Verizon Communications
2007 Annual Report
Financial Highlights
(as of December 31, 2007)
Consolidated
Revenues
(billions)
Operating Cash Flow
from Continuing
Operations
(billions)
Declared Dividends
per Share
Reported Diluted
Earnings per Share
$93.5
$88.2
$69.5
$23.0
$20.4
$26.3
$1.62
$1.62
$1.67
$2.65
$2.12
$1.90
Adjusted Diluted
Earnings per Share
(non-GAAP)
$2.56
$2.54
$2.39
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Corporate Highlights
> 5.8% consolidated revenue growth
> 17.9% operating income growth
> 14.2% increase in operating cash flow from continuing operations
> 6.2% increase in annual dividend
> $2.8 billion in share repurchases
Note: Prior-period amounts have been reclassified to reflect comparable results.
See www.verizon.com/investor for reconciliations to generally accepted accounting principles (GAAP) for the non-GAAP financial measures included in this annual report. Verizon’s 2006 reported results
include revenues and expenses from the former MCI, Inc., subsequent to the close of the merger in January 2006. Information provided in this annual report on a pro forma (non-GAAP) basis presents the
combined operating results of Verizon and the former MCI on a comparable basis. Discontinued operations include Verizon’s former directory publishing unit, which was spun-off to shareowners in the
fourth quarter 2006, and the operations of Verizon Dominicana C. por A. (Verizon Dominicana) and Telecomunicaciones de Puerto Rico Inc. (TELPRI) following second quarter 2006 agreements to sell the
businesses. The Verizon Dominicana sale closed in the fourth quarter 2006. The TELPRI sale closed in the first quarter of 2007. Corporate Highlights shown above are presented on a pro forma and
adjusted basis. Intra- and inter-segment transactions have not been eliminated from the business group revenue totals cited in this document.
In keeping with Verizon’s commitment to protecting the environment, this annual report is printed on recycled paper.
Chairman’s Letter to Shareowners
v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 7 a n n ua l r e p o r t
Ivan Seidenberg
Chairman and Chief Executive Officer
Verizon has spent the better part of the last decade
transforming our company to grow and compete
in the digital era. Our goal is simple: to be the best
company in the communications sector, period.
To that end, we have gained scale in the broadband, global IP and
mobile technologies required for us to become a leading network
company. We have also come together around a single brand,
common values and a results-driven culture. While there is always
more to do, we have come through an important phase in our
strategic transformation. We now have a superior set of assets in
place, based on quality networks and direct relationships with
millions of customers, and we have developed a capable and
experienced management team. This business model is delivering
improved operational performance and creating higher returns for
shareowners. And with
this solid
foundation, Verizon
is
well-positioned to meet future market demands for mobility,
bandwidth and global connectivity.
1
In changing the profile of our company, we have drawn on the talents of our
employees, the commitment of our leadership team, and the foresight and resolve of our
Board of Directors. Now our focus is on using these great assets to deliver the best results
of any company in our industry. Under our chief operating officer, Denny Strigl, our
leadership team is focused on the fundamentals of running a great business: growing
revenue and taking market share, improving efficiency and productivity, delivering
excellent service and strengthening our culture.
Our 2007 results show that this focus on performance and execution is paying off,
most notably in our revenue profile. Revenues were $93.5 billion in 2007. On a pro forma
basis – that is, as if Verizon and MCI had merged on January 1, 2006 – this represents an
increase of 5.8 percent, compared to the 3.3 percent of pro forma growth we saw in 2006.
This accelerated growth reflects our continued investment in the expanding wireless,
Wireless
Revenue
(billions)
$43.9
$38.0
$32.3
global business and broadband markets.
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We believe that having the best networks is key to being the best communications
company, so we continue to differentiate our businesses through network quality. Our
reliable wireless network has long been a source of industry-leading customer loyalty,
and we have extended this competitive edge into the wireless data arena with our
nationwide third-generation data network. We are gaining scale and momentum with
FiOS, our high-speed fiber network, which passed more than 9.3 million homes at the
end of 2007. Verizon also is a leader in providing the global IP network over which the
digital cargo of the 21st century runs. Our network currently offers secure global access
to large business and government customers around the world, and we are steadily
expanding its speed and reach in growing markets throughout Europe and the Asia-
Wireless
Customers
(millions)
65.7
59.1
51.3
Pacific region. Each of our network businesses received top awards for quality in 2007
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2007 Total Return
Verizon
S&P 500
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
22.2%
5.5%
12/29/2006
03/29/07
06/29/07
09/29/07
12/29/2007
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v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 7 a n n ua l r e p o r t
from sources as varied as J.D. Power and Associates, PC World and Wireless Week. Our
reputation for quality is critical in attracting a large and growing base of customers who
buy the Verizon brand: we ended the year with 65.7 million wireless subscribers, 8.2
million broadband customers, close to 1 million FiOS TV subscribers, and large business
sales to 97 percent of the Fortune 500.
We achieved this growth by expanding into new markets, innovating, and delivering
more value to our customers. Wireless revenues were $43.9 billion, up more than 15
percent in 2007, driven by the tremendous 65 percent growth in data revenues from
Wireless
Data Revenue
(billions)
$7.4
such services as text and picture messaging, video, music, and broadband access. Data
$4.5
accounted for about one-fifth of service revenues in 2007, and we believe this is just the
beginning of the growth curve for wireless multimedia services. Within Wireline, we
$2.2
experienced growth in the consumer space in 2007 as a result of broadband and video
revenues, which few would have predicted a few years ago. Clearly, the driver here is
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the success we are having with FiOS – our super-high-speed network that takes fiber
all the way to customers’ homes – which PC World listed as #4 on its list of the 100
best products of 2007. Customers are responding enthusiastically to the superior speed,
quality and product line-up that FiOS delivers, and we are continuing to roll out new
services that take advantage of its capabilities. Our global business operations, bolstered
by our acquisition of MCI in 2006, have delivered five straight quarters of year-over-year
pro forma revenue growth, driven by 26 percent growth in strategic services – private IP,
managed services, security, and hosting – that constitute an increasingly large share of
our base in this market. We are continuing to strengthen our vertical capabilities in this
market, as we did earlier this year with our acquisition of the managed security firm,
Cybertrust, and we are expanding our ability to serve global customers.
To accelerate our productivity and help us put all our capabilities to work for the cus-
tomer, we implemented a new corporate structure last year to coordinate functions such
as marketing, IT, network planning and purchasing across Verizon. Working together,
these organizations are identifying opportunities for productivity improvement and
implementing the corporate-wide structural solutions that truly take advantage of our
scale and scope. One example of this disciplined approach to improving business effec-
tiveness is the performance of Verizon Services Operations, launched in the fall of 2005
and recently named the best new shared services organization of 2007. This unit has
helped reduce operating costs for such shared services as finance, real estate, and supply
chain operations, which has contributed to Verizon’s expanding operating income
Wireless Retail
ARPU
$51.57
$50.11 $50.44
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3
margins. Going forward, these support organizations will be focused on creating the
end-to-end efficiencies that will expand margins. More importantly, they are also help-
ing us to think through the customer’s total relationship with Verizon and create the
FiOS Internet
Customers
(thousands)
1,541
687
170
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integrated experiences that build loyalty and long-term value.
Our focus on operational excellence is helping us drive the benefits of our growth to
the bottom line. Reported earnings for the year were $5.5 billion, or $1.90 per share.
Adjusted earnings from continuing operations were $6.9 billion, or $2.36 per share, up 15.1
percent on a pro forma basis for the year. Adjusted operating income grew almost 18
percent, with margins improving every quarter. Operating cash flows from continuing
operations grew 14.2 percent, to $26.3 billion, which we have used to strengthen our bal-
ance sheet, reinvest $17.5 billion in our business, raise our quarterly dividend by 6.2
percent and buy back $2.8 billion of stock. (See charts on pages 4-7 for an illustration of
the Verizon value creation model.)
Investors noted our solid execution, confidence in the future and commitment to
growing shareowner value. Total return for 2007 was just over 22 percent, compared to
5.5 percent for the S&P 500. Although we have seen some of those gains erode in early
2008 as the overall market has dropped on investors’ concerns over a slowing economy
The Verizon Value Creation Model
2007 Revenue Mix
Wireless 47%
1.
Global Business 23%
Consumer Retail
(Legacy Verizon) 16%
Telecom Wholesale 9%
Other 5%
We changed our profile by investing in growth.
With all of the changes taking place in the telecom industry, we
developed a strategy to simplify our operations and focus our invest-
ments in growth products. We streamlined our portfolio by divesting
our directory business and selling some access lines and international
equity holdings. The capital from these transactions helped to further
change our corporate profile, through the acquisition of MCI and
investments in our broadband wireless and fiber networks.
Collectively, these moves have diversified our revenue base, provided
new growth opportunities and created shareowner value. Today a
larger percentage of our revenue stream comes from our growth
businesses. By focusing on the power of our advanced wireless, fiber
and global IP networks – along with offering a superior set of prod-
ucts, services and distribution capabilities – we have created a strong
platform for continued growth.
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v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 7 a n n ua l r e p o r t
and the crisis in the subprime mortgage market, we are confident that our strong balance
sheet, good cash flows and diversified business model will sustain us through whatever
economic uncertainty we may experience in the coming months. In fact, as a sign of that
FiOS TV
Customers
(thousands)
943
confidence, the Verizon Board of Directors recently authorized the repurchase of up to
100 million shares over the next three years.
Our belief is that good execution and sound financials give you the ability to control
your own destiny, even in uncertain economic times. More broadly, we think our
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fundamental strength will serve us well as we prepare for the next phase of growth in
communications.
As we look ahead, we are getting a better picture of the opportunities being created
by the accelerating shift to ultra-high-speed broadband, wireless multimedia and
anytime-anywhere applications and services. We expect that a new wave of wireless
devices will expand the market beyond phones and computers by embedding
communications capabilities into appliances, cars, cameras, credit cards and more. The
enormous growth of sites like YouTube, Facebook and other social media will continue to
feed the demand for bandwidth that supports these highly visual and interactive forms
of communicating. All of the defining experiences of the digital lifestyle – social
Consolidated Revenues
(billions)
$88.2
$93.5
$69.5
2.
2005
2006
2007
As a result of our investments, we accelerated our revenue growth.
We believe that the best way for us to create value for our
shareowners is to grow the business. By strengthening our busi-
ness mix around growth products and services, we created a
stronger revenue stream. Sales of our new growth products have
also led to increased revenue per customer, which has helped
offset the losses we experienced in some of our legacy products.
In 2006, consolidated revenues increased by $18.7 billion to a total of
$88.2 billion, largely a result of our acquisition of MCI. In 2007, con-
solidated revenues totaled $93.5 billion, an increase of $5.3 billion
compared to 2006.
5
networking, media sharing, e-commerce, and mobile media – depend on advanced
networks and practical applications that deliver their power to customers.
We continue to roll out the industry-leading wireless, wireline and IP technologies
that give us a global platform for providing this next generation of services. Our fiber-
Verizon Business
Strategic Services
Revenue
(billions)
$5.2
$4.1
optic network has the capacity to deliver the full-fledged multimedia experiences and
$3.3
radical interactivity that will create new opportunities in education, entertainment,
medicine, commerce and the arts. We are already planning for the fourth generation
of wireless network technology, which we will begin testing in 2008. We are upgrading
our backbone networks to increase the performance and reliability of the vast amount
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of Internet traffic that we carry. Verizon is the founding American investor in an inter-
national consortium that is building a cable across the Pacific Ocean to accommodate
the huge growth in voice, Internet and video traffic from Asia to the United States.
To make sure our customers have the broadest array of wireless options and to encour-
age innovation on the part of entrepreneurs and application developers, we have
announced an Open Development Initiative that will enable customers to “bring their
own” devices and applications to run on our networks.
The Verizon Value Creation Model (continued)
Operating Cash Flow from Continuing Operations
(billions)
$26.3
$20.4
$23.0
3.
2005
2006
2007
Operational improvements have created stronger cash flow.
In addition to creating top-line growth, our business model also
focuses on creating value for shareowners by generating strong cash
flow and margins. Our goal is to take advantage of our scale, stream-
line our processes, eliminate duplication and drive savings to the
bottom-line.
We continue to increase operational efficiency within each of our
business groups to improve productivity and margins across the
entire business. The results are evident in our strong operating cash
flow from continuing operations, which last year grew by 14.2 percent
compared to 2006.
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v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 7 a n n ua l r e p o r t
But for all the technological wizardry of our industry, the real key to being the best
company in communications is delivering the benefits of all this technology to the
millions of customers who rely on us for service.
Think about the range of digital devices, experiences, networks and services you
juggle over the course of an average day. Multiply that by those of your family, your
friends, your co-workers and your on-line communities and you have a digital
environment whose complexity is increasing exponentially. Giving customers the tools
Total Debt
(billions)
$38.3
$36.4
$31.2
to manage their digital lives – anytime, anywhere, on any device – will be one of the
great business opportunities of the next decade. Few companies are better positioned to
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help customers do that than Verizon. That’s why, going forward, we are focused on using
our unique combination of assets – networks, software and relationships with millions
of customers – to deliver the differentiated Verizon experience that will build competitive
advantage and customer loyalty in the future.
No one in our industry has cracked the code on customer service for the digital age.
Verizon can be the company that does that, and we are attacking this mission with the
same kind of consistency, clarity and accountability that we have exhibited in achieving
our other performance objectives.
2007 Use of Cash
(billions)
Shareowner
Returns
Investment
Dividends: $4.8
Share Repurchase: $2.8
Capital Expenditures: $17.5
Debt Reduction: $5.2
2007
4.
We used our improved cash flow to provide strong returns to our investors,
while continuing to invest in future growth.
Our strong cash position and balance sheet give us the financial
flexibility to continue investing for growth and at the same time
return capital to our shareowners. The confidence that our business
model can generate top-line and bottom-line performance allowed
us to increase our dividend payment and repurchase $2.8 billion
of Verizon stock last year. By creating sustainable growth in our
broadband, wireless and enterprise markets, we are able to reward
our shareowners today while we continue to invest in the future
growth of the business.
7
We are fortunate to have nearly 235,000 dedicated employees who come to work
every day committed to serving our customers and delivering the products and services
that will make their lives more manageable, convenient and productive. Our legacy of
service is built on a strong foundation of rock-solid values and ethical management. Our
employees’ record of excellence in such areas as diversity, energy conservation and
environmental preservation continues to win recognition and enhance our reputation.
Their actions reflect our deep roots in the communities we serve and our commitment to
using our size, talent and technology to improve society.
In 2007 we said goodbye to two retiring board members, James Barker and Walter
Shipley, and Robert Storey will retire in May 2008. Together, they have devoted 78 years
of service to our shareowners. Every shareowner owes them a debt of thanks for their
extraordinary commitment to our company. We will continue to reap the rewards of
their work in the years to come, and you can be assured that our current Board of Directors
is equally committed to being responsive and accountable to our shareowners.
The hard work of transformation is never finished, nor is the desire to be the best in
the business ever totally fulfilled. We will always have much more to do. But our 2007
results show what hands-on leadership can accomplish when united around a big,
ambitious goal. There’s no room at Verizon for remote-control management. To us,
leadership is a personal commitment that requires each of us to be a vital, visible force
in the lives of our organizations. That passion for performance has made Verizon one of
a handful of companies that have shown we have what it takes to navigate the changes
in our industry and come out a winner. I’m excited at the opportunity we have to practice
that leadership every day, and I’m confident that the Verizon team will continue to
produce results for shareowners and customers in the years ahead.
Ivan G. Seidenberg
Chairman and Chief Executive Officer
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v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 7 a n n ua l r e p o r t
“To move an industry forward, technology has to
address the things that people care about, deliver real
benefits and solve real problems. This is great news
for those of us in the information and communications
business, which is so much a part of the daily lives
of our customers and the communities we operate in.
If we can use our technology to make their lives
better, the potential – for us and for our society –
is unlimited.”
Dennis F. Strigl
President and Chief Operating Officer
Verizon Communications
From a speech given at Fairleigh Dickinson University on Sept. 27, 2007
9
Wireless Broadband for Mobile Connectivity
U.S. Households
with Mobile Phones
(millions)
Actual
Forecast
U.S. Households
with Laptops
(millions)
Actual
Forecast
80
60
40
20
0
01
02
03
04
05
06
07
Y EA R
08
09
10
11
12
01
02
03
04
05
08
09
10
11
12
07
06
YEAR
Source: Forrester Research, Inc., Benchmark 2007:
The Five-Year Forecast for Devices and Access, Sept. 2007
Source: Forrester Research, Inc., Benchmark 2007:
The Five-Year Forecast for Devices and Access, Sept. 2007
120
100
80
60
40
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v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 7 a n n ua l r e p o r t
One of the biggest trends in the communications marketplace is the
consumer’s increasing appetite for wireless broadband applications
such as downloading music, watching TV, sharing photos and
connecting to the Internet. Recent advances in mobile technology
have transformed the wireless experience by moving traditional
high-bandwidth Internet applications off the PC and onto handheld
devices. As a result, consumers are now able to use their wireless
phones, laptops, PDAs and smartphones to download videos,
purchase songs, navigate city streets, watch the news, manage their
finances and send email from just about anywhere they may be.
Verizon is leading the way in meeting these evolving needs of
mobile customers. Our nationwide wireless broadband network is
available to more than 240 million people across the United States,
enabling a suite of services that deliver entertainment, information
and productivity benefits to customers.
With Verizon’s V CAST services, for example, customers can listen
to their favorite music by choosing from more than 2.6 million songs
available for downloading from Verizon’s online music store.
We also offer V CAST Mobile TV, which provides customers TV
broadcasts of their favorite full-length comedy, sports and news
programming right to their phone. In addition, our VZ Navigator
service is a real-time GPS navigation system, featuring up-to-date
maps and spoken turn-by-turn directions.
For business customers, Verizon’s BroadbandAccess service
provides high-speed wireless access to email, corporate intranets and
the Internet from notebook computers. We also offer a wide variety
of smartphones that provide wireless access to email and other
information stored on home or office computers.
Through our Open Development Initiative, announced late last
year, we will provide customers the option to use, on the Verizon
Wireless network, wireless devices and applications not offered by
the company but available from developers. These devices will be
certified that they meet our technical standards. By opening our
wireless network to an even wider array of innovators, we will set
the stage for the next level of wireless growth. This new option for
customers will be available by the end of this year.
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High Bandwidth for Today’s Digital Lifestyle
U.S. Households
with Broadband
(millions)
Actual
Forecast
U.S. Households
with HDTV
(millions)
Actual
Forecast
80
70
60
50
40
30
20
10
0
01
02
03
04
05
06
07
YE AR
08
09
10
11
12
01
02
03
04
05
08
09
10
11
12
07
06
YEAR
Source: Forrester Research, Inc., Benchmark 2007:
The Five-Year Forecast for Devices and Access, Sept. 2007
Source: Forrester Research, Inc., Benchmark 2007:
The Five-Year Forecast for Devices and Access, Sept. 2007
100
80
60
40
20
0
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v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 7 a n n ua l r e p o r t
Early online applications like email were primarily text-based and
rode over existing telephone and cable networks. But now a new
generation of broadband, fueled by the demand for interactive
multimedia and high-definition content, is gaining popularity in the
marketplace.
The number of homes with high-definition TVs continues to
grow, as does the prevalence of computers in the household. At the
same time, the content and applications that run on these devices
require an increasing amount of bandwidth coming into the home.
Copper wires and coaxial cables simply aren’t the best solution for
delivering the advanced communications services of the 21st century.
Only fiber-optic cables have the necessary bandwidth to keep pace
with consumer demand in the years ahead.
With Verizon’s all-fiber network, our customers’ homes and
offices are wired for the future. We’re the only major communications
company that’s installing fiber directly to homes and businesses
on a mass scale across the country. Our fiber-optic network offers
nearly unlimited bandwidth for voice, Internet and high-definition
TV services, and is designed to handle new applications as they’re
developed.
Thanks to the massive bandwidth of fiber, Verizon’s FiOS Internet is
the fastest service available, with speeds as high as 50 Mbps (megabits
per second). No other provider comes close. As our customers
continue to need more “downstream” bandwidth to download music,
movies and other high-capacity applications, we can easily add
additional bandwidth to meet their needs. In addition, customers
are demanding faster “upstream” speeds for sending photos, videos
and other large files to their family and friends. Again, Verizon’s fiber
network is unmatched. In 2007, Verizon introduced a symmetrical
FiOS Internet service with upload and download speeds of up to 20
Mbps, which is ideal for uploading large files to businesses from work-
at-home employees. We are the only company to offer symmetric
Internet service at these speeds on a mass scale.
Verizon’s FiOS TV service is also provided over our advanced
fiber-optic network. Because of our direct fiber connection, FiOS TV
delivers amazingly sharp pictures and sound. And with the virtually
unlimited bandwidth potential of fiber, Verizon will be able to provide
more high-definition channels and programs than any other video
provider. So as the number of HD channels continues to grow, our
advanced network will be able to meet our customers’ increasing
appetite for more bandwidth.
Verizon is delivering the broadband future right to our customers’
front doors. By connecting our fiber network directly to homes and
businesses, we are uniquely positioned to enable the bandwidth-
intensive applications and services that will continue to transform the
world we live in.
13
Global Connectivity for International Growth
Global Security Services
Spending Forecast
($ in billions)
Global Telecom Spending
on Business Data Forecast
($ in billions)
$37.9
$32.7
$185.2
$172.4
$158.6
$146.1
$134.4
$123.4
$28.0
$23.8
$20.2
$17.0
06
07
08
09
10
11
06
07
YE AR
09
10
11
08
YEAR
Source: IDC, Worldwide and U.S. Security Services
2006-2011 Forecast and Analysis, Dec. 2007
Source: IDC Estimates, 2008
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v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 7 a n n ua l r e p o r t
In the pursuit of growth, companies are moving into new, high-
potential global markets to offer their products and services. These
companies also want to maximize their effectiveness and productivity.
As a result, corporations are faced with the challenge of connecting
their workforce, their systems and their communications networks in
countries around the world.
A global company’s network shouldn’t care if employees and
customers are wired or wireless, if they’re in Paris or Singapore, or if
they’re working on a laptop or a PDA. They need to be able to gain
access whenever they want, wherever they are and on whatever
device they choose.
Verizon is a leading provider of advanced communications and
information technology solutions to large business and government
customers worldwide. Combining our vast global network reach with
advanced communications, security and other professional service
capabilities, Verizon delivers innovative and seamless products to
customers around the globe. We use our world-class network as the
foundation for offering secure services and end-to-end solutions that
enable our customers to better serve their customers.
In 2007, Verizon Business moved to further increase its strategic
services leadership. With the acquisition of Cybertrust, Verizon Business
became the leading provider of managed information security
services to business and government customers worldwide. By
combining Cybertrust’s global presence and customer base, focused
security expertise and professional services with Verizon Business’
comprehensive security portfolio, global IP network and financial
strength, the acquisition created a powerful and unique player in the
global security marketplace.
Verizon Business is also a founding partner and landing party
in a consortium building the Trans Pacific Express (TPE) – the first
next-generation undersea optical cable system directly linking the
U.S. mainland and China. The TPE system will use the latest optical
technology to provide greater capacity and higher speeds to
meet the dramatic increase in demand for IP and video services.
The TPE cable system will complement Verizon’s existing submarine
cables in the Asia-Pacific region, providing further diversity from other
undersea routes.
Whether it’s providing significant network capability, personal
service or an extensive set of products and services, Verizon is the
premier provider of advanced communications and IT solutions
worldwide.
15
Corporate Responsibility: Doing the Work
At Verizon, we believe that corporate responsibility is more than how
we conduct our business. It’s the sum of our identity: the quality of our
people, the value of our brand, our standing in the community and
our performance in the marketplace. We’re committed to acting with
integrity, adhering to the highest ethical standards and improving
the lives of the people we serve.
But bold statements don’t make a company great – performance
does. That’s why Verizon was named one of the “100 Best Corporate
Citizens” by CRO Magazine in 2008. For more information on Verizon’s
commitment to corporate responsibility, please visit www.verizon.
com/responsibility.
Education and Literacy
Improving basic literacy skills in the United States is among the
Verizon Foundation’s major priorities because of its enormous impact
on education, health and economic development. Here in the United
States, more than 30 million American adults have basic or below
average literacy skills.
Thinkfinity.org is designed to improve education and literacy
achievement. This comprehensive free website delivers online
resources to advance student achievement. Thinkfinity delivers top-
quality K-12 lesson plans, student materials, interactive tools and
connections to educational web sites. It gives teachers, instructors
and parents the tools they need to increase student performance.
More information is available at www.thinkfinity.org.
Verizon Volunteers
We know that the most effective resources we have for carrying out
our commitment to communities are our employee volunteers. In
2007, Verizon employees and retirees donated more than 485,000
hours of service and, with the Verizon Foundation, contributed $25
million in combined matching gift funds, making Verizon Volunteers
one of the largest corporate volunteer incentive programs in the
United States.
Domestic Violence Prevention
Domestic violence is the greatest cause of injury to women between
the ages of 15 and 44 in the United States – more than muggings,
car accidents and rapes combined. Last year the Verizon Foundation
supported domestic violence prevention organizations with $5.4
million in grants. In addition, Verizon Wireless’ HopeLine® program,
which puts wireless technology to work to help victims of domestic
violence, collected more than 1 million no-longer-used phones,
awarded more than $1.7 million in cash grants to domestic violence
agencies, and distributed more than 20,000 phones – with the
equivalent of 60 million minutes of service – to be used by victims of
domestic violence.
For more information on the Verizon Foundation’s philanthropic
efforts, please visit www.verizon.com/foundation.
16
Selected Financial Data
2007
2006
(dollars in millions, except per share amounts)
2003
2004
2005
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Results of Operations
Operating revenues
Operating income
Income before discontinued operations, extraordinary item
and cumulative effect of accounting change
Per common share – basic
Per common share – diluted
Net income available to common shareowners
Per common share – basic
Per common share – diluted
Cash dividends declared per common share
Financial Position
Total assets
Debt maturing within one year
Long-term debt
Employee benefit obligations
Minority interest
Shareowners’ investment
$ 93,469
15,578
$ 88,182
13,373
$ 69,518
12,581
$ 65,751
10,870
$ 61,754
5,312
5,510
1.90
1.90
5,521
1.91
1.90
1.67
5,480
1.88
1.88
6,197
2.13
2.12
1.62
6,027
2.18
2.16
7,397
2.67
2.65
1.62
5,899
2.13
2.11
7,831
2.83
2.79
1.54
2,168
.79
.79
3,077
1.12
1.12
1.54
$ 186,959
2,954
28,203
29,960
32,288
50,581
$ 188,804
7,715
28,646
30,779
28,337
48,535
$ 168,130
6,688
31,569
17,693
26,433
39,680
$ 165,958
3,476
34,970
16,796
24,709
37,560
$ 165,968
5,883
38,609
15,726
24,023
33,466
• Significant events affecting our historical earnings trends in 2005 through 2007 are described in Management’s Discussion and Analysis of Results of Operations and Financial Condition.
• 2004 data includes sales of business, severance, pension and benefit charges and other items.
• 2003 data includes severance, pension and benefit charges and other items.
Stock Performance Graph
Comparison of Five-Year Total Return Among Verizon, S&P 500 Telecom Services Index and S&P 500 Stock Index
Verizon
S&P 500 Telecom Services
S&P 500
s
r
a
l
l
o
D
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
2002
2003
2004
2005
2006
2007
$60.0
Data Points in Dollars
Verizon
S&P Telecom Services
S&P 500
2002
100.0
100.0
100.0
2003
94.5
107.2
128.7
At December 31,
2004
113.6
128.5
142.7
2005
88.5
121.6
149.6
2006
119.1
166.2
173.3
2007
145.4
185.9
182.8
The graph compares the cumulative total returns of Verizon, the S&P 500 Telecommunications Services Index, and the S&P 500 Stock Index over a five-year period, adjusted for the spin-off of
our domestic print and Internet yellow pages directories business. It assumes $100 was invested on December 31, 2002, with dividends reinvested.
17
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Overview
Verizon Communications Inc. (Verizon or the Company) is one of the
world’s leading providers of communications services. Verizon’s wireline
business provides communications services, including voice, broadband
data and video services, network access, nationwide long-distance and
other communications products and services, and also owns and oper-
ates one of the most expansive end-to-end global Internet Protocol (IP)
networks. Verizon’s 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. Stressing diversity and commitment to the communities in
which we operate, we have a highly diverse workforce of approximately
235,000 employees.
The sections that follow provide information about the important aspects
of our operations and investments, both at the consolidated and seg-
ment levels, and include discussions of our results of operations, financial
position and sources and uses of cash. In addition, we have highlighted
key trends and uncertainties to the extent practicable. The content and
organization of the financial and non-financial data presented in these
sections are consistent with information used by our chief operating
decision makers for, among other purposes, evaluating performance and
allocating resources. 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, in evaluating our oper-
ating results and analyzing and understanding business trends. While
most key economic indicators, including gross domestic product, impact
our operations to some degree, we have noted higher correlations to
housing starts, non-farm employment, personal consumption expendi-
tures and capital spending, as well as more general economic indicators
such as inflation and unemployment rates.
Our results of operations, financial position and sources and uses of cash
in the current and future periods reflect Verizon management’s focus on
the following strategic imperatives:
• Revenue Growth – Our emphasis is on revenue growth, devoting
more resources to higher growth markets such as wireless, including
wireless data, wireline broadband connections, including Verizon’s
high-capacity fiber optics to the premises network operated under the
FiOS service mark, digital subscriber lines (DSL) and other data services,
as well as expanded strategic services to business markets, rather than
to the traditional wireline voice market. During 2007, we reported
consolidated revenue growth of 6% compared to 2006, primarily
driven by 15.3% higher revenue at Domestic Wireless, where we added
approximately 6.9 million retail net wireless customers, partially offset
by a decline in reseller customers, resulting in approximately 6.7 mil-
lion total wireless net customer additions. At Wireline, revenue growth
in the residential market, driven by broadband and video services,
coupled with growth in the business market derived from strategic
services, partially offset declines in the traditional voice mass market.
• Market Share Gains – We are focused on gaining market share. In
our wireline business, our goal is to become the leading broadband
provider in every market in which we operate. We added 1,253,000
wireline broadband connections during 2007 and we achieved our
goal of being among the top 10 video providers in the U.S. during
2007 through the continued deployment of FiOS. At Wireline, as of
December 31, 2007, we passed 9.3 million premises with our high-
capacity fiber network, and we have obtained over 1,000 video
franchises covering 12.5 million households with TV service available
for sale to 5.9 million premises. We had 943,000 FiOS TV customers,
adding approximately 736,000 net new FiOS TV customers in 2007
18
and exceeded 1.8 million total video customers, including our satellite
offering from DIRECTV. Also during 2007, revenues from our enterprise
customers grew 2.7% compared with last year, primarily driven by a
25.7% increase in revenues from sales of strategic services (Private IP, IP,
Virtual Private Network or VPN, Web Hosting and Voice over IP or VoIP).
At Domestic Wireless, we continue to add retail customers, grow rev-
enue and gain market share while maintaining a low churn (customer
turnover) rate.
• Profitability Improvement – Our goal is to increase operating income
and margins. In 2007, operating income rose 16.5% compared to 2006,
while income before provision for income taxes, discontinued opera-
tions, extraordinary item and cumulative effect of accounting change
rose 16.4% over the same period. Our operating income margin rose
to 16.7% in 2007, compared with 15.2% in 2006. Supporting these
improvements, our capital spending continues to be directed toward
growth markets, positioning the Company for sustainable, long-term
profitability. High-speed wireless data (Evolution-Data Optimized or
EV-DO) services, deployment of fiber optics to the premises, as well
as expanded services to enterprise customers are examples of these
growth markets. During 2007, capital expenditures were $17,538 mil-
lion compared with capital expenditures of $17,101 million in 2006,
excluding discontinued operations. We expect 2008 capital expendi-
tures to be lower than 2007 capital expenditures. In addition to capital
expenditures, Domestic Wireless expects, from time-to-time, to acquire
additional wireless spectrum through participation in the Federal
Communications Commission’s (FCC) wireless spectrum auctions and
in the secondary market, as spectrum capacity is needed to support
expanding data applications and a growing customer base. Domestic
Wireless also expects, from time-to-time, to acquire operating mar-
kets and spectrum in geographic areas where it does not currently
operate.
• Operational Efficiency – While focusing resources on revenue growth
and market share gains, we are continually challenging our manage-
ment team to lower expenses, particularly through technology-
assisted productivity improvements, including self-service initiatives.
The effect of these and other efforts, such as real estate consolidations,
call center routing improvements, the formation of a centralized
shared services organization, and centralizing information technology
and marketing efforts, has led to changes to the Company’s cost struc-
ture as well as maintaining and improving operating income margins.
With our deployment of the FiOS network, we expect to realize savings
in annual, ongoing operating expenses as a result of efficiencies gained
from fiber network facilities. As the deployment of the FiOS network
gains scale and installation and automation improvements occur, costs
per home connected are expected to decline. Since the merger with
MCI, we have gained operational benefits from sales force and product
and systems integration initiatives. Workforce levels in 2007 decreased
to 235,000 compared to 238,000 in 2006, primarily from a decrease at
Wireline due to continued productivity improvements and merger syn-
ergy savings, partially offset by an increase in headcount at Wireless.
• Customer Experience – Our goal is to provide the best customer
experience possible and to be the leading company in customer
service in every market we serve. We view superior product offerings
and customer service experiences as a competitive differentiator and
a catalyst to growing revenues and gaining market share. During 2007,
our Company received citations for superior products and customer
service, and we continued these initiatives to enhance the value of
our products and services. We are developing and marketing innova-
tive product bundles to include local wireline, long-distance, wireless
and broadband services for consumer and general business retail cus-
tomers. These efforts will help counter the effects of competition and
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
COnsOlidated results Of OperatiOns
In this section, we discuss our overall results of operations and highlight
items that are not included in our business segment results. As a result
of the spin-off of our domestic print and Internet yellow pages directo-
ries business, which was included in the Information Services segment,
and the sale of our interests in Telecomunicaciones de Puerto Rico, Inc.
(TELPRI) and Verizon Dominicana, each of which was included in the
International segment, the operations of our former domestic print
and Internet yellow pages directories business, Verizon Dominicana
and TELPRI are reported as discontinued operations and assets held for
sale. Accordingly, we currently have two reportable segments, which we
operate and manage as strategic business units and organize by products
and services. Our segments are Wireline and Domestic Wireless. Included
in our Wireline results of operations are the results of the former MCI busi-
ness subsequent to the close of the merger on January 6, 2006.
This section and the following “Segment Results of Operations” section
also highlight and describe those items of a non-recurring nature sepa-
rately to ensure consistency of presentation. In the following section, we
review the performance of our two reportable segments. We exclude the
effects of certain items that management does not consider in assessing
segment performance, due primarily to their non-recurring and/or non-
operational nature as discussed below and in the “Other Consolidated
Results” and “Other Items” sections. We believe that this presentation
will assist readers in better understanding our results of operations and
trends from period to period.
technology substitution that have resulted in access line losses, and
will enable us to grow revenues. Also at Wireline, we continued to roll
out next-generation global IP networks to meet the ongoing global
enterprise market shift to IP-based products and services. Deployment
of new strategic service offerings -- including expansion of our VoIP
and international Ethernet capabilities, the introduction of cutting
edge video and web-based conferencing capabilities, and enhance-
ments to our virtual private network portfolio -- will allow us to con-
tinue to gain share in the enterprise market. In addition, during 2007
we acquired a security-services firm that enhanced our managed infor-
mation security services offerings to large-business and government
customers worldwide. At Domestic Wireless, we continue to execute
on the fundamentals of our network superiority and value proposition
to deliver growth for our business and provide new and innovative
products and services, such as Broadband Access, our EV-DO service.
We also continue to expand our wireless data, messaging and multi-
media offerings for both consumer and business customers and take
advantage of the growing demand for wireless data services.
• Performance-Based Culture – We embrace a culture of corporate-
wide accountability, based on individual and team objectives that are
performance-based and tied to these imperatives. Key objectives of our
compensation programs are pay-for-performance and the alignment
of executives’ and shareowners’ long-term interests. We also employ a
highly diverse workforce, since respect for diversity is an integral part of
Verizon’s culture and a critical element of our competitive success.
We create value for our shareowners by investing the cash flows gen-
erated by the business in opportunities and transactions that support
these strategic imperatives, thereby increasing customer satisfaction and
usage of our products and services. In addition, we use our cash flows
to repurchase shares and maintain and grow our dividend payout to
shareowners. Verizon’s total debt decreased by $5,204 million to $31,157
million as of December 31, 2007 from December 31, 2006. Reflecting
continued strong cash flows and confidence in Verizon’s business model,
Verizon’s Board of Directors increased the Company’s quarterly dividend
6.2% during the third quarter of 2007. Verizon’s ratio of debt to debt
combined with shareowners’ equity was 38.1% as of December 31, 2007
compared with 42.8% as of December 31, 2006. During 2007, we repur-
chased $2,843 million of our common stock as part of our previously
announced share buyback program. We plan to continue our share buy-
back program in 2008. Verizon’s cash and cash equivalents at December
31, 2007 of $1,153 million decreased by $2,066 million from $3,219 mil-
lion at December 31, 2006.
As discussed in the “Recent Developments” section beginning on page 33,
in January 2007, Verizon announced a definitive agreement with FairPoint
Communications, Inc. (FairPoint) that will result in Verizon establishing a
separate entity for its local exchange access lines and related business
assets in Maine, New Hampshire and Vermont, spinning off that new
entity to Verizon’s shareowners, and immediately merging it with and
into FairPoint. Based upon the number of shares (as adjusted) and closing
price of FairPoint common stock on the date immediately prior to the
announcement of the merger, the estimated total value to be received by
Verizon and its shareowners in exchange for these operations was approx-
imately $2,715 million. The actual total value to be received by Verizon and
its shareowners will be determined based on the number of shares (as
adjusted) and price of FairPoint common stock on the date of the closing
of the merger, and is expected to be less than $2,715 million.
19
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Consolidated Revenues
Years Ended December 31,
2007
2006
% Change
Wireline
Verizon Telecom
Verizon Business
Intrasegment eliminations
Domestic Wireless
Corporate & Other
Revenues of Hawaii operations sold
Consolidated Revenues
$ 31,926
21,236
(2,846)
50,316
43,882
(729)
–
$ 93,469
$
$
32,938
20,678
(2,888)
50,728
38,043
(589)
–
88,182
(0.8)
15.3
23.8
–
6.0
2006
32,938
20,678
(2,888)
50,728
38,043
(589)
–
88,182
$
$
(dollars in millions)
% Change
2005
$
$
31,694
7,771
(1,849)
37,616
32,301
(579)
180
69,518
34.9
17.8
1.7
(100.0)
26.8
2007 Compared to 2006
Consolidated revenues in 2007 increased by $5,287 million, or 6.0% com-
pared to 2006. This increase was primarily the result of continued strong
growth at Domestic Wireless.
2006 Compared to 2005
Consolidated revenues in 2006 were higher by $18,664 million, or 26.8%
compared to 2005 revenues. This increase was primarily the result of sig-
nificantly higher revenues at Wireline and Domestic Wireless.
Wireline’s revenues in 2007 decreased $412 million, or 0.8% compared
to 2006, primarily driven by lower demand and usage of our basic local
exchange and accompanying services, partially offset by continued
growth from broadband and strategic services. During 2007, we added
1,253,000 new broadband connections, an increase of 17.9%, including
854,000 for FiOS, for a total of 8,235,000 lines at December 31, 2007. In
addition, we added 736,000 FiOS TV customers in 2007, for a total of
943,000 at December 31, 2007. Revenues at Verizon Business increased
during 2007 compared to 2006 primarily due to higher demand for stra-
tegic products. These increases were offset by a decline in voice revenues
at Verizon Telecom due to a 3.6 million decline in subscribers resulting
from competition and technology substitution, such as wireless and
VoIP, including those subscribers who have migrated to our other service
offerings.
Domestic Wireless’s revenues in 2007 increased by $5,839 million, or 15.3%
compared to 2006 due to increases in service revenues, which include
data revenues, and equipment and other revenue. Equipment and other
revenue increased principally as a result of increases in the number of
existing customers upgrading their wireless devices. Total data revenues
increased by $2,911 million, or 65.0% in 2007 compared to 2006. There
were approximately 65.7 million total Domestic Wireless customers as
of December 31, 2007, an increase of 11.3% from December 31, 2006.
Domestic Wireless’s retail customer base as of December 31, 2007 was
approximately 63.7 million, a 12.2% increase from 2006, and represented
approximately 97% of its total customer base. Average total service rev-
enue per customer (ARPU) increased by 2.3% to $50.96 in 2007 compared
to 2006, primarily attributable to increases in data revenue per customer
driven by increased use of our messaging and other data services. Retail
ARPU increased by 2.2% to $51.57 in 2007 compared to 2006.
Wireline’s revenues in 2006 increased by $13,112 million, or 34.9% com-
pared to 2005 primarily due to the acquisition of MCI and, to a lesser
extent, growth from broadband and long distance services. We added 1.8
million new broadband connections, for a total of 7.0 million lines in ser-
vice at December 31, 2006, an increase of 35.7% compared to 5.1 million
lines in service at December 31, 2005. The number of retail service plans
continued to stimulate growth in long distance services, as the number
of packages reached 7.9 million at December 31, 2006, representing a
44.1% increase from December 31, 2005. These increases were partially
offset by declines in wholesale revenues at Verizon Telecom due to sub-
scriber losses resulting from technology substitution, including wireless
and VoIP. Wholesale revenues at Verizon Telecom declined by $748 mil-
lion, or 8.2% in 2006 compared to similar periods in 2005 primarily due to
the exclusion of affiliated access revenues billed to the former MCI mass
market entities in 2006. Revenues at Verizon Business increased primarily
due to the acquisition of MCI.
Domestic Wireless’s revenues increased by $5,742 million, or 17.8% com-
pared to 2005 due to increases in service revenues (which include data
revenues) and equipment and other revenue. Data revenues increased
by $2,232 million or 99.5% compared to 2005. Domestic Wireless ended
2006 with 59.1 million customers, an increase of 15.0% over 2005.
Domestic Wireless’s retail customer base as of December 31, 2006 was
approximately 56.8 million, a 15.9% increase over December 31, 2005,
and represented approximately 96.2% of our total customer base. ARPU
increased by 0.6% to $49.80 in 2006 compared to 2005, primarily attribut-
able to increases in data revenue per customer driven by increased use
of our messaging and other data services. Retail ARPU increased by 0.7%
to $50.44 for 2006 compared to 2005.
The $180 million decrease in revenues from Hawaii operations from 2006
to 2005 resulted from the sale of our wireline and directory businesses in
Hawaii during 2005. Verizon Hawaii Inc., which operated approximately
700,000 switched access lines, as well as the services and assets of Verizon
Long Distance, Verizon Online, Verizon Information Services and Verizon
Select Services Inc. in Hawaii, were sold to an affiliate of The Carlyle Group
for $1,326 million in cash proceeds. In connection with this sale, we
recorded a net pretax gain of $530 million ($336 million after-tax, or $.12
per diluted share) during the second quarter of 2005.
20
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Consolidated Operating Expenses
Years Ended December 31,
2007
2006
% Change
2006
(dollars in millions)
% Change
2005
Cost of services and sales
Selling, general and administrative
expense
Depreciation and amortization expense
Sales of businesses, net
Consolidated Operating Expenses
$ 37,547
$
35,309
25,967
14,377
–
$ 77,891
24,955
14,545
–
74,809
$
6.3
4.1
(1.2)
–
4.1
$
35,309
$
24,409
44.7
24,955
14,545
–
74,809
$
19,443
13,615
(530)
56,937
$
28.3
6.8
(100.0)
31.4
2007 Compared to 2006
Cost of Services and Sales
Cost of services and sales includes the following costs directly attribut-
able to a service or product: salaries and wages, benefits, materials and
supplies, contracted services, network access and transport costs, cus-
tomer provisioning costs, computer systems support, costs to support
our outsourcing contracts and technical facilities and contributions to
the universal service fund. Aggregate customer care costs, which include
billing and service provisioning, are allocated between cost of services
and sales and selling, general and administrative expense.
Consolidated cost of services and sales in 2007 increased $2,238 million,
or 6.3% compared to 2006, primarily as a result of higher wireless network
costs and wireless equipment costs, as well as higher costs associated
with Wireline’s growth businesses. The increase was partially offset by the
impact of productivity improvement initiatives and decreases in net pen-
sion and other postretirement benefit costs.
The higher wireless network costs were caused by increased network
usage relating to both voice and data services in 2007 compared to
2006, partially offset by decreased local interconnection, long distance
and roaming rates. Cost of wireless equipment sales increased in 2007
compared to 2006, primarily as a result of an increase in wireless devices
sold due to an increase in equipment upgrades.
Consolidated operating expenses in 2007 and 2006 primarily include $32
million and $25 million, respectively, of costs associated with the integra-
tion of MCI into our wireline business.
Selling, General and Administrative Expense
Selling, general and administrative expense includes salaries and wages
and benefits not directly attributable to a service or product, bad debt
charges, taxes other than income, advertising and sales commission
costs, customer billing, call center and information technology costs, pro-
fessional service fees and rent for administrative space.
Consolidated selling, general and administrative expense in 2007
increased $1,012 million, or 4.1% compared to 2006. The increase was
primarily attributable to higher salary and benefits expenses. Also contrib-
uting to the increase was higher sales commission expense at Domestic
Wireless and higher advertising costs at Wireline. Partially offsetting the
increases were lower bad debt expenses and cost reduction initiatives.
Consolidated operating expenses in 2007 included $772 million for sever-
ance and related expenses as a result of workforce reductions that began
in the fourth quarter of 2007 and are expected to occur throughout 2008
as well as adjustments to our actuarial assumptions for severance to
align with future expectations, $146 million for merger integration costs,
primarily comprised of Wireline systems integration activities related
to businesses acquired and $84 million related to the spin-off of local
exchange and related business assets in Maine, New Hampshire and
Vermont. In addition, during 2007 we contributed $100 million of the
proceeds from the sale of TELPRI to the Verizon Foundation.
Consolidated operating expenses in 2006 included $56 million related
to pension settlement losses incurred in connection with our benefit
plans and a net pretax charge of $369 million for employee severance
and severance-related activities in connection with the involuntary sepa-
ration of approximately 4,100 employees who were separated in 2006.
Consolidated operating expenses in 2006 also included $207 million of
merger integration costs, primarily for advertising and other costs related
to re-branding initiatives and systems integration activities, and a net
pretax charge of $184 million for Verizon Center relocation costs.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $168 million, or 1.2%
in 2007 compared to 2006. The decrease was primarily due to lower
rates of depreciation as a result of changes in the estimated useful lives
of certain asset classes at Wireline and fully amortized customer lists at
Domestic Wireless, partially offset by growth in depreciable telephone
plant as a result of increased capital expenditures.
2006 Compared to 2005
Cost of Services and Sales
Cost of services and sales increased by $10,900 million, or 44.7% in 2006
compared to 2005. This increase was principally driven by higher costs
attributable to the inclusion of the former MCI operations in the Wireline
segment subsequent to the completion of the merger, and to a lesser
extent higher wireless network costs, increases in wireless equipment
costs and increases in pension and other postretirement benefit costs,
partially offset by the net impact of productivity improvement initiatives.
The higher wireless network costs were caused by increased network
usage relating to both voice and data services in 2006 compared to 2005,
partially offset by decreased roaming, local interconnection and long dis-
tance rates. Cost of wireless equipment sales increased in 2006 compared
to 2005 primarily as a result of an increase in wireless devices sold due to
an increase in gross activations and equipment upgrades as well as an
increase in cost per unit.
Costs in these periods were also impacted by increased pension and other
postretirement benefit costs. The overall impact of the 2006 assumptions,
combined with the impact of lower than expected actual asset returns
over the past several years, resulted in pension and other postretirement
benefit expense of approximately $1,377 million in 2006 compared to net
pension and postretirement benefit expense of $1,231 million in 2005.
Consolidated operating expenses in 2006 included $25 million of merger
integration costs related to the acquisition of MCI.
21
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Selling, General and Administrative Expense
Selling, general and administrative expense increased by $5,512 million,
or 28.3% in 2006 compared to 2005. This increase was driven by the inclu-
sion of the former MCI operations in the Wireline segment subsequent
to the completion of the merger, increases in the Domestic Wireless seg-
ment primarily related to increased salary and benefits expenses, and
non-operational charges.
Consolidated operating expenses in 2006 included $56 million related
to pension settlement losses incurred in connection with our benefit
plans, a net pretax charge of $369 million for employee severance and
severance-related activities in connection with the involuntary separation
of approximately 4,100 employees who were separated in 2006.
Consolidated operating expenses in 2006 also included $207 million
of merger integration costs primarily for advertising and other costs
related to re-branding initiatives and systems integration activities, and
a net pretax charge of $184 million for Verizon Center relocation costs.
Consolidated operating expenses in 2005 included a pretax impairment
charge of $125 million pertaining to our leasing operations for airplanes
leased to airlines experiencing financial difficulties, a net pretax charge
of $98 million related to the restructuring of the Verizon management
retirement benefit plans and a pretax charge of $59 million associated
with employee severance costs and severance-related activities in
connection with the voluntary separation program for surplus union-
represented employees.
Depreciation and Amortization Expense
Depreciation and amortization expense increased by $930 million, or
6.8% in 2006 compared to 2005. This increase was primarily due to higher
depreciable and amortizable asset bases as a result of the MCI merger
and, to a lesser extent, increased capital expenditures.
Other Consolidated Results
Equity in Earnings of Unconsolidated Businesses
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Vodafone Omnitel
CANTV
Other
$
$
597
–
(12)
585
$
$
703
182
(112)
773
$
$
741
53
(108)
686
Equity in earnings of unconsolidated businesses decreased by $188 mil-
lion, or 24.3% in 2007 compared to 2006. The decrease is primarily driven
by the nationalization of Compañía Anónima Nacional Teléfonos de
Venezuela (CANTV) during 2007, as well as the effect of lower tax benefits
at Vodafone Omnitel N.V. (Vodafone Omnitel).
Equity in earnings of unconsolidated businesses increased by $87 mil-
lion, or 12.7% in 2006 compared to 2005. The increase is primarily due
to additional pension liabilities that CANTV recognized in 2005, as well
as the effect of favorable operating results and lower taxes in 2006. In
addition, the increase reflects our proportionate share, or $85 million, of
a tax benefit at Vodafone Omnitel in the third quarter of 2006, partially
offset by a similar benefit recorded in the third quarter of 2005 of $76
million. This was offset by lower tax benefits and lower operating results
at Vodafone Omnitel.
Other Income and (Expense), Net
Years Ended December 31,
Interest income
Foreign exchange gains (losses), net
Other, net
Total
2007
168
14
29
211
$
$
(dollars in millions)
2005
2006
$
$
201
(3)
197
395
$
$
103
11
197
311
Other Income and (Expense), Net in 2007 decreased $184 million, or
46.6% compared to 2006. The decline was primarily attributable to a gain
on the sale of a Wireline investment in the prior year, as well as decreased
interest income as a result of lower average cash balances.
Other Income and (Expense), Net in 2006 increased $84 million, or 27%
compared to 2005. The increase was primarily due to increased interest
income as a result of higher average cash balances coupled with higher
interest rates in 2006 compared to 2005, partially offset by foreign
exchange losses. Other, net in 2005 included a pretax gain on the sale of
a small international business and investment gains and expenses related
to the early retirement of debt.
Interest Expense
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Total interest costs on debt balances
Less: capitalized interest costs
Interest expense
$ 2,258
(429)
$ 1,829
$
$
2,811
(462)
2,349
$
$
2,481
(352)
2,129
Weighted average debt outstanding
Effective interest rate
$ 32,964
6.85%
$ 41,500
6.78%
$ 39,152
6.30%
Total interest costs decreased $553 million in 2007 compared to 2006, pri-
marily due to a decrease in average debt levels, partially offset by slightly
higher interest rates. Debt levels decreased primarily as a result of the
approximately $7.1 billion reduction from the spin-off of our domestic
print and Internet yellow pages directories business in November 2006,
as well as from debt redemptions and retirements funded by proceeds
from the spin-off and the divestiture of our Caribbean and Latin American
investments during 2006 and the first quarter of 2007.
In 2006, interest costs increased $330 million compared to 2005 primarily
due to an increase in average debt level of $2,348 million and increased
interest rates compared to 2005. Higher capital expenditures in 2006
contributed to higher capitalized interest costs.
Minority Interest
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Minority interest
$ 5,053
$
4,038
$
3,001
The increase in minority interest in 2007 compared to 2006, and in 2006
compared to 2005, was due to the higher earnings at Domestic Wireless,
which has a significant minority interest attributable to Vodafone Group
Plc (Vodafone).
Provision for Income Taxes
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Provision for income taxes
Effective income tax rate
$ 3,982
42.0%
$
2,674
32.8%
$
2,421
28.7%
22
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
The effective income tax rate is calculated by dividing the provision for
income taxes by income from continuing operations before the provi-
sion for income taxes. The effective income tax rate in 2007 compared
to 2006 was higher primarily due to recording $610 million of foreign
and domestic taxes and expenses specifically relating to our share of
Vodafone Omnitel distributable earnings. Verizon received a net distri-
bution from Vodafone Omnitel in December 2007 of approximately $2.1
billion and anticipates that it may receive an additional distribution from
Vodafone Omnitel within the next twelve months. The 2007 rate was
also increased due to higher state taxes in 2007 as compared to 2006,
as well as greater benefits from foreign operations in 2006 compared to
2007. These increases were partially offset by lower expenses recorded for
unrecognized tax benefits in 2007 as compared to 2006.
Our effective income tax rate in 2006 was higher than 2005 primarily
as a result of favorable tax settlements and the recognition of capital
loss carry forwards in 2005. These increases were partially offset by tax
benefits from foreign operations and lower state taxes in 2006 compared
to 2005.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate for each period is included in Note 16 to the consoli-
dated financial statements.
Discontinued Operations
In accordance with Statement of Financial Accounting Standard (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we
have classified TELPRI, Verizon Dominicana and our former domestic print
and Internet yellow pages directories publishing operations as discon-
tinued operations in the consolidated financial statements for all periods
presented through the date of the spin-off or divestiture.
On March 30, 2007, after receiving Federal Communications Commission
approval, we completed the sale of our 52% interest in TELPRI and
received gross proceeds of approximately $980 million. The sale resulted
in a pretax gain of $120 million ($70 million after-tax, or $.02 per diluted
share). Additionally, $100 million of the proceeds were contributed to the
Verizon Foundation.
The sale of Verizon Dominicana closed in December 2006, and primarily
due to taxes on previously unremitted earnings, a pretax gain of $30 mil-
lion resulted in an after-tax loss of $541 million (or $.18 per diluted share).
We completed the spin-off of our domestic print and Internet yellow
pages directories business to our shareowners on November 17, 2006,
which resulted in an $8,695 million increase to contributed capital in
shareowner’s investment. In addition, we recorded pretax charges of
$117 million ($101 million after-tax, or $.03 per diluted share) for costs
related to this spin-off. These costs primarily consisted of debt retirement
costs, costs associated with accumulated vested benefits of employees,
investment banking fees and other transaction costs related to the spin-
off, which are included in discontinued operations.
Extraordinary Item
In January 2007, the Bolivarian Republic of Venezuela (the Republic)
declared its intent to nationalize certain companies, including CANTV. On
February 12, 2007, we entered into a Memorandum of Understanding
(MOU) with the Republic, which provided that the Republic offer to
purchase all of the equity securities of CANTV, including our 28.5%
interest, through public tender offers in Venezuela and the United States.
Under the terms of the MOU, the prices in the tender offers would
be adjusted downward to reflect any dividends declared and paid
subsequent to February 12, 2007. During the second quarter of 2007,
the tender offers were completed and Verizon received an aggregate
amount of approximately $572 million, which included $476 million from
the tender offers as well as $96 million of dividends declared and paid
subsequent to the MOU. Based upon our investment balance in CANTV,
we recorded an extraordinary loss of $131 million, including taxes of $38
million, or $.05 per diluted share.
Cumulative Effect of Accounting Change
Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based
Payments, utilizing the modified prospective method. The impact to
Verizon primarily resulted from Domestic Wireless, for which we recorded
a $42 million ($.01 per diluted share) cumulative effect of accounting
change, net of taxes and after minority interest, to recognize the effect of
initially measuring the outstanding liability for awards granted to Domestic
Wireless employees at fair value utilizing a Black-Scholes model.
segment results Of OperatiOns
We have two reportable segments, which we operate and manage as
strategic business units and organize by products and services. Our
segments are Wireline and Domestic Wireless. You can find additional
information about our segments in Note 17 to the consolidated financial
statements.
We measure and evaluate our reportable segments based on segment
income. Corporate, eliminations and other includes unallocated cor-
porate expenses, intersegment eliminations recorded in consolidation,
the results of other businesses such as our wholly-owned insurance and
leasing subsidiaries, the results of investments in unconsolidated busi-
nesses, primarily Vodafone Omnitel, and other adjustments that are not
allocated in assessing segment performance. These adjustments also
include transactions that the chief operating decision makers exclude in
assessing business unit performance due primarily to their non-recurring
and/or non-operational nature. Although such transactions are excluded
from the business segment results, they are included in reported consoli-
dated earnings. Gains and losses that are not individually significant are
included in all segment results, since these items are included in the chief
operating decision makers’ assessment of unit performance.
Wireline
Income from discontinued operations, net of tax, decreased by $617
million, or 81.3% in 2007 compared to 2006. The decrease was primarily
driven by the assets disposed of in 2006, partially offset by the after-tax
gain recorded in 2007 on the sale of TELPRI. Income from discontinued
operations, net of tax, decreased by $611 million, or 44.6% in 2006
compared to 2005. This decrease was primarily due to the after-tax loss
recorded in 2006 on the sale of Verizon Dominicana, partially offset by the
cessation of depreciation on fixed assets held for sale.
The Wireline segment consists of the operations of Verizon Telecom, a
provider of communication services, including voice, broadband video
and data, network access, long distance, and other services to residential
and small business customers and carriers, and Verizon Business, which
provides next-generation IP network services to medium and large busi-
nesses and government customers globally. Operating results shown for
2006 exclude the results of the former MCI prior to the date of the merger
(January 6, 2006).
23
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Operating Revenues
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Verizon Telecom
Mass Markets
Wholesale
Other
Verizon Business
Enterprise Business
Wholesale
International and Other
Intrasegment Eliminations
Total Wireline Operating Revenues
$ 21,978
8,086
1,862
$ 22,234
8,336
2,368
$ 20,044
9,084
2,566
14,677
3,345
3,214
(2,846)
$ 50,316
14,296
3,281
3,101
(2,888)
$ 50,728
6,385
1,386
–
(1,849)
$ 37,616
Verizon Telecom
Mass Markets
Verizon Telecom’s Mass Markets revenue includes local exchange (basic
service and end-user access), value-added services, long distance, broad-
band services for residential and certain small business accounts and FiOS
TV services. Also included are revenues generated from former MCI con-
sumer and small business products and services. Long distance includes
both regional toll services and long distance services. Broadband services
include DSL and FiOS data.
Our Mass Markets revenue decreased by $256 million, or 1.2% in 2007,
and increased by $2,190 million, or 10.9% in 2006. The decrease in 2007
was primarily driven by lower demand and usage of our basic local
exchange and accompanying services, attributable to consumer sub-
scriber losses. These losses are driven by competition and technology
substitution, including wireless and VoIP. These decreases were partially
offset by growth from broadband services and FiOS TV services and the
inclusion of the results of operations of the former MCI business subse-
quent to the close of the merger on January 6, 2006, which helped drive
the increase in 2006 over 2005.
Declines in switched access lines in service of 8.1% in 2007 and 7.6% in
2006 were mainly driven by the effects of competition and technology
substitution. Residential retail access lines declined 9.5% in 2007 and 8.8%
in 2006, as customers substituted wireless, VoIP, broadband and cable ser-
vices for traditional voice landline services. At the same time, business retail
access lines declined 4.0% in 2007 and 3.2% in 2006, primarily reflecting
competition and a shift to high-speed access lines. The resulting total
retail access line loss was 7.6% and 6.9% in 2007 and 2006, respectively.
Access line losses include the loss of lines served by the former MCI.
We added 1,253,000 new broadband connections, including 854,000
for FiOS data in 2007. We ended 2007 with 8,235,000 broadband lines
in service, including 1,541,000 for FiOS data, representing an increase of
17.9% compared to 6,982,000 lines in service at December 31, 2006. In
addition, we added approximately 736,000 FiOS TV customers in 2007
and ended the year with a total of 943,000, an increase of approximately
355% compared to 207,000 FiOS TV customers at December 31, 2006. As
of December 31, 2007, for FiOS data and FiOS TV, we achieved penetra-
tion rates of 20.6% and 16.0%, respectively, across the markets where we
have been selling these services.
Wholesale
Wholesale revenues are earned from long distance and other com-
peting carriers who use our local exchange facilities to provide services
to their customers. Switched access revenues are generated from fixed
and usage-based charges paid by carriers for access to our local network.
Special access revenues are generated from carriers that buy dedicated
local exchange capacity to support their private networks. Wholesale
services also include local wholesale revenues from unbundled network
elements (UNEs) and interconnection revenues from competitive local
exchange carriers (CLECs) and wireless carriers.
Wholesale revenues decreased by $250 million, or 3.0% in 2007 and by
$748 million, or 8.2% in 2006, due to declines in switched access rev-
enues and local wholesale revenues (UNEs) and, in 2006, the reduction
in access revenues billed to the former MCI mass market entities. These
declines were partially offset by increases in special access revenues.
Switched minutes of use (MOUs) declined in 2007 and 2006, reflecting
the impact of access line loss and wireless substitution. Wholesale lines
decreased by 15.9% in 2007 due to the ongoing impact of a 2005 deci-
sion by a major competitor to deemphasize their local market initiatives.
Special access revenue growth reflects continuing demand for high-
capacity, high-speed digital services, partially offset by lower demand for
older, low-speed data products and services. As of December 31, 2007,
customer demand for high-capacity and digital data services increased
8.2% compared to 2006.
The FCC regulates the rates that we charge customers for interstate access
services. See “Other Factors That May Affect Future Results – Regulatory
and Competitive Trends – FCC Regulation” for additional information on
FCC rulemaking concerning federal access rates, universal service and
certain broadband services.
Other Revenues
Other revenues include such services as operator services (including
deaf relay services), public (coin) telephone, card services and supply
sales, as well as dial around services including 10-10-987, 10-10-220,
1-800-COLLECT and Prepaid Cards.
Verizon Telecom’s revenues from other services decreased by $506
million, or 21.4% in 2007, and by $198 million, or 7.7% in 2006. These rev-
enue decreases were mainly due to the discontinuation of non-strategic
product lines and reduced business volumes, partially offset by the inclu-
sion of revenues from the former MCI in 2006.
Verizon Business
Enterprise Business
Our Enterprise Business channel distributes voice, data and Internet
communications services to medium and large business customers, multi-
national corporations, and state and federal government customers. In
addition to communication services, this channel provides value-added
services that make communications more secure, reliable and efficient.
Enterprise Business provides managed network services for customers
that outsource all or portions of their communications and information
processing operations and data services such as Private IP, Private Line,
Frame Relay and ATM services, both domestically and internationally.
Enterprise Business 2007 revenues of $14,677 million increased by
$381 million, or 2.7%, as compared to 2006, primarily reflecting growth
in demand for our strategic products, specifically IP services and man-
aged services, as well as the inclusion of the results of operations of the
24
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
former MCI business subsequent to the close of the merger on January
6, 2006. The IP suite of products is Enterprise Business’ fastest growing
set of product offerings and includes Private IP, IP VPN, Web Hosting and
VoIP. Our Enterprise Business channel services many customer accounts
that are moving from core data products to IP based products. This shift
in technology is occurring across our customer base. Enterprise Business
2006 revenues of $14,296 million increased $7,911 million, or 123.9%
compared to 2005 primarily due to the acquisition of MCI.
Wholesale
Our Wholesale revenues relate to domestic wholesale services and
include all interexchange wholesale traffic sold in the United States, as
well as internationally destined traffic that originates in the United States.
The Wholesale line of business is comprised of numerous large and small
customers that predominately resell voice services to their own customer
base. A portion of this revenue is generated by a few large telecommuni-
cation carriers, many of whom compete directly with Verizon.
Verizon Business 2007 Wholesale revenues of $3,345 million increased
by $64 million, or 2.0% as compared to 2006, primarily due to increased
MOUs in traditional voice products, partially offset by continued rate com-
pression due to competition in the marketplace. During 2006, Verizon
Business Wholesale revenues of $3,281 million, increased $1,895 million,
or 136.7%, compared to 2005, primarily due to the MCI acquisition.
International and Other
Our International operations serve retail and wholesale customers,
including enterprise businesses, government entities and telecommu-
nication carriers outside of the United States, primarily in Europe, the
Middle East and Africa, the Asia Pacific region, Latin America and Canada.
These operations provide telecommunications services, which include
voice, data services, Internet and managed network services.
International and other revenues of $3,214 million during 2007 increased
by $113 million, or 3.6% as compared to 2006. Revenue growth in our stra-
tegic products, specifically IP services, was partially offset by competitive
rate compression and lower volumes with respect to our voice products.
Our revenues from International and Other in the year ended December
31, 2006 were $3,101 million. This market represented a new revenue
stream to Verizon resulting from the MCI acquisition on January 6, 2006.
Operating Expenses
Years Ended December 31,
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
2007
$ 25,220
11,236
9,184
$ 45,640
(dollars in millions)
2005
2006
$ 24,767
11,820
9,590
$ 46,177
$ 15,813
8,210
8,801
$ 32,824
Cost of Services and Sales
Cost of services and sales includes the following costs directly attribut-
able to a service or product: salaries and wages, benefits, materials and
supplies, contracted services, network access and transport costs, cus-
tomer provisioning costs, computer systems support, costs to support
our outsourcing contracts and technical facilities, contributions to the
universal service fund, customer provisioning costs and cost of products
sold. Aggregate customer care costs, which include billing and service
provisioning, are allocated between cost of services and sales and selling,
general and administrative expense.
Cost of services and sales increased by $453 million, or 1.8%, during 2007
compared to 2006. This increase was primarily due to higher costs asso-
ciated with our growth businesses, annual wage increases and higher
customer premise equipment costs, partially offset by productivity
improvement initiatives and lower switched access lines in service, as
well as lower wholesale voice connections.
Cost of services and sales increased by $8,954 million, or 56.6%, in 2006
compared to 2005. These increases were primarily due to the MCI merger
in 2006 partially offset by the net impact of other cost changes. Higher
costs associated with our growth businesses and annual wage increases
were partially offset by productivity improvement initiatives, which
reduced cost of services and sales expenses in 2006. Expenses were also
impacted by increased net pension and other postretirement benefit
costs. The overall impact of the 2006 assumption changes, combined with
the impact of lower than expected actual asset returns over the past sev-
eral years, resulted in pension and other postretirement benefit expense
of $1,408 million in 2006 compared to net pension and postretirement
benefit expense of $1,248 million in 2005. Expenses decreased in 2006
due to the discontinuation of non-strategic businesses, including the ter-
mination of a large commercial inventory management contract in 2005.
Selling, General and Administrative Expense
Selling, general and administrative expense includes salaries, wages
and benefits not directly attributable to a service or product, bad debt
charges, taxes other than income, advertising and sales commission
costs, customer billing, call center and information technology costs, pro-
fessional service fees and rent for administrative space.
Selling, general and administrative expenses in 2007 decreased by $584
million or 4.9%, in 2007 compared to 2006. The decrease was primarily
due to cost reduction initiatives, as well as the impact of gains from real
estate sales and lower bad debt costs, partially offset by higher adver-
tising costs and the inclusion of the results of operations of the former
MCI business subsequent to the close of the merger on January 6, 2006.
Selling, general and administrative expenses in 2006 increased by $3,610
million, or 44.0% compared to 2005. These increases were primarily due
to the inclusion of expenses from the former MCI in 2006, partially offset
by synergy savings resulting from our merger integration efforts, the
impact of gains from real estate sales and lower bad debt costs.
Depreciation and Amortization Expense
The decrease in depreciation and amortization expense of $406 million,
or 4.2%, in 2007 compared to 2006 was mainly driven by lower rates of
depreciation as a result of changes in the estimated useful lives of certain
asset classes, partially offset by growth in depreciable telephone plant
from increased capital spending. The increase in depreciation and amor-
tization expense of $789 million, or 9.0% in 2006 compared to 2005 was
mainly driven by the acquisition of MCI’s depreciable property and equip-
ment and finite-lived intangible assets, including its customer lists and
capitalized non-network software, and by growth in depreciable tele-
phone plant and non-network software assets.
Segment Income
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Segment Income
$ 1,506
$
1,625
$
1,906
25
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Segment income decreased by $119 million, or 7.3% in 2007 and by $281
million, or 14.7% in 2006, due to the after-tax impact of operating rev-
enues and operating expenses described above, along with the impact
of favorable income tax adjustments in 2005.
Non-recurring or non-operational items not included in Verizon Wireline’s
segment income totaled $714 million, $407 million and ($168) million
in 2007, 2006, and 2005, respectively. Non-recurring or non-operational
items in 2007 included costs associated with severance and other related
charges, costs incurred related to network, non-network software, and
other activities in connection with the spin-off of local exchange assets
in Maine, New Hampshire and Vermont (see “Recent Developments”
section), as well as costs associated with merger integration initiatives,
principally related to the acquisition of MCI and other items. Non-recurring
or non-operational items in 2006 included costs associated with sever-
ance activity, pension settlement losses, Verizon Center relocation-related
costs and merger integration costs. Merger integration costs primarily
included costs related to advertising and re-branding initiatives, facility
exit costs, severance costs, labor and contractor costs related to informa-
tion technology integration initiatives and employee retention expenses.
Non-recurring or non-operational items in 2005 related to the gain on
the sale of our Hawaii wireline operations, the net gain on the sale of a
New York City office building, changes to management retirement ben-
efit plans, severance costs and Verizon Center relocation-related costs.
Domestic Wireless
Our Domestic Wireless segment provides wireless voice and data services,
other value-added services and equipment sales across the United States.
This segment primarily represents the operations of the Verizon Wireless
joint venture with Vodafone. Verizon owns a 55% interest in the joint ven-
ture and Vodafone owns the remaining 45%. All financial results included
in the tables below reflect the consolidated results of Verizon Wireless.
Operating Revenues
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Service revenues
Equipment and other
Total Domestic
Wireless Operating Revenue
$ 38,016
5,866
$ 32,796
5,247
$ 28,131
4,170
$ 43,882
$ 38,043
$ 32,301
Domestic Wireless’s total operating revenues of $43,882 million were
$5,839 million, or 15.3% higher in 2007 compared to 2006. Service rev-
enues of $38,016 million were $5,220 million, or 15.9% higher than 2006.
The service revenue increase was primarily due to an 11.3% increase in
customers as of December 31, 2007 compared to December 31, 2006, and
increased average revenue per customer. Equipment and other revenue
increased $619 million, or 11.8% in 2007 compared to 2006, principally as
a result of increases in the number of customers upgrading their wireless
devices. Other revenue also increased due to increases in cost recovery
surcharges and regulatory fees.
Total customers as of December 31, 2007 were 65.7 million, of which 97%
were retail customers, compared to 59.1 million, of which 96% were retail
customers at December 31, 2006. Retail (non-wholesale) customers are
customers who are directly served and managed by Verizon Wireless and
who buy its branded services. Our Domestic Wireless customer base as
of December 31, 2007 was 93% retail postpaid compared to 92.6% retail
postpaid at December 31, 2006. Total average monthly churn was 1.21%
in 2007 compared to 1.17% in 2006.
Our Domestic Wireless segment ended 2007 with 63.7 million retail
customers, an increase of 6.9 million net new retail customers or 12.2%,
compared to December 31, 2006. Average monthly retail postpaid churn,
the rate at which retail postpaid customers disconnect service, was 0.91%
in 2007, unchanged compared to 2006.
Average retail service revenue per customer per month increased 2.2% to
$51.57 in 2007 compared to 2006. Average retail data service revenue per
customer per month increased 43.9% in 2007 compared to 2006 driven
by increased use of our messaging service, VZAccess, and other data ser-
vices. Retail data revenues were $7,309 million and accounted for 19.7%
of retail service revenue in 2007, compared to $4,445 million and 14.0%
of retail service revenue in 2006.
Domestic Wireless’s total operating revenues of $38,043 million in 2006
increased $5,742 million, or 17.8% compared to 2005. Service revenues of
$32,796 million were $4,665 million, or 16.6% higher than 2005. The ser-
vice revenue increase was primarily due to a 15.0% increase in customers
as of December 31, 2006 compared to December 31, 2005, and increased
average revenue per customer. Equipment and other revenue increased
$1,077 million, or 25.8% in 2006 compared to 2005 principally as a result
of increases in the number and price of wireless devices sold. Other rev-
enue also increased due to increases in regulatory fees, primarily the
universal service fund and cost recovery surcharges.
Average retail service revenue per customer per month increased 0.7% to
$50.44 in 2006 compared to 2005. Average retail data service revenue per
customer per month increased 71.3% in 2006, compared to 2005, driven
by increased use of our messaging, VZAccess and other data services.
However, Domestic Wireless experienced an increase in the proportion
of customers on its Family Share price plans, which put downward pres-
sure on average service revenue per customer during 2006. Retail data
revenues were $4,445 million and accounted for 14.0% of retail service
revenue in 2006, compared to $2,232 million and 8.2% of retail service
revenue in 2005.
Operating Expenses
Years Ended December 31,
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
2007
$ 13,456
13,477
5,154
$ 32,087
(dollars in millions)
2005
2006
$ 11,491
12,039
4,913
$ 28,443
$
9,393
10,768
4,760
$ 24,921
Cost of Services and Sales
Cost of services and sales, which are costs to operate the wireless net-
work as well as the cost of roaming, long distance and equipment sales,
increased by $1,965 million, or 17.1% in 2007 compared to 2006. Cost of
services increased due to higher wireless network costs in 2007 caused
by increased network usage, partially offset by lower rates for long dis-
tance, roaming and local interconnection. Cost of equipment sales grew
by 20.2% in 2007 compared to 2006. The increase was primarily attrib-
uted to an increase in equipment upgrades, together with an increase
in cost per unit as a result of increased sales of higher cost advanced
wireless devices.
Cost of services and sales increased by $2,098 million, or 22.3% in 2006
compared to 2005. This increase was primarily due to higher wireless net-
work costs in 2006 caused by increased network usage relating to both
voice and data services and an increase in cost of equipment sales driven
by an increase in wireless devices sold, resulting from an increase in
equipment upgrades, together with an increase in cost per unit in 2006.
26
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Selling, General and Administrative Expense
Selling, general and administrative expense increased by $1,438 million,
or 11.9% in 2007 compared to 2006. This increase was primarily due to an
increase in salary and benefits expense of $641 million, resulting from an
increase in employees in the sales and customer care areas, and higher
per employee salary and benefit costs. Sales commissions expense
in both our direct and indirect channels increased by $147 million in
2007 compared to 2006, primarily as a result of an increase in customer
renewals and equipment upgrades. Advertising and promotion expense
increased $144 million in 2007, compared to 2006. Also contributing to
the increase were higher costs associated with regulatory fees, which
increased by $127 million in 2007.
Selling, general and administrative expense increased by $1,271 million,
or 11.8% in 2006 compared to 2005. This increase was primarily due to an
increase in salary and benefits expense, as well as advertising and promo-
tion, and regulatory fee increases, compared to 2005.
Depreciation and Amortization Expense
Depreciation and amortization expense increased by $241 million, or
4.9% in 2007 compared to 2006 and increased by $153 million, or 3.2%
in 2006 compared to 2005. These increases were primarily due to an
increase in depreciable assets. Partially offsetting this increase in 2007
was lower amortization expense resulting from customer lists becoming
fully amortized during 2006.
Segment Income
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Segment Income
$ 3,794
$
2,976
$
2,219
Segment income increased by $818 million, or 27.5% in 2007 compared
to 2006 and increased by $757 million, or 34.1% in 2006 compared to
2005, primarily as a result of the after-tax impact of operating revenues
and operating expenses described above, partially offset by higher
minority interest expense. Segment income in 2006 excludes $42 million
after-tax due to the adoption of SFAS No. 123(R).
Increases in minority interest expense in 2007 and 2006 were due to
the increased income of the wireless joint venture and the significant
minority interest attributable to Vodafone.
Other items
Merger Integration Costs
In 2007 and 2006, we recorded pretax charges of $178 million ($112 mil-
lion after-tax, or $.04 per diluted share) and $232 million ($146 million
after-tax, or $.05 per diluted share), respectively, primarily associated with
the MCI acquisition in 2006 that were comprised of advertising and other
costs related to re-branding initiatives, facility exit costs and systems inte-
gration activities.
Tax Matters
In December 2007, Verizon received a net distribution from Vodafone
Omnitel of approximately $2.1 billion and we anticipate that we may
receive an additional distribution from Vodafone Omnitel within the next
twelve months. As a result, we recorded $610 million ($.21 per diluted
share) of foreign and domestic taxes and expenses specifically relating to
our share of Vodafone Omnitel’s distributable earnings.
During 2005, we recorded tax benefits of $336 million ($.12 per diluted
share) in connection with the utilization of prior year loss carry forwards.
As a result of the capital gain realized in 2005 in connection with the
sale of our Hawaii businesses, we recorded a tax benefit of $242 million
related to the capital losses incurred in previous years.
Also during 2005, we recorded a net tax provision of $206 million ($.07
per diluted share) related to the repatriation of foreign earnings under
the provisions of the American Jobs Creation Act of 2004, for two of our
foreign investments.
Facility and Employee-Related Items
During the fourth quarter of 2007, we recorded a charge of $772 million
($477 million after-tax, or $.16 per diluted share) primarily in connec-
tion with workforce reductions of 9,000 employees and related charges,
4,000 of whom were terminated in the fourth quarter of 2007 with the
remaining reductions expected to occur throughout 2008. In addition,
we adjusted our actuarial assumptions for severance to align with future
expectations.
During 2006, we recorded net pretax severance, pension and benefits
charges of $425 million ($258 million after-tax, or $.09 per diluted share).
These charges included net pretax pension settlement losses of $56 mil-
lion ($26 million after-tax, or $.01 per diluted share) related to employees
that received lump-sum distributions primarily resulting from our separa-
tion plans. These charges were recorded in accordance with SFAS No. 88,
Employers’ Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination (SFAS No. 88), which requires that set-
tlement losses be recorded once prescribed payment thresholds have
been reached. Also included are pretax charges of $369 million ($228
million after-tax, or $.08 per diluted share), for employee severance and
severance-related costs in connection with the involuntary separation of
approximately 4,100 employees. In addition, during 2005 we recorded
a charge of $59 million ($36 million after-tax, or $.01 per diluted share)
associated with employee severance costs and severance-related activi-
ties in connection with the voluntary separation program for surplus
union-represented employees.
During 2006, we recorded pretax charges of $184 million ($118 million
after-tax, or $.04 per diluted share) in connection with the relocation of
employees and business operations to Verizon Center in Basking Ridge,
New Jersey. During 2005, we recorded a net pretax gain of $18 million
($8 million after-tax) in connection with the relocation, including a pretax
gain of $120 million ($72 million after-tax, or $.03 per diluted share)
related to the sale of a New York City office building, partially offset by
a pretax charge of $102 million ($64 million after-tax, or $.02 per diluted
share), primarily associated with relocation, employee severance and
related activities.
During 2005, we reported a net pretax charge of $98 million ($59 mil-
lion after-tax, or $.02 per diluted share) related to the restructuring of the
Verizon management retirement benefit plans. This pretax charge was
recorded in accordance with SFAS No. 88, and SFAS No. 106, Employers’
Accounting for the Postretirement Benefits Other Than Pensions (SFAS No.
106) and includes the unamortized cost of prior pension enhance-
ments of $430 million offset partially by a pretax curtailment gain of
$332 million related to retiree medical benefits. In connection with this
restructuring, management employees: no longer earn pension benefits
or earn service towards the company retiree medical subsidy after June,
2006; received an 18-month enhancement of the value of their pension
and retiree medical subsidy; and receive a higher savings plan matching
contribution.
27
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Other
In 2006, we recorded pretax charges of $26 million ($16 million after-
tax, or $.01 per diluted share) resulting from the extinguishment of debt
assumed in connection with the completion of the MCI merger.
During 2005, we recorded pretax charges of $139 million ($133 million
after-tax, or $.05 per diluted share) including a pretax impairment charge
of $125 million ($125 million after-tax, or $.04 per diluted share) per-
taining to aircraft leased to airlines involved in bankruptcy proceedings
and a pretax charge of $14 million ($8 million after-tax, or less than $.01
per diluted share) in connection with the early extinguishment of debt.
COnsOlidated finanCial COnditiOn
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Cash Flows Provided By (Used In)
Operating Activities:
Continuing operations
Discontinued operations
Investing Activities:
Continuing operations
Discontinued operations
Financing activities:
Continuing operations
Discontinued operations
$ 26,309
(570)
$ 23,030
1,076
$ 20,444
1,581
(16,865)
757
(17,422)
1,806
(18,136)
(356)
(11,697)
–
(5,752)
(279)
(4,958)
(76)
Increase (Decrease) In Cash and Cash
Equivalents
$ (2,066)
$
2,459
$
(1,501)
We use the net cash generated from our operations to fund network
expansion and modernization, repay external financing, pay dividends
and invest in new businesses. Additional external financing is obtained
when necessary. While our current liabilities typically exceed current
assets, our sources of funds, primarily from operations and, to the extent
necessary, from readily available external financing arrangements, are
sufficient to meet ongoing operating and investing requirements. We
expect that capital spending requirements will continue to be financed
primarily through internally generated funds. Additional debt or equity
financing may be needed to fund additional development activities or to
maintain our capital structure to ensure our financial flexibility.
Cash Flows Provided By Operating Activities
Our primary source of funds continues to be cash generated from opera-
tions. In total, cash from operating activities in 2007 increased compared
to the similar period of 2006. The increase was due to higher cash flow
from continuing operations, partially offset by decreased cash flow from
discontinued operations. The increase in cash flow from operating activi-
ties – continuing operations in 2007 compared to 2006 was primarily due
to the distributions from Vodafone Omnitel and CANTV, increased oper-
ating cash flows from Domestic Wireless and lower interest payments on
outstanding debt, partially offset by changes in working capital.
The decrease in cash flow from operating activities - discontinued opera-
tions in 2007 compared to 2006 was primarily due to income taxes
paid in 2007 related to the fourth quarter 2006 disposition of Verizon
Dominicana, as well as the disposal of the discontinued operations in the
fourth quarter of 2006.
In 2006, the increase in cash from operating activities compared to
2005 was primarily due to higher earnings at Domestic Wireless, which
included higher minority interest earnings, and lower dividends paid to
minority partners. Total minority interest earnings, net of dividends paid
to minority interest partners, was $3.2 billion in 2006 compared to $1.7
billion in 2005. In addition, higher operating cash flow in 2006 compared
to 2005 was due to lower cash taxes paid in 2006, resulting from 2005 tax
payments related to foreign operations and investments sold during the
fourth quarter of 2004. Partially offsetting these increases were significant
2005 repatriations of foreign earnings of unconsolidated businesses.
Operating cash flows from discontinued operations decreased $505
million to $1,076 million in 2006 from $1,581 million in 2005 due to the
completion of our domestic print and Internet yellow pages directories
business spin-off on November 17, 2006 and the close of the sale of
Verizon Dominicana on December 1, 2006, partially offset by the oper-
ating activities of the remaining assets held for sale.
Cash Flows Used In Investing Activities
Capital expenditures continue to be our primary use of cash flows from
operations, as they facilitate the introduction of new products and ser-
vices, enhance responsiveness to competitive challenges and increase
the operating efficiency and productivity of our networks. Including capi-
talized software, we invested $10,956 million in our Wireline business in
2007, compared to $10,259 million and $8,267 million in 2006 and 2005,
respectively. We also invested $6,503 million in our Domestic Wireless
business in 2007, compared to $6,618 million and $6,484 million in 2006
and 2005, respectively. The increase in capital spending at Wireline is
mainly driven by increased spending in high growth areas such as fiber
optic to the premises. Capital spending at Domestic Wireless represents
our continuing effort to invest in this high growth business.
In 2008, capital expenditures, including capitalized software, are expected
to be lower than 2007 expenditures.
In 2007, we paid $417 million, net of cash received, to acquire a security-
services firm and $180 million to purchase several wireless properties
and licenses. In 2006, we invested $1,422 million in acquisitions and
investments in businesses, including $2,809 million to acquire thirteen
20 MHz licenses in connection with the FCC Advanced Wireless Services
auction and $57 million to acquire other wireless properties. This was
offset by MCI’s cash balances of $2,361 million we acquired at the date
of the merger. In 2005, we invested $4,684 million in acquisitions and
investments in businesses, including $3,003 million to acquire NextWave
Telecom Inc. (NextWave) personal communications services licenses,
$641 million to acquire 63 broadband wireless licenses in connection with
FCC auction 58, $419 million to purchase Qwest Wireless, LLC’s spectrum
licenses and wireless network assets in several existing and new markets,
$230 million to purchase spectrum from MetroPCS, Inc. and $297 million
for other wireless properties and licenses. In 2005, we received cash pro-
ceeds of $1,326 million in connection with the sale of Verizon’s wireline
operations in Hawaii.
Our short-term investments principally include cash equivalents held in
trust accounts for payment of employee benefits. In 2007, 2006 and 2005,
we invested $1,693 million, $1,915 million and $1,955 million, respec-
tively, in short-term investments, primarily to pre-fund active employees’
health and welfare benefits. Proceeds from the sales of all short-term
investments, principally for the payment of these benefits, were $1,862
million, $2,205 million and $1,609 million in the years 2007, 2006 and
2005, respectively.
28
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Other, net investing activities during 2007 primarily include cash proceeds
of approximately $800 million from property sales and sales of select non-
strategic assets, as well as $476 million from the disposition of our interest
in CANTV. Other, net investing activities for 2006 primarily include cash
proceeds of $283 million from property sales. Other, net investing activi-
ties for 2005 primarily include a net investment of $913 million for the
purchase of 43.4 million shares of MCI common stock from eight entities
affiliated with Carlos Slim Helú, offset by cash proceeds of $713 million
from property sales, including a New York City office building, and $349
million of repatriated proceeds from the sales of European investments
in prior years.
In 2007, investing activities of discontinued operations primarily included
gross proceeds of approximately $980 million in connection with the
sale of TELPRI. In 2006, investing activities of discontinued operations
included net pretax cash proceeds of $2,042 million in connection
with the sale of Verizon Dominicana. In 2005, investing activities of
discontinued operations primarily related to capital expenditures related
to discontinued operations.
Cash Flows Used In Financing Activities
In 2007, our total debt was reduced by $5.2 billion, due to the repay-
ment of approximately $1.7 billion of Wireline debt, including the early
repayment of previously guaranteed $300 million 7% debentures issued
by Verizon South Inc. and $480 million 7% debentures issued by Verizon
New England Inc., as well as approximately $1.6 billion of other borrow-
ings. Also, we redeemed $1,580 million principal of our outstanding
floating rate notes, which were called on January 8, 2007, and the $500
million 7.90% debentures issued by GTE Corporation. Partially offsetting
the reduction in total debt were cash proceeds of $3,402 million in con-
nection with fixed and floating rate debt issued during 2007.
Our total debt was reduced by $1,896 million in 2006. We repaid $6,838
million of Wireline debt, including premiums associated with the retire-
ment of $5,665 million of aggregate principal amount of long-term
debt assumed in connection with the MCI merger. The Wireline repay-
ments also included the early retirement/prepayment of $697 million of
long-term debt and $155 million of other long-term debt at maturity.
We repaid approximately $2.5 billion of Domestic Wireless 5.375% fixed
rate notes that matured on December 15, 2006. Also, we redeemed the
$1,375 million accreted principal of our remaining zero-coupon convert-
ible notes and retired $482 million of other corporate long-term debt at
maturity. These repayments were partially offset by our issuance of long-
term debt with a total aggregate principal amount of $4 billion, resulting
in cash proceeds of $3,958 million, net of discounts, issuance costs and
the receipt of cash proceeds related to hedges on the interest rate of an
anticipated financing. In connection with the spin-off of our domestic
print and Internet yellow pages directories business, we received net
cash proceeds of approximately $2 billion and retired debt in the aggre-
gate principal amount of approximately $7 billion.
Cash of $240 million was used to reduce our total debt in 2005. We repaid
$1,533 million of Domestic Wireless, $1,183 million of Wireline and $1,109
million of Verizon corporate long-term debt. The Wireline debt repayment
included the early retirement of $350 million of long-term debt and $806
million of other long-term debt at maturity. This decrease was largely
offset by the issuance by Verizon corporate of long-term debt with a total
principal amount of $1,500 million, resulting in total cash proceeds of
$1,478 million, net of discounts and costs, and an increase in our short-
term borrowings of $2,098 million.
Our ratio of debt to debt combined with shareowners’ equity was 38.1%
at December 31, 2007 compared to 42.8% at December 31, 2006.
As of December 31, 2007, we had no bank borrowings outstanding. We
also had approximately $6.2 billion of unused bank lines of credit (including
a $6 billion three-year committed facility that expires in September 2009
and various other facilities totaling approximately $400 million) and we
had shelf registrations for the issuance of up to $8 billion of unsecured
debt securities. The debt securities of Verizon and our telephone subsid-
iaries continue to be accorded high ratings by primary rating agencies.
In July 2007, S&P revised its outlook to stable from negative and affirmed
its long term rating of A. Other long-term ratings of Verizon are: Moody’s
A3 with stable outlook; and Fitch A+ with stable outlook. The short-term
ratings of Verizon are: Moody’s P-2; S&P A-1; and Fitch F1.
We and our consolidated subsidiaries are in compliance with all of our
debt covenants.
In February 2008, we issued $4,000 million of fixed rate notes with varying
maturities that resulted in cash proceeds of $3,953 million, net of dis-
count and issuance costs.
As in prior years, dividend payments were a significant use of cash flows
from operations. We continuously evaluate the level of our dividend pay-
ments by considering such factors as long-term growth opportunities,
internal cash requirements and the expectations of our shareowners.
During the first half of 2007, Verizon announced quarterly cash dividends
of $.405 per share. During the third quarter of 2007, we increased our
dividend payments 6.2% to $.43 per share from $.405 per share. In the
third and fourth quarters of 2007, Verizon declared a quarterly cash divi-
dend of $.43 per share. In 2006 and 2005, Verizon declared quarterly cash
dividends of $.405 per share.
Common stock has been used from time to time to satisfy some of the
funding requirements of employee and shareowner plans. On March 1,
2007, the Board of Directors determined that no additional common
shares could be purchased under previously authorized share repur-
chase programs and gave authorization to repurchase up to 100 million
common shares terminating no later than the close of business on
February 28, 2010. During 2007, we repurchased $2,843 million of our
common stock. We plan to continue our share buyback program in 2008.
Additionally, we received $1,274 million of cash proceeds from the sale of
common stock, primarily due to the exercise of stock options. On February
7, 2008, the Board of Directors replaced this share buy back program with
a new program for the repurchase of up to 100 million common shares
terminating no later than the close of business on February 28, 2011. The
Board also determined that no additional shares were to be purchased
under the prior program.
Increase (Decrease) In Cash and Cash Equivalents
Our cash and cash equivalents at December 31, 2007 totaled $1,153 mil-
lion, a $2,066 million decrease compared to cash and cash equivalents at
December 31, 2006. Our cash and cash equivalents at December 31, 2006
totaled $3,219 million, a $2,459 million increase compared to cash and
cash equivalents at December 31, 2005 of $760 million.
29
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Employee Benefit Plan Funded Status and Contributions
Leasing Arrangements
We are the lessor in leveraged and direct financing lease agreements for
commercial aircraft and power generating facilities, which comprise the
majority of the portfolio along with telecommunications equipment, real
estate property and other equipment. These leases have remaining terms
up to 48 years as of December 31, 2007. Minimum lease payments receiv-
able represent unpaid rentals, less principal and interest on third-party
nonrecourse debt relating to leveraged lease transactions. Since we have
no general liability for this debt, which holds a senior security interest in
the leased equipment and rentals, the related principal and interest have
been offset against the minimum lease payments receivable in accor-
dance with generally accepted accounting principles. All recourse debt
is reflected in our consolidated balance sheets. See “Other Items” for a
discussion of lease impairment charges.
We operate numerous qualified and nonqualified pension plans and other
postretirement benefit plans. These plans primarily relate to our domestic
business units. The majority of Verizon’s pension plans are adequately
funded. We contributed $612 million, $451 million and $593 million in
2007, 2006 and 2005, respectively, to our qualified pension plans. We also
contributed $125 million, $117 million and $105 million to our nonquali-
fied pension plans in 2007, 2006 and 2005, respectively.
Based on the funded status of the plans at December 31, 2007,
we anticipate qualified pension trust contributions of $350 million
in 2008. Our estimate of required qualified pension trust contributions
for 2009 is approximately $300 million. Nonqualified pension contribu-
tions are estimated to be approximately $130 million for both 2008 and
2009, respectively.
Contributions to our other postretirement benefit plans generally relate
to payments for benefits on an as-incurred basis since the other postre-
tirement benefit plans do not have funding requirements similar to the
pension plans. We contributed $1,048 million, $1,099 million and $1,040
million to our other postretirement benefit plans in 2007, 2006 and 2005,
respectively. Contributions to our other postretirement benefit plans are
estimated to be approximately $1,580 million in 2008 and $1,770 million
in 2009.
Refer to Note 1 in the consolidated financial statements for a discussion of
the adoption of SFAS No. 158, which was effective December 31, 2006.
Off Balance Sheet Arrangements and Contractual Obligations
Contractual Obligations and Commercial Commitments
The following table provides a summary of our contractual obligations and commercial commitments at December 31, 2007. Additional detail about
these items is included in the notes to the consolidated financial statements.
Contractual Obligations
Long-term debt (see Note 11)
Capital lease obligations (see Note 10)
Total long-term debt, including current maturities
Interest on long-term debt (see Note 11)
Operating leases (see Note 10)
Purchase obligations (see Note 20)
Income Tax Audit Settlements*
(see Note 16)
Other long-term liabilities (see Note 15)
Total contractual obligations
Payments Due By Period
Total
Less than
1 year
1-3 years
3-5 years
$ 30,455
312
30,767
21,116
7,001
844
233
4,190
$ 64,151
$
$
2,518
46
2,564
1,897
1,489
613
233
2,020
8,816
$
5,781
93
5,874
3,350
2,292
188
–
2,170
$ 13,874
$
6,891
71
6,962
2,622
1,253
33
–
–
$ 10,870
(dollars in millions)
More than
5 years
$ 15,265
102
15,367
13,247
1,967
10
–
–
$ 30,591
* The $233 million of income tax audit settlements include gross unrecognized tax benefits of $148 million as determined under Financial Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) and related gross interest of $85 million. We are not able to make a reliable estimate of when the balance of $2,735 million
of unrecognized tax benefits and related interest and penalties will be settled with the respective taxing authorities until issues or examinations are further developed (see Note 16).
Guarantees
In connection with the execution of agreements for the sale of businesses
and investments, Verizon ordinarily provides representations and warran-
ties to the purchasers pertaining to a variety of nonfinancial matters, such
as ownership of the securities being sold, as well as financial losses.
As of December 31, 2007, letters of credit totaling $225 million were exe-
cuted in the normal course of business, which support several financing
arrangements and payment obligations to third parties.
30
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
market risk
We are exposed to various types of market risk in the normal course
of business, including the impact of interest rate changes, foreign cur-
rency exchange rate fluctuations, changes in equity investment and
commodity prices and changes in corporate tax rates. We employ risk
management strategies using a variety of derivatives, including interest
rate swap agreements, interest rate locks, foreign currency forwards and
commodity swaps. 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 the 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 pro-
tect 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, commodity prices and foreign exchange rates on our earnings. We
do not expect that our net income, liquidity and cash flows will be mate-
rially affected by these risk management strategies.
Interest Rate Risk
The table that follows summarizes the fair values of our long-term debt
and interest rate derivatives as of December 31, 2007 and 2006. The table
also provides a sensitivity analysis of the estimated fair values of these
financial instruments assuming 100-basis-point upward and downward
shifts in the yield curve. Our sensitivity analysis does not include the fair
values of our commercial paper and bank loans, if any, because they are
not significantly affected by changes in market interest rates.
At December 31, 2007
Fair Value
Fair Value
assuming
+100 basis
point shift
(dollars in millions)
Fair Value
assuming
–100 basis
point shift
Long-term debt and interest
rate derivatives
At December 31, 2006
Long-term debt and interest
rate derivatives
$
31,930
$
30,154
$
33,957
$
33,569
$
31,724
$
35,607
Foreign Currency Translation
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 cumu-
lative translation adjustments, which are included in Accumulated Other
Comprehensive Loss in our consolidated balance sheets. The transla-
tion gains and losses of foreign currency transactions and balances are
recorded in the consolidated statements of income in Other Income and
(Expense), Net and Income from Discontinued Operations, Net of Tax. At
December 31, 2007, our primary translation exposure was to the British
Pound and the Euro.
During 2007, we entered into foreign currency forward contracts to hedge
a portion of our net investment in Vodafone Omnitel. Changes in fair value
of these contracts due to Euro exchange rate fluctuations are recognized
in Accumulated Other Comprehensive Loss and partially offset the impact
of foreign currency changes on the value of our net investment. As of
December 31, 2007, Accumulated Other Comprehensive Loss includes
unrecognized losses of approximately $57 million ($37 million after-tax)
related to these hedge contracts, which along with the unrealized for-
eign currency translation balance on the investment hedged, remain in
Accumulated Other Comprehensive Loss until the investment is sold. We
have not hedged our accounting translation exposure to foreign currency
fluctuations relative to the carrying value of our other investments.
CritiCal aCCOunting estimates and
reCent aCCOunting prOnOunCements
Critical Accounting Estimates
A summary of the critical accounting estimates used in preparing our
financial statements are as follows:
• Verizon’s plant, property and equipment balance represents a sig-
nificant component of our consolidated assets. Depreciation expense
on Verizon’s local telephone operations is principally based on the
composite group remaining life method and straight-line composite
rates, which provides for the recognition of the cost of the remaining
net investment in telephone plant, less anticipated net salvage value,
over the remaining asset lives. We depreciate other plant, property
and equipment generally on a straight-line basis over the estimated
useful life of the assets. Changes in the remaining useful lives of assets
as a result of technological change or other changes in circumstances,
including competitive factors in the markets where we operate, can
have a significant impact on asset balances and depreciation expense.
• We maintain benefit plans for most of our employees, including pen-
sion and other postretirement benefit plans. In the aggregate, the
fair value of pension plan assets exceeds benefit obligations, which
contributes to pension plan income. Other postretirement benefit
plans have larger benefit obligations than plan assets, resulting in
expense. Significant benefit plan assumptions, including the discount
rate used, the long-term rate of return on plan assets and health care
trend rates are periodically updated and impact the amount of ben-
efit plan income, expense, assets and obligations (see “Consolidated
Results of Operations – Consolidated Operating Expenses – Pension
and Other Postretirement Benefits”). A sensitivity analysis of the impact
of changes in these assumptions on the benefit obligations and
expense (income) recorded as of December 31, 2007 and for the year
then ended pertaining to Verizon’s pension and postretirement benefit
plans is provided in the table below.
Percentage
point
change
Benefit obligation
increase
(decrease) at
December 31, 2007
(dollars in millions)
Expense increase
(decrease) for the
year ended
December 31, 2007
Pension plans
discount rate
Long-term rate of return
on pension plan assets
Postretirement plans
discount rate
Long-term rate of return
on postretirement
plan assets
Health care trend rates
+ 0.50
- 0.50
+ 1.00
- 1.00
+ 0.50
- 0.50
+ 1.00
- 1.00
+ 1.00
- 1.00
$
(1,768)
1,886
$
–
–
(1,442)
1,579
–
–
3,038
(2,512)
(64)
109
(374)
374
(117)
118
(37)
37
489
(378)
31
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
• Our current and deferred income taxes, and associated valuation allow-
ances, are impacted by events and transactions arising in the normal
course of business as well as in connection with the adoption of new
accounting standards, acquisitions of businesses and non-recurring
items. Assessment of the appropriate amount and classification of
income taxes is dependent on several factors, including estimates
of the timing and realization of deferred income tax assets and the
timing of income tax payments. Actual collections and payments may
materially differ from these estimates as a result of changes in tax laws
as well as unanticipated future transactions impacting related income
tax balances. We account for tax benefits taken or expected to be
taken in our tax returns in accordance with FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48), which requires the
use of a two-step approach for recognizing and measuring tax benefits
taken or expected to be taken in a tax return and disclosures regarding
uncertainties in income tax positions.
• Goodwill and other intangible assets are a significant component of
our consolidated assets. Wireline goodwill of $4,900 million represents
the largest component of our goodwill and, as required by SFAS No.
142, Goodwill and Other Intangible Assets (SFAS No. 142), is periodically
evaluated for impairment. The evaluation of Wireline goodwill for
impairment is primarily based on a discounted cash flow model that
includes estimates of future cash flows. There is inherent subjectivity
involved in estimating future cash flows, which can have a material
impact on the amount of any potential impairment. Wireless licenses
of $50,796 million represent the largest component of our intangible
assets. Our wireless licenses are indefinite-lived intangible assets, and
as required by SFAS No. 142, are not amortized but are periodically
evaluated for impairment. Any impairment loss would be determined
by comparing the aggregated fair value of the wireless licenses with
the aggregated carrying value. The direct value approach is used to
determine fair value by estimating future cash flows. There is inherent
subjectivity involved in estimating future cash flows, which can have a
material impact on the amount of any impairment.
Recent Accounting Pronouncements
Business Combinations
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations
(SFAS No. 141(R)), to replace SFAS No. 141, Business Combinations.
SFAS No. 141(R) requires use of the acquisition method of accounting,
defines the acquirer, establishes the acquisition date and broadens the
scope to all transactions and other events in which one entity obtains
control over one or more other businesses. This statement is effective
for business combinations or transactions entered into for fiscal years
beginning on or after December 15, 2008. We are still evaluating the
impact of SFAS No. 141(R), however, the adoption of this statement is not
expected to have a material impact on our financial position or results
of operations.
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements – an amendment of ARB No. 51, (SFAS
No. 160). SFAS No. 160 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the retained interest
and gain or loss when a subsidiary is deconsolidated. This statement is
effective for financial statements issued for fiscal years beginning on or
after December 15, 2008. Upon the initial adoption of this statement we
will change the classification and presentation of Noncontrolling Interest
in our financial statements, which we currently refer to as minority
interest. We are still evaluating the impact SFAS No. 160 will have, but
we do not expect a material impact on our financial position or results
of operations.
Fair Value Measurements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of SFAS
115 (SFAS No. 159), which permits but does not require us to measure
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected are
reported in earnings. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. As we will not
elect to fair value any of our financial instruments under the provisions of
SFAS No. 159, the adoption of this statement effective January 1, 2008 will
not have an impact on our financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement
(SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework
for measuring fair value in GAAP and establishes a hierarchy that catego-
rizes and prioritizes the sources to be used to estimate fair value. SFAS
No. 157 also expands financial statement disclosures about fair value
measurements. On February 12, 2008, the FASB issued FASB Staff Position
(FSP) 157-2 which delays the effective date of SFAS No. 157 for one year,
for all nonfinancial assets and nonfinancial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on
a recurring basis (at least annually). SFAS No. 157 and FSP 157-2 are
effective for financial statements issued for fiscal years beginning after
November 15, 2007. We will elect a partial deferral of SFAS No. 157 under
the provisions of FSP 157-2 related to the measurement of fair value used
when evaluating goodwill, other intangible assets, wireless licenses and
other long-lived assets for impairment and valuing asset retirement obli-
gations and liabilities for exit or disposal activities. The impact of partially
adopting SFAS No. 157 effective January 1, 2008 will not be material to
our financial statements.
Refer to Note 1 in the consolidated financial statements for a discussion
of the accounting pronouncements adopted during 2007.
32
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Other faCtOrs that may affeC t future results
Recent Developments
Rural Cellular Corporation
In late July 2007, Verizon Wireless announced that it had entered into an
agreement to acquire Rural Cellular Corporation (Rural Cellular), for $45
per share in cash (or approximately $757 million). As a result of the acqui-
sition, Verizon Wireless will assume Rural Cellular’s outstanding debt. The
total value of the transaction is approximately $2.7 billion. Rural Cellular
has more than 700,000 customers in markets adjacent to Verizon Wireless’s
existing customer service areas. Rural Cellular’s networks are located in
the states of Maine, Vermont, New Hampshire, New York, Massachusetts,
Alabama, Mississippi, Minnesota, North Dakota, South Dakota, Wisconsin,
Kansas, Idaho, Washington, and Oregon. Rural Cellular’s shareholders
approved the transaction on October 4, 2007. The acquisition, which is
subject to regulatory approvals, is expected to close in the first half of
2008.
In a related transaction, on December 3, 2007, Verizon Wireless signed a
definitive exchange agreement with AT&T. Under the terms of the agree-
ment, Verizon Wireless will receive cellular operating markets in Madison
and Mason, KY, and 10MHz PCS licenses in Las Vegas, NV; Buffalo, NY;
Sunbury-Shamokin and Erie, PA; and Youngstown, OH. Verizon Wireless
will also receive minority interests held by AT&T in three entities in which
Verizon Wireless also holds an interest plus a cash payment. In exchange,
Verizon Wireless will transfer to AT&T six cellular operating markets in
Burlington, Franklin and the northern portion of Addison, VT; Franklin, NY;
and Okanogan and Ferry, WA; and a cellular license for the Kentucky-6
market. The operating markets Verizon Wireless is exchanging are among
those it is to acquire from Rural Cellular. The exchange with AT&T is subject
to regulatory approvals and is expected to close in the first half of 2008.
Telephone Access Lines Spin-off
On January 16, 2007, we announced a definitive agreement with FairPoint
that will result in Verizon establishing a separate entity for its local exchange
and related business assets in Maine, New Hampshire and Vermont,
spinning off that new entity into a newly formed company, known as
Northern New England Spinco Inc. (Spinco), to Verizon’s shareowners, and
immediately merging it with and into FairPoint. These local exchange and
business assets are included in Verizon’s continuing operations. It is antici-
pated that as long as all conditions are satisfied and assuming completion
of the related financing transactions, both the spin-off of Spinco to Verizon
shareowners and the merger of Spinco with FairPoint will occur on March
31, 2008. Verizon’s Board of Directors established a record date of March
7, 2008, and a closing date of March 31, 2008, for the proposed spin-off of
shares of Spinco to Verizon shareowners.
During 2007, we recorded pretax charges of $84 million ($80 million after-
tax, or $.03 per diluted share) for costs incurred related to certain network
and work center re-arrangements, the isolation and extraction of related
business information, and other activities to separate the wireline facili-
ties and operations in Maine, New Hampshire and Vermont from Verizon
at the closing of the transaction, as well as professional advisory and legal
fees in connection with this transaction.
Upon the closing of the transaction, Verizon shareowners will own approx-
imately 60 percent of the new company, and FairPoint shareowners will
own approximately 40 percent. Verizon Communications will not receive
any shares in FairPoint as a result of the transaction. In connection with
the merger, Verizon shareowners will receive one share of FairPoint stock
for approximately every 53 shares of Verizon stock held as of the record
date. The proposal relating to the merger was approved by the FairPoint
shareowners in August 2007. Both the spin-off and merger are expected
to qualify as tax-free transactions, except to the extent that cash is paid to
Verizon shareowners in lieu of fractional shares.
Based upon the number of shares (as adjusted) and price of FairPoint
common stock (NYSE: FRP) on the date of the announcement of the
merger, the estimated total value to be received by Verizon and its shar-
eowners in exchange for these operations was approximately $2,715
million. This consisted of (a) approximately $1,015 million of FairPoint
common stock that was to be received by Verizon shareowners in the
merger, and (b) $1,700 million in value that was to be received by Verizon
through a combination of cash distributions to Verizon and debt securi-
ties issued to Verizon prior to the spin-off. Verizon currently intends to
exchange these newly issued debt securities for certain debt that was
previously issued by Verizon, which would have the effect of reducing
Verizon’s then-outstanding debt. The actual total value to be received
by Verizon and its shareowners will be determined in part based on the
number of shares (as adjusted) and price of FairPoint common stock on
the date of the closing of the merger. This value is now expected to be
less than $2,715 million because (a) FairPoint expects to issue approxi-
mately 54 million shares of common stock in the merger and the price
of FairPoint common stock has declined since the announcement of the
merger (the closing price of FairPoint common stock on the last business
day prior to the announcement of the merger was $18.54 per share) and
(b) in connection with the regulatory approval process, Verizon currently
expects to make additional contributions of approximately $320 million
to the entity that will merge with FairPoint.
Environmental Matters
During 2003, under a government-approved plan, remediation com-
menced 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 may also be
made based upon actual conditions discovered during the remediation
at any of the sites requiring remediation.
New York Recovery Funding
In August 2002, President Bush signed the Supplemental Appropriations
bill that included $5.5 billion in New York recovery funding. Of that amount,
approximately $750 million was allocated to cover utility restoration and
infrastructure rebuilding as a result of the September 11th terrorist attacks
on lower Manhattan. These funds will be distributed through the Lower
Manhattan Development Corporation following an application and audit
process. As of September 2004, we had applied for reimbursement of
approximately $266 million under Category One and in 2004 and 2005
we applied for reimbursement of an additional $139 million of Category
Two losses. Category One funding relates to Emergency and Temporary
Service Response while Category Two funding is for permanent restora-
tion and infrastructure improvement. According to the plan, permanent
restoration is reimbursed up to 75% of the loss. On November 3, 2005, we
received the results of preliminary audit findings disallowing all but $49.9
million of our $266 million of Category One application. On December 8,
33
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
2005, we provided a detailed rebuttal to the preliminary audit findings.
We received a copy of the final audit report for Verizon’s Category One
applications largely confirming the preliminary audit findings and, on
January 4, 2007, we filed an appeal. That appeal, as well as our Category
Two applications, are pending.
Regulatory and Competitive Trends
Competition and Regulation
Technological, regulatory and market changes have provided Verizon
both new opportunities and challenges. These changes have allowed
Verizon to offer new types of services in an increasingly competitive
market. At the same time, they have allowed other service providers
to broaden the scope of their own competitive offerings. Current and
potential competitors for network services include other telephone
companies, cable companies, wireless service providers, foreign telecom-
munications providers, satellite providers, electric utilities, Internet service
providers, providers of VoIP services, and other companies that offer net-
work services using a variety of technologies. Many of these companies
have a strong market presence, brand recognition and existing customer
relationships, all of which contribute to intensifying competition and may
affect our future revenue growth. Many of our competitors also remain
subject to fewer regulatory constraints than Verizon.
We are unable to predict definitively the impact that the ongoing
changes in the telecommunications industry will ultimately have on our
business, results of operations or financial condition. The financial impact
will depend on several factors, including the timing, extent and success
of competition in our markets, the timing and outcome of various regula-
tory proceedings and any appeals, and the timing, extent and success of
our pursuit of new opportunities.
FCC Regulation
The FCC has jurisdiction over our interstate telecommunications ser-
vices and other matters for which the FCC has jurisdiction under the
Communications Act of 1934, as amended (Communications Act). The
Communications Act generally provides that we may not charge unjust
or unreasonable rates, or engage in unreasonable discrimination when
we are providing services as a common carrier, and regulates some of the
rates, terms and conditions under which we provide certain services. The
FCC also has adopted regulations governing various aspects of our busi-
ness including: (i) use and disclosure of customer proprietary network
information; (ii) telemarketing; (iii) assignment of telephone numbers to
customers; (iv) provision to law enforcement agencies of the capability to
obtain call identifying information and call content information from calls
pursuant to lawful process; (v) accessibility of services and equipment to
individuals with disabilities if readily achievable; (vi) interconnection with
the networks of other carriers; (vii) customers’ ability to keep (or “port”)
their telephone numbers when switching to another carrier; and (viii)
availability of back-up power. In addition, we pay various fees to support
other FCC programs, such as the universal service program discussed
below. Changes to these mandates, or the adoption of additional man-
dates, could require us to make changes to our operations or otherwise
increase our costs of compliance.
Broadband
The FCC has adopted a series of orders that recognize the competitive
nature of the broadband market and impose lesser regulatory require-
ments on broadband services and facilities than apply to narrowband
or traditional telephone services. With respect to facilities, the FCC has
determined that certain unbundling requirements that apply to narrow-
band facilities do not apply to broadband facilities such as fiber to the
premise loops and packet switches. With respect to services, the FCC has
34
concluded that broadband Internet access services offered by telephone
companies and their affiliates qualify as largely deregulated information
services. The same order also concluded that telephone companies may
offer the underlying broadband transmission services that are used as an
input to Internet access services through private carriage arrangements
on negotiated commercial terms. The order was upheld on appeal. In
addition, a Verizon petition asking the FCC to forbear from applying
common carrier regulation to certain broadband services sold primarily
to larger business customers when those services are not used for
Internet access was deemed granted by operation of law on March 19,
2006 when the FCC did not deny the petition by the statutory deadline.
The relief obtained through the forbearance petition has been upheld on
appeal, but remains under challenge.
Video
The FCC has a body of rules that apply to cable operators under Title VI
of the Communications Act of 1934, and these rules also generally apply
to telephone companies that provide cable services over their networks.
In addition, companies that provide cable service over a cable system
generally must obtain a local cable franchise. On March 5, 2007, the FCC
released an order setting forth parameters consistent with Section 621
of the Communications Act of 1934 and other federal law, on the timing
and scope of franchise negotiations by local franchising authorities. The
FCC found that some prior practices in the local franchise approval pro-
cess constituted an unreasonable refusal to award a competitive local
franchise under the requirements of federal law. This order is the subject
of a pending appeal.
Interstate Access Charges and Intercarrier Compensation
The current framework for interstate access rates was established in the
Coalition for Affordable Local and Long Distance Services (CALLS) plan
which the FCC adopted on May 31, 2000. The CALLS plan has three main
components. First, it establishes portable interstate access universal
service support of $650 million for the industry that replaces implicit sup-
port previously embedded in interstate access charges. Second, the plan
simplifies the patchwork of common line charges into one subscriber line
charge (SLC) and provides for de-averaging of the SLC by zones and class
of customers. Third, the plan set into place a mechanism to transition to
a set target of $.0055 per minute for switched access services. Once that
target rate is reached, local exchange carriers are no longer required to
make further annual price cap reductions to their switched access prices.
As a result of tariff adjustments which became effective in July 2003, vir-
tually all of our switched access lines reached the $.0055 benchmark.
The FCC currently is conducting a broad rulemaking proceeding to con-
sider new rules governing intercarrier compensation including, but not
limited to, access charges, compensation for Internet traffic and recip-
rocal compensation for local traffic. The FCC has sought comments about
intercarrier compensation in general and requested input on a number
of specific reform proposals. The FCC also has pending before it issues
relating to intercarrier compensation for dial-up Internet-bound traffic.
The FCC previously found that this traffic is not subject to reciprocal
compensation under Section 251(b)(5) of the Telecommunications Act of
1996. Instead, the FCC established federal rates per minute for this traffic
that declined from $.0015 to $.0007 over a three-year period, established
caps on the total minutes of this traffic subject to compensation in a state
and required incumbent local exchange carriers to offer to both bill and
pay reciprocal compensation for local traffic at the same rate as they are
required to pay on Internet-bound traffic. The U.S. Court of Appeals for
the D.C. Circuit rejected part of the FCC’s rationale, but declined to vacate
the order while it is on remand. As a result, pending further action by the
FCC, the FCC’s underlying order remains in effect. The FCC subsequently
denied a petition to discontinue the $.0007 rate cap on this traffic, but
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
removed the caps on the total minutes of Internet-bound traffic subject
to compensation. That decision has been upheld on appeal. Disputes
also remain pending in a number of forums relating to the appropriate
compensation for Internet-bound traffic during previous periods under
the terms of our interconnection agreements with other carriers.
The FCC also is conducting a rulemaking proceeding to address the regu-
lation of services that use Internet protocol. One of the issues raised in the
rulemaking as well as in several petitions currently pending before the
FCC addresses whether, and under what circumstances, access charges
should apply to voice or other Internet protocol services. The FCC previ-
ously has held that one provider’s peer-to-peer Internet protocol service
that does not use the public switched network is an interstate information
service and is not subject to access charges, while a service that utilizes
Internet protocol for only one intermediate part of a call’s transmission is
a telecommunications service that is subject to access charges. Another
petition asking the FCC to forbear from applying access charges to voice
over Internet protocol services that are terminated on switched local
exchange networks was withdrawn by the carrier that filed that petition.
The FCC also declared the services offered by one provider of a voice
over Internet protocol service to be jurisdictionally interstate. The FCC
also stated that its conclusion would apply to other services with similar
characteristics. On March 21, 2007, the Eighth Circuit Court of Appeals
affirmed the FCC’s Order.
The FCC also has adopted rules for special access services that provide for
pricing flexibility and ultimately the removal of services from price regu-
lation when prescribed competitive thresholds are met. More than half of
special access revenues are now removed from price regulation. The FCC
currently has a rulemaking proceeding underway to update the public
record concerning its pricing flexibility rules and to determine whether
any changes to those rules are warranted.
Universal Service
The FCC also has a body of rules implementing the universal service
provisions of the Telecommunications Act of 1996, including rules
governing support to rural and non-rural high-cost areas, support for low
income subscribers and support for schools, libraries and rural health care.
The FCC’s current rules for support to high-cost areas served by larger
“non-rural” local telephone companies were previously remanded by U.S.
Court of Appeals for the Tenth Circuit, which had found that the FCC had
not adequately justified these rules. The FCC has initiated a rulemaking
proceeding in response to the court’s remand, but its rules remain in effect
pending the results of the rulemaking. It is also considering modifications
to the high-cost support system that could include a cap on the amount
of support and other limits on what certain eligible carriers may receive.
The FCC also has proceedings underway to evaluate possible changes
to its current rules for assessing contributions to the universal service
fund. As an interim step, in June 2006, the FCC ordered that providers of
VoIP services are subject to federal universal service obligations. The FCC
also increased the percentage of revenues subject to federal universal
service obligations that wireless providers may use as a safe harbor. The
substance of these orders was upheld on appeal in June 2007, but the
Court did remand some more minor implementation issues back to the
FCC. Any further change in the current assessment mechanism could
result in a change in the contribution that local telephone companies,
wireless carriers or others must make and that would have to be collected
from customers.
Unbundling of Network Elements
Under Section 251 of the Telecommunications Act of 1996, incumbent
local exchange carriers were required to provide competing carriers
with access to components of their network on an unbundled basis,
known as UNEs, where certain statutory standards are satisfied. The
Telecommunications Act of 1996 also adopted a cost-based pricing stan-
dard for these UNEs, which the FCC interpreted as allowing it to impose
a pricing standard known as “total element long run incremental cost” or
“TELRIC.” The FCC’s rules defining the unbundled network elements that
must be made available at TELRIC prices have been overturned on mul-
tiple occasions by the courts. In its most recent order issued in response
to these court decisions, the FCC eliminated the requirement to unbundle
mass market local switching on a nationwide basis, with the obligation
to accept new orders ending as of the effective date of the order (March
11, 2005). The FCC also established a one year transition for existing UNE
switching arrangements. For high-capacity transmission facilities, the
FCC established criteria for determining whether high-capacity loops,
transport or dark fiber transport must be unbundled in individual wire
centers, and stated that these standards were only expected to affect a
small number of wire centers. The FCC also eliminated the obligation to
provide dark fiber loops and found that there is no obligation to provide
UNEs exclusively for wireless or long distance service. In any instance
where a particular high-capacity facility no longer has to be made avail-
able as a UNE, the FCC established a similar one year transition for any
existing high-capacity loop or transport UNEs, and an 18 month tran-
sition for any existing dark fiber UNEs. This decision has been upheld
on appeal.
As noted above, the FCC has concluded that the requirement under
Section 251 of the Telecommunications Act of 1996 to provide unbun-
dled network elements at TELRIC prices generally does not apply with
respect to broadband facilities, such as fiber to the premises loops, the
packet-switched capabilities of hybrid loops and packet switching. The
FCC also has held that any separate unbundling obligations that may be
imposed by Section 271 of the Telecommunications Act of 1996 do not
apply to these same facilities. The decision with respect to Section 271
has been upheld on appeal and a petition for rehearing of that order
was denied.
Wireless Services
The FCC regulates the licensing, construction, operation, acquisition and
transfer of wireless communications systems, including the systems that
Verizon Wireless operates, pursuant to the Communications Act, other
legislation, and the FCC’s rules. The FCC and Congress continuously con-
sider changes to these laws and rules. Adoption of new laws or rules
may raise the cost of providing service or require modification of Verizon
Wireless’ business plans or operations.
To use the radio frequency spectrum, wireless communications sys-
tems must be licensed by the FCC to operate the wireless network and
mobile devices in assigned spectrum segments. Verizon Wireless holds
FCC licenses to operate in several different radio services, including
the cellular radiotelephone service, personal communications service,
advanced wireless service, and point-to-point radio service. The technical
and service rules, the specific radio frequencies and amounts of spec-
trum we hold, and the sizes of the geographic areas we are authorized
to operate in, vary for each of these services. However, all of the licenses
Verizon Wireless holds allow it to use spectrum to provide a wide range
of mobile and fixed communications services, including both voice and
data services, and Verizon Wireless operates a seamless network that uti-
lizes those licenses to provide services to customers. Because the FCC
issues licenses for only a fixed time, generally 10 years, Verizon Wireless
35
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
must periodically seek renewal of those licenses. Although the FCC has
routinely renewed all of Verizon Wireless’ licenses that have come up for
renewal to date, challenges could be brought against the licenses in the
future. If a wireless license were revoked or not renewed upon expira-
tion, Verizon Wireless would not be permitted to provide services on the
licensed spectrum in the area covered by that license.
The FCC has also imposed specific mandates on carriers that operate
wireless communications systems, which increase Verizon Wireless’ costs.
These mandates include requirements that Verizon Wireless: (i) meet
specific construction and geographic coverage requirements during
the license term; (ii) meet technical operating standards that, among
other things, limit the radio frequency radiation from mobile devices and
antennas; (iii) deploy “Enhanced 911” wireless services that provide the
wireless caller’s number, location and other information upon request by
a state or local public safety agency that handles 911 calls; (iv) provide
backup electric power at most cell sites in the event electric utility ser-
vice is disrupted; and (v) comply with regulations for the construction of
transmitters and towers that, among other things, restrict siting of towers
in environmentally sensitive locations and in places where the towers
would affect a site listed or eligible for listing on the National Register of
Historic Places. Changes to these mandates could require Verizon Wireless
to make changes to operations or increase its costs of compliance.
The Communications Act imposes restrictions on foreign ownership of
U.S. wireless systems. The FCC has approved the interest that Vodafone
Group Plc holds, through various of its subsidiaries, in Verizon Wireless.
The FCC may need to approve any increase in Vodafone’s interest or the
acquisition of an ownership interest by other foreign entities. In addition,
as part of the FCC’s approval of Vodafone’s ownership interest, Verizon
Wireless, Verizon and Vodafone entered into an agreement with the
U.S. Department of Defense, Department of Justice and Federal Bureau
of Investigation which imposes national security and law enforce-
ment-related obligations on the ways in which Verizon Wireless stores
information and otherwise conducts its business.
Verizon Wireless anticipates that it will need additional spectrum to meet
future demand. It can meet spectrum needs by purchasing licenses or
leasing spectrum from other licensees, or by acquiring new spectrum
licenses from the FCC. Under the Communications Act, before Verizon
Wireless can acquire a license from another licensee in order to expand
its coverage or its spectrum capacity in a particular area, it must file an
application with the FCC, and the FCC can grant the application only after
a period for public notice and comment. This review process can delay
acquisition of spectrum needed to expand services. The Communications
Act also requires the FCC to award new licenses for most commercial wire-
less services through a competitive bidding process in which spectrum is
awarded to bidders in an auction. Verizon Wireless participated in spec-
trum auctions to acquire licenses for personal communication service
and most recently advanced wireless service. In addition, the FCC began
conducting an auction of spectrum in the 700 MHz band on January
24, 2008. This spectrum is currently used for UHF television operations
but by law those operations must cease no later than February 17, 2009.
Verizon Wireless filed an application on December 3, 2007, to qualify as
a bidder in this auction, and on January 14, 2008, the FCC announced
that Verizon Wireless and 213 other applicants had qualified as eligible
to bid in the auction. The FCC determined that bidding in this auction
will be “anonymous,” which means that prior to and during the course
of the auction(s), the FCC will not make public any information about
a specific applicant’s upfront deposit or its bids. In addition, FCC rules
restrict information that bidders may disclose about their participation in
the auction. The FCC also adopted service rules that will impose costs on
licensees that acquire the 700 MHz band spectrum, including minimum
coverage mandates by specific dates during the license terms, and, for
approximately one-third of the spectrum, “open access” requirements,
which generally require licensees of that spectrum to allow customers
to use devices and applications of their choice, subject to certain limits.
The open access requirements are the subject of a pending appeal in
which Verizon Wireless has intervened. The timing of future auctions, and
the spectrum being sold, may not match Verizon Wireless’ needs, and the
company may not be able to secure the spectrum in the amounts and/or
in the markets it seeks through the current or any future auction.
The FCC is also conducting several proceedings to explore making
additional spectrum available for licensed and/or unlicensed use. These
proceedings could increase radio interference to Verizon Wireless’ opera-
tions from other spectrum users and could impact the ways in which
it uses spectrum, the capacity of that spectrum to carry traffic, and the
value of that spectrum.
State Regulation and Local Approvals
Telephone Operations
State public utility commissions regulate our telephone operations with
respect to certain telecommunications intrastate rates and services and
other matters. Our competitive local exchange carrier and long distance
operations are generally classified as nondominant and lightly regulated
the same as other similarly situated carriers. Our incumbent local
exchange operations are generally classified as dominant. These latter
operations predominantly are subject to alternative forms of regulation
(AFORs) in the various states, although they remain subject to rate of
return regulation in a few states. Arizona, Illinois, Nevada, New Hampshire,
Oregon and Washington are rate of return regulated with various levels
of pricing flexibility for competitive services. California, Connecticut,
Delaware, the District of Columbia, Florida, Indiana, Maryland, Michigan,
Maine, Massachusetts, New Jersey, New York, North Carolina, Ohio,
Pennsylvania, Rhode Island, South Carolina, Texas, Vermont, Virginia, West
Virginia and Wisconsin are under AFORs with various levels of pricing
flexibility, detariffing, and service quality standards. None of the AFORs
include earnings regulation. In Idaho, Verizon has made the election
under a recent statutory amendment into a deregulatory regime that
phases out all price regulation.
Video
Companies that provide cable service over a cable system are typically
subject to state and/or local cable television rules and regulations. As
noted above, cable operators generally must obtain a local cable fran-
chise from each local unit of government prior to providing cable service
in that local area. Some states have recently enacted legislation that
enables cable operators to apply for, and obtain, a single cable franchise
at the state, rather than local, level. To date, Verizon has applied for and
received state-issued franchises in California, Indiana, Florida, New Jersey,
Texas and the unincorporated areas of Delaware. Virginia law provides us
the option of entering a given franchise area using state standards if local
franchise negotiations are unsuccessful.
36
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Wireless Services
The rapid growth of the wireless industry has led to an increase in efforts
by some state legislatures and state public utility commissions to regu-
late the industry in ways that may impose additional costs on Verizon
Wireless. The Communications Act generally preempts regulation by
state and local governments of the entry of, or the rates charged by, wire-
less carriers. Although a state may petition the FCC to allow it to impose
rate regulation, no state has done so. In addition, the Communications
Act does not prohibit the states from regulating the other “terms and
conditions” of wireless service. While numerous state commissions do
not currently have jurisdiction over wireless services, state legislatures
may decide to grant them such jurisdiction, and those commissions that
already have authority to impose regulations on wireless carriers may
adopt new rules.
State efforts to regulate wireless services have included proposals to
regulate customer billing, termination of service, trial periods for service,
advertising, network outages, the use of handsets while driving, and the
provision of emergency or alert services. Over the past several years, only
a few states have imposed regulation in one or more of these areas, and
in 2006 a federal appellate court struck down one such state statute,
but Verizon Wireless expects these efforts to continue. Some states also
impose their own universal service support regimes on wireless and other
telecommunications carriers, and other states are considering whether to
create such regimes.
Verizon Wireless (as well as AT&T (formerly Cingular) and Sprint-Nextel)
is a party to an Assurance of Voluntary Compliance (“AVC”) with 33 State
Attorneys General. The AVC, which generally reflected Verizon Wireless’s
practices at the time it was entered into in July 2004, obligates the com-
pany to disclose certain rates and terms during a sales transaction, to
provide maps depicting coverage, and to comply with various require-
ments regarding advertising, billing, and other practices.
At the state and local level, wireless facilities are subject to zoning and
land use regulation. Under the Communications Act, neither state nor
local governments may categorically prohibit the construction of wireless
facilities in any community or take actions, such as indefinite moratoria,
which have the effect of prohibiting service. Nonetheless, securing state
and local government approvals for new tower sites has been and is
likely to continue to be a difficult, lengthy and expensive process. Finally,
state and local governments continue to impose new or higher fees and
taxes on wireless carriers.
CautiOnary statement COnCerning
fOrward-lOOking statements
In this Annual Report on Form 10-K we have made forward-looking state-
ments. 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 pre-
ceded 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 Annual Report, could affect future results and could cause those
results to differ materially from those expressed in the forward-looking
statements:
• materially adverse changes in economic and industry conditions and
labor matters, including workforce levels and labor negotiations, and
any resulting financial and/or operational impact, in the markets served
by us or by companies in which we have substantial investments;
• material changes in available technology, including disruption of our
suppliers’ provisioning of critical products or services;
• the impact on our operations of natural or man-made disasters 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;
• the final results of federal and state regulatory proceedings concerning
our provision of retail and wholesale services and judicial review of
those results;
• the effects of competition in our markets;
• the timing, scope and financial impact of our deployment of fiber-to-
the-premises broadband technology;
• the ability of Verizon Wireless to continue to obtain sufficient spectrum
resources;
• 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;
• the ability to complete acquisitions and dispositions; and
• the extent and timing of our ability to obtain revenue enhancements
and cost savings following our business combination with MCI, Inc.
37
Report of Management on Internal Control Over
Financial Reporting
Report of Independent Registered Public Accounting
Firm on Internal Control Over Financial Reporting
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
We, the management of Verizon Communications Inc., are responsible
for establishing and maintaining adequate internal control over financial
reporting of the company. Management has evaluated internal control
over financial reporting of the company using the criteria for effective
internal control established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
Management has assessed the effectiveness of the company’s internal
control over financial reporting as of December 31, 2007. Based on this
assessment, we believe that the internal control over financial reporting
of the company is effective as of December 31, 2007. In connection with
this assessment, there were no material weaknesses in the company’s
internal control over financial reporting identified by management.
The company’s financial statements included in this annual report have
been audited by Ernst & Young LLP, independent registered public
accounting firm. Ernst & Young LLP has also provided an attestation
report on the company’s internal control over financial reporting.
Ivan G. Seidenberg
Chairman and Chief Executive Officer
Doreen A. Toben
Executive Vice President and Chief Financial Officer
Thomas A. Bartlett
Senior Vice President and Controller
To The Board of Directors and Shareowners of Verizon
Communications Inc.:
We have audited Verizon Communications Inc. and subsidiaries’ (Verizon)
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Verizon’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting included
in the accompanying Report of Management on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assur-
ance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external pur-
poses in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those poli-
cies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assur-
ance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and direc-
tors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or dis-
position of the company’s assets that could have a material effect on the
financial statements.
38
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evalua-
tion of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, Verizon maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based
on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
balance sheets of Verizon as of December 31, 2007 and 2006, and the
related consolidated statements of income, cash flows and changes in
shareowners’ investment for each of the three years in the period ended
December 31, 2007 of Verizon and our report dated February 22, 2008
expressed an unqualified opinion thereon.
Ernst & Young LLP
New York, New York
February 22, 2008
Report of Independent Registered Public Accounting
Firm on Financial Statements
To The Board of Directors and Shareowners of Verizon
Communications Inc.:
We have audited the accompanying consolidated balance sheets of
Verizon Communications Inc. and subsidiaries (Verizon) as of December
31, 2007 and 2006, and the related consolidated statements of income,
cash flows and changes in shareowners’ investment for each of the three
years in the period ended December 31, 2007. These financial statements
are the responsibility of Verizon’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those stan-
dards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and signifi-
cant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Verizon
at December 31, 2007 and 2006, and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, Verizon changed its
methods of accounting for uncertainty in income taxes and leveraged
lease transactions effective January 1, 2007, stock-based compensation
effective January 1, 2006 and pension and other post-retirement obliga-
tions effective December 31, 2006.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), Verizon’s internal
control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 22, 2008 expressed an
unqualified opinion thereon.
Ernst & Young LLP
New York, New York
February 22, 2008
39
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
2007
(dollars in millions, except per share amounts)
2005
2006
$ 93,469
$
88,182
$
69,518
37,547
25,967
14,377
–
77,891
15,578
585
211
(1,829)
(5,053)
9,492
(3,982)
5,510
142
(131)
–
5,521
1.90
.05
(.05)
–
1.91
2,898
1.90
.05
(.05)
–
1.90
2,902
$
$
$
$
$
35,309
24,955
14,545
–
74,809
13,373
773
395
(2,349)
(4,038)
8,154
(2,674)
5,480
759
–
(42)
6,197
1.88
.26
–
(.01)
2.13
2,912
1.88
.26
–
(.01)
2.12
2,938
$
$
$
$
$
24,409
19,443
13,615
(530)
56,937
12,581
686
311
(2,129)
(3,001)
8,448
(2,421)
6,027
1,370
–
–
7,397
2.18
.50
–
–
2.67
2,766
2.16
.49
–
–
2.65
2,817
$
$
$
$
$
Consolidated Statements of Income
Years Ended December 31,
Operating Revenues
Operating Expenses
Cost of services and sales (exclusive of items shown below)
Selling, general & administrative expense
Depreciation and amortization expense
Sales of businesses, net
Total Operating Expenses
Operating Income
Equity in earnings of unconsolidated businesses
Other income and (expense), net
Interest expense
Minority interest
Income Before Provision for Income Taxes, Discontinued Operations,
Extraordinary Item and Cumulative Effect of Accounting Change
Provision for income taxes
Income Before Discontinued Operations, Extraordinary Item
and Cumulative Effect of Accounting Change
Income from discontinued operations, net of tax
Extraordinary item, net of tax
Cumulative effect of accounting change, net of tax
Net Income
Basic Earnings Per Common Share(1)
Income before discontinued operations, extraordinary item
and cumulative effect of accounting change
Income from discontinued operations, net of tax
Extraordinary item, net of tax
Cumulative effect of accounting change, net of tax
Net Income
Weighted-average shares outstanding (in millions)
Diluted Earnings Per Common Share(1)
Income before discontinued operations, extraordinary item
and cumulative effect of accounting change
Income from discontinued operations, net of tax
Extraordinary item, net of tax
Cumulative effect of accounting change, net of tax
Net Income
Weighted-average shares outstanding (in millions)
(1) Total per share amounts may not add due to rounding.
See Notes to Consolidated Financial Statements.
40
Consolidated Balance Sheets
At December 31,
Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $1,025 and $1,139
Inventories
Assets held for sale
Prepaid expenses and other
Total current assets
Plant, property and equipment
Less accumulated depreciation
Investments in unconsolidated businesses
Wireless licenses
Goodwill
Other intangible assets, net
Other assets
Total assets
Liabilities and Shareowners’ Investment
Current liabilities
Debt maturing within one year
Accounts payable and accrued liabilities
Liabilities related to assets held for sale
Other
Total current liabilities
Long-term debt
Employee benefit obligations
Deferred income taxes
Other liabilities
Minority interest
Shareowners’ investment
Series preferred stock ($.10 par value; none issued)
Common stock ($.10 par value; 2,967,610,119 shares and 2,967,652,438 shares issued)
Contributed capital
Reinvested earnings
Accumulated other comprehensive loss
Common stock in treasury, at cost
Deferred compensation-employee stock ownership plans and other
Total shareowners’ investment
Total liabilities and shareowners’ investment
See Notes to Consolidated Financial Statements.
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
(dollars in millions, except per share amounts)
2006
2007
$
1,153
2,244
11,736
1,729
–
1,836
18,698
213,994
128,700
85,294
3,372
50,796
5,245
4,988
18,566
$ 186,959
$
2,954
14,462
–
7,325
24,741
28,203
29,960
14,784
6,402
32,288
–
297
40,316
17,884
(4,506)
(3,489)
79
50,581
$ 186,959
$
$
$
$
3,219
2,434
10,891
1,514
2,592
1,888
22,538
204,109
121,753
82,356
4,868
50,959
5,655
5,140
17,288
188,804
7,715
14,320
2,154
8,091
32,280
28,646
30,779
16,270
3,957
28,337
–
297
40,124
17,324
(7,530)
(1,871)
191
48,535
188,804
41
Consolidated Statements of Cash Flows
Years Ended December 31,
Cash Flows from Operating Activities
Net Income
Adjustments to reconcile net income to net cash provided by operating activities –
continuing operations:
Depreciation and amortization expense
Sales of businesses, net
Loss on sale of discontinued operations
Employee retirement benefits
Deferred income taxes
Provision for uncollectible accounts
Equity in earnings of unconsolidated businesses, net of dividends received
Extraordinary item, net of tax
Cumulative effect of accounting change, net of tax
Changes in current assets and liabilities, net of effects from acquisition/disposition
of businesses:
Accounts receivable
Inventories
Other assets
Accounts payable and accrued liabilities
Other, net
Net cash provided by operating activities – continuing operations
Net cash provided by (used in) operating activities – discontinued operations
Net cash provided by operating activities
Cash Flows from Investing Activities
Capital expenditures (including capitalized software)
Acquisitions, net of cash acquired, and investments
Proceeds from disposition of businesses
Net change in short-term and other current investments
Other, net
Net cash used in investing activities – continuing operations
Net cash provided by (used in) investing activities – discontinued operations
Net cash used in investing activities
Cash Flows from Financing Activities
Proceeds from long-term borrowings
Repayments of long-term borrowings and capital lease obligations
Increase (decrease) in short-term obligations, excluding current maturities
Dividends paid
Proceeds from sale of common stock
Purchase of common stock for treasury
Other, net
Net cash used in financing activities – continuing operations
Net cash used in financing activities – discontinued operations
Net cash used in financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See Notes to Consolidated Financial Statements.
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
2007
2006
(dollars in millions)
2005
$
5,521
$
6,197
$
7,397
14,377
–
–
1,720
408
1,047
1,986
131
–
(1,931)
(255)
(140)
(567)
4,012
26,309
(570)
25,739
(17,538)
(763)
–
169
1,267
(16,865)
757
(16,108)
3,402
(5,503)
(3,252)
(4,773)
1,274
(2,843)
(2)
(11,697)
–
(11,697)
14,545
–
541
1,923
(252)
1,034
(731)
–
42
(1,312)
8
52
(383)
1,366
23,030
1,076
24,106
(17,101)
(1,422)
–
290
811
(17,422)
1,806
(15,616)
3,983
(11,233)
7,944
(4,719)
174
(1,700)
(201)
(5,752)
(279)
(6,031)
(2,066)
3,219
1,153
$
2,459
760
3,219
$
$
13,615
(530)
–
1,695
(1,093)
1,076
1,649
–
–
(788)
(236)
(176)
(899)
(1,266)
20,444
1,581
22,025
(14,964)
(4,684)
1,326
(346)
532
(18,136)
(356)
(18,492)
1,487
(3,825)
2,098
(4,427)
37
(271)
(57)
(4,958)
(76)
(5,034)
(1,501)
2,261
760
42
Consolidated Statements of Changes in Shareowners’ Investment
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Years Ended December 31,
Common Stock
Balance at beginning of year
Shares issued-MCI/Price acquisitions
Balance at end of year
Contributed Capital
Balance at beginning of year
Shares issued-employee and shareowner plans
Shares issued-MCI/Price acquisitions
Domestic print and Internet yellow pages directories
business spin-off
Other
Balance at end of year
Reinvested Earnings
Balance at beginning of year
Adoption of tax accounting standards (See Note 1)
Adjusted balance at beginning of year
Net income
Dividends declared ($1.67, $1.62 and $1.62 per share)
Other
Balance at end of year
Accumulated Other Comprehensive Loss
Balance at beginning of year
Foreign currency translation adjustments
Unrealized gains on net investment hedges
Unrealized gains (losses) on marketable securities
Unrealized gains on cash flow hedges
Defined benefit pension and postretirement plans
Minimum pension liability adjustment
Other
Other comprehensive income (loss)
Adoption of pension and postretirement benefit
accounting standard (See Note 15)
Balance at end of year
Treasury Stock
Balance at beginning of year
Shares purchased
Shares distributed
Employee plans
Shareowner plans
Balance at end of year
Deferred Compensation–ESOPs and Other
Balance at beginning of year
Amortization
Other
Balance at end of year
Total Shareowners’ Investment
Comprehensive Income
Net income
Other comprehensive income (loss) per above
Total Comprehensive Income
See Notes to Consolidated Financial Statements.
Shares
2007
Amount
(dollars in millions, except per share amounts, and shares in thousands)
2005
Amount
2006
Amount
Shares
Shares
2,967,652
(42)
2,967,610
$
297
–
297
2,774,865
192,787
2,967,652
$
277
20
297
2,774,865
–
2,774,865
$
277
–
277
40,124
58
–
–
134
40,316
17,324
(134)
17,190
5,521
(4,830)
3
17,884
(7,530)
838
–
(4)
1
1,948
–
241
3,024
–
(4,506)
(1,871)
(2,843)
1,224
1
(3,489)
191
(112)
–
79
$ 50,581
$
$
5,521
3,024
8,545
(11,456)
(50,066)
5,355
20
(56,147)
25,369
(1)
6,010
8,695
51
40,124
15,905
–
15,905
6,197
(4,781)
3
17,324
(1,783)
1,196
–
54
14
–
526
(128)
1,662
(7,409)
(7,530)
(353)
(1,700)
181
1
(1,871)
265
(74)
–
191
48,535
6,197
1,662
7,859
$
$
$
(5,213)
(7,859)
1,594
22
(11,456)
25,404
(24)
–
–
(11)
25,369
12,984
–
12,984
7,397
(4,479)
3
15,905
(1,053)
(755)
2
(21)
10
–
51
(17)
(730)
–
(1,783)
(142)
(271)
59
1
(353)
90
174
1
265
39,680
7,397
(730)
6,667
43
$
$
$
(56,147)
(68,063)
33,411
13
(90,786)
Notes to Consolidated Financial Statements
NOTE 1
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of Business
Verizon Communications Inc. (Verizon or the Company) is one of the
world’s leading providers of communications services. We have two
reportable segments, Wireline and Domestic Wireless, which we operate
and manage as strategic business units and organize by products and
services. For further information concerning our business segments,
see Note 17. Our Wireline segment provides communications services,
including voice, broadband video and data, network access, nationwide
long-distance and other communications products and services, and
also owns and operates one of the most expansive end-to-end global
Internet Protocol (IP) networks. We continue to deploy advanced broad-
band network technology, with our fiber-to-the-premises network (FiOS)
creating a platform with sufficient bandwidth and capabilities to meet
customers’ current and future needs. FiOS allows us to offer our cus-
tomers a wide array of broadband services, including advanced data and
video offerings. Our IP network includes over 485,000 route miles of fiber
optic cable and provides access to over 150 countries across six conti-
nents, enabling us to provide next-generation IP network products and
Information Technology (IT) services to medium and large businesses
and government customers worldwide.
Verizon’s Domestic Wireless segment, operating as Verizon Wireless, pro-
vides wireless voice and data products and other value-added services
and equipment across the United States using one of the most extensive
and reliable wireless networks. Verizon Wireless continues to expand our
wireless data, messaging and multi-media offerings at broadband speeds
for both consumer and business customers.
Consolidation
The method of accounting applied to investments, whether consoli-
dated, equity or cost, involves an evaluation of all significant terms of
the investments that explicitly grant or suggest evidence of control or
influence over the operations of the investee. The consolidated financial
statements include our controlled subsidiaries. Investments in businesses
which we do not control, but have the ability to exercise significant influ-
ence over operating and financial policies, are accounted for using the
equity method. Investments in which we do not have the ability to
exercise significant influence over operating and financial policies are
accounted for under the cost method. Equity and cost method invest-
ments are included in Investments in Unconsolidated Businesses in our
consolidated balance sheets. Certain of our cost method investments
are classified as available-for-sale securities and adjusted to fair value
pursuant to the Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS No. 115).
All significant intercompany accounts and transactions have been
eliminated.
We have reclassified prior year amounts to conform to the current year
presentation.
Discontinued Operations, Assets Held for Sale, and Sales of
Businesses and Investments
We classify as discontinued operations for all periods presented any
component of our business that we hold for sale or disposal that has
operations and cash flows that are clearly distinguishable operationally
and for financial reporting purposes from the rest of Verizon. For those
components, Verizon has no significant continuing involvement after dis-
posal and their operations and cash flows are eliminated from Verizon’s
44
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
ongoing operations. Sales of significant components of our business
not classified as discontinued operations are reported as either Sales of
Businesses, Net, Equity in Earnings of Unconsolidated Businesses or Other
Income and (Expense), Net in our consolidated statements of income.
Use of Estimates
We prepare our financial statements using U.S. generally accepted
accounting principles (GAAP), which require management to make esti-
mates and assumptions that affect reported amounts and disclosures.
Actual results could differ from those estimates.
Examples of significant estimates include unrealized tax benefits, the
allowance for doubtful accounts, the recoverability of plant, property and
equipment, the recoverability of intangible assets and other long-lived
assets, valuation allowances on tax assets and pension and postretire-
ment benefit assumptions.
Revenue Recognition
Wireline
Our Wireline segment earns revenue based upon usage of our 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 the following month when earned. Revenue from ser-
vices that are not fixed in amount and are based on usage are recognized
when such services are provided.
We recognize equipment revenue for services, in which we bundle the
equipment with maintenance and monitoring services, when the equip-
ment 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 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.
Customer activation fees, along with the related costs up to but not
exceeding the activation fees, are deferred and amortized over the cus-
tomer relationship period.
Domestic Wireless
Our Domestic Wireless segment earns revenue by providing access to
and usage of our network, which includes roaming revenue. In general,
access revenue is billed one month in advance and recognized when
earned. Access revenue, usage revenue and roaming revenue are rec-
ognized 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 consid-
ered to be a separate earnings process from the sale of wireless services.
Customer activation fees are considered additional consideration when
handsets are sold to customers at a discount and are recorded as equip-
ment sales revenue at the time of customer acceptance.
Maintenance and Repairs
We charge the cost of maintenance and repairs, including the cost of
replacing minor items not constituting substantial betterments, princi-
pally to Cost of Services and Sales as these costs are incurred.
Advertising Costs
Advertising costs for advertising products and services as well as other
promotional and sponsorship costs are charged to Selling, General &
Administrative expense in the periods in which they are incurred.
Earnings Per Common Share
Basic earnings per common share are based on the weighted-average
number of shares outstanding during the period. Diluted earnings per
common share include the dilutive effect of shares issuable under our
Notes to Consolidated Financial Statements continued
stock-based compensation plans, an exchangeable equity interest and
zero-coupon convertible notes (see Note 13). As of December 31, 2006,
the exchangeable equity interest and zero-coupon convertible notes
were no longer outstanding.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of 90 days or
less when purchased to be cash equivalents, except cash equivalents
held as short-term investments. Cash equivalents are stated at cost,
which approximates market value.
Short-Term Investments
Our short-term investments consist primarily of cash equivalents held in
trust to pay for certain employee benefits. Short-term investments are
stated at cost, which approximates market value.
Marketable Securities
Marketable securities are included in the accompanying consolidated
balance sheets in Investments in Unconsolidated Businesses or Other
Assets. We continually evaluate our investments in marketable securi-
ties for impairment due to declines in market value considered to be
other than temporary. That evaluation includes, in addition to persistent,
declining stock prices, general economic and company-specific evalu-
ations. In the event of a determination that a decline in market value is
other than temporary, a charge to earnings is recorded for the loss, and a
new cost basis in the investment is established.
Inventories
Inventory consists primarily of wireless equipment held for sale, which is
carried at the lower of cost (determined principally on either an average
cost or first-in, first-out basis) or market. We also include in inventory new
and reusable supplies and network equipment of our local telephone
operations, which are stated principally at average original cost, except
that specific costs are used in the case of large individual items.
Plant and Depreciation
We record plant, property and equipment at cost. Our local telephone
operations’ depreciation expense is principally based on the composite
group remaining life method and straight-line composite rates. This
method provides for the recognition of the cost of the remaining net
investment in local telephone plant, less anticipated net salvage value,
over the remaining asset lives. This method requires the periodic revision
of depreciation rates.
Plant, property and equipment of other wireline and wireless operations
are generally depreciated on a straight-line basis.
The asset lives used by our operations are presented in the following
table:
Average Useful Lives (in years)
Buildings
Central office equipment
Other network equipment
Outside communications plant
Copper cable
Fiber cable (including undersea cable)
Microwave towers
Poles and conduit
Furniture, vehicles and other
8 – 45
3 – 11
3 – 15
13 – 18
11 – 25
30
30 – 50
1 – 20
When we replace, retire or otherwise dispose of depreciable plant used
in our local telephone network, we deduct the carrying amount of such
plant from the respective accounts and charge it to accumulated depre-
ciation. When the depreciable assets of our other Wireline and Domestic
Wireless operations are retired or otherwise disposed of, the related cost
and accumulated depreciation are deducted from the plant accounts,
and any gains or losses on disposition are recognized in income.
We capitalize network software purchased or developed along with
related plant assets. We also capitalize interest associated with the acqui-
sition or construction of network-related assets. Capitalized interest is
reported as part of the cost of the network-related assets and as a reduc-
tion in interest expense.
In connection with our ongoing review of the estimated remaining useful
lives of plant, property and equipment and associated depreciation rates,
we determined that, effective January 1, 2005, the remaining useful lives
of copper cable and certain components of central office equipment at
our Wireline segment would be shortened by 1 to 2 years. These changes
in asset lives were based on Verizon’s plans, and progress to date on those
plans, to deploy fiber optic cable to homes, replacing copper cable.
Effective January 1, 2007, the remaining useful lives of certain of the
circuit equipment was lengthened from 8 years to 9 years based on
subsequent modifications to our fiber optic cable deployment plan. The
remaining useful lives of buildings was also increased from 42 years to
45 years. The reduction in depreciation resulting from these adjustments
in 2007 was partially offset by increased depreciation resulting from the
shortening of the lives of various types of wireless plant, property and
equipment. While the timing and extent of current deployment plans are
subject to modification, we believe that current estimates of reductions
in impacted asset lives is reasonable and subject to ongoing analysis as
deployment of fiber optic lines continues.
Computer Software Costs
We capitalize the cost of internal-use network and non-network software
which has a useful life in excess of one year in accordance with Statement
of Position (SOP) No. 98-1, “Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use.” Subsequent additions,
modifications or upgrades to internal-use network and non-network soft-
ware are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and
training costs are expensed in the period in which they are incurred. Also,
we capitalize interest associated with the development of non-network
internal-use software. Capitalized non-network internal-use software
costs are amortized using the straight-line method over a period of 2 to 7
years and are included in Other Intangible Assets, Net in our consolidated
balance sheets. For a discussion of our impairment policy for capital-
ized software costs under SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS No. 144), see “Goodwill and Other
Intangible Assets” below. Also, see Note 9 for additional detail of internal-
use non-network software reflected in our consolidated balance sheets.
Goodwill and Other Intangible Assets
Goodwill
Goodwill is the excess of the acquisition cost of businesses over the
fair value of the identifiable net assets acquired. Impairment testing
for goodwill is performed annually or more frequently if indications of
impairment exist under the provisions of SFAS No.142, Goodwill and Other
Intangible Assets (SFAS No. 142). The impairment test for goodwill uses a
two-step approach, which is performed at the reporting unit level. We
have determined that in our case, the reporting units are our operating
segments since that is the lowest level at which discrete, reliable finan-
cial and cash flow information is available. Step one compares the fair
value of the reporting unit (calculated using a market approach and a
discounted cash flow method) to its carrying value. If the carrying value
exceeds the fair value, there is a potential impairment and step two must
be performed. Step two compares the carrying value of the reporting
45
Notes to Consolidated Financial Statements continued
unit’s goodwill to its implied fair value (i.e., fair value of reporting unit
less the fair value of the unit’s assets and liabilities, including identifiable
intangible assets). If the carrying value of goodwill exceeds its implied fair
value, the excess is required to be recorded as an impairment.
Intangible Assets Not Subject to Amortization
A significant portion of our intangible assets are Domestic Wireless
licenses that provide our wireless operations with the exclusive right to
utilize designated radio frequency spectrum to provide cellular com-
munication services. While licenses are issued for only a fixed time,
generally ten years, such licenses are subject to renewal by the Federal
Communications Commission (FCC). Renewals of licenses have occurred
routinely and at nominal cost. Moreover, we have determined that there
are currently no legal, regulatory, contractual, competitive, economic or
other factors that limit the useful life of our wireless licenses. As a result,
we treat the wireless licenses as an indefinite-lived intangible asset under
the provisions of SFAS No. 142. We reevaluate the useful life determina-
tion for wireless licenses each reporting period to determine whether
events and circumstances continue to support an indefinite useful life.
We test our Domestic Wireless licenses for impairment annually or
more frequently if indications of impairment exist. We use a direct value
approach in performing our annual impairment test. The direct value
approach determines fair value using estimates of future cash flows asso-
ciated specifically with the licenses. If the fair value of the aggregated
wireless licenses is less than the aggregated carrying amount of the
licenses, an impairment is recognized.
Intangible Assets Subject to Amortization
Our intangible assets that do not have indefinite lives (primarily cus-
tomer lists and non-network internal-use software) are amortized over
their useful lives and reviewed for impairment in accordance with SFAS
No. 144, whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. If any indications
were present, we would test for recoverability by comparing the carrying
amount of the asset to the net undiscounted cash flows expected to be
generated from the asset. If those net undiscounted cash flows do not
exceed the carrying amount (i.e., the asset is not recoverable), we would
perform the next step which is to determine the fair value of the asset
and record an impairment, if any. We reevaluate the useful life determi-
nations for these intangible assets each reporting period to determine
whether events and circumstances warrant a revision in their remaining
useful lives.
For information related to the carrying amount of goodwill, other
intangibles and wireless licenses by segment as well as the major
components and average useful lives of our other acquired intangible
assets, see Note 9.
Income Taxes
Verizon and its domestic subsidiaries file a consolidated federal income
tax return.
Deferred income taxes are provided for temporary differences in the
bases between financial statement and income tax assets and liabilities.
Deferred income taxes are recalculated annually at rates then in effect.
We record valuation allowances to reduce our deferred tax assets to the
amount that is more likely than not to be realized.
Effective January 1, 2007, we adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48), which requires the
use of a two-step approach for recognizing and measuring tax benefits
taken or expected to be taken in a tax return and disclosures regarding
uncertainties in income tax positions. The first step is recognition: we
determine whether it is more likely than not that a tax position will be
46
sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. In
evaluating whether a tax position has met the more-likely-than-not rec-
ognition threshold, we presume that the position will be examined by
the appropriate taxing authority that has full knowledge of all relevant
information. The second step is measurement: a tax position that meets
the more-likely-than-not recognition threshold is measured to determine
the amount of benefit to recognize in the financial statements. The tax
position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Differences
between tax positions taken in a tax return and amounts recognized in
the financial statements will generally result in one or more of the fol-
lowing: an increase in a liability for income taxes payable, a reduction of
an income tax refund receivable, a reduction in a deferred tax asset, or an
increase in a deferred tax liability.
As a result of the implementation of FIN 48, we recorded adjustments
to liabilities that resulted in a net $79 million increase in the liability for
unrecognized tax benefits with an offsetting reduction to reinvested
earnings as of January 1, 2007. The implementation of FIN 48 also resulted
in adjustments to prior acquisitions accounted for under purchase
accounting, resulting in a reduction in the liability for tax contingencies
in the amount of $635 million and corresponding reductions to goodwill
and wireless licenses of $100 million and $535 million, respectively. The
implementation impact included a reduction in deferred income taxes of
approximately $3 billion, offset with a similar increase in other liabilities
as of January 1, 2007.
FASB Staff Position FAS 13-2, Accounting for a Change or Projected Change in
the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged
Lease Transaction (FSP 13-2), requires that changes in the projected timing
of income tax cash flows generated by a leveraged lease transaction be
recognized as a gain or loss in the year in which the change occurs. We
adopted FSP 13-2 effective January 1, 2007. The cumulative effect of ini-
tially adopting FSP 13-2 was a reduction to reinvested earnings of $55
million, after-tax.
Stock-Based Compensation
Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based
Payment (SFAS No. 123(R)) utilizing the modified prospective method.
SFAS No. 123(R) requires the measurement of stock-based compensa-
tion expense based on the fair value of the award on the date of grant.
Under the modified prospective method, the provisions of SFAS No.
123(R) apply to all awards granted or modified after the date of adoption.
The impact to Verizon resulted from the Domestic Wireless segment, for
which we recorded a $42 million cumulative effect of accounting change
as of January 1, 2006, net of taxes and after minority interest, to recog-
nize the effect of initially measuring the outstanding liability for Value
Appreciation Rights (VARs) granted to Domestic Wireless employees at
fair value utilizing a Black-Scholes model.
Foreign Currency Translation
The functional currency for all of our foreign operations is generally the
local currency. For these foreign entities, we translate income statement
amounts at average exchange rates for the period, and we translate assets
and liabilities at end-of-period exchange rates. We record these translation
adjustments in Accumulated Other Comprehensive Loss, a separate com-
ponent of Shareowners’ Investment, in our consolidated balance sheets.
We report exchange gains and losses on intercompany foreign currency
transactions of a long-term nature in Accumulated Other Comprehensive
Loss. Other exchange gains and losses are reported in income.
Notes to Consolidated Financial Statements continued
Employee Benefit Plans
Pension and postretirement health care and life insurance benefits earned
during the year as well as interest on projected benefit obligations are
accrued currently. Prior service costs and credits resulting from changes
in plan benefits are amortized over the average remaining service period
of the employees expected to receive benefits. Expected return on plan
assets is determined by applying the return on assets assumption to the
market-related value of assets.
As of July 1, 2006, Verizon management employees no longer earn
pension benefits or earn service towards the company retiree medical
subsidy (see Note 15).
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans—an amendment
of FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158). Effective
December 31, 2006, SFAS No. 158 requires the recognition of a defined
benefit postretirement plan’s funded status as either an asset or liability
on the balance sheet. SFAS No. 158 also requires the immediate recog-
nition of the unrecognized actuarial gains and losses and prior service
costs and credits that arise during the period as a component of other
accumulated comprehensive income, net of applicable income taxes.
Additionally, the fair value of plan assets must be determined as of the
Company’s year-end. We adopted SFAS No. 158 effective December
31, 2006, which resulted in a net decrease to shareowners’ investment
of $7,409 million. This included a net increase in pension obligations of
$2,007 million, an increase in Other Postretirement Benefits Obligations
of $10,828 million and an increase in Other Employee Benefit Obligations
of $31 million, offset by an increase in deferred taxes of $5,457 million.
Derivative Instruments
We have entered into derivative transactions to manage our exposure to
fluctuations in foreign currency exchange rates, interest rates and com-
modity prices. We employ risk management strategies using a variety
of derivatives including foreign currency forwards and collars, equity
options, interest rate and commodity swap agreements and interest rate
locks. We do not hold derivatives for trading purposes.
In accordance with SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133) and related amendments and inter-
pretations, 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 ineffec-
tive 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 por-
tions of cash flow hedges are reported in other comprehensive income
(loss) and recognized in earnings when the hedged item is recognized
in earnings.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations
(Revised), (SFAS No. 141(R)), to replace SFAS No. 141, Business Combinations.
SFAS No. 141(R) requires the use of the acquisition method of accounting,
defines the acquirer, establishes the acquisition date and broadens the
scope to all transactions and other events in which one entity obtains
control over one or more other businesses. This statement is effective
for business combinations or transactions entered into for fiscal years
beginning on or after December 15, 2008. We are still evaluating the
impact of SFAS No. 141(R), however, the adoption of this statement is not
expected to have a material impact on our financial position or results
of operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements – an amendment of ARB No. 51, (SFAS
No. 160). SFAS No. 160 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the retained interest
and gain or loss when a subsidiary is deconsolidated. This statement is
effective for financial statements issued for fiscal years beginning on or
after December 15, 2008. Upon the initial adoption of this statement we
will change the classification and presentation of Noncontrolling Interest
in our financial statements, which we currently refer to as minority
interest. We are still evaluating the impact SFAS No. 160 will have, but
we do not expect a material impact on our financial position or results
of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of SFAS
115 (SFAS No. 159), which permits but does not require us to measure
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected are
reported in earnings. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. As we will not
elect to fair value any of our financial instruments under the provisions of
SFAS No.159, the adoption of this statement effective January 1, 2008 will
not have any impact on our financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles and
establishes a hierarchy that categorizes and prioritizes the sources to be
used to estimate fair value. SFAS No. 157 also expands financial state-
ment disclosures about fair value measurements. On February 12, 2008,
the FASB issued FASB Staff Position (FSP) 157-2 which delays the effective
date of SFAS No. 157 for one year, for all nonfinancial assets and non-
financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually).
SFAS No. 157 and FSP 157-2 are effective for financial statements issued
for fiscal years beginning after November 15, 2007. We will elect a partial
deferral of SFAS No. 157 under the provisions of FSP 157-2 related to the
measurement of fair value used when evaluating goodwill, other intan-
gible assets, wireless licenses and other long-lived assets for impairment
and valuing asset retirement obligations and liabilities for exit or disposal
activities. The impact of partially adopting SFAS No. 157 effective January
1, 2008 will not be material to our financial statements.
In June 2006, the Emerging Issues Task Force (EITF) reached a consensus
on EITF No. 06-3, How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (EITF
No. 06-3). EITF No. 06-3 permits that such taxes may be presented on
either a gross basis or a net basis as long as that presentation is used
consistently. The adoption of EITF No. 06-3 on January 1, 2007 did not
impact our financial statements. We present the taxes within the scope
of EITF No. 06-3 on a net basis.
47
Notes to Consolidated Financial Statements continued
NOTE 2
DISCONTINUED OPERATIONS , ExTRAORDINARY ITEM AND
OThER DISPOSITIONS
Discontinued Operations
Telecomunicaciones de Puerto Rico, Inc.
On March 30, 2007, we completed the sale of our 52% interest in
Telecomunicaciones de Puerto Rico, Inc. (TELPRI) and received gross pro-
ceeds of approximately $980 million. The sale resulted in a pretax gain of
$120 million ($70 million after-tax). Verizon contributed $100 million ($65
million after-tax) of the proceeds to the Verizon Foundation.
Verizon Dominicana C. por A.
On December 1, 2006, we closed the sale of Verizon Dominicana C. por
A (Verizon Dominicana). The transaction resulted in net pretax cash
proceeds of $2,042 million, net of a purchase price adjustment of $373
million. The U.S. taxes that became payable and were recognized at the
time the transaction closed exceeded the $30 million pretax gain on the
sale resulting in an overall after-tax loss of $541 million.
Verizon Information Services
In October, 2006, we announced our intention to spin-off our domestic
print and Internet yellow pages directories publishing operations, which
have been organized into a newly formed company known as Idearc
Inc. On October 18, 2006, the Verizon Board of Directors declared a divi-
dend consisting of 1 share of the newly formed company for each 20
shares of Verizon owned. In making its determination to effect the spin-
off, Verizon’s Board of Directors considered, among other things, that the
spin-off may allow each company to separately focus on its core busi-
ness, which may facilitate the potential expansion and growth of Verizon
and the newly formed company, and allow each company to determine
its own capital structure.
On November 17, 2006, we completed the spin-off of our domestic print
and Internet yellow pages directories business. Cash was paid for frac-
tional shares. The distribution of common stock of the newly formed
company to our shareowners was considered a tax free transaction for
us and for our shareowners, except for the cash payments for fractional
shares which were generally taxable.
At the time of the spin-off, the exercise price and number of shares of
Verizon common stock underlying options to purchase shares of Verizon
common stock, restricted stock units (RSU’s) and performance stock units
(PSU’s) were adjusted pursuant to the terms of the applicable Verizon
equity incentive plans, taking into account the change in the value of
Verizon common stock as a result of the spin-off.
In connection with the spin-off, Verizon received approximately $2 bil-
lion in cash from the proceeds of loans under a term loan facility of the
newly formed company and transferred to the newly formed company
debt obligations in the aggregate principal amount of approximately
$7.1 billion thereby reducing Verizon’s outstanding debt at that time. We
incurred pretax charges of approximately $117 million ($101 million after-
tax), including debt retirement costs, costs associated with accumulated
vested benefits of employees of the newly formed company, investment
banking fees and other transaction costs related to the spin-off, which
are included in discontinued operations.
In accordance with SFAS No. 144 we have classified TELPRI, Verizon
Dominicana and our former domestic print and Internet yellow page
directories publishing operations as discontinued operations in the con-
solidated financial statements for all periods presented through the date
of the spin-off or divestiture.
48
The assets and liabilities of TELPRI are disclosed as current assets held for
sale and current liabilities related to assets held for sale in the consoli-
dated balance sheet as of December 31, 2006. Additional details related
to those assets and liabilities were as follows:
At December 31,
Current assets
Plant, property and equipment, net
Other non-current assets
Total assets
Current liabilities
Long-term debt
Other non-current liabilities
Total liabilities
(dollars in millions)
2006
$
$
$
$
303
1,436
853
2,592
181
575
1,398
2,154
Related to the assets and liabilities above was $241 million included as
Accumulated Other Comprehensive Loss in the consolidated balance
sheet as of December 31, 2006.
Income from discontinued operations, net of tax, presented in the con-
solidated statements of income included the following:
Year Ended December 31,
Operating revenues
Income before provision for income taxes
Provision for income taxes
Income from discontinued operations,
net of tax
2007
306
185
(43)
142
$
$
$
$
$
$
(dollars in millions)
2005
2006
5,077
2,041
(1,282)
$
$
5,595
2,159
(789)
759
$
1,370
Extraordinary Item
Compañía Anónima Nacional Teléfonos de Venezuela (CANTV)
In January 2007, the Bolivarian Republic of Venezuela (the Republic)
declared its intent to nationalize certain companies, including CANTV. On
February 12, 2007, we entered into a Memorandum of Understanding
(MOU) with the Republic, which provided that the Republic offer to pur-
chase all of the equity securities of CANTV, including our 28.5% interest,
through public tender offers in Venezuela and the United States. Under
the terms of the MOU, the prices in the tender offers would be adjusted
downward to reflect any dividends declared and paid subsequent to
February 12, 2007. During the second quarter of 2007, the tender offers
were completed and Verizon received an aggregate amount of approxi-
mately $572 million, which included $476 million from the tender offers
as well as $96 million of dividends declared and paid subsequent to the
MOU. Based upon our investment balance in CANTV, we recorded an
extraordinary loss of $131 million, including taxes of $38 million.
Other Dispositions
Telephone Access Lines Spin-off
On January 16, 2007, we announced a definitive agreement with FairPoint
Communications, Inc. (FairPoint) that will result in Verizon establishing
a separate entity for its local exchange and related business assets in
Maine, New hampshire and Vermont, spinning off that new entity into
a newly formed company, known as Northern New England Spinco Inc.
(Spinco), to Verizon’s shareowners, and immediately merging it with and
into FairPoint. These local exchange and business assets are included
in Verizon’s continuing operations. It is anticipated that as long as all
conditions are satisfied and assuming completion of the related financing
transactions, both the spin-off of Spinco to Verizon shareowners and the
merger of Spinco with FairPoint will occur on March 31, 2008. Verizon’s
Notes to Consolidated Financial Statements continued
Board of Directors established a record date of March 7, 2008, and a closing
date of March 31, 2008, for the proposed spin-off of shares of Spinco to
Verizon shareowners.
NOTE 3
OThER ITEMS
Other Tax Matters
During 2005, we recorded tax benefits of $336 million in connection with
the utilization of prior year loss carry forwards. As a result of the capital
gain realized in 2005 in connection with the sale of our hawaii busi-
nesses, we recorded a tax benefit of $242 million related to the capital
losses incurred in previous years.
Also during 2005, we recorded a net tax provision of $206 million related
to the repatriation of foreign earnings under the provisions of the
American Jobs Creation Act of 2004, for two of our foreign investments.
Facility and Employee-Related Items
During the fourth quarter of 2007, we recorded a charge of $772 million
($477 million after-tax) primarily in connection with workforce reductions
of 9,000 employees and related charges, 4,000 of whom were terminated
in the fourth quarter of 2007 with the remaining reductions expected to
occur throughout 2008 (see Note 15). In addition, we adjusted our actu-
arial assumptions for severance to align with future expectations.
During 2006, we recorded net pretax severance, pension and benefits
charges of $425 million ($258 million after-tax). These charges included
net pretax pension settlement losses of $56 million ($26 million after-
tax) related to employees that received lump-sum distributions primarily
resulting from our separation plans. These charges were recorded in
accordance with SFAS No. 88, Employers’ Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination (SFAS No.
88), which requires that settlement losses be recorded once prescribed
payment thresholds have been reached. Also included are pretax charges
of $369 million ($228 million after-tax) for employee severance and sev-
erance-related costs in connection with the involuntary separation of
approximately 4,100 employees. In addition, during 2005 we recorded
a charge of $59 million ($36 million after-tax) associated with employee
severance costs and severance-related activities in connection with a vol-
untary separation program for surplus union-represented employees.
During 2006, we recorded pretax charges of $184 million ($118 million
after-tax) in connection with the continued relocation of employees and
business operations to Verizon Center located in Basking Ridge, New
Jersey. During 2005, we recorded a net pretax gain of $18 million ($8 mil-
lion after-tax) in connection with this relocation, including a pretax gain
of $120 million ($72 million after-tax) related to the sale of a New York City
office building, partially offset by a pretax charge of $102 million ($64 mil-
lion after-tax) primarily associated with relocation, employee severance
and related activities.
During 2007, we recorded pretax charges of $84 million ($80 million
after-tax) for costs incurred related to certain network and work center
re-arrangements, the isolation and extraction of related business informa-
tion, and other activities to separate the wireline facilities and operations
in Maine, New hampshire and Vermont from Verizon at the closing of the
transaction, as well as professional advisory and legal fees in connection
with this transaction.
Upon the closing of the transaction, Verizon shareowners will own approx-
imately 60 percent of the new company, and FairPoint shareowners will
own approximately 40 percent. Verizon Communications will not receive
any shares in FairPoint as a result of the transaction. In connection with
the merger, Verizon shareowners will receive one share of FairPoint stock
for approximately every 53 shares of Verizon stock held as of the record
date. The proposal relating to the merger was approved by the FairPoint
shareowners in August 2007. Both the spin-off and merger are expected
to qualify as tax-free transactions, except to the extent that cash is paid to
Verizon shareowners in lieu of fractional shares.
Based upon the number of shares (as adjusted) and price of FairPoint
common stock (NYSE: FRP) on the date of the announcement of the
merger, the estimated total value to be received by Verizon and its shar-
eowners in exchange for these operations was approximately $2,715
million. This consisted of (a) approximately $1,015 million of FairPoint
common stock that was to be received by Verizon shareowners in the
merger, and (b) $1,700 million in value that was to be received by Verizon
through a combination of cash distributions to Verizon and debt securi-
ties issued to Verizon prior to the spin-off. Verizon currently intends to
exchange these newly issued debt securities for certain debt that was
previously issued by Verizon, which would have the effect of reducing
Verizon’s then-outstanding debt. The actual total value to be received
by Verizon and its shareowners will be determined in part based on the
number of shares (as adjusted) and price of FairPoint common stock on
the date of the closing of the merger. This value is now expected to be
less than $2,715 million because (a) FairPoint expects to issue approxi-
mately 54 million shares of common stock in the merger and the price
of FairPoint common stock has declined since the announcement of the
merger (the closing price of FairPoint common stock on the last business
day prior to the announcement of the merger was $18.54 per share) and
(b) in connection with the regulatory approval process, Verizon currently
expects to make additional contributions of approximately $320 million
to the entity that will merge with FairPoint.
Verizon Hawaii Inc.
During 2005, we sold our wireline and directory businesses in hawaii,
including Verizon hawaii Inc. which operated approximately 700,000
switched access lines, as well as the services and assets of Verizon Long
Distance, Verizon Online, Verizon Information Services and Verizon Select
Services Inc. in hawaii, to an affiliate of The Carlyle Group for $1,326 mil-
lion in cash proceeds. In connection with this sale, we recorded a net
pretax gain of $530 million ($336 million after-tax).
49
Notes to Consolidated Financial Statements continued
During 2005, we reported a net pretax charge of $98 million ($59 million
after-tax) related to the restructuring of the Verizon management retire-
ment benefit plans. This pretax charge was recorded in accordance with
SFAS No. 88, and SFAS No. 106, Employers’ Accounting for the Postretirement
Benefits Other Than Pensions (SFAS No. 106) and included the unamortized
cost of prior pension enhancements of $430 million, offset partially by a
pretax curtailment gain of $332 million related to retiree medical ben-
efits. In connection with this restructuring, management employees: no
longer earn pension benefits or earn service towards the company retiree
medical subsidy after June, 2006; received an 18-month enhancement
of the value of their pension and retiree medical subsidy; and receive a
higher savings plan matching contribution.
Other Items
In 2006, we recorded pretax charges of $26 million ($16 million after-tax)
resulting from the extinguishment of debt assumed in connection with
the completion of the MCI merger (see Note 8).
During 2005, we recorded pretax charges of $139 million ($133 million
after-tax) including a pretax impairment charge of $125 million per-
taining to aircraft leased to airlines involved in bankruptcy proceedings
and a pretax charge of $14 million ($8 million after-tax) in connection
with the early extinguishment of debt.
NOTE 4
MARkETABLE SECURITIES AND OThER INVESTMENTS
We have investments in marketable securities which are considered
“available-for-sale” under SFAS No. 115. These investments have been
included in our consolidated balance sheets in Short-Term Investments,
Investments in Unconsolidated Businesses and Other Assets.
Under SFAS No. 115, available-for-sale securities are required to be carried
at their fair value, with unrealized gains and losses (net of income taxes)
that are considered temporary in nature recorded in Accumulated Other
Comprehensive Loss. The fair values of our investments in marketable
securities are determined based on market quotations. We continually
evaluate our investments in marketable securities for impairment due to
declines in market value considered to be other than temporary. That
evaluation includes, in addition to persistent, declining stock prices,
general economic and company-specific evaluations. In the event of a
determination that a decline in market value is other than temporary,
a charge to earnings is recorded in Other Income and (Expense), Net in
the consolidated statements of income for all or a portion of the unreal-
ized loss, and a new cost basis in the investment is established. As of
December 31, 2007, no impairments were determined to exist.
The following table shows certain summarized information related to our
investments in marketable securities:
(dollars in millions)
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Cost
Fair
Value
At December 31, 2007
Short-term investments
Investments in unconsolidated
businesses (Note 6)
Other assets
At December 31, 2006
Short-term investments
Investments in unconsolidated
businesses (Note 6)
Other assets
$
497
$
21
$
286
661
$ 1,444
$
616
259
594
1,469
$
$
$
$
42
31
94
28
38
31
97
$
$
$
–
–
–
–
–
$
518
328
692
$ 1,538
$
644
(2)
–
(2)
$
295
625
1,564
Our short-term investments are primarily bonds and mutual funds.
Certain other investments in securities that we hold are not adjusted to
market values because those values are not readily determinable and/
or the securities are not marketable. We do, however, adjust the carrying
values of these securities in situations where we believe declines in value
below cost were other than temporary. The carrying values for invest-
ments not adjusted to market value were $15 million at December 31,
2007 and $12 million at December 31, 2006.
50
Notes to Consolidated Financial Statements continued
NOTE 5
PLANT, PROPERT Y AND EqUIPMENT
The following table displays the details of plant, property and equipment,
which is stated at cost:
At December 31,
Land
Buildings and equipment
Network equipment
Furniture, office and data processing equipment
Work in progress
Leasehold improvements
Other
Less accumulated depreciation
Total
NOTE 6
(dollars in millions)
2006
2007
$
839
19,734
173,654
11,912
1,988
3,612
2,255
213,994
128,700
$ 85,294
$
959
19,207
163,580
12,789
2,315
3,061
2,198
204,109
121,753
$ 82,356
INVESTMENTS IN UNCONSOLIDATED BUSINESSES
Our investments in unconsolidated businesses are comprised of the
following:
At December 31,
Ownership
2007
Investment
(dollars in millions)
2006
Investment
Ownership
Equity Investees
Vodafone Omnitel
CANTV
Other
Total equity investees
Cost Investees
Total investments
in unconsolidated
businesses
–
Various
23.1% $ 2,313
–
744
3,057
23.1% $
28.5
Various
Various
315
Various
3,624
230
744
4,598
270
$ 3,372
$
4,868
Dividends and repatriations of foreign earnings received from these
investees amounted to $2,571 million in 2007, $42 million in 2006 and
$2,335 million in 2005.
Equity Investees
Vodafone Omnitel
Vodafone Omnitel is the second largest wireless communications
company in Italy. At December 31, 2007 and 2006, our investment in
Vodafone Omnitel included goodwill of $1,154 million and $1,044 million,
respectively.
In December 2007, Verizon received a net distribution from Vodafone
Omnitel of approximately $2.1 billion and we anticipate that we may
receive an additional distribution from Vodafone Omnitel within the
next twelve months. As a result, we recorded $610 million of foreign
and domestic taxes and expenses specifically relating to our share of
Vodafone Omnitel’s distributable earnings. During 2005, we repatriated
approximately $2.2 billion of Vodafone Omnitel’s earnings through the
repurchase of issued and outstanding shares of its equity. Vodafone
Omnitel’s owners, Verizon and Vodafone Group Plc ( Vodafone),
participated on a pro rata basis; consequently, Verizon’s ownership
interest after the share repurchase remained at 23.1%.
CANTV
Verizon sold its interest in CANTV in 2007 (see Note 2).
Other Equity Investees
Verizon has limited partnership investments in entities that invest in
affordable housing projects, for which Verizon provides funding as a
limited partner and receives tax deductions and tax credits based on its
partnership interests. At December 31, 2007 and 2006, Verizon had equity
investments in these partnerships of $637 million and $659 million, respec-
tively. Verizon currently adjusts the carrying value of these investments for
any losses incurred by the limited partnerships through earnings.
The remaining investments include wireless partnerships in the U.S. and
other smaller domestic and international investments.
Cost Investees
Some of our cost investments are carried at their current market value.
Other cost investments are carried at their original cost, except in cases
where we have determined that a decline in the estimated market value
of an investment is other than temporary as described in Note 4. Our cost
investments include a variety of domestic and international investments
primarily involved in providing communication services.
NOTE 7
MINORIT Y INTEREST
Minority interests in equity of subsidiaries were as follows:
At December 31,
Minority interests in consolidated subsidiaries:
Wireless joint venture
Cellular partnerships and other
(dollars in millions)
2006
2007
$ 31,782
506
$ 32,288
$ 27,854
483
$ 28,337
Wireless Joint Venture
The wireless joint venture was formed in April 2000 in connection with
the combination of the U.S. wireless operations and interests of Verizon
and Vodafone. The wireless joint venture operates as Verizon Wireless.
Verizon owns a controlling 55% interest in Verizon Wireless and Vodafone
owns the remaining 45%.
Under the terms of an investment agreement, Vodafone had the right
to require Verizon Wireless to purchase up to an aggregate of $20 billion
worth of Vodafone’s interest in Verizon Wireless at designated times (put
windows) at its then fair market value, not to exceed $10 billion in any
one put window. The last of these put windows opened on June 10 and
closed on August 9 in 2007. Vodafone did not exercise its right during this
period and no longer has any right to require the purchase of any of its
interest in Verizon Wireless.
Cellular Partnerships and Other
In August 2002, Verizon Wireless and Price Communications Corp. (Price)
combined Price’s wireless business with a portion of Verizon Wireless. The
resulting limited partnership, Verizon Wireless of the East LP (VZ East),
is controlled and managed by Verizon Wireless. In exchange for its con-
tributed assets, Price received a limited partnership interest in VZ East
which was exchangeable into the common stock of Verizon Wireless if
an initial public offering of that stock occurred, or into the common stock
of Verizon on the fourth anniversary of the asset contribution date. On
August 15, 2006, Verizon delivered 29.5 million shares of newly-issued
Verizon common stock to Price valued at $1,007 million in exchange for
Price’s limited partnership interest in VZ East. As a result of acquiring Price’s
limited partnership interest, Verizon recorded goodwill of $345 million in
the third quarter of 2006 attributable to its Domestic Wireless segment.
51
Notes to Consolidated Financial Statements continued
The following table summarizes the allocation of the cost of the merger
to the assets acquired, including cash of $2,361 million, and liabilities
assumed as of the close of the merger.
(dollars in millions)
Assets acquired
Current assets
Property, plant & equipment
Intangible assets subject to amortization
Customer relationships
Rights of way and other
Deferred income taxes and other assets
Goodwill
Total assets acquired
Liabilities assumed
Current liabilities
Long-term debt
Deferred income taxes and other non-current liabilities
Total liabilities assumed
Purchase price
$
6,001
6,453
1,162
176
1,995
5,085
$ 20,872
$
$
6,093
6,169
1,720
13,982
6,890
The goodwill resulting from the merger with MCI is included in our
Wireline segment, which includes the operations of the former MCI. The
customer relationships are being amortized on a straight-line basis over
3-8 years based on whether the relationship is with a consumer or a busi-
ness customer since this correlates to the pattern in which the economic
benefits are expected to be realized.
We recorded certain severance and severance-related costs and contract
termination costs in connection with the merger, pursuant to EITF Issue
No. 95-3, Recognition of Liabilities in Connection with a Purchase Business
Combination. The following table summarizes the activity related to these
obligations during 2007:
At December 31,
2006
(dollars in millions)
At December 31,
2007
Payments
Severance costs and contract
termination costs
$ 376
$ (340)
$
36
The remaining contract termination costs at December 31, 2007 are
expected to be paid over the remaining contract periods through 2008.
In 2007 and 2006, we recorded pretax charges of $178 million ($112
million after-tax) and $232 million ($146 million after-tax), respectively,
primarily associated with the MCI acquisition that were comprised of
advertising and other costs related to re-branding initiatives, facility exit
costs and systems integration activities.
NOTE 8
MERGER AND ACqUISITIONS
Completion of Merger with MCI
On January 6, 2006, after receiving the required state, federal and inter-
national regulatory approvals, Verizon completed the acquisition of 100%
of the outstanding common stock of MCI, Inc. (MCI) for a combination
of Verizon common shares and cash. MCI was a global communications
company that provided Internet, data and voice communication services
to businesses and government entities throughout the world and con-
sumers in the United States.
The merger was accounted for using the purchase method in accordance
with SFAS No. 141, and the aggregate transaction value was $6,890 mil-
lion, consisting of $5,829 million of cash and common stock issued at
closing, $973 million of consideration for the shares acquired from entities
controlled by Carlos Slim helú, net of the portion of the special dividend
paid by MCI that was treated as a return of our investment, and closing
and other direct merger-related costs. The number of shares issued was
based on the “Average Parent Stock Price,” as defined in the merger agree-
ment. The consolidated financial statements include the results of MCI’s
operations from the date of the close of the merger.
Allocation of the cost of the merger
In accordance with SFAS No. 141, the cost of the merger was allocated
to the assets acquired and liabilities assumed based on their fair values
as of the close of the merger, with the amounts exceeding the fair value
being recorded as goodwill. The process to identify and record the fair
value of assets acquired and liabilities assumed included an analysis of
the acquired fixed assets, including real and personal property; various
contracts, including leases, contractual commitments, and other busi-
ness contracts; customer relationships; investments; and contingencies.
The fair values of the assets acquired and liabilities assumed were deter-
mined using one or more of three valuation approaches: market, income
and cost. The selection of a particular method for a given asset depended
on the reliability of available data and the nature of the asset, among
other considerations. The market approach, which indicates value for a
subject asset based on available market pricing for comparable assets,
was utilized for certain acquired real property and investments. The
income approach, which indicates value for a subject asset based on the
present value of cash flow projected to be generated by the asset, was
used for certain intangible assets such as customer relationships, as well
as for favorable/unfavorable contracts. Projected cash flow is discounted
at a required rate of return that reflects the relative risk of achieving the
cash flow and the time value of money. Projected cash flows for each
asset considered multiple factors, including current revenue from existing
customers; distinct analysis of expected price, volume, and attrition
trends; reasonable contract renewal assumptions from the perspective of
a marketplace participant; expected profit margins giving consideration
to marketplace synergies; and required returns to contributory assets. The
cost approach, which estimates value by determining the current cost of
replacing an asset with another of equivalent economic utility, was used
for the majority of personal property. The cost to replace a given asset
reflects the estimated reproduction or replacement cost for the property,
less an allowance for loss in value due to depreciation or obsolescence,
with specific consideration given to economic obsolescence if indicated.
52
Notes to Consolidated Financial Statements continued
Rural Cellular Corporation
In late July 2007, Verizon Wireless announced that it had entered into an
agreement to acquire Rural Cellular Corporation (Rural Cellular), for $45
per share in cash (or approximately $757 million). As a result of the acqui-
sition, Verizon Wireless will assume Rural Cellular’s outstanding debt. The
total value of the transaction is approximately $2.7 billion. Rural Cellular
has more than 700,000 customers in markets adjacent to Verizon Wireless’s
existing customer service areas. Rural Cellular’s networks are located in
the states of Maine, Vermont, New hampshire, New York, Massachusetts,
Alabama, Mississippi, Minnesota, North Dakota, South Dakota, Wisconsin,
kansas, Idaho, Washington, and Oregon. Rural Cellular’s shareholders
approved the transaction on October 4, 2007. The acquisition, which
is subject to regulatory approvals, is expected to close in the first half
of 2008.
In a related transaction, on December 3, 2007, Verizon Wireless signed a
definitive exchange agreement with AT&T. Under the terms of the agree-
ment, Verizon Wireless will receive cellular operating markets in Madison
and Mason, kY, and 10Mhz PCS licenses in Las Vegas, NV; Buffalo, NY;
Sunbury-Shamokin and Erie, PA; and Youngstown, Oh. Verizon Wireless
will also receive minority interests held by AT&T in three entities in which
Verizon Wireless also holds an interest plus a cash payment. In exchange,
Verizon Wireless will transfer to AT&T six cellular operating markets in
Burlington, Franklin and the northern portion of Addison, VT; Franklin, NY;
and Okanogan and Ferry, WA; and a cellular license for the kentucky-6
market. The operating markets Verizon Wireless is exchanging are among
those it is to acquire from Rural Cellular. The exchange with AT&T is subject
to regulatory approvals and is expected to close in the first half of 2008.
Other Acquisitions
In July 2007, Verizon acquired a security-services firm for $435 million,
resulting in goodwill of $343 million and other intangible assets of $81
million. This acquisition was made to enhance our managed information
security services to large business and government customers world-
wide. This acquisition was integrated into the Wireline segment.
On November 29, 2006, we were granted thirteen 20Mhz licenses we
won in an FCC auction that concluded on September 18, 2006. We paid a
total of $2,809 million for the licenses, which cover a population of nearly
200 million.
Pro Forma Information
The following unaudited pro forma consolidated results of operations
assume that the MCI merger was completed as of January 1 for the
periods shown below:
Years Ended December 31,
(dollars in millions, except per share amounts)
2005
2006
Operating revenues
Income before discontinued operations and cumulative
effect of accounting change
Net income
$ 88,409
$ 85,781
5,480
6,197
6,724
8,176
Basic earnings per common share:
Income before discontinued operations and cumulative
effect of accounting change
Net income
Diluted earnings per common share:
Income before discontinued operations and cumulative
effect of accounting change
Net income
1.88
2.13
1.88
2.12
2.30
2.79
2.28
2.76
The unaudited pro forma information presents the combined operating
results of Verizon and the former MCI, with the results prior to the acqui-
sition date adjusted to include the pro forma impact of: the elimination
of transactions between Verizon and the former MCI; the adjustment of
amortization of intangible assets and depreciation of fixed assets based
on the purchase price allocation; the elimination of merger expenses
incurred by the former MCI; the elimination of the loss on the early
redemption of MCI’s debt; the adjustment of interest expense reflecting
the redemption of all of MCI’s debt and the replacement of that debt
with $4 billion of new debt issued in February 2006 at Verizon’s weighted
average borrowing rate; and to reflect the impact of income taxes on the
pro forma adjustments utilizing Verizon’s statutory tax rate of 40%. The
unaudited pro forma results for 2005 include $82 million for discontinued
operations that were sold by MCI during the first quarter of 2005. The
unaudited pro forma results for 2005 include approximately $300 million
of net tax benefits resulting from tax reserve adjustments recognized by
the former MCI primarily during the third and fourth quarters of 2005,
including audit settlements and other activity.
The unaudited pro forma consolidated basic and diluted earnings per
share for 2006 and 2005 are based on the consolidated basic and diluted
weighted average shares of Verizon and the former MCI. The historical
basic and diluted weighted average shares of the former MCI were
converted for the actual number of shares issued upon the closing of
the merger.
The unaudited pro forma results are presented for illustrative purposes
only and do not reflect the realization of potential cost savings, or
any related integration costs. Certain cost savings may result from the
merger; however, there can be no assurance that these cost savings will
be achieved. Cost savings, if achieved, could result from, among other
things, the reduction of overhead expenses, including employee levels
and the elimination of duplicate facilities and capital expenditures. These
pro forma results do not purport to be indicative of the results that would
have actually been obtained if the merger occurred as of the beginning
of each of the periods presented, nor does the pro forma data intend to
be a projection of results that may be obtained in the future.
53
Notes to Consolidated Financial Statements continued
NOTE 9
GOODWILL AND OThER INTANGIBLE ASSETS
Goodwill
Changes in the carrying amount of goodwill are as follows:
(dollars in millions)
Wireline
Domestic
Wireless
Total
Balance at December 31, 2005
Acquisitions
Reclassifications and adjustments
Balance at December 31, 2006
Acquisitions
Reclassifications and adjustments
Balance at December 31, 2007
$
315
5,085
(90)
5,310
343
(753)
$ 4,900
$
$
$
$
–
345
–
345
–
–
345
$
315
5,430
(90)
5,655
343
(753)
$ 5,245
$
Reclassifications and adjustments to goodwill include the impact of
adopting FIN 48 (see Note 1) of $100 million as of January 1, 2007, as well
as to reflect revised estimated tax bases of acquired assets and liabilities
during 2007 and 2006.
Other Intangible Assets
The following table displays the details of other intangible assets:
Finite-lived intangible assets:
Customer lists (3 to 10 years)
Non-network internal-use software (2 to 7 years)
Other (1 to 25 years)
Total
Indefinite-lived intangible assets:
Wireless licenses
At December 31, 2007
Accumulated
Amortization
Gross
Amount
$
$
$
1,307
8,116
215
9,638
50,796
$
$
459
4,147
44
4,650
(dollars in millions)
At December 31, 2006
Accumulated
Amortization
Gross
Amount
$
$
$
1,278
7,777
204
9,259
50,959
$
$
270
3,826
23
4,119
Reclassifications and adjustments to wireless licenses include the impact
of adopting FIN 48 (see Note 1) of $535 million as of January 1, 2007,
partially offset by acquisitions during 2007.
Amortization expense was $1,341 million, $1,423 million, and $1,444 mil-
lion for the years ended December 31, 2007, 2006 and 2005, respectively
and is estimated to be $1,324 million in 2008, $1,116 million in 2009, $884
million in 2010, $696 million in 2011 and $472 million in 2012. Customer
lists and relationships of $3,313 million at Domestic Wireless became fully
amortized during 2006.
54
Notes to Consolidated Financial Statements continued
NOTE 10
LEASING ARRANGEMENTS
As Lessor
We are the lessor in leveraged and direct financing lease agreements for commercial aircraft and power generating facilities, which comprise the
majority of the portfolio along with telecommunications equipment, real estate property, and other equipment. These leases have remaining terms
up to 48 years as of December 31, 2007. Minimum lease payments receivable represent unpaid rentals, less principal and interest on third-party nonre-
course debt relating to leveraged lease transactions. Since we have no general liability for this debt, which holds a senior security interest in the leased
equipment and rentals, the related principal and interest have been offset against the minimum lease payments receivable in accordance with GAAP.
All recourse debt is reflected in our consolidated balance sheets. See Note 3 for information on lease impairment charges.
Finance lease receivables, which are included in Prepaid Expenses and Other and Other Assets in our consolidated balance sheets are comprised of
the following:
At December 31,
Minimum lease payments receivable
Estimated residual value
Unamortized initial direct costs
Unearned income
Allowance for doubtful accounts
Finance lease receivables, net
Current
Noncurrent
Leveraged
Leases
$ 2,959
1,434
–
(1,483)
$ 2,910
Direct
Finance
Leases
$
$
131
16
1
(25)
123
2007
Total
$ 3,090
1,450
1
(1,508)
3,033
(168)
$ 2,865
$
36
$ 2,829
Leveraged
Leases
$
$
3,311
1,637
–
(1,895)
3,053
Direct
Finance
Leases
$
$
128
18
–
(22)
124
(dollars in millions)
2006
Total
3,439
1,655
–
(1,917)
3,177
(175)
3,002
40
2,962
$
$
$
$
Accumulated deferred taxes arising from leveraged leases, which are
included in Deferred Income Taxes, amounted to $2,307 million at
December 31, 2007 and $2,674 million at December 31, 2006.
Amortization of capital leases is included in depreciation and amortiza-
tion expense in the consolidated statements of income. Capital lease
amounts included in plant, property and equipment are as follows:
The following table is a summary of the components of income from
leveraged leases:
At December 31,
Years Ended December 31,
Pretax lease income
Income tax expense/(benefit)
Investment tax credits
$
2007
78
30
4
(dollars in millions)
2005
2006
$
$
96
57
4
119
(25)
4
The future minimum lease payments to be received from noncancelable
leases, net of nonrecourse loan payments related to leveraged and direct
financing leases for the periods shown at December 31, 2007, are as fol-
lows:
Years
2008
2009
2010
2011
2012
Thereafter
Total
(dollars in millions)
Operating
Leases
Capital
Leases
$
$
127
215
136
110
110
2,392
3,090
$
$
29
23
16
10
9
16
103
Capital leases
Accumulated amortization
Total
(dollars in millions)
2006
2007
$
$
329
(153)
176
$
$
359
(160)
199
The aggregate minimum rental commitments under noncancelable
leases for the periods shown at December 31, 2007, are as follows:
Years
2008
2009
2010
2011
2012
Thereafter
Total minimum rental commitments
Less interest and executory costs
Present value of minimum lease payments
Less current installments
Long-term obligation at December 31, 2007
(dollars in millions)
Operating
Leases
Capital
Leases
$
$
1,489
1,276
1,016
756
497
1,967
7,001
$
$
75
63
59
55
38
132
422
(110)
312
(46)
266
As Lessee
We lease certain facilities and equipment for use in our operations under
both capital and operating leases. Total rent expense from continuing
operations under operating leases amounted to $1,712 million in 2007,
$1,608 million in 2006 and $1,458 million in 2005.
As of December 31, 2007, the total minimum sublease rentals to be
received in the future under noncancelable operating and capital sub-
leases were $50 million and $22 million, respectively.
55
Notes to Consolidated Financial Statements continued
NOTE 11
DEBT
Debt Maturing Within One Year
Debt maturing within one year is as follows:
At December 31,
Long-term debt maturing within one year
Commercial paper
Total debt maturing within one year
(dollars in millions)
2006
2007
$ 2,564
390
$ 2,954
$
$
4,139
3,576
7,715
The weighted average interest rate for our commercial paper at December
31, 2007 and December 31, 2006 was 4.6% and 5.3%, respectively.
Capital expenditures (primarily acquisition and construction of network
assets) are partially financed, pending long-term financing, through bank
loans and the issuance of commercial paper payable within 12 months.
At December 31, 2007, we had approximately $6.2 billion of unused bank
lines of credit (including a $6 billion three-year committed facility that
expires in September 2009 and various other facilities totaling approxi-
mately $400 million). Certain of these lines of credit contain requirements
for the payment of commitment fees.
Long-Term Debt
Outstanding long-term debt obligations are as follows:
At December 31,
Notes payable
Telephone subsidiaries – debentures
Capital lease obligations (average rate 6.8% and 8.0%)
Unamortized discount, net of premium
Total long-term debt, including current maturities
Less: debt maturing within one year
Total long-term debt
Notes Payable
In April 2007, Verizon issued $750 million of 5.50% notes due 2017, $750
million of 6.25% notes due 2037, and $500 million of floating rate notes
due 2009 resulting in cash proceeds of $1,977 million, net of discounts
and issuance costs.
In March 2007, Verizon issued $1,000 million of 13-month floating rate
exchangeable notes with an original maturity of 2008. These notes are
exchangeable periodically at the option of the note holder into similar
notes until 2017.
In February 2007, Verizon utilized a $425 million floating rate vendor
financing facility due 2013.
In February 2008, we issued $4,000 million of fixed rate notes, with
varying maturities, that resulted in cash proceeds of $3,953 million, net of
discounts and issuance costs.
56
Other subsidiaries – debentures and other
6.46 – 8.75
2008 – 2028
2,450
Employee stock ownership plan loans – NYNEx debentures
9.55
2010
Interest Rates %
Maturities
2007
(dollars in millions)
2006
4.00 – 8.23
2008 – 2037
$ 14,923
$ 14,805
4.63 – 7.00
7.15 – 7.63
7.85 – 8.75
2008 – 2033
2012 – 2032
2010 – 2031
10,580
850
1,679
11,703
1,275
1,679
2,977
92
360
(106)
32,785
(4,139)
$ 28,646
70
312
(97)
30,767
(2,564)
$ 28,203
Previously, Verizon issued $1,750 million in principal amount at matu-
rity of floating rate notes due August 15, 2007. On January 8, 2007, we
redeemed the remaining $1,580 million principal of the outstanding
floating rate notes at a redemption price equal to 100% of the principal
amount of the notes being redeemed plus accrued and unpaid interest
through the date of redemption. The total payment on the date of
redemption was approximately $1,593 million. Approximately $1,600 mil-
lion of other borrowings were redeemed during 2007.
Notes to Consolidated Financial Statements continued
Zero-Coupon Convertible Notes
The previously issued $5.4 billion zero-coupon convertible notes due
2021, which resulted in gross proceeds of approximately $3 billion, were
redeemable at the option of the holders on May 15th in each of the years
2004, 2006, 2011 and 2016. On May 15, 2004, $3,292 million of principal
amount of the notes ($1,984 million after unamortized discount) were
redeemed. On May 15, 2006, we redeemed the remaining $1,375
million accreted principal of the remaining outstanding zero-coupon
convertible principal. The total payment on the date of redemption was
$1,377 million.
Guarantees
Verizon Global Funding had guaranteed the debt obligations of GTE
Corporation (but not the debt of its subsidiary or affiliate companies) that
were issued and outstanding prior to July 1, 2003. Verizon assumed this
guarantee in connection with the 2006 merger of Verizon Global Funding
into Verizon. As of December 31, 2007, $2,450 million principal amount of
these obligations remained outstanding.
Verizon and NYNEx Corporation are the joint and several co-obligors of
the 20-Year 9.55% Debentures due 2010 previously issued by NYNEx on
March 26, 1990. As of December 31, 2007, $70 million principal amount
of this obligation remained outstanding. NYNEx and GTE no longer issue
public debt or file SEC reports.
Debt Covenants
We and our consolidated subsidiaries are in compliance with all of our
debt covenants.
Maturities of Long-Term Debt
Maturities of long-term debt outstanding at December 31, 2007 are
as follows:
Years
2008
2009
2010
2011
2012
Thereafter
(dollars in million)
$
2,564
2,966
2,908
2,671
4,291
15,367
Telephone and Other Subsidiary Debt
During the fourth quarter of 2007, Verizon redeemed previously guar-
anteed $480 million 7.0% debentures, Series B, issued by Verizon New
England Inc. due 2042 at par plus accrued and unpaid interest to the
redemption dates. During the third quarter of 2007, $150 million Verizon
Pennsylvania Inc. 7.375% notes matured and were repaid. During the
second quarter of 2007, $125 million Verizon New England Inc. 7.65%
notes and the $225 million Verizon South Inc. 6.125% notes matured and
were repaid. During the first quarter of 2007, $150 million GTE Southwest
Inc. 6.23% notes and the $275 million Verizon California Inc. 7.65% notes
matured and were repaid. In addition, we redeemed $500 million of GTE
Corporation 7.90% debentures due February 1, 2027 and $300 million
Verizon South Inc. 7.0% debentures, Series F, due 2041 at par plus accrued
and unpaid interest to the redemption dates. During the first quarter we
recorded pretax charges of $28 million ($18 million after-tax) in connec-
tion with the early extinguishments of debt.
During the second quarter of 2006, we redeemed/prepaid several debt
issuances, including: Verizon North Inc. $200 million 7.625% Series C
debentures due May 15, 2026; Verizon Northwest Inc. $175 million 7.875%
Series B debentures due June 1, 2026; Verizon South Inc. $250 million
7.5% Series D debentures due March 15, 2026; Verizon California Inc. $25
million 9.41% Series W first mortgage bonds due 2014; Verizon California
Inc. $30 million 9.44% Series x first mortgage bonds due 2015; Verizon
Northwest Inc. $3 million 9.67% Series hh first mortgage bonds due 2010
and Contel of the South Inc. $14 million 8.159% Series GG first mortgage
bonds due 2018. The gain/(loss) from these retirements was immaterial.
During the third quarter of 2005, we redeemed Verizon New England Inc.
$250 million 6.875% debentures due October 1, 2023 resulting in a pretax
charge of $10 million ($6 million after-tax) in connection with the early
extinguishment of the debt.
Redemption of Debt Assumed in Merger
On January 17, 2006, Verizon announced offers to purchase two series
of MCI senior notes, MCI $1,983 million aggregate principal amount of
6.688% Senior Notes Due 2009 and MCI $1,699 million aggregate prin-
cipal amount of 7.735% Senior Notes Due 2014, at 101% of their par
value. Due to the change in control of MCI that occurred in connection
with the merger with Verizon on January 6, 2006, Verizon was required
to make this offer to noteholders within 30 days of the closing of the
merger. Noteholders tendered $165 million of the 6.688% Senior Notes.
Separately, Verizon notified noteholders that MCI was exercising its
right to redeem both series of Senior Notes prior to maturity under the
optional redemption procedures provided in the indentures. The 6.688%
Notes were redeemed on March 1, 2006, and the 7.735% Notes were
redeemed on February 16, 2006.
In addition, on January 20, 2006, Verizon announced an offer to repur-
chase MCI $1,983 million aggregate principal amount of 5.908% Senior
Notes Due 2007 at 101% of their par value. On February 21, 2006, $1,804
million of these notes were redeemed by Verizon. Verizon satisfied and
discharged the indenture governing this series of notes shortly after the
close of the offer for those noteholders who did not accept this offer.
We recorded pretax charges of $26 million ($16 million after-tax) during
the first quarter of 2006 resulting from the extinguishment of the debt
assumed in connection with the completion of this merger.
57
Notes to Consolidated Financial Statements continued
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk con-
sist primarily of temporary cash investments, short-term and long-term
investments, trade receivables, certain notes receivable, including lease
receivables, and derivative contracts. Our policy is to deposit our tem-
porary cash investments with major financial institutions. Counterparties
to our derivative contracts are also major financial institutions. The finan-
cial institutions have all been accorded high ratings by primary rating
agencies. We limit the dollar amount of contracts entered into with any
one financial institution and monitor our counterparties’ credit ratings.
We generally do not give or receive collateral on swap agreements due
to our credit rating and those of our counterparties. While we may be
exposed to credit losses due to the nonperformance of our counterpar-
ties, we consider the risk remote and do not expect the settlement of
these transactions to have a material effect on our results of operations
or financial condition.
Fair Values of Financial Instruments
The tables that follow provide additional information about our signifi-
cant financial instruments:
Financial Instrument
Valuation Method
Cash and cash equivalents and
Carrying amounts
short-term investments
Short- and long-term debt
(excluding capital leases)
Market quotes for similar terms
and maturities or future cash flows
discounted at current rates
Cost investments in unconsolidated
businesses, derivative assets
and liabilities and notes receivable
Future cash flows discounted at
current rates, market quotes
for similar instruments or other
valuation models
At December 31,
Short- and long-term debt
Cost investments in
2007
(dollars in millions)
2006
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
$ 30,845
$ 32,380
$ 36,000
$ 37,165
unconsolidated businesses
315
315
270
270
Short- and long-term
derivative assets
Short- and long-term
derivative liabilities
61
57
61
57
31
10
31
10
NOTE 12
FINANCIAL INSTRUMENTS
Derivatives
The ongoing effect of SFAS No. 133 and related amendments and inter-
pretations on our consolidated financial statements will be determined
each period by several factors, including the specific hedging instru-
ments in place and their relationships to hedged items, as well as market
conditions at the end of each period.
Interest Rate Risk Management
We have entered into domestic interest rate swaps to achieve a targeted
mix of fixed and variable rate debt, where we principally receive fixed
rates and pay variable rates based on LIBOR. These swaps hedge against
changes in the fair value of our debt portfolio. We record the interest rate
swaps at fair value in our balance sheet as assets and liabilities and adjust
debt for the change in its fair value due to changes in interest rates.
We also enter into interest rate derivatives to limit our exposure to interest
rate changes. In accordance with the provisions of SFAS No. 133, changes
in fair value of these cash flow hedges due to interest rate fluctuations
are recognized in Accumulated Other Comprehensive Loss. Amounts
recorded to Other Comprehensive Income related to these interest rate
cash flow hedges for the years ended December 31, 2007, 2006 and 2005
were not material.
Net Investment Hedges
During 2007, we entered into foreign currency forward contracts to hedge
a portion of our net investment in Vodafone Omnitel. Changes in fair
value of these contracts due to Euro exchange rate fluctuations are rec-
ognized in Accumulated Other Comprehensive Loss and partially offset
the impact of foreign currency changes on the value of our net invest-
ment. As of December 31, 2007, Accumulated Other Comprehensive Loss
includes unrecognized losses of approximately $57 million ($37 million
after-tax) related to these hedge contracts, which along with the unre-
alized foreign currency translation balance on the investment hedged,
remain in Accumulated Other Comprehensive Loss until the investment
is sold.
During 2005, we entered into zero cost Euro collars to hedge a portion
of our net investment in Vodafone Omnitel. During 2005, our positions
in the zero cost euro collars were settled. As of December 31, 2007 and
2006, Accumulated Other Comprehensive Loss includes unrecognized
gains of $2 million in each year related to these hedge contracts, which
along with the unrealized foreign currency translation balance of the
investment hedged, remain in Accumulated Other Comprehensive Loss
until the investment is sold.
Other Derivatives
On May 17, 2005, we purchased 43.4 million shares of MCI common stock
under a stock purchase agreement that contained a provision for the
payment of an additional cash amount determined immediately prior to
April 9, 2006 based on the market price of Verizon’s common stock. Under
SFAS No. 133, this additional cash payment was an embedded derivative
which we carried at fair value and was subject to changes in the market
price of Verizon stock. Since this derivative did not qualify for hedge
accounting under SFAS No. 133, changes in its fair value were recorded in
the consolidated statements of income in Other Income and (Expense),
Net. As of December 31, 2006, this embedded derivative expired with
no requirement for an additional cash payment to be made under the
stock purchase agreement. During 2006 and 2005, we recorded pretax
income of $4 million and $57 million, respectively, in connection with this
embedded derivative.
58
Notes to Consolidated Financial Statements continued
NOTE 13
NOTE 14
EARNINGS PER ShARE AND ShAREOWNERS ’ INVESTMENT
STOCk-BASED COMPENSATION
Earnings Per Share
The following table is a reconciliation of the numerators and denomina-
tors used in computing earnings per common share:
Years Ended December 31,
(dollars and shares in millions, except per share amounts)
2005
2007
2006
Income Before Discontinued
Operations, Extraordinary Item and
Cumulative Effect of Accounting
Change
After-tax minority interest expense related
to exchangeable equity interest
After-tax interest expense related to zero-
coupon convertible notes
Income Before Discontinued
Operations, Extraordinary Item and
Cumulative Effect of Accounting
Change – after assumed conversion
of dilutive securities
Weighted-average shares
outstanding – basic
Effect of dilutive securities:
Stock options
Exchangeable equity interest
Zero-coupon convertible notes
Weighted-average shares
outstanding – diluted
Earnings Per Common Share from
Income Before Discontinued
Operations, Extraordinary Item and
Cumulative Effect of Accounting
Change
Basic
Diluted
$ 5,510
$
5,480
$
6,027
–
–
20
11
32
28
$ 5,510
$
5,511
$
6,087
2,898
2,912
2,766
4
–
–
1
18
7
5
29
17
2,902
2,938
2,817
$
$
1.90
1.90
$
$
1.88
1.88
$
$
2.18
2.16
Certain outstanding options to purchase shares were not included in
the computation of diluted earnings per common share because they
were not dilutive, including approximately 170 million weighted-average
shares during 2007, 228 million weighted-average shares during 2006
and 250 million shares during 2005.
The zero-coupon convertible notes were retired on May 15, 2006 and
the exchangeable equity interest was converted on August 15, 2006 by
issuing 29.5 million Verizon shares (see Notes 7 and 11).
Shareowners’ Investment
Our certificate of incorporation provides authority for the issuance of up
to 250 million shares of Series Preferred Stock, $.10 par value, in one or
more series, with such designations, preferences, rights, qualifications,
limitations and restrictions as the Board of Directors may determine.
We are authorized to issue up to 4.25 billion shares of common stock.
On February 7, 2008, the Board of Directors replaced the prior share buy
back program with a new program for the repurchase of up to 100 mil-
lion shares of Verizon common stock through the earlier of February 28,
2011 or when the total number of shares repurchased under the new
buy back program aggregates to 100 million.
During 2007, 2006 and 2005, we repurchased approximately 68 million,
50 million and 7.9 million common shares under programs previously
authorized by the Board of Directors.
Refer to Note 1 for a discussion of the adoption of SFAS No. 123(R), which
was effective January 1, 2006.
Verizon Communications Long Term Incentive Plan
The Verizon Communications Long Term Incentive Plan (the Plan), per-
mits the granting of nonqualified stock options, incentive stock options,
restricted stock, restricted stock units, performance shares, performance
share units and other awards. The maximum number of shares for awards
is 207 million.
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 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’s stock. Dividend equivalent units are also paid to participants
at the time the RSU award is paid.
The following table summarizes Verizon’s Restricted Stock Unit activity:
(shares in thousands)
Outstanding, January 1, 2005
Granted
Cancelled/Forfeited
Outstanding, December 31, 2005
Granted
Cancelled/Forfeited
Outstanding, December 31, 2006
Granted
Payments
Cancelled/Forfeited
Outstanding, December 31, 2007
Restricted
Stock Units
525
6,410
(66)
6,869
9,116
(392)
15,593
6,779
(602)
(197)
21,573
Weighted-
Average
Grant-Date
Fair Value
$
36.75
36.06
36.07
36.12
31.88
35.01
33.67
37.59
36.75
34.81
34.80
Performance Share Units
The Plan also provides for grants of performance share units (PSUs) that
generally vest at the end of the third year after the grant. The human
Resources Committee of the Board of Directors determines the number
of PSUs a participant earns based on Verizon’s Total Shareholder Return
(TSR), as defined in the Plan, for a three-year performance cycle relative
to the total shareholder returns of: the companies in the industry peer
group (60% weight); and the companies in the Standard & Poor’s (S&P)
500 index (40% weight). 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’s stock as well
as Verizon’s TSR relative to the peer group’s TSR and the S&P 500 TSR.
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.
59
Notes to Consolidated Financial Statements continued
The following table summarizes Verizon’s Performance Share Unit activity:
The following table summarizes the Value Appreciation Rights activity:
(shares in thousands)
Outstanding, January 1, 2005
Granted
Cancelled/Forfeited
Outstanding, December 31, 2005
Granted
Payments
Cancelled/Forfeited
Outstanding, December 31, 2006
Granted
Payments
Cancelled/Forfeited
Outstanding, December 31, 2007
Performance
Share Units
10,079
9,300
(288)
19,091
14,166
(3,607)
(1,227)
28,423
10,371
(5,759)
(900)
32,135
Weighted-
Average
Grant-Date
Fair Value
$
37.50
36.13
36.91
36.84
32.05
38.54
37.25
34.22
37.59
36.75
36.18
34.80
(shares in thousands)
Outstanding rights, January 1, 2005
Granted
Exercised
Cancelled/Forfeited
Outstanding rights, December 31, 2005
Exercised
Cancelled/Forfeited
Outstanding rights, December 31, 2006
Exercised
Cancelled/Forfeited
Outstanding rights, December 31, 2007
VARs
160,661
10
(47,964)
(3,784)
108,923
(7,448)
(7,008)
94,467
(30,848)
(3,207)
60,412
Weighted-
Average
Grant-Date
Fair Value
$
15.63
14.85
12.27
15.17
17.12
13.00
23.25
16.99
15.07
24.55
17.58
As of December 31, 2007, all VARs were fully vested.
Stock-Based Compensation Expense
After-tax compensation expense for stock-based compensation related
to RSUs, PSUs, and VARs described above included in net income as
reported was $750 million, $535 million and $359 million for 2007, 2006
and 2005, respectively.
Stock Options
The Verizon Long Term Incentive Plan provides for grants of stock options
to employees at an option price per share of 100% of the fair market
value of Verizon 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)
Outstanding, January 1, 2005
Exercised
Cancelled/Forfeited
Outstanding, December 31, 2005
Exercised
Cancelled/Forfeited
Outstanding, December 31, 2006
Exercised
Cancelled/Forfeited
Options outstanding, December 31, 2007
Options exercisable, December 31,
2005
2006
2007
Stock
Options
280,889
(1,133)
(19,996)
259,760
(3,371)
(27,025)
229,364
(33,079)
(21,422)
174,863
244,424
225,067
174,838
Weighted
Average
Exercise
Price
$
46.18
28.73
49.62
46.01
32.12
43.72
46.48
38.50
48.26
47.78
46.64
46.69
47.78
As of December 31, 2007, unrecognized compensation expense related
to the unvested portion of Verizon’s RSUs and PSUs was approximately
$439 million and is expected to be recognized over a weighted-average
period of approximately two years.
Verizon Wireless’s Long-Term Incentive Plan
The 2000 Verizon Wireless Long-Term Incentive Plan (the Wireless Plan)
provides compensation opportunities to eligible employees and other
participating affiliates 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. The aggregate number of VARs that
may be issued under the Wireless Plan is approximately 343 million.
VARs reflect the change in the value of the Partnership, as defined in
the Wireless Plan, similar to stock options. Once VARs become vested,
employees can exercise their VARs and receive a payment that is equal to
the difference between the VAR price on the date of grant and the VAR
price on the date of exercise, less applicable taxes. VARs are fully exercis-
able three years from the date of grant with a maximum term of 10 years.
All VARs are granted at a price equal to the estimated fair value of the
Partnership, as defined in the Wireless Plan, at the date of the grant.
With the adoption of SFAS No. 123(R), the Partnership began estimating
the fair value of VARs granted using a Black-Scholes option valuation
model. The following table summarizes the assumptions used in the
model during 2007:
Risk-free rate
Expected term (in years)
Expected volatility
Expected dividend yield
Ranges
3.2% – 5.1%
0.9 – 3.4
18.1% – 23.4%
n/a
The risk-free rate is based on the U.S. Treasury yield curve in effect at
the time of the measurement date. The expected term of the VARs
granted was estimated using a combination of the simplified method
as prescribed in Staff Accounting Bulletin (SAB) No. 107, “Share Based
Payments,” (SAB No. 107) historical experience, and management judg-
ment. Expected volatility was based on a blend of the historical and
implied volatility of publicly traded peer companies for a period equal to
the VARs expected life, ending on the measurement date, and calculated
on a monthly basis.
60
Notes to Consolidated Financial Statements continued
The following table summarizes information about Verizon’s stock options
outstanding as of December 31, 2007:
Range of
Exercise Prices
Shares
(in thousands)
$
20.00 – 29.99
30.00 – 39.99
40.00 – 49.99
50.00 – 59.99
60.00 – 69.99
Total
27
20,671
76,518
77,183
464
174,863
Weighted-
Average
Remaining Life
Stock Options Outstanding
Weighted-
Average
Exercise Price
4.7 years
5.5
2.9
2.1
1.8
2.9
$
27.68
36.45
44.06
54.43
60.74
47.78
The total intrinsic value was approximately $223 million for stock options
outstanding as of December 31, 2007. The total intrinsic value for stock
options exercised was $147 million, $10 million and $6 million, during
2007, 2006 and 2005, respectively.
The amount of cash received from the exercise of stock options was
approximately $1,274 million, $101 million and $34 million for 2007, 2006
and 2005, respectively. The related tax benefits were not material.
The after-tax compensation expense for stock options was not material
in 2007, and was $28 million and $53 million for 2006 and 2005,
respectively.
NOTE 15
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 the
Company’s share of cost for certain recent and future retirees. We also
sponsor defined contribution savings plans to provide opportunities for
eligible employees to save for retirement on a tax-deferred basis. We use
a measurement date of December 31 for our pension and postretirement
health care and life insurance plans.
Refer to Note 1 for a discussion of the adoption of SFAS No. 158, which
was effective December 31, 2006.
Pension and Other Postretirement Benefits
Pension and other postretirement benefits for many of our employees
are subject to collective bargaining agreements. Modifications in benefits
have been bargained from time to time, and we may also periodically
amend the benefits in the management plans.
As of June 30, 2006, Verizon management employees no longer earned
pension benefits or earned service towards the company retiree medical
subsidy. In addition, new management employees hired after December
31, 2005 are not eligible for pension benefits and managers with less than
13.5 years of service as of June 30, 2006 are not eligible for company-sub-
sidized retiree healthcare or retiree life insurance benefits. Beginning July
1, 2006, management employees receive an increased company match
on their savings plan contributions.
The following tables summarize benefit costs, as well as the benefit obli-
gations, plan assets, funded status and rate assumptions associated with
pension and postretirement health care and life insurance benefit plans:
Obligations and Funded Status
At December 31,
Change in Benefit
Obligations
Beginning of year
Service cost
Interest cost
Plan amendments
Actuarial (gain) loss, net
Benefits paid
Termination benefits
Acquisitions and
divestitures, net
Settlements
End of year
Change in Plan Assets
Beginning of year
Actual return on plan assets
Company contributions
Benefits paid
Settlements
Acquisitions and
divestitures, net
End of year
Funded Status
End of year
Amounts recognized on
the balance sheet
Noncurrent assets
Current liabilities
Noncurrent liabilities
Total
Amounts recognized in
Accumulated Other
Comprehensive Loss
(Pre-tax)
Actuarial loss, net
Prior service cost
Total
2007
Pension
2006
(dollars in millions)
Health Care and Life
2006
2007
$ 34,159
442
1,975
–
123
(4,204)
–
$ 35,540
581
1,995
–
(282)
(2,762)
47
$ 27,330
354
1,592
–
(409)
(1,561)
–
$ 26,783
356
1,499
50
152
(1,564)
14
–
–
$ 32,495
477
(1,437)
$ 34,159
–
–
$ 27,306
40
–
$ 27,330
$ 41,509
4,591
737
(4,204)
–
$ 39,227
5,536
568
(2,762)
(1,437)
$ 4,303
352
1,048
(1,561)
–
$
4,275
493
1,099
(1,564)
–
26
$ 42,659
377
$ 41,509
–
$ 4,142
–
4,303
$
$ 10,164
$
7,350
$ (23,164)
$ (23,027)
$ 13,745
(130)
(3,451)
$ 10,164
$ 12,058
–
(4,708)
7,350
$
$
–
(360)
(22,804)
$ (23,164)
$
–
–
(23,027)
$ (23,027)
$
$
13
932
945
$
$
1,428
975
2,403
$ 6,040
3,636
$ 9,676
$
6,799
4,029
$ 10,828
Changes in benefit obligations were caused by factors including changes
in actuarial assumptions and settlements.
The accumulated benefit obligation for all defined benefit pension plans
was $31,343 million and $32,724 million at December 31, 2007 and 2006,
respectively.
Information for pension plans with an accumulated benefit obligation in
excess of plan assets follows:
At December 31,
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
(dollars in millions)
2006
2007
$ 11,001
10,606
8,868
$ 11,495
11,072
8,288
61
Notes to Consolidated Financial Statements continued
Net Periodic Cost
The following table displays the details of net periodic pension and other
postretirement costs:
Years Ended December 31,
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Actuarial loss, net
Net periodic benefit (income) cost
Termination benefits
Settlement loss
Curtailment (gain) loss and other, net
Subtotal
Total (income) cost
2007
442
1,975
(3,175)
43
98
(617)
–
–
–
–
(617)
$
$
2006
581
1,995
(3,173)
44
182
(371)
47
56
–
103
(268)
$
$
In 2005, as a result of changes in management retiree benefits, we
recorded pretax expense of $430 million for pension curtailments and
pretax income of $332 million for retiree medical curtailments (see Note
3 for additional information).
Termination benefits and settlement and curtailment losses of $94 mil-
lion pertaining to the sale of hawaii operations in 2005 were recorded in
the consolidated statements of income in Sales of Businesses, Net.
Other changes in plan assets and benefit obligations recognized in other
comprehensive income in 2007 are as follows:
At December 31,
Other changes in plan assets and benefit obligations recognized in other
comprehensive income (Pre-tax)
Actuarial (gain), net
Reversal of amortization items:
Prior service cost
Actuarial loss, net
Total recognized in other comprehensive income
The estimated net loss and prior service cost for the defined benefit pen-
sion plans that will be amortized from Accumulated Other Comprehensive
Loss into net periodic benefit cost over the next fiscal year are $39 million
and $54 million, respectively. The estimated net loss and prior service cost
for the defined benefit postretirement plans that will be amortized from
Accumulated Other Comprehensive Loss into net periodic benefit cost
over the next fiscal year are $268 million and $397 million, respectively.
Pension
2005
$
$
675
1,959
(3,231)
42
124
(431)
11
80
436
527
96
2007
$
354
1,592
(317)
392
316
2,337
–
–
–
–
$ 2,337
2006
356
1,499
(328)
360
290
2,177
14
–
–
14
2,191
$
$
(dollars in millions)
Health Care and Life
2005
$
$
358
1,467
(349)
290
258
2,024
1
–
(332)
(331)
1,693
2007
Pension
2006
(dollars in millions)
Health Care and Life
2006
2007
$ (1,317)
(43)
(98)
$ (1,458)
$
$
–
–
–
–
$
(444)
(392)
(316)
$ (1,152)
$
$
–
–
–
–
62
Notes to Consolidated Financial Statements continued
Additional Information
As a result of the adoption of SFAS No. 158 in 2006, we no longer record an
additional minimum pension liability. In prior years, as a result of changes
in interest rates and changes in investment returns, an adjustment to the
additional minimum pension liability was required for a number of plans,
as indicated below. The adjustment in the liability was recorded as a charge
or (credit) to Accumulated Other Comprehensive Loss, net of tax, in shar-
eowners’ investment in the consolidated balance sheets. The Additional
Minimum Pension Liability at December 31, 2006, was reduced by $809
million, ($526 million after-tax) based on the final measurement just prior
to the adoption of SFAS No. 158. The remaining $396 million, ($262 million
after-tax), was reversed as a result of the adoption of SFAS No. 158.
Years Ended December 31,
2007
2006
(dollars in millions)
2005
Increase (decrease) in minimum liability included in other comprehensive income, net of tax
$
–
$
(526)
$
(51)
Assumptions
The weighted-average assumptions used in determining benefit obliga-
tions follow:
At December 31,
Discount rate
Rate of future increases in compensation
The weighted-average assumptions used in determining net periodic
cost follow:
Years Ended December 31,
Discount rate
Expected return on plan assets
Rate of compensation increase
2007
6.00%
8.50
4.00
2006
5.75%
8.50
4.00
In order to project the long-term target investment return for the total
portfolio, estimates are prepared for the total return of each major asset
class over the subsequent 10-year period, or longer. Those estimates
are based on a combination of factors including the following: current
market interest rates and valuation levels, consensus earnings expecta-
tions, historical long-term risk premiums and value-added. To determine
the aggregate return for the pension trust, the projected return of each
individual asset class is then weighted according to the allocation to that
investment area in the trust’s long-term asset allocation policy.
The assumed health Care Cost Trend Rates follow:
At December 31,
health care cost trend rate assumed
for next year
Rate to which cost trend rate
gradually declines
Year the rate reaches level it is assumed
Health Care and Life
2005
2006
2007
10.00%
10.00%
10.00%
5.00
5.00
5.00
to remain thereafter
2013
2011
2010
A one-percentage-point change in the assumed health care cost trend
rate would have the following effects:
One-Percentage-Point
Effect on 2007 service and interest cost
Effect on postretirement benefit obligation as of
December 31, 2007
(dollars in millions)
Decrease
Increase
$
295
$
(234)
3,038
(2,512)
2007
6.50%
4.00
Pension
2005
5.75%
8.50
5.00
Pension
2006
6.00%
4.00
2007
6.00%
8.25
4.00
Health Care and Life
2006
2007
6.50%
4.00
6.00%
4.00
Health Care and Life
2005
2006
5.75%
8.25
4.00
5.75%
7.75
4.00
63
Notes to Consolidated Financial Statements continued
Plan Assets
Pension Plans
The weighted-average asset allocations for the pension plans by asset
category follow:
At December 31,
Asset Category
Equity securities
Debt securities
Real estate
Other
Total
2007
2006
59%
18
6
17
100%
63%
16
4
17
100%
Equity securities include Verizon common stock of $127 million and $95
million at December 31, 2007 and 2006, respectively. Other assets include
cash and cash equivalents (primarily held for the payment of benefits),
private equity and investments in absolute return strategies.
Health Care and Life Plans
The weighted-average asset allocations for the other postretirement ben-
efit plans by asset category follow:
At December 31,
Asset Category
Equity securities
Debt securities
Other
Total
2007
2006
74%
21
5
100%
72%
21
7
100%
There was no Verizon common stock held at the end of 2007 and 2006 in
the health care and life plans.
Estimated Future Benefit Payments
The benefit payments to retirees, which reflect expected future service,
are expected to be paid as follows:
$
Pension
Benefits
4,422
3,665
2,944
2,921
2,864
13,926
2008
2009
2010
2011
2012
2013 – 2017
(dollars in millions)
Health Care and Life
Prior to Medicare
Prescription
Drug Subsidy
Expected
Medicare Prescription
Drug Subsidy
$
1,925
2,036
2,131
2,205
2,212
11,045
$
88
99
110
120
133
838
Savings Plan and Employee Stock Ownership Plans
We maintain four leveraged employee stock ownership plans (ESOP).
Only one plan currently has unallocated shares. We match a certain per-
centage of eligible employee contributions to the savings plans with
shares of our common stock from this ESOP. At December 31, 2007, the
number of unallocated and allocated shares of common stock in this
ESOP were 4 million and 77 million, respectively. All leveraged ESOP
shares are included in earnings per share computations.
Total savings plan costs were $712 million, $669 million, and $499 million
in 2007, 2006 and 2005, respectively.
Severance Benefits
The following table provides an analysis of our severance liability
recorded in accordance with SFAS No. 112, Employers’ Accounting for
Postemployment Benefits (SFAS No. 112):
This portfolio strategy emphasizes a long-term equity orientation, signifi-
cant global diversification, the use of both public and private investments
and professional financial and operational risk controls. Assets are allo-
cated according to a long-term policy neutral position and held within
a relatively narrow and pre-determined range. Both active and passive
management approaches are used depending on perceived market effi-
ciencies and various other factors.
Year
2005
2006
2007
Beginning
of Year
Charged to
Expense
Payments
Other End of Year
(dollars in millions)
$
$
753
596
644
$
99
343
743
$
(251)
(383)
(363)
(5)
88
–
$
596
644
1,024
Cash Flows
In 2007, we contributed $612 million to our qualified pension plans, $125
million to our nonqualified pension plans and $1,048 million to our other
postretirement benefit plans. We estimate required qualified pension plan
contributions for 2008 to be approximately $350 million. We also antici-
pate $130 million in contributions to our non-qualified pension plans
and $1,580 million to our other postretirement benefit plans in 2008.
The remaining severance liability is actuarially determined. The 2007
expense includes charges for the involuntary separation of approxi-
mately 9,000 employees, including approximately 4,000 during the
fourth quarter of 2007 and 5,000 expected during 2008. In addition, the
expense includes costs associated with higher assumed attrition beyond
2008. The 2006 expense includes charges for the involuntary separation
of 4,100 employees (see Note 3).
64
Notes to Consolidated Financial Statements continued
NOTE 16
INCOME TAxES
The components of Income Before Provision for Income Taxes,
Discontinued Operations, Extraordinary Item and Cumulative Effect of
Accounting Change are as follows:
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Domestic
Foreign
$ 8,508
984
$ 9,492
$
$
7,000
1,154
8,154
$
$
7,707
741
8,448
The components of the provision for income taxes from continuing oper-
ations are as follows:
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Valuation allowance
Deferred tax assets
Current
Federal
Foreign
State and local
Deferred
Federal
Foreign
State and local
Investment tax credits
Total income tax expense
$ 2,568
461
545
3,574
397
66
(48)
415
(7)
$ 3,982
$
$
2,364
141
421
2,926
(9)
(45)
(191)
(245)
(7)
2,674
$
$
2,772
81
661
3,514
(844)
(55)
(187)
(1,086)
(7)
2,421
The following table shows the principal reasons for the difference
between the effective income tax rate and the statutory federal income
tax rate:
Years Ended December 31,
2007
2006
2005
Statutory federal income tax rate
Distributions from foreign investments
State and local income tax, net of federal
tax benefits
Tax benefits from investment losses
Equity in earnings from unconsolidated
businesses
Other, net
Effective income tax rate
35.0 %
5.9
35.0 %
–
35.0 %
2.0
3.4
(0.8)
(2.3)
0.8
42.0 %
1.8
(0.9)
(3.8)
0.7
32.8 %
3.6
(4.5)
(3.5)
(3.9)
28.7 %
The effective income tax rate is the provision for income taxes as a
percentage of income from continuing operations before the provi-
sion for income taxes. The effective income tax rate in 2007 compared
to 2006 was higher primarily due to recording $610 million of foreign
and domestic taxes and expenses specifically relating to our share of
Vodafone Omnitel’s distributable earnings. Verizon received a net distri-
bution from Vodafone Omnitel in December 2007 of approximately $2.1
billion and anticipates that it may receive an additional distribution from
Vodafone Omnitel within the next twelve months. The 2007 rate was
also increased due to higher state taxes in 2007 as compared to 2006,
as well as greater benefits from foreign operations in 2006 compared to
2007. These increases were partially offset by lower expenses recorded for
unrecognized tax benefits in 2007 as compared to 2006.
Our effective income tax rate in 2006 was higher than 2005 primarily as a
result of favorable tax settlements and the recognition of capital loss carry
forwards in 2005. These increases were partially offset by tax benefits from
foreign operations and lower state taxes in 2006 compared to 2005.
Deferred taxes arise because of differences in the book and tax bases of
certain assets and liabilities. Significant components of deferred tax are
shown in the following table:
At December 31,
Employee benefits
Tax loss carry forwards
Uncollectible accounts receivable
Other – assets
Former MCI intercompany accounts receivable
basis difference
Depreciation
Leasing activity
Wireless joint venture including wireless licenses
Other – liabilities
Deferred tax liabilities
Net deferred tax liability
(dollars in millions)
2006
2007
$ 7,067
2,868
400
422
10,757
(2,671)
8,086
$
7,788
2,994
455
903
12,140
(2,600)
9,540
1,977
7,045
2,307
11,634
349
23,312
$ 15,226
2,003
7,617
2,674
12,177
2,493
26,964
$ 17,424
Employee benefits deferred tax assets include $4,929 million and $5,590
million at December 31, 2007 and 2006, respectively, recognized in accor-
dance with SFAS No. 158 (see Notes 1 and 15).
At December 31, 2007, undistributed earnings of our foreign subsidiaries
indefinitely invested outside of the United States amounted to
approximately $900 million. We have not provided deferred taxes on
these earnings because we intend that they will remain indefinitely
invested outside of the United States. Determination of the amount of
unrecognized deferred taxes related to these undistributed earnings is
not practical.
At December 31, 2007, we had net operating loss carry forwards for
income tax purposes of approximately $3,600 million, expiring through
2026 in various foreign, state and local jurisdictions. The amount of tax
loss carry forwards reflected as a deferred tax asset above has been
reduced by approximately $1,017 million due to federal and state tax law
limitations on utilization of net operating losses.
During 2007, the valuation allowance increased $71 million. Under cur-
rent accounting guidelines, approximately $2.0 billion of the valuation
allowance, if recognized, would be recorded as a reduction of goodwill.
65
Notes to Consolidated Financial Statements continued
FASB Interpretation No. 48
Effective January 1, 2007, we adopted FIN 48, which prescribes the rec-
ognition, measurement and disclosure standards for uncertainties in
income tax positions. See Note 1 for a discussion of the impact to Verizon
of adopting this new accounting pronouncement.
A reconciliation of the beginning and ending balance of unrecognized
tax benefits is as follows:
Balance at January 1, 2007
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Lapses of statutes of limitations
Balance at December 31, 2007
(dollars in millions)
$
2,958
141
291
(420)
(11)
(76)
$ 2,883
Included in the total unrecognized tax benefits at December 31, 2007
is $1,245 million that, if recognized, would favorably affect the effec-
tive income tax rate. The remaining unrecognized tax benefits relate to
temporary items that would not affect the effective income tax rate and
uncertain tax positions resulting from prior acquisitions which, pursuant
to current purchase accounting tax rules, would adjust goodwill.
We recognize any interest and penalties accrued related to unrecognized
tax benefits in income tax expense. During the year ended December
31, 2007, we recognized approximately $154 million (after-tax) for the
payment of interest and penalties. We had approximately $598 million
(after-tax) and $444 million (after-tax) for the payment of interest and
penalties accrued in the balance sheet at December 31, 2007 and January
1, 2007, respectively.
Verizon or one of its subsidiaries files income tax returns in the U.S. fed-
eral jurisdiction, and various state, local and foreign jurisdictions. The
Company is generally no longer subject to U.S. federal, state and local, or
non-U.S. income tax examinations by tax authorities for years before 2000.
The Internal Revenue Service (IRS) is currently examining the Company’s
U.S. income tax returns for years 2000 through 2003. As a large taxpayer,
we are under continual audit by the IRS and other taxing authorities on
numerous open tax positions. It is possible that the amount of the lia-
bility 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.
NOTE 17
SEGMENT INFORMATION
Reportable Segments
On March 30, 2007, we completed the sale of our 52% interest in TELPRI.
On February 12, 2007 we entered into an MOU to sell our interest in
CANTV. On December 1, 2006, we closed the sale of Verizon Dominicana.
Consequently, with these three transactions, we completed the disposi-
tion of our International segment. For further information concerning the
disposition of the International segment, see Note 2.
On November 17, 2006, we completed the spin-off of our Information
Services segment which included our domestic print and Internet yellow
pages directories business. For further information concerning the dispo-
sition of the Information Services segment, see Note 2.
We now 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
income. Corporate, eliminations and other includes unallocated corpo-
rate expenses, intersegment eliminations recorded in consolidation, the
results of other businesses such as our investments in unconsolidated
businesses, lease financing, and other adjustments and gains and losses
that are not allocated in assessing segment performance due to their
non-recurring or unusual nature. These adjustments include transactions
that the chief operating decision makers exclude in assessing business
unit performance due primarily to their non-recurring and/or non-opera-
tional 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, since these items are included in the chief operating
decision makers’ assessment of unit performance.
Our segments and their principal activities consist of the following:
Segment
Wireline
Description
Wireline communications services include voice, Internet
access, broadband video and data, next generation IP
network services, network access, long distance and other
services. We provide these services to consumers, carriers,
businesses and government customers both domestically
and internationally in 150 countries.
Domestic Wireless Domestic Wireless’s products and services include wireless
voice, data products, and other value-added services and
equipment sales across the United States.
66
Notes to Consolidated Financial Statements continued
The following table provides operating financial information for our two reportable segments:
2007
Wireline
Domestic Wireless
External revenues
Intersegment revenues
Total operating revenues
Cost of services and sales
Selling, general & administrative expense
Depreciation & amortization expense
Total operating expenses
Operating income
Equity in earnings of unconsolidated businesses
Other income and (expense), net
Interest expense
Minority interest
Provision for income taxes
Segment income
Assets
Plant, property and equipment, net
Capital expenditures
2006
External revenues
Intersegment revenues
Total operating revenues
Cost of services and sales
Selling, general & administrative expense
Depreciation & amortization expense
Total operating expenses
Operating income
Equity in earnings of unconsolidated businesses
Other income and (expense), net
Interest expense
Minority interest
Provision for income taxes
Segment income
Assets
Plant, property and equipment, net
Capital expenditures
2005
External revenues
Intersegment revenues
Total operating revenues
Cost of services and sales
Selling, general & administrative expense
Depreciation & amortization expense
Total operating expenses
Operating income
Equity in earnings of unconsolidated businesses
Other income and (expense), net
Interest expense
Minority interest
Provision for income taxes
Segment income
Assets
Plant, property and equipment, net
Capital expenditures
$
$
$
$
$
$
$
$
$
49,059
1,257
50,316
25,220
11,236
9,184
45,640
4,676
–
206
(2,032)
–
(1,344)
1,506
92,264
58,702
10,956
49,555
1,173
50,728
24,767
11,820
9,590
46,177
4,551
–
250
(2,062)
–
(1,114)
1,625
92,274
57,031
10,259
36,628
988
37,616
15,813
8,210
8,801
32,824
4,792
–
79
(1,701)
–
(1,264)
1,906
75,188
49,618
8,267
$
$
$
$
$
$
$
$
$
43,777
105
43,882
13,456
13,477
5,154
32,087
11,795
32
(3)
(251)
(5,053)
(2,726)
3,794
83,755
25,971
6,503
37,930
113
38,043
11,491
12,039
4,913
28,443
9,600
19
4
(452)
(4,038)
(2,157)
2,976
81,989
24,659
6,618
32,219
82
32,301
9,393
10,768
4,760
24,921
7,380
27
6
(601)
(2,995)
(1,598)
2,219
76,729
22,790
6,484
(dollars in millions)
Total Segments
$
$
92,836
1,362
94,198
38,676
24,713
14,338
77,727
16,471
32
203
(2,283)
(5,053)
(4,070)
5,300
$ 176,019
84,673
17,459
$
$
$
$
$
$
87,485
1,286
88,771
36,258
23,859
14,503
74,620
14,151
19
254
(2,514)
(4,038)
(3,271)
4,601
174,263
81,690
16,877
68,847
1,070
69,917
25,206
18,978
13,561
57,745
12,172
27
85
(2,302)
(2,995)
(2,862)
4,125
151,917
72,408
14,751
67
Notes to Consolidated Financial Statements continued
Reconciliation To Consolidated Financial Information
A reconciliation of the results for the operating segments to the applicable line items in the consolidated financial statements is as follows:
Operating Revenues
Total reportable segments
Impact of hawaii (2005) and other operations sold (2006)
Corporate, eliminations and other
Consolidated operating revenues – reported
Operating Expenses
Total reportable segments
Merger integration costs (see Note 8)
Access line spin-off related charges (see Note 2)
Taxes on foreign distributions (see Note 6)
Verizon Center relocation (see Note 3)
Severance, pension and benefit charges, net (see Note 3)
Impact of hawaii (2005) and other operations sold (2006) (see Note 2)
Sales of businesses net (see Note 2)
Lease impairment and other items (see Note 3)
Verizon Foundation contribution (see Note 2)
Corporate, eliminations and other
Consolidated operating expenses – reported
Net Income
Segment income – reportable segments
Debt extinguishment costs (see Note 11)
Merger integration costs (see Note 8)
Sales of businesses and investments, net (see Note 2)
Extraordinary item (see Note 2)
Access line spin-off related charges (see Note 2)
Taxes on foreign distributions (see Note 6)
Cumulative effect of accounting change (see Note 1)
Verizon Center relocation, net (see Note 3)
Severance, pension and benefit charges (see Note 3)
Domestic print and Internet yellow pages directories business
spin-off costs (see Note 2)
Lease impairment and other items (see Note 3)
Tax benefits (see Note 3)
Income from discontinued operations, net of tax (see Note 2)
Corporate and other
Consolidated net income – reported
Assets
Total reportable segments
Reconciling items
Consolidated assets
Financial information for Wireline excludes the effects of hawaii access
lines and directory operations sold in 2005, in addition to the sale of non-
strategic assets of the Wireline segment sold in the first quarter of 2007.
We generally account for intersegment sales of products and services
and asset transfers at current market prices. We are not dependent on
any single customer.
68
2007
94,198
–
(729)
93,469
77,727
178
84
15
–
772
–
–
–
100
(985)
77,891
5,300
–
(112)
5
(131)
(80)
(610)
–
–
(477)
–
–
–
72
1,554
5,521
$
$
$
$
$
$
$ 176,019
10,940
$ 186,959
Geographic Areas
2006
88,771
104
(693)
88,182
74,620
232
–
–
184
425
89
–
–
–
(741)
74,809
4,601
(16)
(146)
(541)
–
–
–
(42)
(118)
(258)
(101)
–
–
1,398
1,420
6,197
174,263
14,541
188,804
$
$
$
$
$
$
$
$
(dollars in millions)
2005
$
$
$
$
$
$
$
$
69,917
180
(579)
69,518
57,745
–
–
–
(18)
157
118
(530)
125
–
(660)
56,937
4,125
–
–
336
–
–
(206)
–
8
(95)
–
(133)
336
1,370
1,656
7,397
151,917
16,213
168,130
Our foreign investments are located principally in the Americas and
Europe. Domestic and foreign operating revenues are based on the
location of customers. Long-lived assets consist of plant, property and
equipment (net of accumulated depreciation) and investments in uncon-
solidated businesses. The table below presents financial information by
major geographic area:
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Domestic
Operating revenues
Long-lived assets
International
Operating revenues
Long-lived assets
$ 89,504
85,081
$ 84,731
82,277
$ 69,327
74,813
3,965
3,585
3,451
4,947
191
2,776
Notes to Consolidated Financial Statements continued
NOTE 18
COMPREhENSIVE INCOME
Comprehensive income consists of net income and other gains and
losses affecting shareowners’ investment that, under GAAP, are excluded
from net income. Significant changes in the components of other
comprehensive income (loss), net of income tax expense (benefit), are
described below.
Foreign Currency Translation
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Foreign Currency Translation
Adjustments:
Vodafone Omnitel
CANTV
Verizon Dominicana
Other international operations
$
$
397
412
–
29
838
$
$
330
–
786
80
1,196
$
$
(590)
(47)
(114)
(4)
(755)
We sold our interest in CANTV during the second quarter of 2007. We
sold our interest in Verizon Dominicana during the fourth quarter of
2006. See Note 2 for information on CANTV and Verizon Dominicana. The
foreign currency translation adjustment in 2005 represents unrealized
losses from the decline in the functional currencies of our investments in
Vodafone Omnitel, Verizon Dominicana and CANTV.
Unrealized Gains (Losses) on Marketable Securities
The changes in Unrealized Gains (Losses) on Marketable Securities were
as follows:
Accumulated Other Comprehensive Loss
The components of Accumulated Other Comprehensive Loss are as
follows:
At December 31,
Foreign currency translation adjustments
Net unrealized losses on hedging
Unrealized gains on marketable securities
Defined benefit pension and postretirement plans
Other
Accumulated Other Comprehensive Loss
(dollars in millions)
2006
2007
$ 1,167
(10)
60
(5,723)
–
$ (4,506)
$
$
329
(11)
64
(7,671)
(241)
(7,530)
The foreign currency translation adjustments at December 31, 2007 were
primarily comprised of unrealized gains in the value of our investment in
Vodafone Omnitel as a result of the appreciation of the Euro.
NOTE 19
ADDITIONAL FINANCIAL INFORMATION
The tables that follow provide additional financial information related to
our consolidated financial statements:
Income Statement Information
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Depreciation expense
Interest cost incurred
Capitalized interest
Advertising expense
$ 13,036
2,258
(429)
2,463
$ 13,122
2,811
(462)
2,271
$ 12,171
2,481
(352)
1,844
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Balance Sheet Information
Unrealized Gains (Losses) on
Marketable Securities
Unrealized gains, net of taxes of
$13, $30 and $10
Less reclassification adjustments for
gains realized in net income,
net of taxes of $11, $13 and $14
Net unrealized gains (losses) on
marketable securities
$
13
$
79
$
4
(17)
(25)
(25)
$
(4)
$
54
$
(21)
Defined Benefit Pension and Postretirement Plans
During 2007, the change in defined benefit pension and postretire-
ment plans of $1,948 million, net of taxes of $661 million, represents the
change in the funded status of the plans in connection with the annual
pension and postretirement valuation in accordance with SFAS No. 158.
The funded status was impacted by changes in actuarial assumptions,
asset performance and plan experience.
At December 31,
Accounts Payable and Accrued Liabilities
Accounts payable
Accrued expenses
Accrued vacation, salaries and wages
Interest payable
Accrued taxes
Other Current Liabilities
Advance billings and customer deposits
Dividends payable
Other
(dollars in millions)
2006
2007
$ 4,491
2,400
4,828
473
2,270
$ 14,462
$
4,392
2,982
3,575
614
2,757
$ 14,320
$ 2,476
1,266
3,583
$ 7,325
$
$
2,226
1,199
4,666
8,091
69
Notes to Consolidated Financial Statements continued
Cash Flow Information
Years Ended December 31,
2007
(dollars in millions)
2005
2006
Cash Paid
Income taxes, net of amounts refunded
Interest, net of amounts capitalized
$ 2,491
1,682
$
3,299
2,103
$
4,189
2,025
Supplemental Investing and Financing
Transactions
Cash acquired in business combinations
Assets acquired in business combinations
Liabilities assumed in business
combinations
Debt assumed in business combinations
Shares issued to Price to acquire limited
partnership interest in VZ East (Note 7)
17
589
154
–
2,361
18,511
7,813
6,169
–
1,007
–
635
35
9
–
Other, net cash provided by operating activities – continuing operations
primarily included the add back of the minority interest’s share of Verizon
Wireless earnings, net of dividends paid to minority partners, of $3,953
million in 2007, $3,232 million in 2006 and $1,720 million in 2005.
NOTE 20
COMMITMENTS AND CONTINGENCIES
Several state and federal regulatory proceedings may require our tele-
phone operations to pay penalties or to refund to customers a portion
of the revenues collected in the current and prior periods. There are also
various legal actions pending to which we are a party and claims which,
if asserted, may lead to other legal actions. We have established reserves
for specific liabilities in connection with regulatory and legal actions,
including environmental matters, that we currently deem to be probable
and estimable. We do not expect that the ultimate resolution of pending
regulatory and legal matters in future periods, including the hicksville
matter described below, will have a material effect on our financial con-
dition, 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 com-
menced 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 necessary. Adjustments may also
be necessary based upon actual conditions discovered during the reme-
diation at any of the sites requiring remediation.
70
In connection with the execution of agreements for the sales of businesses
and investments, Verizon ordinarily provides representations and warran-
ties to the purchasers pertaining to a variety of nonfinancial matters, such
as ownership of the securities being sold, as well as financial losses.
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 since a variety of the potential outcomes available under the
guarantee result in costs and revenues or benefits that may offset each
other. In addition, performance under the guarantee is not likely.
As of December 31, 2007, letters of credit totaling $225 million were exe-
cuted in the normal course of business, which support several financing
arrangements and payment obligations to third parties.
We have several commitments primarily to purchase network services,
equipment and software from a variety of suppliers totaling $844 million.
Of this total amount, $613 million, $137 million, $51 million, $28 million,
$5 million and $10 million are expected to be purchased in 2008, 2009,
2010, 2011, 2012 and thereafter, respectively.
Notes to Consolidated Financial Statements continued
NOTE 21
qUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(dollars in millions, except per share amounts)
quarter Ended
2007
March 31
June 30
September 30
December 31
2006
March 31
June 30
September 30
December 31
Operating
Revenues
Operating
Income
$ 22,584
23,273
23,772
23,840
$ 21,231
21,886
22,459
22,606
$ 3,796
4,149
4,210
3,423
$
3,175
3,217
3,537
3,444
Income Before Discontinued Operations, Extraordinary Item
and Cumulative Effect of Accounting Change
Per Share-
Basic
Per Share-
Diluted
Amount
$ 1,484
1,683
1,271
1,072
$
1,282
1,263
1,545
1,390
$
$
.51
.58
.44
.37
.44
.43
.53
.48
$
$
.51
.58
.44
.37
.44
.43
.53
.48
Net Income
$ 1,495
1,683
1,271
1,072
$
1,632
1,611
1,922
1,032
• Results of operations for the first quarter of 2007 include after-tax charges of $9 million for merger integration costs, $131 million for an extraordinary charge related to the nationalization of
CANTV, a $70 million after-tax gain on the sale of our interest in TELPRI and a $65 million after-tax contribution to the Verizon Foundation.
• Results of operations for the second quarter of 2007 include after-tax charges of $17 million for merger integration costs.
• Results of operations for the third quarter of 2007 include after-tax charges of $28 million for merger integration costs, $44 million related to access line spin-off charges and $471 million asso-
ciated with taxes on foreign distributions.
• Results of operations for the fourth quarter of 2007 include after-tax charges of $58 million for merger integration costs, $36 million related to access line spin-off charges, $139 million associ-
ated with taxes on foreign distributions, and $477 million for severance, pension and other charges.
• Results of operations for the first quarter of 2006 include after-tax charges of $16 million for the early extinguishment of debt related to the MCI merger, $28 million for costs associated with
the relocation to Verizon Center, $42 million for the impact of accounting for share based payments, and $35 million for merger integration costs.
• Results of operations for the second quarter of 2006 include after-tax charges of $48 million for merger integration costs, $29 million for costs associated with the relocation to Verizon Center
and $186 million for severance, pension and benefits charges.
• Results of operations for the third quarter of 2006 include after-tax charges of $16 million for merger integration costs, $31 million for costs associated with the relocation to Verizon Center
and $17 million for severance, pension and benefits charges.
• Results of operations for the fourth quarter of 2006 include after-tax charges of $47 million for merger integration costs, $30 million for costs associated with the relocation to Verizon Center,
$55 million for severance, pension and benefits charges, $541 million for the loss on sale of Verizon Dominicana included in discontinued operations, and $101 million for costs associated
with the spin-off of our directories publishing business.
Income before discontinued operations per common share is computed independently for each quarter and the sum of the quarters may not equal the annual amount.
71
Board of Directors
Richard L. Carrión
Chairman, President and
Chief Executive Officer
Popular, Inc.
and Chairman and Chief Executive Officer
Banco Popular de Puerto Rico
M. Frances Keeth
Retired Executive Vice President
Royal Dutch Shell plc
Robert W. Lane
Chairman and Chief Executive Officer
Deere & Company
Sandra O. Moose
President
Strategic Advisory Services LLC
Joseph Neubauer
Chairman and Chief Executive Officer
ARAMARk holdings Corporation
Donald T. Nicolaisen
Former Chief Accountant
United States Securities and
Exchange Commission
Thomas H. O’Brien
Retired Chairman and Chief Executive Officer
The PNC Financial Services Group, Inc.
and PNC Bank, N.A.
Clarence Otis, Jr.
Chairman and Chief Executive Officer
Darden Restaurants, Inc.
Hugh B. Price
Senior Fellow
The Brookings Institution
Ivan G. Seidenberg
Chairman and Chief Executive Officer
Verizon Communications Inc.
John W. Snow
President
JWS Associates, LLC
John R. Stafford
Retired Chairman and Chief Executive Officer
Wyeth
Robert D. Storey
Retired Partner
Thompson hine LLP
Retired in 2007:
James R. Barker
Chairman
The Interlake Steamship Co. and
New England Fast Ferry Co.
and Vice Chairman
Mormac Marine Group, Inc. and
Moran Towing Corporation
Walter V. Shipley
Retired Chairman
The Chase Manhattan Corporation
Corporate Officers and
Executive Leadership
Ivan G. Seidenberg
Chairman and Chief Executive Officer
Dennis F. Strigl
President and Chief Operating Officer
Doreen A. Toben
Executive Vice President and
Chief Financial Officer
William P. Barr
Executive Vice President and
General Counsel
John W. Diercksen
Executive Vice President –
Strategy, Development and Planning
Shaygan Kheradpir
Executive Vice President and
Chief Information Officer
Richard J. Lynch
Executive Vice President and
Chief Technology Officer
Lowell C. McAdam
Executive Vice President and
President and Chief Executive Officer –
Verizon Wireless
Marc C. Reed
Executive Vice President –
human Resources
John G. Stratton
Executive Vice President and
Chief Marketing Officer
Thomas J. Tauke
Executive Vice President –
Public Affairs, Policy and Communications
Thomas A. Bartlett
Senior Vice President and Controller
Marianne Drost
Senior Vice President, Deputy General
Counsel and Corporate Secretary
Ronald H. Lataille
Senior Vice President – Investor Relations
Kathleen H. Leidheiser
Senior Vice President – Internal Auditing
Catherine T. Webster
Senior Vice President and Treasurer
John F. Killian
President – Verizon Business
Daniel S. Mead
President – Verizon Services
Daniel C. Petri
Group President – International
Virginia P. Ruesterholz
President – Verizon Telecom
72
Investor Information
Registered Shareowner Services
Questions or requests for assistance regarding changes to or transfers
of your registered stock ownership should be directed to our transfer
agent, Computershare Trust Company, N.A. at:
Verizon Communications Shareowner Services
c/o Computershare
P.O. Box 43078
Providence, RI 02940-3078
Phone: 800 631-2355
Website: www.computershare.com/verizon
Email: verizon@computershare.com
Persons outside the U.S. may call: 781 575-3994
Persons using a telecommunications device for the deaf (TDD) may call:
800 524-9955
Online Account Access – Registered shareowners can view account
information online at: www.computershare.com/verizon
You will need your account number, a password and taxpayer identifica-
tion number to enroll. For more information, contact Computershare.
Direct Dividend Deposit Service – Verizon offers an electronic funds
transfer service to registered shareowners wishing to deposit dividends
directly into savings or checking accounts on dividend payment dates.
For more information, contact Computershare.
Direct Invest Stock Purchase and Ownership Plan – Verizon offers a
direct stock purchase and share ownership plan. The plan allows cur-
rent and new investors to purchase common stock and to reinvest the
dividends toward the purchase of additional shares. To receive a Plan
Prospectus and enrollment form, contact Computershare or visit their
website.
eTree® Program – Worldwide, Verizon is acting to conserve natural
resources in a variety of ways. Now we are proud to offer shareowners
an opportunity to be environmentally responsible. By receiving links
to proxy, annual report and shareowner materials online, you can help
Verizon reduce the amount of materials we print and mail. As a thank
you for choosing electronic delivery, Verizon will plant a tree on your
behalf. It’s fast and easy and you can change your electronic delivery
options at any time. Sign up at www.eTree.com/verizon or call
800 631-2355 or 781 575-3994.
Corporate Governance
Verizon’s Corporate Governance Guidelines are available on our
website – www.verizon.com/investor
If you would prefer to receive a printed copy in the mail, please contact
the Assistant Corporate Secretary:
Verizon Communications Inc.
Assistant Corporate Secretary
140 West Street, 29th Floor
New York, NY 10007
v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 7 a n n ua l r e p o r t
Investor Services
Investor Website – Get company information and news on our
website – www.verizon.com/investor
VZ Mail – Get the latest investor information delivered directly to your
computer desktop. Subscribe to VzMail at our investor information
website.
Stock Market Information
Shareowners of record at December 31, 2007: 836,237
Verizon is listed on the New York Stock Exchange
(ticker symbol: VZ)
Also listed on the Philadelphia, Chicago, London, Swiss, Amsterdam and
Frankfurt exchanges.
Common Stock Price and Dividend Information
2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2006*
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Market Price
High
Low
$ 38.77 $ 35.60
36.75
39.27
40.77
43.99
44.75
46.24
Cash
Dividend
Declared
$ 0.405
0.405
0.430
0.430
$
$
33.89
33.46
36.62
37.64
28.95
29.00
30.22
33.99
$
0.405
0.405
0.405
0.405
*2006 prices have been adjusted for the spin-off of our domestic print and
Internet yellow pages directory business.
Form 10–K
To receive a copy of the 2007 Annual Report on Form 10-K, which is
filed with the Securities and Exchange Commission, contact Investor
Relations:
Verizon Communications Inc.
Investor Relations
One Verizon Way
Basking Ridge, NJ 07920
Phone: 212 395-1525
Certifications Regarding Public Disclosures & Listing Standards
The 2007 Annual Report on Form 10-K filed with the Securities and
Exchange Commission includes the certifications required by Section
302 of the Sarbanes-Oxley Act regarding the quality of Verizon’s
public disclosure. In addition, the annual certification of the chief
executive officer regarding compliance by Verizon with the corporate
governance listing standards of the New York Stock Exchange was
submitted without qualification following the 2007 annual meeting of
shareholders.
Equal Opportunity Policy
Verizon maintains a long-standing commitment to equal opportunity
and valuing the diversity of its employees, suppliers and customers.
Verizon is fully committed to a workplace free from discrimination and
harassment for all persons, without regard to race, color, religion, age,
gender, national origin, sexual orientation, marital status, citizenship
status, veteran status, disability or other protected classifications.
Verizon Communications Inc.
140 West Street
New York, New York 10007
212 395-1000
verizon.com
©2008. Verizon. All Rights Reserved.
002CS-60954
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