,251  
  

 

 

 

(1)quoted prices in active markets for identical assets or liabilities

(2)observable inputs other than 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 in a variety of industry sectors and are generally measured using quoted prices in active markets and are classified as Level 1.

Fixed income securities consist primarily of investments in U.S. Treasuries and agencies, as well as municipal bonds. We use quoted prices in active markets for our U.S. Treasury securities, and therefore these securities are classified as Level 1. For all other fixed income securities that do not have quoted prices in active markets, we use alternative matrix pricing as a practical expedient resulting in these debt securities being classified as Level 2.

Derivative contracts are valued using models based on readily observable market parameters for all substantial terms of our derivative contracts and thus are classified within Level 2. We use mid-market pricing for fair value measurements of our derivative instruments.

We recognize transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the fair value hierarchy during the nine months ended September 30, 2011.

Fair Value of Short-term and Long-term Debt

The fair value of our short-term and long-term debt, excluding capital leases, which is determined based on market quotes for similar terms and maturities or future cash flows discounted at current rates, was as follows:

 

     At September 30, 2011      At December 31, 2010  
  

 

 

 
(dollars in millions)    Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Short- and long-term debt, excluding capital leases

   $ 54,540      $ 63,225      $ 52,462      $ 59,020  

Derivative Instruments

We enter into derivative transactions to manage our exposure to fluctuations in foreign currency exchange rates, interest rates, and equity and commodity prices. We employ risk management strategies, which may include the use of a variety of derivatives including cross currency swaps, foreign currency and prepaid forwards and collars, interest rate and commodity swap agreements and interest rate locks. We do not hold derivatives for trading purposes.

We measure all derivatives, including derivatives embedded in other financial instruments, at fair value and recognize them as either assets or liabilities on our consolidated balance sheets. Changes in the fair values of derivative instruments not qualifying as hedges or any ineffective portion of hedges are recognized in earnings in the current period. Changes in the fair values of derivative instruments used effectively as fair value hedges are recognized in earnings, along with changes in the fair value of the hedged item. Changes in the fair value of the effective portions of cash flow hedges are reported in Other comprehensive income and recognized in earnings when the hedged item is recognized in earnings.

 

11


Table of Contents

Interest Rate Swaps

We have entered into domestic interest rate swaps to achieve a targeted mix of fixed and variable rate debt. We principally receive fixed rates and pay variable rates based on LIBOR, resulting in 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 condensed consolidated balance sheets as assets and liabilities. Changes in the fair value of the interest rate swaps are recorded to Interest expense, which are offset by changes in the fair value of the debt due to changes in interest rates. The fair value of these contracts was $0.6 billion at September 30, 2011 and $0.3 billion at December 31, 2010, and is primarily included in Other assets and Long-term debt. As of September 30, 2011, the total notional amount of these interest rate swaps was $8.0 billion.

Forward Interest Rate Swaps

In order to manage our exposure to future interest rate changes, during 2010, we entered into forward interest rate swaps with a total notional value of $1.4 billion. We had designated these contracts as cash flow hedges. The fair value of these contracts was $0.1 billion at December 31, 2010 and the contracts were included in Other assets. On or before February 7, 2011, we terminated these forward interest rate swaps.

Cross Currency Swaps

Verizon Wireless has entered into cross currency swaps designated as cash flow hedges to exchange approximately $2.4 billion of British Pound Sterling and Euro-denominated debt into U.S. dollars and to fix our future interest and principal payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses. The fair value of these swaps, primarily included in Other assets, was approximately $0.1 billion at September 30, 2011 and December 31, 2010, respectively. During the three months ended September 30, 2011, a pretax loss of $0.2 billion was recognized in Other comprehensive income. During the nine months ended September 30, 2011, the pretax loss recognized in Other comprehensive income was not significant. During the three and nine months ended September 30, 2010, a pretax gain of $0.2 billion and a pretax loss of $0.2 billion, respectively, were recognized in Other comprehensive income. A portion of these gains and losses recognized in Other comprehensive income was reclassified to Other income and (expense), net to offset the related pretax foreign currency transaction gain or loss on the underlying debt obligations.

 

6.

Stock-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 units, performance shares, performance stock units and other awards. The maximum number of shares available for awards from the Plan is 119.6 million shares.

Restricted Stock Units

The Plan provides for grants of Restricted Stock Units (RSUs) that generally vest at the end of the third year after the grant. The RSUs granted prior to January 1, 2010 are classified as liability awards because the RSUs will be paid in cash upon vesting. The RSU award liability is measured at its fair value at the end of each reporting period and, therefore, will fluctuate based on the performance of Verizon common stock. The RSUs granted subsequent to January 1, 2010 are classified as equity awards because the RSUs will be paid in Verizon common stock upon vesting. The RSU equity awards are measured using the grant date fair value of Verizon common stock and are not remeasured at the end of each reporting period. Dividend equivalent units are also paid to participants at the time the RSU award is paid, and in the same proportion as the RSU award.

Performance Stock Units

The Plan also provides for grants of Performance Stock Units (PSUs) that generally vest at the end of the third year after the grant. As defined by the Plan, the Human Resources Committee of the Board of Directors determines the number of PSUs a participant earns based on the extent to which the corresponding goal has been achieved over the three-year performance cycle. All payments are subject to approval by the Human Resources Committee. The PSUs are classified as liability awards because the PSU awards are paid in cash upon vesting. The PSU award liability is measured at its fair value at the end of each reporting period and, therefore, will fluctuate based on the price of Verizon common stock as well as performance relative to the targets. Dividend equivalent units are also paid to participants at the time that the PSU award is determined and paid, and in the same proportion as the PSU award.

 

12


Table of Contents

The following table summarizes the Restricted Stock Unit and Performance Stock Unit activity:

 

(shares in thousands)    Restricted
Stock Units
    Performance
Stock Units
 

Outstanding, beginning of year

     20,923       32,380  

Granted

     6,354       9,878  

Payments

     (7,571     (12,137

Cancelled/Forfeited

     (121     (161
  

 

 

 

Outstanding, September 30, 2011

     19,585       29,960  
  

 

 

 

As of September 30, 2011, unrecognized compensation expense related to the unvested portion of Verizon’s RSUs and PSUs was approximately $0.5 billion and is expected to be recognized over a weighted-average period of approximately two years.

The RSUs granted in 2011 and 2010, and classified as equity awards, have a weighted average grant date fair value of $36.38 and $28.63 per unit, respectively.

Stock Options

The Plan provides for grants of stock options to participants at an option price per share of no less than 100% of the fair market value of Verizon common stock on the date of grant. Each grant has a 10-year life, vesting equally over a three-year period, starting at the date of the grant. We have not granted new stock options since 2004.

The following table summarizes Verizon’s stock option activity:

 

(shares in thousands)    Stock Options     Weighted-Average
Exercise Price
 

Outstanding, beginning of year

     56,844     $ 44.25  

Exercised

     (3,869     34.82  

Cancelled/Forfeited

     (20,314     51.58  
  

 

 

   

Outstanding, September 30, 2011

     32,661       40.80  
  

 

 

   

All stock options outstanding at September 30, 2011 were exercisable.

Verizon Wireless Long-Term Incentive Plan

The 2000 Verizon Wireless Long-Term Incentive Plan (the Wireless Plan) provides compensation opportunities to eligible employees of Verizon Wireless (the Partnership). The Wireless Plan provides rewards that are tied to the long-term performance of the Partnership. Under the Wireless Plan, Value Appreciation Rights (VARs) were granted to eligible employees. As of September 30, 2011, all VARs were fully vested. We have not granted new VARs since 2004.

The following table summarizes the Value Appreciation Rights activity:

 

(shares in thousands)    Value Appreciation
Rights
    Weighted-Average
Grant-Date
Fair Value
 

Outstanding, beginning of year

     11,569     $ 13.11  

Exercised

     (2,494     15.02  

Cancelled/Forfeited

     (35     14.93  
  

 

 

   

Outstanding, September 30, 2011

     9,040       12.57  
  

 

 

   

 

13


Table of Contents
7.

Employee Benefits

 

We maintain non-contributory defined benefit pension plans for many of our employees. In addition, we maintain postretirement 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, actuarial gains and losses are recognized in operating results in the year in which they occur. These gains and losses are measured annually as of December 31 or upon a remeasurement event.

Net Periodic Benefit Cost

The following table summarizes the benefit cost related to our pension and postretirement health care and life insurance plans:

 

(dollars in millions)    Pension     Health Care and Life  
  

 

 

 
Three Months Ended September 30,    2011     2010     2011     2010  

Service cost

   $ 77     $ 85     $ 74     $ 75  

Amortization of prior service cost (credit)

     18       27       (15     94  
  

 

 

 

Subtotal

     95       112       59       169  

Expected return on plan assets

     (494     (537     (40     (63

Interest cost

     397       445       356       408  
  

 

 

 

Subtotal

     (2     20       375       514  

Remeasurement loss, net

     329       1,188                
  

 

 

 

Net periodic benefit cost

   $ 327     $ 1,208     $ 375     $ 514  
  

 

 

 
(dollars in millions)    Pension     Health Care and Life  
  

 

 

 
Nine Months Ended September 30,    2011     2010     2011     2010  

Service cost

   $ 230     $ 268     $ 224     $ 231  

Amortization of prior service cost (credit)

     54       82       (43     282  
  

 

 

 

Subtotal

     284       350       181       513  

Expected return on plan assets

     (1,482     (1,638     (122     (189

Interest cost

     1,192       1,352       1,066       1,231  
  

 

 

 

Subtotal

     (6     64       1,125       1,555  

Remeasurement loss, net

     309       1,751              1,100  
  

 

 

 

Net periodic benefit cost

     303       1,815       1,125       2,655  

Curtailment and termination benefits

            854              386  
  

 

 

 

Total

   $ 303     $   2,669     $ 1,125     $ 3,041  
  

 

 

 

Severance, Pension and Benefit Charges

During the three and nine months ended September 30, 2011, we recorded net pre-tax severance, pension and benefits charges of $0.3 billion, including pension settlement losses, for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses upon a remeasurement event.

During the three and nine months ended September 30, 2010, we recorded net pre-tax severance, pension and benefits charges of $1.2 billion and $5.1 billion, respectively. The charges during the three and nine months ended September 30, 2010 included remeasurement losses of $1.2 billion and $2.9 billion, respectively, for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses upon a remeasurement event. The remeasurement losses included $0.1 billion of pension settlement losses related to employees that received lump sum distributions primarily resulting from our previously announced separation plans. Additionally, during the nine months ended September 30, 2010, we reached an agreement with certain unions on temporary enhancements to the separation programs contained in their existing collective bargaining agreements. These temporary enhancements were intended to help address a previously declared surplus of employees and to help reduce the need for layoffs. Accordingly, we recorded severance, pension and benefits charges associated with the approximately 11,900 union-represented employees who volunteered for the incentive offer. These charges included $1.0 billion for severance for the 2010 separation programs mentioned above and a planned workforce reduction of approximately 2,500 employees in 2011. In addition, we recorded $1.2 billion for pension and postretirement curtailment losses and special termination benefits that were due to the workforce reductions, which caused the elimination of a significant amount of future service.

 

14


Table of Contents

Severance Payments

During the three and nine months ended September 30, 2011, we paid severance benefits of $0.1 billion and $0.4 billion, respectively. At September 30, 2011, we had a remaining severance liability of $1.2 billion, a portion of which includes future contractual payments to employees separated as of September 30, 2011.

Employer Contributions

During the three months ended September 30, 2011, we contributed $25 million to our nonqualified pension plans and $0.4 billion to our other postretirement benefit plans. During the nine months ended September 30, 2011, we contributed $0.4 billion to our qualified pension trusts, $0.1 billion to our nonqualified pension plans and $1.1 billion to our other postretirement benefit plans. We do not expect to make additional qualified pension plan contributions during the remainder of 2011.

Medicare Part D Subsidy

Under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, both of which became law in March 2010 (collectively the Health Care Act), beginning in 2013, Verizon and other companies that receive a subsidy under Medicare Part D to provide retiree prescription drug coverage will no longer receive a federal income tax deduction for the expenses incurred in connection with providing the subsidized coverage to the extent of the subsidy received. Because future anticipated retiree prescription drug plan liabilities and related subsidies are 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 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.

 

8.

Equity and Comprehensive Income

 

Equity

Changes in the components of Total equity were as follows:

 

   

Nine Months Ended

September 30, 2011

 
 

 

 

 
(dollars in millions)   Attributable
to Verizon
    Noncontrolling
Interest
    Total
Equity
 

 

 

Balance at beginning of period

  $   38,569     $   48,343     $   86,912  

Net income

    4,427       5,983       10,410  

Other comprehensive loss

    (12     (3     (15
 

 

 

 

Comprehensive income

    4,415       5,980       10,395  
 

 

 

 

Contributed capital

    (10            (10

Dividends declared

    (4,176            (4,176

Distributions declared

           (4,500     (4,500

Common stock in treasury

    155              155  

Distributions and other

    98       (1,359     (1,261
 

 

 

 

Balance at end of period

  $ 39,051     $ 48,464     $ 87,515  
 

 

 

 

Noncontrolling interests included in our condensed consolidated financial statements primarily consist of Vodafone Group Plc’s 45% ownership interest in Verizon Wireless. On July 28, 2011, the Board of Representatives of Verizon Wireless declared a distribution to its owners, payable on January 31, 2012 in proportion to their partnership interests on that date, in the aggregate amount of $10 billion. As a result, based on current ownership interests in Verizon Wireless, we will receive a cash payment of $5.5 billion and Vodafone Group Plc will receive a cash payment of $4.5 billion on the distribution date, which is included in Other current liabilities on our condensed consolidated balance sheet.

 

15


Table of Contents

Comprehensive Income

Comprehensive income consists of net income and other gains and losses affecting equity that, under generally accepted accounting principles, are excluded from net income. Significant changes in the components of Other comprehensive income (loss), net of income tax expense (benefit), are described below.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(dollars in millions)    2011     2010      2011     2010  

Net Income

   $ 3,542     $ 2,698      $ 10,410     $ 5,569  

Other comprehensive income (loss), net of taxes

         

Foreign currency translation adjustments

     (290     350        (16     (101

Net unrealized gain (loss) on cash flow hedges

     (1             27       (22

Net unrealized gain (loss) on marketable securities

     (28     53        (30     34  

Defined benefit pension and postretirement plans (Note 7)

     2       72        7       441  
  

 

 

 

Other comprehensive income (loss) attributable to Verizon

     (317     475        (12     352  

Other comprehensive income (loss) attributable to noncontrolling interest

     1               (3     (32
  

 

 

 

Total Comprehensive Income

   $ 3,226     $ 3,173      $ 10,395     $ 5,889  
  

 

 

 

Comprehensive income attributable to noncontrolling interest

   $ 2,164     $ 2,039      $ 5,980     $ 5,627  

Comprehensive income attributable to Verizon

     1,062       1,134        4,415       262  
  

 

 

 

Total Comprehensive Income

   $ 3,226     $ 3,173      $ 10,395     $ 5,889  
  

 

 

 

Other comprehensive income attributable to noncontrolling interest primarily reflects activity related to cross currency swaps (see Note 5).

Foreign Currency Translation Adjustments

The change in Foreign currency translation adjustments for the three months ended September 30, 2011 and the nine months ended September 30, 2010 was primarily due to the strengthening of the U.S. dollar against the Euro. The change for the three months ended September 30, 2010 was primarily due to the weakening of the U.S. dollar against the Euro.

Unrealized Gain (Loss) on Marketable Securities

Gross unrealized gains and losses on marketable securities for the three and nine months ended September 30, 2011 and 2010 were not significant.

The components of Accumulated other comprehensive income were as follows:

 

(dollars in millions)    At September 30,
2011
     At December 31,
2010
 

Foreign currency translation adjustments

   $ 827      $ 843  

Net unrealized gain on cash flow hedges

     153        126  

Unrealized gain on marketable securities

     49        79  

Defined benefit pension and postretirement plans

     8        1  
  

 

 

 

Accumulated Other Comprehensive Income

   $ 1,037      $ 1,049  
  

 

 

 

 

16


Table of Contents
9.

Segment Information

 

Reportable Segments

We have two reportable segments, which we operate and manage as strategic business units and organize by products and services. We measure and evaluate our reportable segments based on segment operating income, consistent with the chief operating decision maker’s assessment of segment performance.

Corporate, eliminations and other includes unallocated corporate expenses, intersegment eliminations recorded in consolidation, the results of other businesses, such as our investments in unconsolidated businesses, pension and other employee benefit related costs, lease financing, as well as divested operations and other adjustments and gains and losses that are not allocated in assessing segment performance due to their non-operational nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. Gains and losses that are not individually significant are included in all segment results as these items are included in the chief operating decision maker’s assessment of segment performance.

Corporate, eliminations and other during the nine months ended September 30, 2010 includes a non-cash adjustment of $235 million, primarily to adjust wireless data revenues. This adjustment was recorded to properly defer previously recognized wireless data revenues that were earned and recognized in future periods.

Our segments and their principal activities consist of the following:

 

Segment    Description
Domestic Wireless   

Domestic Wireless provides wireless voice and data services and equipment sales to consumer, business and government customers in the United States.

Wireline   

Wireline’s communications products and services include voice, Internet access, broadband video and data, Internet protocol network services, network access, long distance and other services. We provide these products and services to consumers in the United States, as well as to carriers, businesses and government customers both in the United States and in over 150 other countries around the world.

 

17


Table of Contents

The following table provides operating financial information for our two reportable segments:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(dollars in millions)    2011     2010     2011     2010  

External Operating Revenues

        

Domestic Wireless

        

Retail service

   $   14,392     $   13,460     $   42,055     $   39,771  

Other service

     626       689       1,952       1,641  
  

 

 

 

Service revenue

     15,018       14,149       44,007       41,412  

Equipment

     1,797       1,275       5,234       3,289  

Other

     890       802       2,590       2,517  
  

 

 

 

Total Domestic Wireless

     17,705       16,226       51,831       47,218  

Wireline

        

Consumer retail

     3,400       3,364       10,177       10,034  

Small business

     666       706       2,038       2,130  
  

 

 

 

Mass Markets

     4,066       4,070       12,215       12,164  

Strategic services

     1,935       1,674       5,617       4,867  

Other

     1,984       2,168       6,078       6,572  
  

 

 

 

Global Enterprise

     3,919       3,842       11,695       11,439  

Global Wholesale

     1,668       1,859       5,138       5,723  

Other

     185       202       558       641  
  

 

 

 

Total Wireline

     9,838       9,973       29,606       29,967  
  

 

 

 

Total segments

     27,543       26,199       81,437       77,185  

Corporate, eliminations and other

     370       285       1,002       2,985  
  

 

 

 

Total consolidated – reported

   $ 27,913     $ 26,484     $ 82,439     $ 80,170  
  

 

 

 

Intersegment Revenues

        

Domestic Wireless

   $ 21     $ 24     $ 69     $ 41  

Wireline

     311       313       937       971  
  

 

 

 

Total segments

     332       337       1,006       1,012  

Corporate, eliminations and other

     (332     (337     (1,006     (1,012
  

 

 

 

Total consolidated – reported

   $      $      $      $   
  

 

 

 

Total Operating Revenues

        

Domestic Wireless

   $ 17,726     $ 16,250     $ 51,900     $ 47,259  

Wireline

     10,149       10,286       30,543       30,938  
  

 

 

 

Total segments

     27,875       26,536       82,443       78,197  

Corporate, eliminations and other

     38       (52     (4     1,973  
  

 

 

 

Total consolidated – reported

   $ 27,913     $ 26,484     $ 82,439     $ 80,170  
  

 

 

 

Operating Income

        

Domestic Wireless

   $ 5,149     $ 4,854     $ 14,192     $ 13,870  

Wireline

     53       187       659       515  
  

 

 

 

Total segments

     5,202       5,041       14,851       14,385  

Reconciling items

     (555     (1,658     (859     (6,151
  

 

 

 

Total consolidated – reported

   $ 4,647     $ 3,383     $ 13,992     $ 8,234  
  

 

 

 

 

18


Table of Contents
(dollars in millions)    At September 30,
2011
    At December 31,
2010
 

Assets

    

Domestic Wireless

   $   144,508     $   138,863  

Wireline

     88,486       83,849  
  

 

 

 

Total segments

     232,994       222,712  

Reconciling items

     (4,962     (2,707
  

 

 

 

Total consolidated – reported

   $ 228,032     $ 220,005  
  

 

 

 

A reconciliation of the segment operating revenues to consolidated operating revenues is as follows:

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
(dollars in millions)    2011      2010     2011     2010  

Total segment operating revenues

   $     27,875      $     26,536     $     82,443     $     78,197  

Deferred revenue adjustment

                           (235

Impact of divested operations (Note 2)

                           2,407  

Corporate, eliminations and other

     38        (52     (4     (199
  

 

 

 

Total consolidated operating revenues

   $ 27,913      $ 26,484     $ 82,439     $ 80,170  
  

 

 

 

A reconciliation of the total of the reportable segments’ operating income to consolidated income before provision for income taxes is as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(dollars in millions)    2011     2010     2011     2010  

Total segment operating income

   $   5,202     $   5,041     $   14,851     $   14,385  

Severance, pension and benefit charges (Note 7)

     (329     (1,188     (329     (5,084

Impact of divested operations (Note 2)

                          755  

Deferred revenue adjustment

                          (235

Merger integration and acquisition costs (Note 2)

            (159            (451

Access line spin-off related charges (Note 2)

            (67            (407

Corporate, eliminations and other

     (226     (244     (530     (729
  

 

 

 

Total consolidated operating income

     4,647       3,383       13,992       8,234  

Equity in earnings of unconsolidated businesses

     125       141       347       395  

Other income and (expense), net

     24       (51     70       11  

Interest expense

     (698     (597     (2,124     (1,956
  

 

 

 

Income Before Provision For Income Taxes

   $ 4,098     $ 2,876     $ 12,285     $ 6,684  
  

 

 

 

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 three and nine months ended September 30, 2011 and 2010.

 

19


Table of Contents
10.

Commitments and Contingencies

 

In the ordinary course of business Verizon is involved in various legal and regulatory proceedings at the state and federal level. Where it is determined, in consultation with counsel based on litigation and settlement risks, that a loss is probable and estimable in a given matter, the Company establishes an accrual for it. In none of the currently pending matters, including the Hicksville matter described below, is the amount of accrual material. An estimate of the reasonably possible loss or range of loss in excess of the amounts already accrued cannot be made at this time, due to various factors typical in contested proceedings, including (1) uncertain damage theories and demands; (2) a less than complete factual record; (3) uncertainty concerning legal theories and their resolution by courts or regulators; and (4) the unpredictable nature of the opposing party and its demands. We continuously monitor these proceedings as they develop and adjust any accrual or disclosure as needed. We do not expect that the ultimate resolution of any pending regulatory or legal matter in future periods, including the Hicksville matter, will have a material effect on our financial condition, but it could have a material effect on our results of operations for a given reporting period.

During 2003, under a government-approved plan, remediation commenced at the site of a former Sylvania facility in Hicksville, New York that processed nuclear fuel rods in the 1950s and 1960s. Remediation beyond original expectations proved to be necessary and a reassessment of the anticipated remediation costs was conducted. A reassessment of costs related to remediation efforts at several other former facilities was also undertaken. In September 2005, the Army Corps of Engineers (ACE) accepted the Hicksville site into the Formerly Utilized Sites Remedial Action Program. This may result in the ACE performing some or all of the remediation effort for the Hicksville site with a corresponding decrease in costs to Verizon. To the extent that the ACE assumes responsibility for remedial work at the Hicksville site, an adjustment to a reserve previously established for the remediation may be made. Adjustments to the reserve may also be made based upon actual conditions discovered during the remediation at this or any other site requiring remediation.

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 a variety of nonfinancial matters, such as ownership of the securities being sold, as well as indemnity from certain financial losses. From time to time, counterparties may make claims under these provisions, and Verizon will seek to defend against those claims and resolve them in the ordinary course of business.

Subsequent to the sale of Verizon Information Services Canada in 2004, we continue to provide a guarantee to publish directories, which was issued when the directory business was purchased in 2001 and had a 30-year term (before extensions). The preexisting guarantee continues, without modification, despite the subsequent sale of Verizon Information Services Canada and the spin-off of our domestic print and Internet yellow pages directories business. The possible financial impact of the guarantee, which is not expected to be adverse, cannot be reasonably estimated as a variety of the potential outcomes available under the guarantee result in costs and revenues or benefits that may offset each other. We do not believe performance under the guarantee is likely.

 

20


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

Verizon Communications Inc. (Verizon, or the Company), is one of the world’s leading providers of communications services. Our domestic wireless business, operating as Verizon Wireless, provides wireless voice and data products and services across the United States using one of the most extensive and reliable wireless networks. Our wireline business provides communications products and services, including voice, broadband data and video services, network access, long distance and other communications products and services, and also owns and operates one of the most expansive end-to-end global Internet Protocol (IP) networks. We have a highly diverse workforce of approximately 195,400 employees as of September 30, 2011.

In the sections that follow, we provide information about the important aspects of our operations and investments, both at the consolidated and segment levels, and discuss our results of operations, financial position and sources and uses of cash. In addition, we highlight key trends and uncertainties to the extent practicable. We also monitor several key economic indicators as well as the state of the economy in general, primarily in the United States where the majority of our operations are located, for purposes of evaluating our operating results and assessing the potential impacts of these factors on our businesses.

Our results of operations, financial position and sources and uses of cash in the current and future periods reflect our focus on the following strategic imperatives:

Revenue Growth – To generate revenue growth we are devoting our resources to higher growth markets such as the wireless market, the broadband and video markets, and the provision of strategic services to business markets, rather than to the traditional wireline voice market. During the three months ended September 30, 2011, consolidated revenue increased 5.4% compared to the similar period in 2010 in part due to executing this strategy.

 

   

In Domestic Wireless, during the three months ended September 30, 2011 compared to the similar period in 2010, strong customer growth coupled with strong demand for smartphones and internet data devices and increasing service revenue drove a total revenue increase of 9.1%.

 

   

In Wireline, during the three months ended September 30, 2011 compared to the similar period in 2010, revenues were positively impacted by a 15.6% increase in strategic services revenue, which now represents 49% of total Global Enterprise revenues, as well as the expansion of consumer and small business FiOS services. The increase in strategic services revenue was due in part to the acquisition of Terremark Worldwide, Inc. (Terremark), described below.

The increase in revenues from our growth markets was partially offset by lower revenue resulting from a decline in total voice connections and decreased minutes of use (MOUs) in the Wireline segment. FiOS subscriber growth was lower in the third quarter than in prior quarters due to installation delays caused by storm conditions in the Mid-Atlantic and Northeast regions coupled with the work stoppage of our union-represented employees in August. Our union-represented employees are currently working under their previously existing labor contract as negotiations continue.

During April 2011, we acquired Terremark, a global provider of information technology infrastructure and cloud services. The acquisition improved Verizon’s competitive position in the managed hosting and cloud services space, enhanced our offerings to business and government customers globally and enabled us to grow consolidated revenues. During the third quarter of 2011, we acquired a provider of cloud software technology, which is expected to further enhance our offerings of cloud services.

Market Share Gains – In our wireless business, our goal is to continue to be the market leader in providing wireless voice and data communication services in the United States. As of September 30, 2011, total connections increased 6.5% to 107.7 million compared to September 30, 2010. As the demand for wireless data services grows, we continue to increase our data revenues by expanding our penetration of data services as a result of increased sales of smartphones and other data-capable devices. Data revenue now represents 40.6% of Verizon Wireless total service revenue and retail postpaid data average revenue per customer per month (ARPU) increased by 15.7% to $22.22. In 2010, we launched our fourth-generation (4G) Long-Term Evolution technology (LTE) mobile broadband network in 38 major markets, and as of October 20, 2011, we have launched 4G LTE in 165 markets covering more than 186 million people throughout the country. By the end of 2011, we expect LTE to be available in more than 175 markets.

In our wireline business, we continue to see improving trends and progress toward our goal of becoming the leading provider of communications products and services in each of the markets in which we operate.

 

21


Table of Contents

During the three months ended September 30, 2011, in Wireline:

 

   

revenue from our FiOS broadband and video products comprised a greater proportion of our revenue from growth markets as we added 20,000 net wireline broadband connections, including 138,000 net new FiOS Internet subscribers, for a total of 8.6 million connections, including 4.6 million FiOS Internet subscribers; and,

 

   

we added 131,000 net new FiOS TV subscribers, for a total of 4.0 million FiOS TV subscribers.

As of September 30, 2011, we achieved penetration rates of 34.6% and 30.6% for FiOS Internet and FiOS TV, respectively. With FiOS, we have created the opportunity to increase revenue per customer as well as improve overall Wireline profitability as the traditional fixed-line telephone business continues to decline due to customer migration to wireless, cable and other newer technologies.

We are also focused on gaining market share in our enterprise business through the expansion of strategic service offerings, including expansion of our Voice over Internet Protocol (VoIP) and international Ethernet capabilities, managed network and cloud services and security solutions.

Profitability Improvement – Our goal is to increase operating income and margins. Strong wireless data and FiOS revenue growth continue to positively impact operating results. Although the recent economic recovery has positively impacted our revenues in the business market, renewed economic pressures could impact our revenue and profitability in future quarters. However, we remain focused on cost controls with the objective of driving efficiencies.

Operational Efficiency – While focusing resources on revenue growth and market share gains, we are continually challenging our management team to lower expenses, particularly through technology-assisted productivity improvements, including self-service initiatives. These and other efforts, such as supply chain initiatives, real estate consolidation, call center routing improvements, a centralized shared services organization, and information technology and marketing efforts, have led to changes in our cost structure with a goal of maintaining and improving operating income margins.

Customer Service – Our goal is to be the leading company in customer service in every market we serve. We view superior product offerings and customer service as a competitive differentiator and a catalyst to growing revenues and gaining market share. We are committed to providing high-quality customer service and continually monitor customer satisfaction in all facets of our business. In addition, we are focused on providing the highest network reliability and innovative products and services. Our 4G LTE network received numerous third-party accolades addressing the superior speed and performance of our network. During the nine months ended September 30, 2011, we invested $12.5 billion in capital expenditures.

Performance and Values-Based Culture – We embrace a performance and values-based culture that demonstrates our commitment to integrity, respect, performance excellence, accountability, and putting our customers first. Our individual and team objectives are tied to Verizon’s strategic imperatives. Key objectives of our compensation programs are pay-for-performance and the alignment of executives’ and stockholders’ long-term interests. We also employ a highly diverse workforce, as respect for diversity is an integral part of Verizon’s culture and a critical element of our competitive success.

Trends

There have been no significant changes to the information related to trends affecting our business that was disclosed in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010.

 

22


Table of Contents
Consolidated Results of Operations

In this section, we discuss our overall results of operations and highlight items of a non-operational nature that are not included in our segment results. We have two reportable segments, which we operate and manage as strategic business units and organize by products and services. Our segments are Domestic Wireless and Wireline. In “Segment Results of Operations,” we review the performance of our two reportable segments.

Corporate, eliminations and other includes unallocated corporate expenses such as certain pension and other employee benefit related costs, intersegment eliminations recorded in consolidation, the results of other businesses such as our investments in unconsolidated businesses, lease financing and divested operations, and other adjustments and gains and losses that are not allocated in assessing segment performance due to their non-operational nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. Gains and losses that are not individually significant are included in all segment results as these items are included in the chief operating decision maker’s assessment of segment performance. We believe that this presentation assists users of our financial statements in better understanding our results of operations and trends from period to period.

Corporate, eliminations and other during the nine months ended September 30, 2010 included a one-time non-cash adjustment of $235 million, primarily to adjust wireless data revenues. This adjustment was recorded to properly defer previously recognized wireless data revenues that were earned and recognized in future periods. The adjustment was not material to the condensed consolidated financial statements (see “Other Items”). In addition, the results of operations related to the divestitures we completed in 2010 (see “Acquisitions and Divestitures”) included in Corporate, eliminations and other are as follows:

 

     Nine Months Ended
September 30,
 
(dollars in millions)    2011      2010  

Impact of Divested Operations

     

Operating revenues

   $       $ 2,407  

Cost of services and sales

             574  

Selling, general and administrative expense

             665  

Depreciation and amortization expense

             413  

 

Consolidated Revenues

 

     Three Months Ended
September 30,
          Nine Months Ended
September 30,
        
(dollars in millions)    2011      2010     Increase/(Decrease)     2011     2010      Increase/(Decrease)  

Domestic Wireless

                  

Service revenue

   $   15,033      $   14,168     $ 865       6.1    $   44,051     $   41,436      $ 2,615       6.3 

Equipment and other

     2,693        2,082       611       29.3       7,849       5,823        2,026       34.8  
  

 

 

   

 

 

     

 

 

    

 

 

   

Total

     17,726        16,250       1,476       9.1       51,900       47,259        4,641       9.8  

Wireline

                  

Mass Markets

     4,070        4,073       (3     (0.1     12,224       12,171        53       0.4  

Global Enterprise

     3,921        3,841       80       2.1       11,693       11,439        254       2.2  

Global Wholesale

     1,963        2,157       (194     (9.0     6,035       6,648        (613     (9.2

Other

     195        215       (20     (9.3     591       680        (89     (13.1
  

 

 

   

 

 

     

 

 

    

 

 

   

Total

     10,149        10,286       (137     (1.3     30,543       30,938        (395     (1.3

Corporate, eliminations
and other

     38        (52     90       nm        (4     1,973        (1,977     nm   
  

 

 

   

 

 

     

 

 

    

 

 

   

Consolidated Revenues

   $ 27,913      $ 26,484     $ 1,429       5.4     $ 82,439     $ 80,170      $ 2,269       2.8  
  

 

 

   

 

 

     

 

 

    

 

 

   

nm – not meaningful

The increase in consolidated revenues during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 was primarily due to higher revenues at Domestic Wireless, the expansion of FiOS services and growth in strategic services, which was in part due to the inclusion of the operating revenues of Terremark in our Wireline segment. Partially offsetting these increases were decreases in Global Wholesale revenues and total voice connections at our Wireline segment. In addition, the increase during the nine months ended September 30, 2011 was partially offset by the impact of divested operations.

 

23


Table of Contents

Domestic Wireless’ revenues increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to growth in both service and equipment revenue. Service revenue increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to an increase in total connections since October 1, 2010, as well as continued growth in retail postpaid data ARPU, partially offset by a decline in retail postpaid voice ARPU. We expect that retail postpaid data ARPU will continue to grow as a larger proportion of our customer base uses smartphones and other data-capable devices. The rate of retail postpaid data ARPU growth during the three and nine months ended September 30, 2011 was positively affected by the larger proportion of our customer base using smartphones. However, we experienced dilution of our retail postpaid data ARPU for other data-capable devices due to customers optimizing the value of their data packages and we expect this trend to continue.

Wireless total data revenue was $6.1 billion and accounted for 40.6% of service revenue during the three months ended September 30, 2011 compared to $5.1 billion and 35.7% during the similar period in 2010. Wireless total data revenue was $17.4 billion and accounted for 39.4% of service revenue during the nine months ended September 30, 2011 compared to $14.3 billion and 34.5% during the similar period in 2010. Total data revenue continues to increase as a result of the increased penetration of data offerings, in particular to support web and e-mail services resulting from increased sales of smartphones and other data-capable devices. Voice revenue decreased as a result of continued declines in retail postpaid voice ARPU, partially offset by an increase in the number of customers.

Other service revenue decreased for the three months ended September 30, 2011 compared to the similar period in 2010 as a result of a decrease in third party roaming revenue as well as a decrease in revenues from our wholesale channel. Other service revenue increased for the nine months ended September 30, 2011 compared to the similar period in 2010 as a result of year-to-date growth in wholesale and other connections and higher data roaming revenue.

Equipment and other revenue increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 due to an increase in the sales volume to new and upgrading customers as well as an increase in the average revenue per unit for smartphones, including Apple’s iPhone 4, and other data-capable devices. Partially offsetting these increases was a decrease in the sales volume for basic phones in both periods.

Wireline’s revenues decreased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily driven by declines in Global Wholesale revenues and total voice connections, partially offset by increased revenues from our growth markets as well as the impact of the operating revenues of Terremark. Wireline’s revenues were also impacted by an increase in our FiOS order backlog as well as delays in provisioning certain services to enterprise customers in August and September of 2011.

Mass Markets revenues were essentially unchanged during the three months ended September 30, 2011 and increased slightly during the nine months ended September 30, 2011 compared to the similar periods in 2010. Mass Markets revenues were positively impacted by the expansion of consumer and small business FiOS services (voice, Internet and TV), partially offset by the decline of local exchange revenues. The decline in local exchange revenues was due to a decrease in total voice connections resulting primarily from competition and technology substitution. Mass Market revenues during the three and nine months ended September 30, 2011 were also impacted by FiOS installation delays as noted above.

Global Enterprise revenues increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to growth in strategic services, which was in part due to the inclusion of the operating revenues of Terremark, partially offset by lower local services and traditional circuit-based revenues.

Global Wholesale revenues decreased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to decreased MOUs in traditional voice products primarily as a result of increases in voice termination pricing on certain international routes, which negatively impacted volume, and continued rate compression due to competition in the marketplace.

Other revenues decreased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to reduced business volumes, including former MCI mass market customer losses.

 

Consolidated Operating Expenses

 

 

    

Three Months Ended
September 30,

           Nine Months Ended
September 30,
        
(dollars in millions)    2011      2010      Increase/(Decrease)     2011      2010      Increase/(Decrease)  

Cost of services and sales

   $   11,398      $   10,671      $ 727       6.8    $   33,785      $   33,539      $ 246       0.7 

Selling, general and
administrative expense

     7,689        8,407        (718     (8.5     22,346        26,075        (3,729     (14.3

Depreciation and amortization
expense

     4,179        4,023        156       3.9       12,316        12,322        (6       
  

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Consolidated Operating
Expenses

   $ 23,266      $ 23,101      $ 165       0.7     $ 68,447      $ 71,936        $  (3,489     (4.9
  

 

 

    

 

 

     

 

 

    

 

 

   

 

24


Table of Contents

Consolidated operating expenses increased during the three months ended September 30, 2011 and decreased during the nine months ended September 30, 2011 compared to the similar periods in 2010. Consolidated operating expenses were positively impacted by lower non-operational charges and operating expenses at Wireline during the three and nine months ended September 30, 2011 compared to the similar periods in 2010. Partially offsetting these lower costs were higher operating expenses at Domestic Wireless and costs resulting from storm-related events. The change in consolidated operating expenses during the nine months ended September 30, 2011 was also partially attributable to the divested operations.

Cost of Services and Sales

Cost of services and sales increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to higher cost of equipment sales at our Domestic Wireless segment, an increase in content costs associated with FiOS subscriber growth, costs related to repair and maintenance expenses caused by storm-related events, and during the three months ended September 30, 2011, higher non-operational charges. Partially offsetting the increase during the three and nine months ended September 30, 2011 were a decrease in access costs and pension and postretirement benefit expenses at our Wireline segment. Additionally, during the nine months ended September 30, 2011, the increase was also partially offset by the impact of divested operations and lower non-operational charges.

Selling, General and Administrative Expense

Selling, general and administrative expense decreased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to a decrease in non-operational charges, pension and other postretirement benefits and compensation expense at our Wireline segment and, during the nine months ended September 30, 2011, the impact of divested operations. Partially offsetting these decreases were higher costs caused by storm-related events as well as higher sales commission expense at our Domestic Wireless segment.

Depreciation and Amortization Expense

Depreciation and amortization expense increased during the three months ended September 30, 2011 and was essentially unchanged during the nine months ended September 30, 2011 compared to the similar periods in 2010. Depreciation and amortization expense during the three and nine months ended September 30, 2011 was impacted by growth in depreciable assets and the acquisition of Terremark in the second quarter of 2011, partially offset by lower non-operational charges. The change in depreciation and amortization expense during the nine months ended September 30, 2010 was also partially attributable to the divested operations.

Non-operational Charges

Non-operational charges included in operating expenses were as follows:

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
(dollars in millions)    2011      2010      2011      2010  

Merger Integration and Acquisition Related Charges

   $       $ 159       $       $ 451   

Severance, Pension and Benefit Charges

     329         1,188         329         5,084   

Access Line Spin-off Related Charges

             67                 407   

See “Other Items” for a description of other non-operational items.

 

25


Table of Contents
Other Consolidated Results

Equity in Earnings of Unconsolidated Businesses

Equity in earnings of unconsolidated businesses decreased $16 million, or 11.3%, and $48 million, or 12.2%, during the three and nine months ended September 30, 2011, respectively, compared to the similar periods in 2010. Equity in earnings of unconsolidated businesses primarily includes earnings from operations at Vodafone Omnitel N.V. and the related foreign exchange gains and losses due to movements of the Euro against the U.S. dollar.

Other Income and (Expense), Net

Additional information relating to Other income and (expense), net is as follows:

 

    Three Months Ended
September 30,
          Nine Months Ended
September 30,
       
(dollars in millions)   2011     2010     Increase/(Decrease)     2011     2010     Increase/(Decrease)  

Interest income

  $ 16     $ 17     $ (1     (5.9 )%    $     51     $ 61     $     (10     (16.4 )% 

Foreign exchange gains (losses), net

    1       (17     18       nm        (22     3       (25     nm   

Other, net

    7       (51     58       nm        41       (53     94       nm   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total

  $     24     $     (51   $ 75       nm      $ 70     $ 11     $ 59       nm   
 

 

 

   

 

 

     

 

 

   

 

 

   

nm - not meaningful

Other income and (expense), net increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily driven by lower fees incurred during 2011 related to the early extinguishment of debt. Other income and (expense), net during the nine months ended September 30, 2011 also includes gains on sales of short-term investments, partially offset by foreign exchange losses at our international wireline operations.

Interest Expense

 

    Three Months Ended
September 30,
          Nine Months Ended
September 30,
       
(dollars in millions)   2011     2010     Increase/(Decrease)     2011     2010     Increase/(Decrease)  

Total interest costs on debt balances

  $     808     $     834     $ (26     (3.1 )%    $   2,465     $   2,649     $     (184     (6.9 )% 

Less capitalized interest costs

    110       237       (127     (53.6     341       693       (352     (50.8
 

 

 

   

 

 

     

 

 

   

 

 

   

Total

  $ 698     $ 597     $     101       16.9     $ 2,124     $ 1,956     $ 168       8.6  
 

 

 

   

 

 

     

 

 

   

 

 

   

Average debt outstanding

  $ 54,746     $ 54,236         $ 55,632     $ 58,568      

Effective interest rate

    5.9     6.2         5.9     6.0    

Total interest costs on debt balances decreased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010. The decrease in total interest costs on debt balances during the three months ended September 30, 2011 was primarily due to a lower effective interest rate, partially offset by a $0.5 billion increase in average debt. The decrease in total interest costs on debt balances during the nine months ended September 30, 2011 was primarily due to a $2.9 billion decline in average debt.

Total capitalized interest costs decreased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to a reduction in wireless licenses under development for commercial service. Capitalized interest costs will be significantly lower this year due to our ongoing deployment of the 4G LTE network.

 

26


Table of Contents

Provision for Income Taxes

 

     Three Months Ended
September 30,
           Nine Months Ended
September 30,
       
(dollars in millions)    2011     2010     Increase/(Decrease)      2011     2010     Increase/(Decrease)  

Provision for income taxes

   $     556     $     178     $     378        nm       $   1,875     $   1,115     $     760        68.2 

Effective income tax rate

     13.6     6.2           15.3     16.7     

nm – not meaningful

The effective income tax rate is calculated by dividing the provision for income taxes by income before the provision for income taxes. Our annual effective tax rate is significantly lower than the statutory federal income tax rate due to the inclusion of income attributable to Vodafone Group Plc’s (Vodafone) noncontrolling interest in the Verizon Wireless partnership within our income before the provision for income taxes, which resulted in our effective tax rate being 15.1% and 15.1% lower during the three months ended September 30, 2011 and 2010, respectively, and 14.5% and 92.1% lower during the nine months ended September 30, 2011 and 2010, respectively.

The increase in the effective income tax rate for the three months ended September 30, 2011 compared to the similar period in 2010 was primarily driven by lower income before provision for income taxes attributable to Verizon primarily as a result of the pension and benefit charges in the three months ended September 30, 2010.

The decrease in the effective income tax rate for the nine months ended September 30, 2011 compared to the similar period in 2010 was primarily due to a one-time, non-cash income tax charge of $1.0 billion recorded during the three months ended March 31, 2010 as a result of the enactment of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, both of which became law in March 2010 (collectively the Health Care Act). Under the Health Care Act, beginning in 2013, Verizon and other companies that receive a subsidy under Medicare Part D to provide retiree prescription drug coverage will no longer receive a federal income tax deduction for the expenses incurred in connection with providing the subsidized coverage to the extent of the subsidy received. Because future anticipated retiree prescription drug plan liabilities and related subsidies are 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 which the Health Care Act was enacted. This was partially offset by lower income before provision for income taxes attributable to Verizon primarily as a result of the severance, pension and benefit charges in the nine months ended September 30, 2010.

Unrecognized Tax Benefits

Unrecognized tax benefits were $2.7 billion at September 30, 2011 and $3.2 billion at December 31, 2010. Interest and penalties related to unrecognized tax benefits were $0.5 billion (after-tax) at September 30, 2011 and December 31, 2010. The decrease in unrecognized tax benefits was primarily due to the issuance of new Internal Revenue Service (IRS) Revenue Procedures in April 2011 that provided safe harbor elections for network asset maintenance costs and wireless depreciable lives which the Company has adopted. Additional decreases in unrecognized tax benefits resulted from the resolution of income tax examination issues.

As a large taxpayer, we are under audit by the IRS and multiple state and foreign jurisdictions on numerous open tax positions. The IRS completed its examination of the Company’s U.S. income tax returns for tax years 2004 through 2006 in the third quarter of 2011. We are in the process of appealing certain tax adjustments proposed by the IRS related to the 2004 through 2006 examination period. Significant tax examinations and litigation are also ongoing in New York, Canada, Australia and Italy for tax years as early as 2002. It is reasonably possible that the amount of the liability for unrecognized tax benefits could change by a significant amount during the next twelve-month period. An estimate of the range of the possible change cannot be made until issues are further developed or examinations close.

Net Income Attributable to Noncontrolling Interest

 

     Three Months Ended
September 30,
           Nine Months Ended
September 30,
        
(dollars in millions)    2011      2010      Increase/(Decrease)     2011      2010      Increase/(Decrease)  

Net income attributable to
noncontrolling interest

   $   2,163      $   2,039      $     124        6.1    $   5,983      $   5,659      $     324        5.7 

The increase in Net income attributable to noncontrolling interest during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 was due to higher earnings in our Domestic Wireless segment, which has a 45% noncontrolling partnership interest attributable to Vodafone.

 

27


Table of Contents
Segment Results of Operations

We have two reportable segments, Domestic Wireless and Wireline, which we operate and manage as strategic business units and organize by products and services. We measure and evaluate our reportable segments based on segment operating income. The use of segment operating income is consistent with the chief operating decision maker’s assessment of segment performance.

Segment earnings before interest, taxes, depreciation and amortization (Segment EBITDA), which is presented below, is a non-GAAP measure and does not purport to be an alternative to operating income as a measure of operating performance. Management believes that this measure is useful to investors and other users of our financial information in evaluating operating profitability on a more variable cost basis as it excludes the depreciation and amortization expenses related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to our competitors. Segment EBITDA is calculated by adding back depreciation and amortization expense to segment operating income.

Verizon Wireless Segment EBITDA service margin, also presented below, is calculated by dividing Verizon Wireless Segment EBITDA by Verizon Wireless service revenues. Verizon Wireless Segment EBITDA service margin utilizes service revenues rather than total revenues. Service revenues primarily exclude equipment revenues in order to reflect the impact of providing service to the wireless customer base on an ongoing basis. Verizon Wireline EBITDA margin is calculated by dividing Wireline EBITDA by total Wireline revenues.

It is management’s intent to provide non-GAAP financial information to enhance the understanding of Verizon’s GAAP financial information, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-GAAP financial measure is presented along with the corresponding GAAP measure so as not to imply that more emphasis should be placed on the non-GAAP measure. The non-GAAP financial information presented may be determined or calculated differently by other companies. You can find additional information about our segments in Note 9 to the condensed consolidated financial statements.

 

28


Table of Contents
Domestic Wireless

Our Domestic Wireless segment provides wireless voice and data services and equipment sales to consumer, business and government customers in the United States. This segment primarily represents the operations of the Verizon joint venture with Vodafone, operating as Verizon Wireless. We own a 55% interest in Verizon Wireless and Vodafone owns the remaining 45%. All financial results included in the tables below reflect the consolidated results of Verizon Wireless.

Operating Revenue and Selected Operating Statistics

 

(dollars in millions,

except ARPU)

   Three Months Ended
September 30,
          Nine Months Ended
September 30,
       
   2011     2010     Increase/(Decrease)     2011     2010     Increase/(Decrease)  

Retail service

   $ 14,405     $ 13,479     $ 926       6.9    $ 42,098     $ 39,795     $ 2,303        5.8 

Other service

     628       689       (61     (8.9     1,953       1,641       312        19.0  
  

 

 

   

 

 

     

 

 

   

 

 

    

Service revenue

     15,033       14,168       865       6.1       44,051       41,436       2,615        6.3  

Equipment and other

     2,693       2,082       611       29.3       7,849       5,823       2,026        34.8  
  

 

 

   

 

 

     

 

 

   

 

 

    

Total Operating Revenue

   $   17,726     $   16,250     $   1,476       9.1     $   51,900     $   47,259     $   4,641        9.8  
  

 

 

   

 

 

     

 

 

   

 

 

    

Connections (‘000):(1)

                 

Total connections

             107,695       101,095       6,600        6.5  

Retail customers

             90,708       86,734       3,974        4.6  

Retail postpaid customers

             86,175       82,257       3,918        4.8  

Net additions in period (‘000):(2)

                 

Total connections

     1,335       1,248       87       7.0       5,319       4,376       943        21.5  

Retail customers

     968       447       521       nm        3,165       1,174       1,991        nm   

Retail postpaid customers

     882        584       298       51.0       3,045       1,657       1,388        83.8  

Churn Rate:

                 

Retail customers

     1.26     1.43         1.27     1.39     

Retail postpaid customers

     0.94 %       1.07         0.95     1.02     

ARPU:

                 

Retail service

   $ 53.21     $ 51.95     $ 1.26       2.4     $ 52.53     $ 51.42     $ 1.11        2.2  

Retail postpaid

     54.89       53.61       1.28       2.4       54.18       53.03       1.15        2.2  

Retail postpaid data

     22.22       19.21       3.01       15.7       21.34       18.39       2.95        16.0  

nm – not meaningful

(1) – As of end of period

(2) – Excluding acquisitions and adjustments

 

29


Table of Contents

The increase in Domestic Wireless’ total operating revenue during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 was the result of growth in both service and equipment revenue.

Service Revenue

Service revenue increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to an increase in total connections since October 1, 2010, as well as continued growth in retail postpaid data ARPU, partially offset by a decline in retail postpaid voice ARPU.

The increase in retail and retail postpaid customer net additions during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 was due to an increase in retail postpaid customer gross additions as well as ongoing improvements in our retail customer churn rate, both of which we believe were primarily the result of device introductions during the first half of 2011 such as the Apple iPhone 4 and our 4G LTE capable devices. Retail (non-wholesale) customers are customers directly served and managed by Verizon Wireless and that use its branded services. Retail postpaid customers represent individual lines of service for which a customer pays in advance a monthly access charge in return for a monthly voice and/or data service allowance, and use of any services beyond the allowances is billed in arrears. Churn is the rate at which customers disconnect individual lines of service. We expect to continue to experience retail customer growth based on the strength of our product offerings and network service quality.

Total connection net additions increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 due to the above mentioned increases in retail and retail postpaid customer net additions, partially offset by a year over year decline in net additions from wholesale and other connections. Total connections represent the total of our retail customers and wholesale and other connections. Wholesale and other connections include customers from our reseller channel as well as connections from non-traditional wireless-enabled devices, such as those used to support vehicle tracking, telematics services and machine-to-machine connections.

Total data revenue was $6.1 billion and accounted for 40.6% of service revenue during the three months ended September 30, 2011 compared to $5.1 billion and 35.7% during the similar period in 2010. Total data revenue was $17.4 billion and accounted for 39.4% of service revenue during the nine months ended September 30, 2011 compared to $14.3 billion and 34.5% during the similar period in 2010. Total data revenue continues to increase as a result of the increased penetration of data offerings, in particular to support web and e-mail services resulting from increased sales of smartphones and other data-capable devices. Voice revenue decreased as a result of continued declines in retail postpaid voice ARPU, as discussed below, partially offset by an increase in the number of customers. We expect that total service revenue and total data revenue will continue to grow as we grow our customer base and increase the penetration of our data offerings as a larger proportion of our customer base uses smartphones and other data-capable devices.

The increases in retail service ARPU (the average revenue per user per month from retail customers), and retail postpaid ARPU (the average revenue per user per month from retail postpaid customers) for the three and nine months ended September 30, 2011 as compared to the similar periods in 2010 were due to a continued increase in our retail postpaid data ARPU, which more than offset a decline in our retail postpaid voice ARPU. Retail postpaid data ARPU increased as a result of continued growth and penetration of our data offerings, resulting in part from the above mentioned increase in sales of our smartphones and other data-capable devices. We expect that retail postpaid data ARPU will continue to grow as a larger proportion of our customer base uses smartphones and other data-capable devices. The rate of retail postpaid data ARPU growth during the three and nine months ended September 30, 2011 was positively affected by the larger proportion of our customer base using smartphones, which grew to 39.2% of our retail postpaid customers as of September 30, 2011 compared to 24.4% at September 30, 2010. However, we experienced dilution of our retail postpaid data ARPU for other data-capable devices due to customers optimizing the value of their data packages and we expect this trend to continue. Retail postpaid voice ARPU was $32.67 and $32.84 during the three and nine months ended September 30, 2011, respectively, representing declines of $1.73, or 5.0%, and $1.80, or 5.2%, compared to the similar periods in 2010 due to the ongoing impact of our retail customers seeking to optimize the value of our voice minute bundles.

Other service revenue includes revenue from wholesale and other connections as well as third party roaming revenue. Other service revenue decreased for the three months ended September 30, 2011 compared to the similar period in 2010 as a result of a decrease in third party roaming revenue as well as a decrease in revenues from our wholesale channel. Other service revenue increased for the nine months ended September 30, 2011 compared to the similar period in 2010 as a result of year-to-date growth in wholesale and other connections and higher data roaming revenue.

Equipment and Other Revenue

Equipment and other revenue increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 due to an increase in the sales volume to new and upgrading customers, as well as an increase in average revenue per unit, for smartphones including Apple’s iPhone 4, and other data-capable devices. Partially offsetting these increases was a decrease in the sales volume for basic phones in both periods.

 

30


Table of Contents

Operating Expenses

 

     Three Months Ended
September 30,
           Nine Months Ended
September 30,
        
(dollars in millions)    2011      2010      Increase/(Decrease)     2011      2010      Increase/(Decrease)  

Cost of services and sales

   $ 5,670      $ 5,017      $ 653        13.0    $ 17,379      $ 14,428      $ 2,951        20.5 

Selling, general and
administrative expense

     4,867        4,543        324        7.1       14,412        13,486        926        6.9  

Depreciation and
amortization expense

     2,040        1,836        204        11.1       5,917        5,475        442        8.1  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Operating Expenses

   $   12,577      $   11,396      $   1,181        10.4     $   37,708      $   33,389      $   4,319        12.9  
  

 

 

    

 

 

      

 

 

    

 

 

    

Cost of Services and Sales

Cost of services and sales increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to higher costs of equipment sales. Cost of equipment sales increased by $0.7 billion and $2.8 billion for the three and nine months ended September 30, 2011 driven by increased sales of higher cost smartphones, including Apple’s iPhone 4, and other data-capable devices. Partially offsetting these increases were decreases in the volume sold and average cost per unit of basic phones. In addition, cost of services increased in the nine months ended September 30, 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 increase in Ethernet facilities costs that support the 4G LTE network. The increase in cost of services was also impacted by higher roaming costs incurred in divested markets and increased data roaming. Partially offsetting these increases was a decrease in costs for long distance and data services and applications.

Selling, General and Administrative Expense

Selling, general and administrative expense increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to higher sales commission expense in our indirect channel. Indirect sales commission expense increased $0.2 billion and $0.8 billion during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 as a result of increases in the average commission per unit, as the mix of units continues to shift toward data devices and more customers activate data services, and increased contract renewals in connection with equipment upgrades.

Depreciation and Amortization Expense

Depreciation and amortization expense increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily driven by growth in depreciable assets.

Segment Operating Income and EBITDA

 

    Three Months Ended
September 30,
          Nine Months Ended
September 30,
       
(dollars in millions)   2011     2010     Increase/(Decrease)     2011     2010     Increase/(Decrease)  

Segment Operating Income

  $   5,149     $   4,854     $   295       6.1    $   14,192     $   13,870     $   322       2.3 

Add Depreciation and
amortization expense

    2,040       1,836       204       11.1       5,917       5,475       442       8.1  
 

 

 

   

 

 

     

 

 

   

 

 

   

Segment EBITDA

  $ 7,189     $ 6,690     $ 499       7.5     $ 20,109     $ 19,345     $ 764       3.9  
 

 

 

   

 

 

     

 

 

   

 

 

   

Segment operating income margin

    29.0     29.9         27.3     29.3    

Segment EBITDA service margin

    47.8     47.2         45.6     46.7    

The changes in the table above during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 were primarily a result of the factors described in connection with operating revenues and operating expenses above.

 

31


Table of Contents

Non-recurring or non-operational items excluded from Domestic Wireless’ Operating income were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(dollars in millions)    2011      2010      2011      2010  

Merger integration and acquisition costs

   $       $ 159      $       $ 451  

Impact of divested operations

                             (348

Deferred revenue adjustment

                             235  
  

 

 

    

 

 

 
   $   –       $   159      $   –       $   338  
  

 

 

    

 

 

 

 

Wireline

The Wireline segment provides customers with communication products and services, including voice, broadband video and data, network access, long distance and other services, to residential and small business customers and carriers, as well as next-generation IP network services and communications solutions to medium and large businesses and government customers globally.

Operating Revenues and Selected Operating Statistics

 

     Three Months Ended
September 30,
           Nine Months Ended
September 30,
        
(dollars in millions)    2011      2010      Increase/(Decrease)     2011      2010      Increase/(Decrease)  

Consumer retail

   $   3,400      $   3,364      $   36       1.1    $   10,177      $   10,034      $   143       1.4 

Small business

     670        709        (39     (5.5     2,047        2,137        (90     (4.2
  

 

 

    

 

 

     

 

 

    

 

 

   

Mass Markets

     4,070        4,073        (3     (0.1     12,224        12,171        53       0.4  

Strategic services

     1,935        1,674        261       15.6       5,617        4,867        750       15.4  

Other

     1,986        2,167        (181     (8.4     6,076        6,572        (496     (7.5
  

 

 

    

 

 

     

 

 

    

 

 

   

Global Enterprise

     3,921        3,841        80       2.1       11,693        11,439        254       2.2  

Global Wholesale

     1,963        2,157        (194     (9.0     6,035        6,648        (613     (9.2

Other

     195        215        (20     (9.3     591        680        (89     (13.1
  

 

 

    

 

 

     

 

 

    

 

 

   

Total Operating Revenues

   $ 10,149      $ 10,286      $ (137     (1.3   $ 30,543      $ 30,938      $ (395     (1.3
  

 

 

    

 

 

     

 

 

    

 

 

   

Connections (‘000):(1)

                    

Total voice connections

               24,519        26,544        (2,025     (7.6

Total Broadband connections

               8,572        8,340        232       2.8  

FiOS Internet subscribers

               4,616        3,885        731       18.8  

FiOS TV subscribers

               3,979        3,290        689       20.9  

(1) – As of end of period

 

32


Table of Contents

Wireline’s revenues decreased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily driven by declines in Global Wholesale revenues and total voice connections, partially offset by increased revenues from our growth markets as well as the impact of the operating revenues of Terremark. Wireline’s revenues were also impacted by an increase in our FiOS order backlog as well as delays in provisioning certain services to enterprise customers in August and September of 2011.

Mass Markets

Mass Markets revenues includes local exchange (basic service and end-user access), long distance (including regional toll), broadband services (including high-speed Internet and FiOS Internet) and FiOS TV services for residential and small business subscribers.

Mass Markets revenues were essentially unchanged during the three months ended September 30, 2011 compared to the similar period in 2010. During the nine months ended September 30, 2011 compared to the similar period in 2010, Mass Markets revenues increased slightly primarily due to the expansion of consumer and small business FiOS services (voice, Internet and TV), partially offset by the decline of local exchange revenues.

As we continue to expand the number of premises eligible to order FiOS services and extend our sales and marketing efforts to attract new FiOS subscribers, we have continued to grow our subscriber base and consistently improved penetration rates within our FiOS service areas. As of September 30, 2011, we achieved penetration rates of 34.6% and 30.6% for FiOS Internet and FiOS TV, respectively, compared to penetration rates of 31.0% and 27.2% for FiOS Internet and FiOS TV, respectively, at September 30, 2010. During the third quarter of 2011, FiOS subscriber growth was lower than in prior quarters due to installation delays caused by storm conditions in the Mid-Atlantic and Northeast regions coupled with the work stoppage of our union-represented employees in August.

Mass Markets revenues were negatively impacted by the decline of local exchange revenues primarily due to a 7.6% decline in total voice connections resulting primarily from competition and technology substitution. Total voice connections include traditional switched access lines in service as well as FiOS digital voice connections. The majority of the decline in total voice connections was sustained in the residential retail market, which experienced an 8.0% voice connection loss primarily due to substituting traditional landline services with wireless, VoIP, broadband and cable services. There was also a 5.2% decline in small business retail voice connections, primarily reflecting challenging economic conditions, competition and a shift to both IP and high-speed circuits.

Global Enterprise

Global Enterprise offers voice, data and Internet communications services to medium and large business customers, multi-national corporations, and state and federal government customers. In addition to traditional voice and data services, such as private line, frame relay and asynchronous transfer mode (ATM) services, Global Enterprise offers strategic networking products and solutions including IP services, cloud services and value-added solutions that make communications more secure, reliable and efficient. Global Enterprise also provides strategic managed network services for customers that outsource all or portions of their communications and information processing operations and data services, both domestically and internationally. In addition, Global Enterprise offers professional services in more than 30 countries supporting a range of solutions, including network service, security and information technology service, managing a move to IP-based unified communications and providing application performance support.

Global Enterprise revenues increased during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily driven by higher strategic services revenues, in part due to the inclusion of the operating revenues of Terremark, partially offset by lower local services and traditional circuit-based revenues. Strategic services revenue increased $0.3 billion, or 15.6%, and $0.8 billion, or 15.4% during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to higher information technology, security solution and strategic networking revenues. Strategic services continues to be Global Enterprise’s fastest growing suite of offerings. Traditional circuit-based services such as frame relay, private line and ATM services declined compared to the similar period last year as our customer base continues to migrate to next generation IP services.

 

33


Table of Contents

Global Wholesale

Global Wholesale provides voice, data and value-added business services, as well as local service to long distance and other carriers. Voice services include switched access revenues generated from fixed and usage-based charges paid by carriers for access to our local network, interexchange wholesale traffic sold in the United States and internationally destined traffic that originates in the United States. In addition, special access revenues are generated from carriers that buy dedicated local exchange capacity to support their private networks. Data services include high-speed digital data offerings, such as Ethernet, Fast Packet and Synchronous Optical Network, as well as core data circuits, such as DS1/DS3 which aim to enhance wholesale customer networks and to provide connections to their end users and subscribers. Value-added business services include managed services, mobility and security services. Local wholesale revenues include unbundled network elements and interconnection revenues from competitive local exchange carriers and wireless carriers.

The decrease in Global Wholesale revenues during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 was primarily due to decreased MOUs in traditional voice products, primarily as a result of increases in voice termination pricing on certain international routes, which negatively impacted volume, and continued rate compression due to competition in the marketplace. Switched access and interexchange wholesale MOUs declined primarily as a result of wireless substitution and access line losses. Domestic wholesale connections declined by 8.4% as of September 30, 2011 compared to September 30, 2010 due to the continued impact of competitors deemphasizing their local market initiatives coupled with the impact of technology substitution, as well as the continued level of economic pressure. Voice and local loop services declined during the three and nine months ended September 30, 2011 compared to the similar period in 2010. Partially offsetting the overall decrease in wholesale revenue was a continuing demand for high-speed digital data services primarily due to fiber-to-the-cell customers upgrading their core data circuits to Ethernet facilities. As a result, the number of DS1/DS3 circuits experienced a 5.0% decline as compared to the similar period in 2010.

Other

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 from other services during the three and nine months ended September 30, 2011 compared to the similar period in 2010 was primarily due to reduced business volumes, including former MCI mass market customer losses.

Operating Expenses

 

    

Three Months Ended

September 30,

           Nine Months Ended
September 30,
        
(dollars in millions)    2011      2010      Increase/(Decrease)     2011      2010      Increase/(Decrease)  

Cost of services and sales

   $ 5,681      $ 5,658      $ 23       0.4    $ 16,647      $ 17,010      $ (363     (2.1 )% 

Selling, general and
administrative expense

     2,296        2,296                      6,894        7,105        (211     (3.0

Depreciation and
amortization expense

     2,119        2,145        (26     (1.2     6,343        6,308        35       0.6  
  

 

 

    

 

 

     

 

 

    

 

 

   

Total Operating Expenses

   $   10,096      $   10,099      $ (3          $   29,884      $   30,423      $ (539     (1.8
  

 

 

    

 

 

     

 

 

    

 

 

   

Cost of Services and Sales

Cost of services and sales increased during the three months ended September 30, 2011 and decreased during the nine months ended September 30, 2011 compared to the similar periods in 2010. Cost of services and sales during the three and nine months ended September 30, 2011 was negatively impacted by higher costs related to repair and maintenance expenses caused by storm-related events during the third quarter of 2011, higher customer premise equipment costs and content costs associated with continued FiOS subscriber growth and the acquisition of Terremark in the second quarter of 2011. Cost of services and sales during the three and nine months ended September 30, 2011 was positively impacted by a decrease in access costs resulting primarily from management actions to reduce exposure to unprofitable international wholesale routes and declines in overall wholesale long distance volumes, as well as lower pension and postretirement benefit expenses.

Selling, General and Administrative Expense

Selling, general and administrative expense was unchanged during the three months ended September 30, 2011 and decreased during the nine months ended September 30, 2011 compared to the similar periods in 2010 primarily due to decreased pension and other postretirement benefits and compensation expense, partially offset by higher costs caused by storm-related events in the third quarter of 2011, as well as the acquisition of Terremark in the second quarter of 2011.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased during the three months ended September 30, 2011 compared to the similar period in 2010 due to a decrease in amortization expense. Depreciation and amortization expense increased during the nine months ended September 30, 2011 compared to the similar period in 2010 primarily due to the acquisition of Terremark in the second quarter of 2011.

 

34


Table of Contents

Segment Operating Income and EBITDA

 

    Three Months Ended
September 30,
          Nine Months Ended
September 30,
       
(dollars in millions)   2011     2010     Increase/(Decrease)     2011     2010     Increase/(Decrease)  

Segment Operating
Income

  $ 53     $ 187     $ (134     (71.7 )%    $ 659     $ 515     $ 144       28.0 

Add Depreciation and
amortization expense

    2,119       2,145       (26     (1.2     6,343       6,308       35       0.6  
 

 

 

   

 

 

     

 

 

   

 

 

   

Segment EBITDA

  $   2,172     $   2,332     $ (160     (6.9   $   7,002     $   6,823     $   179       2.6  
 

 

 

   

 

 

     

 

 

   

 

 

   

Segment operating income
margin

    0.5     1.8         2.2     1.7    

Segment EBITDA margin

    21.4     22.7         22.9     22.1    

The changes in the table above during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 were primarily a result of the factors described in connection with operating revenues and operating expenses above.

Non-recurring or non-operational items excluded from Wireline’s Operating income were as follows:

 

     Nine Months Ended
September 30,
 
(dollars in millions)    2011      2010  

Access line spin-off and other charges

   $     –       $ 79  

Severance, pension and benefit charges

             2,040  

Impact of divested operations

             (407
  

 

 

 
   $       $ 1,712  
  

 

 

 

 

35


Table of Contents
Other Items

 

Merger Integration and Acquisition Related Charges

During the three and nine months ended September 30, 2010, we recorded merger integration charges of $0.2 billion and $0.5 billion, respectively, for the Alltel acquisition primarily relating to handset conversions, the decommissioning of overlapping cell sites and trade name amortization.

 

Severance, Pension and Benefit Charges

During the three and nine months ended September 30, 2011, we recorded net pre-tax severance, pension and benefits charges of $0.3 billion, including pension settlement losses, for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses upon a remeasurement event.

During the three and nine months ended September 30, 2010, we recorded net pre-tax severance, pension and benefits charges of $1.2 billion and $5.1 billion, respectively. The charges during the three and nine months ended September 30, 2010 included remeasurement losses of $1.2 billion and $2.9 billion, respectively, for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses upon a remeasurement event. The remeasurement losses included $0.1 billion of pension settlement losses related to employees that received lump sum distributions primarily resulting from our previously announced separation plans. Additionally, during the nine months ended September 30, 2010, we reached an agreement with certain unions on temporary enhancements to the separation programs contained in their existing collective bargaining agreements. These temporary enhancements were intended to help address a previously declared surplus of employees and to help reduce the need for layoffs. Accordingly, we recorded severance, pension and benefits charges associated with the approximately 11,900 union-represented employees who volunteered for the incentive offer. These charges included $1.0 billion for severance for the 2010 separation programs mentioned above and a planned workforce reduction of approximately 2,500 employees in 2011. In addition, we recorded $1.2 billion for pension and postretirement curtailment losses and special termination benefits that were due to the workforce reductions, which caused the elimination of a significant amount of future service.

 

Medicare Part D Subsidy Charges

Under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, both of which became law in March 2010 (collectively the Health Care Act), beginning in 2013, Verizon and other companies that receive a subsidy under Medicare Part D to provide retiree prescription drug coverage will no longer receive a federal income tax deduction for the expenses incurred in connection with providing the subsidized coverage to the extent of the subsidy received. Because future anticipated retiree prescription drug plan liabilities and related subsidies are 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 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-Spin-off Related Charges

During the three and nine months ended September 30, 2010, we recorded pre-tax charges of $0.1 billion and $0.5 billion, respectively, primarily for costs incurred related to network, non-network software and other activities to enable the divested markets in the transaction with Frontier Communications Corporation (Frontier) to operate on a stand-alone basis subsequent to the closing of the transaction, and professional advisory and legal fees in connection with this transaction. (See “Acquisitions and Divestitures”.)

Alltel Divestiture Markets

During the three and nine months ended September 30, 2010, we recorded a tax charge of approximately $0.2 billion for the taxable gain associated with the Alltel Divestiture Markets. (See “Acquisitions and Divestitures”.)

 

Other

Corporate, eliminations and other during the nine months ended September 30, 2010 includes a non-cash adjustment of $235 million, primarily to adjust wireless data revenues. This adjustment was recorded to properly defer previously recognized wireless data revenues that were earned and recognized in future periods.

 

36


Table of Contents
Consolidated Financial Condition

 

    

Nine Months Ended

September 30,

       
(dollars in millions)    2011     2010     Change  

Cash Flows Provided By (Used In)

      

Operating activities

   $   21,512     $   25,114     $ (3,602

Investing activities

     (13,412     (10,060     (3,352

Financing activities

     (4,444     (11,669       7,225  
  

 

 

 

Increase In Cash and Cash Equivalents

   $ 3,656     $ 3,385     $ 271  
  

 

 

 

We use the net cash generated from our operations to fund network expansion and modernization, repay external financing, pay dividends, repurchase Verizon common stock from time to time and invest in new businesses. While our current liabilities typically exceed current assets, our sources of funds, primarily from operations and, to the extent necessary, from external financing arrangements, are sufficient to meet ongoing operating and investing requirements. We expect that our capital spending requirements will continue to be financed primarily through internally generated funds. Debt or equity financing may be needed to fund additional development activities or to maintain an appropriate capital structure to ensure our financial flexibility. We believe that we will continue to have the necessary access to capital markets.

Our available external financing arrangements include the issuance of commercial paper, credit available under credit facilities and other bank lines of credit, vendor financing arrangements, issuances of registered debt or equity securities and privately-placed capital market securities. We currently have a shelf registration available for the issuance of up to $7.75 billion of additional unsecured debt or equity 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.

 

Cash Flows Provided By Operating Activities

Our primary source of funds continues to be cash generated from operations. Net cash provided by operating activities during the nine months ended September 30, 2011 decreased by $3.6 billion compared to the similar period in 2010 primarily due to inventory purchases for wireless devices and higher pension plan contributions. In addition, net cash provided by operating activities during the nine months ended September 30, 2010 included cash flows from divested operations (see “Acquisitions and Divestitures”).

During the nine months ended September 30, 2011 and 2010, we received net distributions from Vodafone Omnitel of $0.4 billion.

 

Cash Flows Used In 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 responsiveness to competitive challenges and increase the operating efficiency and productivity of our networks. We are directing our capital spending primarily toward higher growth markets.

Capital expenditures, including capitalized software, were as follows:

 

    

Nine Months Ended

September 30,

 
(dollars in millions)    2011     2010  

Domestic Wireless

   $ 7,186     $ 6,205  

Wireline

     4,767       5,098  

Other

     593       441  
  

 

 

 
   $ 12,546     $ 11,744  
  

 

 

 

Total as a percentage of revenue

     15.2     14.6

The increase in capital expenditures at Domestic Wireless during the nine months ended September 30, 2011 compared to the similar period in 2010 was primarily due to increased investment in the capacity of our wireless EV-DO networks and funding the build-out of our fourth-generation network based on LTE technology. The decrease in capital expenditures at Wireline during the nine months ended September 30, 2011 compared to the similar period in 2010 was primarily due to capital expenditures in 2010 related to the local exchange business and related landline activities that were spun-off to Frontier, as well as lower capital expenditures related to the build-out of FiOS. We expect 2011 consolidated capital expenditures to be similar to last year’s spending of $16.5 billion.

 

37


Table of Contents

Acquisitions

During the second quarter of 2011, we paid approximately $1.4 billion for the equity of Terremark, which was partially offset by $0.1 billion of cash acquired (see “Acquisitions and Divestitures”). Additionally, during the nine months ended September 30, 2011, we acquired various wireless licenses and markets, as well as a provider of cloud software technology, for cash consideration that was not significant.

During the third quarter of 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 2010, we received cash proceeds of $2.6 billion in connection with the sale of the Alltel Divestiture Markets (see “Acquisitions and Divestitures”).

Other, net

During the nine months ended September 30, 2011, Other, net primarily included proceeds related to the sales of long-term investments, which were not significant to our condensed consolidated statements of income.

 

Cash Flows Used In Financing Activities

During the nine months ended September 30, 2011 and 2010, net cash used in financing activities was $4.4 billion and $11.7 billion, respectively.

2011

During March 2011, Verizon issued $6.25 billion aggregate principal amount of fixed and floating rate notes resulting in cash proceeds of approximately $6.19 billion, net of discounts and issuance costs. The net proceeds were used for the repayment of commercial paper, the retirement of certain outstanding notes issued by our telephone operating company subsidiaries and other general corporate purposes. The issuances consisted of the following: $1.0 billion Notes due 2014 that bear interest at a rate equal to three-month London Interbank Offered Rate (LIBOR) plus 0.61%, $1.5 billion 1.95% Notes due 2014, $1.25 billion 3.00% Notes due 2016, $1.5 billion 4.60% Notes due 2021 and $1.0 billion 6.00% Notes due 2041. In addition, during 2011, we utilized $0.3 billion under fixed rate vendor financing facilities.

During April 2011, we redeemed $1.0 billion of 5.65% Verizon Pennsylvania Inc. Debentures due November 15, 2011 at a redemption price of 102.9% of the principal amount of the debentures, plus accrued and unpaid interest through the date of redemption, and $1.0 billion of 6.50% Verizon New England Inc. Debentures due September 15, 2011 at a redemption price of 102.3% of the principal amount of the debentures, plus accrued and unpaid interest through the date of redemption. We also terminated the related interest rate swaps with a notional value totaling $1.0 billion. In addition, during 2011, $0.5 billion of 5.35% Verizon Communications Notes matured and were repaid.

The debt obligations of Terremark that were outstanding at the time of its acquisition by Verizon were repaid during May 2011.

Verizon Wireless

During May 2011, Verizon Wireless repaid $4.0 billion aggregate principal amount of two-year fixed and floating rate notes.

2010

During the nine months ended September 30, 2010, $0.3 billion of 6.125% Verizon New York Inc. Debentures, $0.2 billion of 6.375% Verizon North Inc. Debentures and $0.2 billion of 6.30% Verizon Northwest Inc. Debentures matured and were repaid.

During July 2010, Verizon received approximately $3.1 billion in connection with the completion of the spin-off and merger of a newly formed subsidiary of Verizon with Frontier (see “Acquisitions and Divestitures”). This special cash payment was subsequently used to redeem $2.0 billion of 7.25% Verizon Communications Notes due December 2010 at a redemption price of 102.7% of the principal amount of the Notes, plus accrued and unpaid interest through the date of redemption, as well as other short-term borrowings.

Verizon Wireless

On June 28, 2010, Verizon Wireless exercised its right to redeem the outstanding $1.0 billion of aggregate floating rate notes due June 2011 at a redemption price of 100% of the principal amount of the notes, plus accrued and unpaid interest through the date of redemption. In addition, during the nine months ended September 30, 2010, Verizon Wireless repaid $4.0 billion of borrowings that were outstanding under a three-year term loan facility. No borrowings remain outstanding under this facility and this facility has been cancelled.

 

38


Table of Contents

Credit Facility and Shelf Registration

As of September 30, 2011, the unused borrowing capacity under a $6.2 billion three-year credit facility with a group of major financial institutions was approximately $6.1 billion. On April 15, 2011, we amended this facility primarily to reduce fees and borrowing costs and extend the maturity date to October 15, 2014. The credit facility does not require us to comply with financial covenants or maintain specified credit ratings, and it permits us to borrow even if our business has incurred a material adverse change. We use the credit facility to support the issuance of commercial paper, for the issuance of letters of credit and for general corporate purposes.

We have a shelf registration available for the issuance of up to $7.75 billion of additional unsecured debt or equity securities.

Verizon’s ratio of total debt divided by total debt plus Verizon’s equity was 58.4% at September 30, 2011 and 57.8% at December 31, 2010.

Distributions

As of July 28, 2011 Verizon owned 55% of the Verizon Wireless partnership, and Vodafone Group Plc owned 45% of the partnership. On July 28, 2011, the Board of Representatives of Verizon Wireless declared a distribution to its owners, payable on January 31, 2012 in proportion to their partnership interests on that date, in the aggregate amount of $10 billion. As a result, based on current ownership interests in Verizon Wireless, we will receive a cash payment of $5.5 billion and Vodafone Group Plc will receive a cash payment of $4.5 billion on the distribution date.

Dividends

As in prior periods, dividend payments are a significant use of capital resources. The Board of Directors of Verizon determines the appropriateness of the level of our dividend payments on a periodic basis by considering such factors as long-term growth opportunities, internal cash requirements and the expectations of our shareowners. During the third quarter of 2011, the Board increased our quarterly dividend payment 2.6% to $.50 per share from $.4875 per share in the same period of 2010.

During the nine months ended September 30, 2011 and 2010, we paid $4.1 billion and $4.0 billion in dividends, respectively.

Covenants

Our credit agreements contain covenants that are typical for large, investment grade companies. These covenants include requirements to pay interest and principal in a timely fashion, pay taxes, maintain insurance with responsible and reputable insurance companies, preserve our corporate existence, keep appropriate books and records of financial transactions, maintain our properties, provide financial and other reports to our lenders, limit pledging and disposition of assets and mergers and consolidations, and other similar covenants.

We and our consolidated subsidiaries are in compliance with all debt covenants.

 

Increase In Cash and Cash Equivalents

Our Cash and cash equivalents at September 30, 2011 totaled $10.3 billion, a $3.7 billion increase compared to Cash and cash equivalents at December 31, 2010 for the reasons discussed above.

Free Cash Flow

Free cash flow is a 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 following table reconciles net cash provided by operating activities to Free cash flow:

 

     Nine Months Ended
September 30,
        
(dollars in millions)    2011      2010      Change  

Net cash provided by operating activities

   $ 21,512      $ 25,114      $ (3,602

Less Capital expenditures (including capitalized software)

     12,546        11,744        802  
  

 

 

 

Free cash flow

   $ 8,966      $ 13,370      $ (4,404
  

 

 

 

The change in free cash flow during the nine months ended September 30, 2011 compared to the similar period in 2010 was a result of the factors described in connection with net cash provided by operating activities and capital expenditures above.

 

39


Table of Contents
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, changes in investment, equity and commodity prices and changes in corporate tax rates. We employ risk management strategies, which may include the use of a variety of derivatives including cross currency swaps, foreign currency and prepaid forwards and collars, interest rate and commodity swap agreements and interest rate locks. We do not hold derivatives for trading purposes.

It is our general policy to enter into interest rate, foreign currency and other derivative transactions only to the extent necessary to achieve our desired objectives in limiting our exposure to various market risks. Our objectives include maintaining a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and to protect against earnings and cash flow volatility resulting from changes in market conditions. We do not hedge our market risk exposure in a manner that would completely eliminate the effect of changes in interest rates and foreign exchange rates on our earnings. We do not expect that our net income, liquidity and cash flows will be materially affected by these risk management strategies.

The functional currency for our foreign operations is primarily the local currency. The translation of income statement and balance sheet amounts of our foreign operations into U.S. dollars are recorded as cumulative translation adjustments, which are included in Accumulated other comprehensive income in our condensed consolidated balance sheets. Gains and losses on foreign currency transactions are recorded in the condensed consolidated statements of income in Other income and (expense), net. At September 30, 2011, our primary foreign currency exposure was to the British Pound Sterling, the Euro and the Australian Dollar.

We are exposed to changes in interest rates, primarily on our short-term debt and the portion of long-term debt that carries floating interest rates. As of September 30, 2011, more than three-fourths in aggregate principal amount of our total debt portfolio consisted of fixed rate indebtedness, including the effect of interest rate swap agreements designated as hedges. The impact of a 100 basis point change in interest rates affecting our floating rate debt would result in a change in annual interest expense, including our interest rate swap agreements that are designated as hedges, of approximately $0.1 billion. The interest rates on our existing long-term debt obligations are unaffected by changes to our credit ratings.

Interest Rate Swaps

We have entered into domestic interest rate swaps to achieve a targeted mix of fixed and variable rate debt. We principally receive fixed rates and pay variable rates based on LIBOR, resulting in 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 condensed consolidated balance sheets as assets and liabilities. Changes in the fair value of the interest rate swaps are recorded to Interest expense, which are offset by changes in the fair value of the debt due to changes in interest rates. The fair value of these contracts was $0.6 billion at September 30, 2011 and $0.3 billion at December 31, 2010, and is primarily included in Other assets and Long-term debt. As of September 30, 2011, the total notional amount of these interest rate swaps was $8.0 billion.

Cross Currency Swaps

Verizon Wireless has entered into cross currency swaps designated as cash flow hedges to exchange approximately $2.4 billion of British Pound Sterling and Euro-denominated debt into U.S. dollars and to fix our future interest and principal payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses. The fair value of these swaps, primarily included in Other assets, was approximately $0.1 billion at September 30, 2011 and December 31, 2010, respectively. During the three months ended September 30, 2011, a pretax loss of $0.2 billion was recognized in Other comprehensive income. During the nine months ended September 30, 2011, the pretax loss recognized in Other comprehensive income was not significant. During the three and nine months ended September 30, 2010, a pretax gain of $0.2 billion and a pretax loss of $0.2 billion, respectively, were recognized in Other comprehensive income. A portion of these gains and losses recognized in Other comprehensive income was reclassified to Other income and (expense), net to offset the related pretax foreign currency transaction gain or loss on the underlying debt obligations.

 

40


Table of Contents
Acquisitions and Divestitures

Terremark Worldwide, Inc.

During April 2011, we acquired Terremark for $19 per share in cash. Closing and other direct acquisition-related costs totaled approximately $13 million after-tax. The acquisition was completed via a tender offer and subsequent “short-form” merger under Delaware law through which Terremark became a wholly owned subsidiary of Verizon. The acquisition enhanced Verizon’s offerings to business and government customers globally.

Telephone Access Line Spin-off

On July 1, 2010, we completed the spin-off of the shares of a newly formed subsidiary of Verizon (Spinco) to Verizon stockholders and the merger of Spinco with Frontier. Spinco 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.

Alltel Divestiture Markets

As a condition of the regulatory approvals to complete the acquisition of Alltel Corporation in January 2009, Verizon Wireless was required to divest overlapping properties in 105 operating markets in 24 states (Alltel Divestiture Markets). During the second quarter of 2010, AT&T Mobility acquired 79 of the 105 Alltel Divestiture Markets, including licenses and network assets, for approximately $2.4 billion in cash and Atlantic Tele-Network, Inc. acquired the remaining 26 Alltel Divestiture Markets, including licenses and network assets, for $0.2 billion in cash.

 

Other Factors That May Affect Future Results

 

Regulatory and Competitive Trends

There have been no material changes to Regulatory and Competitive Trends as previously disclosed in Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Environmental Matters

During 2003, under a government-approved plan, remediation commenced at the site of a former Sylvania facility in Hicksville, New York that processed nuclear fuel rods in the 1950s and 1960s. Remediation beyond original expectations proved to be necessary and a reassessment of the anticipated remediation costs was conducted. A reassessment of costs related to remediation efforts at several other former facilities was also undertaken. In September 2005, the Army Corps of Engineers (ACE) accepted the Hicksville site into the Formerly Utilized Sites Remedial Action Program. This may result in the ACE performing some or all of the remediation effort for the Hicksville site with a corresponding decrease in costs to Verizon. To the extent that the ACE assumes responsibility for remedial work at the Hicksville site, an adjustment to a reserve previously established for the remediation may be made. Adjustments to the reserve may also be made based upon actual conditions discovered during the remediation at this or any other site requiring remediation.

 

Recent Accounting Standards

In May 2011, an accounting standard update regarding fair value measurement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. This standard update also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. We will adopt this standard update during the first quarter of 2012. The adoption of this standard update is not expected to have a significant impact on our consolidated financial statements.

In June 2011, an accounting standard update regarding the presentation of comprehensive income was issued to increase the prominence of items reported in other comprehensive income. The update requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate, but consecutive statements. This standard update is effective during the first quarter of 2012. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.

In September 2011, an accounting standard update regarding testing of goodwill for impairment was issued. This standard update gives companies the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This standard update is effective during the first quarter of 2012. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.

 

41


Table of Contents
Cautionary Statement Concerning Forward-Looking Statements

In this Report we have made forward-looking statements. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes” or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

The following important factors, along with those discussed elsewhere in this Report and those disclosed in Part 1, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements:

 

   

the effects of adverse conditions in the U.S. and international economies;

 

   

the effects of competition in our markets;

 

   

materially adverse changes in labor matters, including labor negotiations, and any resulting financial and/or operational impact;

 

   

the effect of material changes in available technology;

 

   

any disruption of our key suppliers’ provisioning 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 impact not covered by insurance;

 

   

technology substitution;

 

   

an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations or adverse conditions in the credit markets impacting the cost, including interest rates, and/or availability of financing;

 

   

any changes in the regulatory environments in which we operate, including any increase in restrictions on our ability to operate our networks;

 

   

the timing, scope and financial impact of our deployment of broadband technology;

 

   

changes in our accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings;

 

   

our ability to complete acquisitions and dispositions; and

 

   

the inability to implement our business strategies.

 

42


Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information relating to market risk is included in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Market Risk.”

Item 4. Controls and Procedures

Our chief executive officer and chief financial officer have evaluated the effectiveness of the registrant’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934), as of the end of the period covered by this quarterly report. Based on this evaluation, our chief executive officer and chief financial officer have concluded that the registrant’s disclosure controls and procedures were effective as of September 30, 2011.

There were no changes in the registrant’s internal control over financial reporting during the third quarter of 2011 that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

Part II - Other Information

Item 1. Legal Proceedings

Verizon Communications Inc. (Verizon), and a number of other telecommunications companies, have been the subject of multiple class action suits concerning its alleged participation in intelligence-gathering activities allegedly carried out by the federal government, at the direction of the President of the United States, as part of the government’s post-September 11 program to prevent terrorist attacks. Plaintiffs generally allege that Verizon has participated by permitting the government to gain access to the content of its subscribers’ telephone calls and/or records concerning those calls and that such action violates federal and/or state constitutional and statutory law. Relief sought in the cases includes injunctive relief, attorneys’ fees, and statutory and punitive damages. On August 9, 2006, the Judicial Panel on Multidistrict Litigation (Panel) ordered that these actions be transferred, consolidated and coordinated in the U.S. District Court for the Northern District of California. The Panel subsequently ordered that a number of “tag along” actions also be transferred to the Northern District of California. Verizon believes that these lawsuits are without merit. On July 10, 2008, the President signed into law the FISA Amendments Act of 2008, which provides for dismissal of these suits by the court based on submission by the Attorney General of the United States of a specified certification. On September 19, 2008, the Attorney General made such a submission in the consolidated proceedings. Based on this submission, the court ordered dismissal of the complaints on June 3, 2009. Plaintiffs have appealed this dismissal, and the appeal remains pending in the United States Court of Appeals for the Ninth Circuit.

On September 15, 2010, the U.S. Bank National Association (U.S. Bank), as Litigation Trustee for the Idearc, Inc. Litigation Trust (Litigation Trust), filed suit in U.S. District Court for the Northern District of Texas against Verizon and certain subsidiaries challenging the November 2006 spin-off of Verizon’s former directories business then known as Idearc Inc. U.S. Bank, which represents a group of creditors who filed claims in the Idearc, Inc. bankruptcy proceedings, alleges that Idearc Inc. was insolvent at the time of the spin-off or became insolvent shortly thereafter. The Litigation Trust seeks over $9 billion in damages.

Item 1A. Risk Factors

There have been no material changes to our risk factors as previously disclosed in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Verizon did not repurchase any shares of Verizon common stock during the three months ended September 30, 2011. At September 30, 2011, the maximum number of shares that could be purchased by or on behalf of Verizon under our share buyback program was 100 million.

 

43


Table of Contents

Item 6. Exhibits

 

Exhibit
Number

  

Description

10           Form of 2011 Special Performance Stock Unit Agreement pursuant to the 2009 Verizon Communications Inc. Long-Term Incentive Plan.
12           Computation of Ratio of Earnings to Fixed Charges.
31.1        Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2        Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1        Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2        Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS     XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.PRE    XBRL Taxonomy Presentation Linkbase Document.
101.CAL    XBRL Taxonomy Calculation Linkbase Document.
101.LAB    XBRL Taxonomy Label Linkbase Document.
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.

 

44


Table of Contents

Signature

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

VERIZON COMMUNICATIONS INC.

Date: October 25, 2011

   

By

 

/s/ Robert J. Barish

     

     Robert J. Barish

     

     Senior Vice President and Controller

     

     (Principal Accounting Officer)

 

45


Table of Contents

Exhibit Index

 

Exhibit
Number

  

Description

10           Form of 2011 Special Performance Stock Unit Agreement pursuant to the 2009 Verizon Communications Inc. Long-Term Incentive Plan.
12           Computation of Ratio of Earnings to Fixed Charges.
31.1        Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2        Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1        Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2        Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS     XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.PRE    XBRL Taxonomy Presentation Linkbase Document.
101.CAL    XBRL Taxonomy Calculation Linkbase Document.
101.LAB    XBRL Taxonomy Label Linkbase Document.
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.

 

46