Verizon Communications
2010 Annual Report
Financial Highlights
(as of December 31, 2010)
Consolidated
Revenues
(billions)
Operating Cash Flow
from Continuing
Operations
(billions)
Declared Dividends
per Share
Reported Diluted
Earnings per Share
$1.72
Adjusted Diluted
Earnings per Share
(non-GAAP)
$107.8 $106.6
$97.4
$27.5
$33.4
$31.4
$1.870
$1.925
$1.780
$0.90
$2.62
$2.26
$2.20
$2.20
$(0.77)
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Corporate Highlights
• 6.3% growth in cash flow from operations
• 16.4% increase in free cash flow
• 4.8 million new wireless customers
• 25.6% growth in wireless data revenue
• 796,000 new FiOS Internet connections
• 722,000 new FiOS TV connections
• 31.9% growth in FiOS revenue
• 23.1% total shareholder return
• 2.6% annual dividend increase
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. Effective with the fourth-quarter
2010, Verizon changed its method of accounting for pension and postretirement benefits. Accordingly, all prior periods have been adjusted for this change, which primarily affected Verizon consolidated
and the Wireline segment. Reclassifications of prior-period amounts have been made, where appropriate, to reflect comparable operating results for the divestiture of overlapping wireless properties in
105 operating markets in 24 states during the first-half of 2010; the wireless deferred revenue adjustment that was disclosed in Verizon’s Form 10-Q for the period ended June 30, 2010; and the spinoff to
Frontier of local exchange and related landline assets in 14 states, effective on July 1, 2010. Verizon’s results for the periods presented also have been adjusted to reflect the spinoff of local exchange and
related business assets in Maine, New Hampshire and Vermont in March 2008.
In keeping with Verizon’s commitment to protect the environment, this report was printed on paper certified by the Forest Stewardship Council (FSC). By selecting FSC-certified paper, Verizon is helping to
make a difference by supporting responsible forest-management practices.
Letter to Shareowners
V E R I ZO N CO M M U N I C AT I O N S I N C . | 20 10 A N N UA L R E P O R T
Ivan Seidenberg, chairman and chief executive officer of Verizon, delivering the opening keynote speech at
the 2011 International Consumer Electronics Show.
Dear Shareowner,
One question lies at the heart of America’s challenge to regain its leadership after
years of economic turmoil: What’s the key to growth and competitiveness? At
Verizon, we answer that question simply and consistently. We have a vision of the
future based on expanding markets for mobility, broadband and video. We invest
capital in network technologies that put us in the center of these growth markets,
and we innovate – on our own and with partners – to deliver new capabilities to
the marketplace and create even more opportunities for growth. We sustained
this investment-and-innovation model throughout the economic downturn,
building scale and capacity in the growth businesses of the future. We focus on
running disciplined, efficient businesses that deliver the benefits of these superior
assets to our customers and shareowners. As a result, these vibrant mobile and
broadband businesses are both driving Verizon’s growth and contributing
substantially to the technology base for a renewal of America’s competitiveness in
the innovation economy.
2010 was a standout year in our continuing shift toward growth.
11
Wireless
Revenue
(billions)
$49.3
Our results in 2010 reflect the fundamental strength of our company. Revenues grew 1.9
percent on a comparable basis for the year, the second straight year of positive revenue growth in
a very sluggish economy. Our growth was propelled by strong performance in wireless, broadband
$60.3 $63.4
and strategic business services, and our results improved in the second half of the year, giving us
good momentum entering 2011. Our cash-flow performance was particularly strong in 2010. We
generated $33.4 billion in operating cash flow and grew free cash flow by 16.4 percent. Combined
with the proceeds from our sale of some non-strategic assets, this enabled us to invest $16.5 billion
in our advanced networks, pay $5.4 billion in dividends and reduce net debt by $14.1 billion. The
Board of Directors showed its confidence in future cash flows by voting in September to raise our
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dividend by 2.6 percent – the fourth increase in as many years – to $1.95 a share on an annual
basis. We also completed the spin-off of some rural telephone properties to Frontier, which yielded
$1.85 per share in value for shareowners.
Verizon’s strategic position is anchored by our sustained investment in superior network
technology. We continued to push that envelope in 2010, embedding ourselves even more deeply
in the high-tech sector of the economy. Our nationwide third-generation wireless network is
consistently rated the nation’s best in quality and reliability. With this competitive edge, we have
captured a significant share of the fast-growing wireless market over the last several years and have
introduced a wide array of wireless data services and products, including most recently the
iPhone 4. In December we launched our fourth-generation wireless network in about one-third of
the U.S. and will expand it across the country over the next three years, giving us a premier position
in the explosive wireless data marketplace and setting the stage for a new phase of growth for
Verizon. Our all-fiber FiOS network is now available to 15.6 million homes and is bar none the
Focus on Profitable Financial Growth
Verizon’s assets provide us with an unmatched strategic position in future growth markets for broadband, wireless data, video and cloud services.
We focus on leveraging these superior assets to deliver increased value to customers and investors. This creates a virtuous cycle of investment,
execution, growth and profitability, in which success in each area promotes success in all the others.
Defend and extend our market position
Execute aggressive business plans for growing
revenue and gaining market share to generate cash
for continued investment.
Operational excellence
Deliver on the power of our assets and
expertise through fundamental execution,
operational efficiency and superior service.
Business
Model
Execution
Consistent investment
Allocate capital to growth platforms, advanced
systems and emerging technologies to deliver
innovative products and services.
Sound portfolio management
Actively manage our portfolio to add
strategic capabilities and, when necessary,
exit non-strategic businesses..
Superior returns through strong execution and performance
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Wireless Total
Customers
(millions)
94.1
89.2
72.1
fastest, highest-quality broadband network in the country. FiOS gives us an unparalleled platform
for delivering the flood of high-definition video content that makes up a rapidly growing portion
of the Internet. We also continued to globalize our company by enhancing our high-speed Internet
backbone, which serves six continents and close to 160 countries worldwide. Furthermore, we’re
adding to our extensive network of data centers to position ourselves for the emerging market for
“cloud” services, in which content, customer data, security, IT services and more will be stored in
the network and made available on-demand to customers wherever they are.
Verizon Wireless ended the year with 94.1 million customers and a growing number of
connections from smart grids, ATM machines, smart cars and other machine-to-machine devices
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that reflect the increasingly pervasive reach of wireless into our daily lives. Data revenues grew at
Wireless
Data Revenue
(billions)
$19.6
$15.6
$10.6
25.6 percent in 2010, fueled by the incredible success of the Droid franchise of smartphones, called
by Ad Age one of the “hottest brands” of 2010. We have now expanded our portfolio of devices to
include the Apple iPad and iPhone 4 and expect to see a steady stream of new smartphones,
tablets and other devices from multiple manufacturers in 2011. We broke ground on an expansion
of our Technology Innovation Center in Waltham, Massachusetts, and we are working with more
than 60 product developers and some 6,000 applications developers and entrepreneurs to create a
new generation of wireless broadband products and applications. Of course, the most meaningful
accomplishment for us is being number one with customers, so we were particularly gratified to
see that Consumer Reports gave us the highest customer satisfaction rating of any major carrier for
the second year in a row.
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telecom business. At year-end we had 4.1 million FiOS Internet customers and 3.5 million video
Revenues from FiOS broadband and video now constitute more than half of our consumer
subscribers, and FiOS revenues grew almost 32 percent on the year. Our all-fiber network contin-
ues to garner top ratings from J.D. Power, PCMag.com and other industry experts. We’ve started
to point the way to the next generation of video services with 3-D broadcasts of major sporting
events; a growing library of video-on-demand content; a new service called FlexView that lets sub-
scribers watch FiOS video content on their TV, PC or smartphone; and a “connected home” solution
coming in 2011 for managing energy, security and entertainment needs from remote locations.
2010 Total Return
Verizon
S&P 500
25%
0%
-25%
23.1%
15.1%
12/31/09
3/3/10
5/3/10
7/3/10
9/3/10
11/3/10
12/31/10
33
Wireless Retail
Service ARPU
$51.84 $50.89 $51.56
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FiOS Internet
Customers
(millions)
4.1
3.3
2.4
Lowell McAdam was named president and chief operating officer in 2010, with the expectation that he will
become chief executive officer when Ivan Seidenberg retires in 2011.
We are starting to see our business revenues stabilize somewhat as the economy begins to
recover, and as we’re seeing in our other major businesses our enterprise revenue base is shifting
heavily to higher growth services. Strategic services now account for 44 percent of our enterprise
revenues. Revenues from strategic services grew 6.3 percent on the year and accelerated to 7.5
percent in the fourth quarter. Our global Internet backbone network and extensive switching and
data center architecture give us a great platform for marketing managed services, security and
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cloud-based services to multinational corporations. We took steps to further strengthen our
position in cloud services in early 2011 by entering into an agreement to acquire Terremark, a
FiOS TV
Customers
(millions)
3.5
2.8
1.8
global provider of managed information-technology solutions. With consistently high marks from
industry analysts such as Gartner, Forrester and Yankee Group and a growing portfolio of
capabilities, we secured a number of significant customer wins in 2010. And we are working with
partners to develop our capabilities in high-growth segments like health care, smart grids, financial
services and security.
I am pleased to report that our stock rebounded strongly in 2010. Total return for the year was
23.1 percent, as compared with 15.1 percent for the S&P and 14.1 percent for the Dow Jones
Industrial Average. The primary drivers of this improved performance were sustained growth in
wireless and stabilizing margins in wireline. This improvement in wireline profitability is evidence
that our strategic growth businesses are beginning to grow faster than our legacy voice business is
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shrinking. Also contributing to our 2010 stock performance were our dividend, strong cash flows
and steady execution – all of which, we believe, will stand Verizon in good stead as the
fundamentals of the economy improve in 2011.
As pleased as we are with our 2010 performance, we are confident that we can raise our game
in 2011. Our outstanding assets give us an advantageous strategic position in the fast-growing
markets for mobile broadband, high-speed Internet and advanced business services. Going
forward, our challenge is to continue to transform our growth profile around these global, high-
tech opportunities while consistently creating shareholder value at the same time. To do that, our
leadership team is focused on executing our profitable growth model (see diagram on page 2) and
leveraging our assets to deliver superior value to customers and investors.
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Wireline Strategic
Services Revenue
(billions)
$5.9
$6.2
$6.6
2010 was a year of change and transition for Verizon. The Board of Directors named Lowell
McAdam – one of the architects of our industry-leading wireless franchise for the last 10 years –
president and chief operating officer for the corporation, with the expectation that he will become
chief executive officer when I retire in the second half of 2011. The Board also named a new chief
financial officer, Fran Shammo, following the retirement of John Killian after 31 years of
distinguished service. Fran is one of our most talented and experienced executives, having held
both operating and finance jobs and worked in all major segments of the business. Having two
executives of unusual depth and experience for these key positions demonstrates the
extraordinary bench we have at Verizon and assures shareowners of a smooth leadership transition.
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We are indebted to the members of our Board of Directors for their wise stewardship and
Capital Expenditures
(billions)
$17.1 $16.9 $16.5
strategic guidance. And as always, we’d also like to thank our employees for another great year of
serving our customers and our communities. In thousands of daily actions, they embody our
performance-based culture and the commitment to integrity that underlies everything we do.
Thanks to them, Verizon continues to be known as a company that stands for something larger
than itself; our long list of accolades – Fortune’s Most Admired Telecommunications Company in
2010, Newsweek “Global Green 100,” the Dow Jones Sustainability North American Index and
Diversity, Inc.’s Top 50, to name a few – speaks to their passion for turning our values into action.
We love what we do, and as we transform Verizon for the high-tech future ahead, we rely on the
steadfast dedication of our people to building a business as good as the networks it runs on.
Whatever the economic challenges of the last few years, we have always had confidence in
our vision of the future – confidence rooted in our absolute belief in the value of what we do.
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We’ve shown that it’s possible to change the growth trajectory of our company by investing in
technology, skills and innovative capacity. In the process, we are helping create value across the
economy: opening new markets, redefining productivity and jump-starting new industries. And in
creating business value, we are creating social value as well by using our technology to help
address the world’s most pressing problems, from education to energy to health care.
Investment, innovation and sound financial management have paved the road to the future
for Verizon and can do the same for America. We’re excited about the possibilities ahead and proud
of the contributions we have made toward putting our country on the path to sustained growth,
competitiveness and prosperity in the years ahead.
Ivan Seidenberg
Chairman and Chief Executive Officer
55
Innovation for
Connected People
ur customers’ lives
revolve around daily
interactions with personal
computers, mobile
phones, laptops, tablets
and a host of other digital
devices connected to the global Internet.
Using advanced broadband services, individu-
als can shape their communication and
entertainment needs to fit today’s ”borderless”
lifestyle, so they can interact with information
and content anywhere, at any time, across a
multitude of devices connected to Verizon’s
high-IQ networks.
Teens and young adults, who have never
known a world without mobile connectivity,
have built complex social networks centered
on a continuous flow of personal digital
information. Their desire for fast access to
information and entertainment is driving
growth of advanced mobile devices across the
entire wireless market. But to make the most
of these smart devices, innovative social
networks must run on innovative broadband
networks.
To keep customers connected at all
times, Verizon is aligning its wireless, fiber and
global IP networks and its vast data center
infrastructure – along with all the devices,
applications and interactive content being
developed – to deliver experiences more
powerful than anything we’ve seen before.
For example, our new FiOS FlexView
video service is an early glimpse at what this
“content anywhere” world will look like.
FlexView gives users a streaming video
experience at their fingertips via their TVs,
PCs, laptops, tablets or smartphones. They can
choose from more than 2,000 FiOS on-
demand titles, start watching a movie on their
home TV and then continue watching on
another device.
To provide dependable connectivity to
these highly mobile individuals, Verizon has
the largest, most reliable 3G wireless voice
and data network in the U.S. We’re the nation’s
largest provider of innovative Android
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The ThunderBolt™ by HTC is Verizon’s first 4G LTE smartphone. Verizon launched the fastest, most
advanced 4G network in the U.S., creating a new growth platform for wireless data services.
O V E R I ZO N CO M M U N I C AT I O N S I N C . | 20 10 A N N UA L R E P O R T
allowing interactive conferencing with
conversations that are more natural. LTE will
also offer new ways to deliver live video feeds
from on-location news reporters, mobile
webcams and remote surveillance cameras. In
addition, LTE will make wireless HD video
possible, allowing first responders and remote
medical providers to send and receive
high-quality images quickly and efficiently.
In 2011, Verizon will roll out a
comprehensive suite of consumer-and
business-oriented smartphones, tablets and
devices for our 4G LTE network from several
major manufacturers. We’ll also see LTE chips
built into a wide range of products, such as
consumer electronic devices, home
appliances and vehicles. For example, GM’s
OnStar service will use Verizon’s 4G LTE
network in vehicles with advanced cameras,
sensors, navigation and monitoring tools to
further enhance the driving experience.
There aren’t many providers who can
connect customers at home, at work and
everywhere in between, wherever they are in
the world. At Verizon, we designed our
high-IQ networks to be the hub of the wheel
that will keep our customers connected to
applications, information and each other
at all times.
In 2010, Verizon and Apple teamed up to offer the iPad™, giving users a new way to browse the
Internet, enjoy photos, watch HD videos, listen to music, play games, read ebooks and much more.
couldn’t be handled efficiently in a mobile
environment before.
In the new world of 4G, video will be a
major factor in wireless communication. But it
won’t be limited to downloading movies and
other content, as we think of video today. For
example, LTE will enable real-time, two-way
video streaming with virtually no delay,
Making a Difference:
Improving
Accessibility
products, including our successful Droid
lineup of smartphones. We’ve also added
Apple’s popular iPhone 4 and iPad to our
comprehensive wireless portfolio.
As a result of our award-winning service,
products and networks, we have the highest-
quality, most loyal customer base in the
wireless industry. To continue providing the
best experience to our customers, Verizon is
investing in the next phase of wireless
broadband growth with the launch of 4G LTE
(Long Term Evolution) technology. This new
service will provide customers with a faster 4G
experience and will help create new data-
driven growth services.
We launched our 4G LTE network last
year in 38 major markets, home to one-third
of all Americans, and made the service
available in more than 60 major airports. We’ll
double our coverage in 2012 to reach 200
million people, and we’ll blanket the U.S. by
the end of 2013.
Verizon’s 4G LTE network will dramatically
change the way our customers live, work and
play. Our 4G LTE service is 10 times faster than
3G, with speeds that approach wired
broadband services. But it’s not just about
doing things faster. Our 4G LTE network will
allow customers to experience bandwidth-
hungry, rich multi-media applications that
Verizon is proud to count itself among the supporters of landmark legislation enacted in
October 2010 – the 21st Century Communications & Video Accessibility Act – that will provide
disabled Americans improved access to communications, television and the Internet.
Making technology accessible has been a Verizon priority for a long time, beginning with
our commitment to universal design. This includes videophone services such as the TALKS™
line of text-to-speech devices, as well as our Centers for Customers with Disabilities, which
provide life-enhancing telecommunications services for people with hearing, vision, mobility,
speech and cognitive limitations.
Other accessibility achievements in 2010 included the rollout of the Haven, a new mobile
device for seniors, and upgrades to our FiOS service to accommodate more applications for
the disabled. Looking ahead, we’re also developing a service to download Braille books to
wireless devices and creating the Verizon Wireless Assistive Technology call center.
7
Innovation for
Connected Homes
Verizon’s all-fiber FiOS network is the ideal platform for bandwidth-intensive applications such as
two-way, high-definition video chats in the comfort of your living room.
The optimal platform for handling this
kind of bandwidth demand is fiber, and
Verizon’s 100 percent fiber-optic FiOS network
investment positions us to be a premier
provider in this market. We’ve built the largest
and fastest fiber-to-the-home network in the
U.S., capable of handling high volumes of
streaming video and on-demand content.
Fiber connectivity is a giant leap forward
from other technologies, moving on-demand
viewing beyond the home and taking
sporting events to a new level. We’ve taken
the lead on delivering the highest-quality 3-D
programming; last year we aired the first 3-D
broadcasts of college football, NFL and major
league baseball games, and we offer a
growing catalogue of 3-D movies-on-demand.
In fact, we recently upped the ante for
home broadband by tripling our top speed to
150 megabits per second, setting a new
benchmark for high-speed Internet. On the
average broadband connection today, a
full-length HD movie takes almost four and a
half hours to download. With 150 megabit
service, that time is reduced to just four and a
half minutes. With practically no limit to the
speeds fiber can deliver, we believe that the
connected home will dramatically change the
way we communicate.
Setting up a connected home begins
with a superior home network. Verizon’s FiOS
service lets users stream content from their
PCs to their FiOS-connected TVs, including
digital photos, music files, Internet radio
stations, home movies and Internet videos.
s home entertainment
has evolved from analog
to high-definition and
now 3-D, Verizon has
created a high-capacity
broadband network that
can stay ahead of new technology. Five years
ago, video accounted for just 10 percent of
the traffic on the Internet. Now, it’s more than
half and could go as high as 90 percent in
the near future. Connected homes have
sparked a creative revolution in digital media
and fueled tremendous growth in game
consoles, HDTVs, DVRs and home-networking
equipment. Going forward, consumers will
experience innovations like 3-D videoconfer-
encing, holographic games, virtual travel and
much more.
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But the home network is only the beginning.
With the intelligence and speed engineered
into our fiber-optic network – along with the
power of our 4G LTE network – Verizon will
continue to transform the broadband
experience and deliver a whole new suite of
innovative services for the home.
We see the fiber-enabled home as the
hub for managing all aspects of a customer’s
digital life. What’s bringing this long-predicted
vision to life is the increasing number of
connected devices in the home, combined
with high-speed connections and a flood of
web-based content that needs to be
managed. And when you layer on social
trends like energy conservation, telework and
environmental concerns, we see tremendous
opportunity for truly efficient and integrated
connected-home solutions.
For example, Verizon is launching
an innovative service for people who want an
affordable way to manage the security and
energy consumption of their home, wherever
they may be. Verizon’s Home Monitoring &
Control service will provide an easy-to-use
combination of devices and online services
accessed by a computer, tablet, cell phone
or smartphone. Customers will be able to
adjust household lights, thermostats and
appliances using an application on FiOS TV;
use their smartphone to watch streaming live
video from their networked surveillance
cameras; and even unlock their front door
from their office computer to let their children
in after school.
Additional connected home solutions
will be developed that take advantage of
Verizon’s high-bandwidth fiber and 4G LTE
networks. Real-time HD video calls on your
wide-screen TV will feel so natural that you’ll
forget you’re not all in the same room.
Monitoring patients in the comfort of their
homes will dramatically improve outpatient
health care and recovery while freeing up
hospital resources. For rural homes, high-
speed Internet access and video programming
will be possible through agreements with
local carriers to deliver Verizon’s 4G LTE
wireless broadband service through the “LTE
in Rural America” program.
The intelligence built into Verizon’s
advanced fiber and 4G LTE networks will
The intelligence built into Verizon’s FiOS network enables new home management services
like remote control of thermostats, lights, door locks and surveillance cameras.
enable users to seamlessly connect their
digital devices, delivering always-on,
always-connected capabilities to manage all
aspects of their lives.
It doesn’t take a huge leap of imagina-
tion to go from smart homes to smart energy
grids, smart factories, smart transportation
systems and smart health care. This “Internet
of things” will be powered by Verizon’s
high-IQ networks and the new universe of
applications they make possible.
Making a Difference:
Increasing
Internet Safety
Verizon is committed to providing people
with the tools and the confidence to get the
most enjoyment out of the Internet. We offer
resources that allow families to create a safe
and secure digital experience whether they’re
interacting online, watching TV or connecting
on a mobile phone.
Verizon’s Parental Controls Center offers
access to a complete line-up of services
from Verizon Safeguards to help customers
manage and create the digital experience
that is appropriate for their families. Verizon’s
tools include free wireless content filters as
well as free parental control features available
with Verizon FiOS, High Speed Internet and
FiOS TV services.
In 2010, Verizon led the industry in
drafting voluntary rating guidelines for mobile
applications. The guidelines were approved by
CTIA-The Wireless Association® in October
and, once implemented, will provide
consumers with the information they need to
make informed choices when accessing
applications using a wireless device.
Samsung Galaxy Tab™
9
Innovation for
A Connected World
Verizon’s cloud strategy delivers highly secure, on-demand solutions to business and government
customers anywhere, anytime over our advanced global IP network.
hanks to iP innovation,
the people we interact
with every day could be
in the next town or on the
next continent. They may
be working in an office,
but they just as likely may be participating in
a video conference at home or downloading
presentations at an international airport.
How people communicate has changed,
but what hasn’t changed is our need to
collaborate. We still have to share ideas, build
relationships and foster a sense of teamwork.
In essence, we need to communicate as if we
are meeting face-to-face, even though we
may be many time zones apart.
Thanks to Verizon’s global capabilities
and Internet backbone facilities, we are a
major provider of communications services on
a global scale, with some 180,000 enterprise
customers around the world. Businesses
increasingly depend on transporting terabytes
of video and data internationally to a wide
array of people and devices, and Verizon’s
high-capacity global networks allow us to
meet this rapidly increasing demand.
Verizon’s Internet backbone reaches close
to 160 countries on six continents and has
been named by TeleGeography as the most
connected Internet backbone network for 11
of the last 12 years. Our high-speed undersea
cables link the world’s major markets, and we
were the first company to deliver commercial
long-haul service at 100 gigabits per second.
We’ve enhanced our capabilities in
professional and strategic services through ac-
quisitions like Cybertrust, which made Verizon
the leading provider of managed informa-
tion security services to large-business and
government customers worldwide. Earlier this
year, we announced a definitive agreement
to acquire Terremark, a global provider of
managed IT infrastructure and cloud services.
This transaction will help accelerate Verizon’s
everything-as-a-service cloud strategy.
The cloud is made up of huge
digital storehouses containing media,
communications, personal data and
network intelligence – basically anything
that can be digitized and made available
to users wherever they are. Verizon’s
global networks and data centers give us
the necessary infrastructure to be a major
source of innovative cloud services. We
have the network intelligence and security
built into our systems to make the vision
of reliable global access a reality. The
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T V E R I ZO N CO M M U N I C AT I O N S I N C . | 20 10 A N N UA L R E P O R T
industry is still in the early stages of this
revolution, but cloud services will be a
dramatic shift in how content and services
are delivered to our connected world.
Verizon is well positioned to deliver
a full range of communications solutions
tailored to key industries. Our network
capabilities are backed by our leading man-
aged and professional services. In addition,
we have a great opportunity to extend our
global reach and scale through our partner-
ship with Vodafone, especially in the area
of global mobility. We are working to align
our technology roadmaps, gain efficiencies
through joint procurement, and unify our
account teams to better serve enterprise and
multinational corporations. With the talent
and resources of our two companies, there
are tremendous opportunities to deliver
superior services for global customers,
expand into high-growth vertical markets
and deliver greater value for shareowners.
This global presence positions us to be a
leader in the next great era of computing, in
which everything – media, communications,
personal data, network intelligence, security
protocols and more – will be stored in the
cloud and delivered globally.
With our data centers, global IP
backbone and service portfolio, we are well
positioned to capitalize on this fast-growing
market by delivering any content to any
Verizon is one of the world’s leading providers of global communication and collaboration
solutions, like Cisco TelePresence®, a high-definition video conferencing service.
device, anywhere, with all the network quality
and reliability our customers have come to
associate with the Verizon brand.
Looking ahead, Verizon is working, on our
own and with partners, to take advantage of
all the opportunities our networks are helping
create. We’re working on a mobile commerce
joint venture that will let users pay for items
using their cell phones. We’re partnering with
utility companies to create smart grids, with
hospitals to create a smarter health care
system, and with educators to use technology
to improve performance in science,
technology and engineering.
We believe that this new era of
connectivity is a global phenomenon with
Verizon at the epicenter, creating growth
and opportunity on a massive scale.
Making a Difference:
Promoting
Sustainability
You probably don’t think of Verizon as an energy company. But when you think about how our
high-IQ networks help drive energy efficiency, you’ll realize we’re at the heart of the clean
economy.
Verizon is focused on bringing environmentally sustainable communications to the
marketplace, and we believe the opportunities for innovation are endless. From downloading
books and movies on smartphones to remotely controlling energy consumption in homes,
intelligent broadband networks, devices and applications have the potential to make our
planet greener.
Our goal is to make sustainability an integrated part of how our employees do their jobs
every day. We strive to operate our business responsibly by minimizing the impact of our
operations on the environment. For example, we’re rolling out eco-friendly wireless devices
and FiOS set top boxes, promoting paperless billing for our customers and deploying
alternative fuel vehicles within Verizon’s fleet.
11
Innovation for
A Connected Society
t verizon, we use our
technology, financial
resources, employees and
partnerships to help solve
critical social issues. Our
approach is motivated by
our deep commitment to
doing business in a way that contributes to
the prosperity of our shareowners, our
employees and the communities we serve.
Since 2005, the Verizon Foundation has
awarded more than $411 million to nonprofit
organizations, with the majority of the funds
going to organizations that support
education, domestic violence prevention and
online safety.
For example, the Verizon Foundation’s
leading education technology initiative is
Thinkfinity.org, an award-winning K-12
website that offers free lesson plans, videos
and interactive learning materials. In 2010,
more than 3 million teachers, students and
parents visited Thinkfinity.org, making it the
third-most-visited site among major
educational websites.
12
Kristin Favale uses an interactive smart board to teach an online poetry lesson from the Verizon
Foundation’s Thinkfinity.org website at the John F. Kennedy Magnet School in Port Chester, N.Y.
We enhanced our Thinkfinity.org search
engine and created thousands of new content
resources, including more than 1,000 new
educational videos. We also launched the
Thinkfinity Community, a social networking
site where teachers can share, learn and
discuss the latest tools that improve student
achievement. In all, Verizon trained more than
42,000 teachers on the benefits of using
Thinkfinity.org in the classroom in 2010,
bringing our training total to nearly 100,000
teachers across the U.S.
The Verizon Foundation has also invested
its capital, human resources and technol-
ogy toward preventing domestic violence.
Domestic violence affects people of all
backgrounds, including one in four women
and over 3 million children. The Verizon
Foundation works to increase awareness of
this pervasive crime, lending its resources and
technology to help victims and their families.
The Verizon-funded documentary, “Telling
Amy’s Story,” recounts the murder of a young
Pennsylvania mother by her abusive husband.
This gripping film about Amy McGee, a Verizon
employee, aired on nearly 300 PBS stations
in 2010 and will continue in 2011.
While domestic violence affects mil-
lions, sometimes a single call can make the
difference. Verizon’s HopeLine® program
refurbishes used phones and gives them to
those who might not otherwise have a way
to call for help. Since 2001, Verizon HopeLine
has collected more than 7.6 million phones,
awarded more than $10 million in grants
to shelters and prevention programs, and
donated nearly 100,000 cell phones and
more than 300 million free minutes of airtime
to victims, survivors and organizations.
In another area of corporate
responsibility, Verizon employees volunteered
more than 730,000 hours in 2010 to support
nonprofit organizations. Through Verizon
Volunteers, one of the largest employee
volunteer programs in the U.S., our employees
and retirees donated nearly 6 million
hours of community service since 2000.
For more information on Verizon’s
commitment to corporate responsibility, visit
verizon.com/responsibility.
A 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
Selected Financial Data – As Adjusted*
2010
2009
(dollars in millions, except per share amounts)
2006
2007
2008
Results of Operations
Operating revenues
Operating income
Income (loss) before discontinued operations, extraordinary item
and cumulative effect of accounting change attributable
to Verizon
Per common share – basic
Per common share – diluted
Net income (loss) attributable to Verizon
Per common share – basic
Per common share – diluted
Cash dividends declared per common share
Net income attributable to noncontrolling interest
$ 106,565
14,645
$ 107,808
15,978
$ 97,354
2,612
$ 93,469
17,816
$ 88,182
17,137
2,549
.90
.90
2,549
.90
.90
1.925
7,668
4,894
1.72
1.72
4,894
1.72
1.72
1.870
6,707
(2,193)
(.77)
(.77)
(2,193)
(.77)
(.77)
1.780
6,155
7,201
2.48
2.48
7,212
2.49
2.49
1.670
5,053
7,763
2.67
2.64
8,480
2.91
2.89
1.620
4,038
Financial Position
Total assets
Debt maturing within one year
Long-term debt
Employee benefit obligations
Noncontrolling interest
Equity attributable to Verizon
$ 220,005
7,542
45,252
28,164
48,343
38,569
$ 226,907
7,205
55,051
32,622
42,761
41,382
$ 202,185
4,993
46,959
32,512
37,199
41,592
$ 186,942
2,954
28,203
29,960
32,266
50,580
$ 189,072
7,715
28,646
30,779
28,310
48,830
• Significant events affecting our historical earnings trends in 2008 through 2010 are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
• 2007 data includes sales of business, severance, pension and benefit charges, merger integration costs, and other items.
• 2006 data includes sales of business, severance, pension and benefit charges, merger integration costs, as well as relocation charges and other items.
* During 2010, we retrospectively changed our method of accounting for benefit plans as described in Note 1 to the consolidated financial statements. As a result, all prior periods have
been adjusted.
Stock Performance Graph
Comparison of Five-Year Total Return Among Verizon, S&P 500 Telecommunications Services Index and S&P 500 Stock Index
Verizon
S&P 500 Telecom Services
S&P 500
s
r
a
l
l
o
D
$180
$160
$140
$120
$100
$80
$60
$40
2005
2006
2007
2008
2009
2010
Data Points in Dollars
Verizon
S&P Telecom Services
S&P 500
2005
100.0
100.0
100.0
2006
134.6
136.7
115.8
At December 31,
2007
164.3
152.9
122.1
2008
134.6
106.3
77.0
2009
139.8
115.8
97.3
2010
172.1
137.8
112.0
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 local exchange business and related landline activities in predominantly rural areas in 14 states, completed in 2010, and in Maine, New Hampshire and Vermont, completed in 2008, and our
domestic yellow pages directories business, completed in 2006. It assumes $100 was invested on December 31, 2005, with dividends reinvested.
13
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted
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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS – AS ADJUSTED
During the fourth quarter of 2010, Verizon retrospectively changed its method
of accounting for benefit plans as described in Note 1 to the consolidated
financial statements. As a result, all prior periods have been adjusted. As part
of this change to our method of accounting, the service cost and the amor-
tization of prior service costs, which are representative of the benefits earned
by active employees during the period, will continue to be allocated to the
segment in which the employee is employed, while interest cost and expected
return on assets will now be recorded at the Corporate level. The recognition
of actuarial gains and losses will also be recorded at the Corporate level.
In addition, in order to comply with regulatory conditions related to the acqui-
sition of Alltel in January 2009, Verizon Wireless divested certain overlapping
properties during the first half of 2010. On July 1, 2010, certain of Verizon’s
local exchange business and related landline activities were spun off. During
the second quarter of 2010, we recorded a non-cash adjustment primarily to
adjust wireless data revenues.
Accordingly, Domestic Wireless and Wireline results from these operations as
well as the deferred revenue adjustment have been reclassified to Corporate
and Other to reflect comparable segment operating results consistent with
the information regularly reviewed by our chief operating decision maker.
We have adjusted prior-period consolidated and segment information, where
applicable, to conform to current year presentation.
OVERVIEW
Verizon Communications Inc. (Verizon, or the Company), is one of the
world’s leading providers of communications services. Our domestic
wireless business, operating as Verizon Wireless, provides wireless voice
and data products and services across the United States using one of
the most extensive and reliable wireless networks. Our wireline business
provides communications products and services, including voice, broad-
band data and video services, network access, long distance and other
communications products and services, and also owns and operates one
of the most expansive end-to-end global Internet Protocol (IP) networks.
We have a highly diverse workforce of approximately 194,400 employees
as of December 31, 2010.
In the sections that follow, we provide information about the important
aspects of our operations and investments, both at the consolidated and
segment levels, and discuss our results of operations, financial position
and sources and uses of cash. In addition, we highlight key trends and
uncertainties to the extent practicable. We also monitor several key eco-
nomic indicators, as well as the state of the economy in general, primarily
in the United States, where the majority of our operations are located for
purposes of evaluating our operating results and assessing the potential
impacts of these factors on our businesses. While most key economic
indicators, including gross domestic product, affect our operations to
some degree, we historically have noted higher correlations to non-farm
employment, personal consumption expenditures and capital spending,
as well as more general economic indicators such as inflationary or reces-
sionary trends and housing starts.
During 2010, we faced the challenges posed by a global economic
downturn and continued to increase revenues in our growth businesses,
increase free cash flow, and make strategic investments in wireless, broad-
band, global connectivity and video. At the same time, we took significant
actions to improve our cost structure, in part by reaching agreements
with certain unions on temporary enhancements and addressing future
profitability as described below.
14
During the second quarter of 2010, as a condition of the regula-
tory approvals by the Department of Justice (DOJ) and the Federal
Communications Commission (FCC) to complete the acquisition of Alltel
Corporation (Alltel) in January 2009, Verizon Wireless divested overlap-
ping properties in 105 operating markets in 24 states (Alltel Divestiture
Markets). The Verizon Wireless customer base was reduced by approxi-
mately 2.1 million customers, after certain adjustments. In July 2010, the
Company spun-off to its stockholders a subsidiary of Verizon (Spinco)
which held defined assets and liabilities of the local exchange business
and related landline activities of Verizon in predominantly rural areas in 14
states. Immediately following the spin-off, Spinco merged with Frontier
Communications Corporation (Frontier) pursuant to a definitive agreement
with Frontier. This transaction further focused Verizon’s asset base around
its fastest growing businesses – wireless, FiOS and other broadband devel-
opment and global IP networks. (See “Acquisitions and Divestitures.”)
Our results of operations, financial position and sources and uses of cash
in the current and future periods reflect our focus on the following stra-
tegic imperatives:
Revenue Growth – To generate revenue growth we are devoting our
resources to higher growth markets, such as the wireless voice and data
markets, the broadband and video markets, and the provision of strategic
services to business markets, rather than to the traditional wireline voice
market. During 2010, consolidated revenue decreased 1.2% compared to
2009 primarily due to the sale of divested operations as well as lower rev-
enue in the Wireline segment resulting from switched access line losses
and decreased minutes of use (MOUs), partially offset by higher revenues
in our growth markets. We continue to develop and market innovative
product bundles to include local, long distance, wireless, broadband data
and video services for consumer, business and government customers.
We anticipate that these efforts will help counter the effects of competi-
tion and technology substitution that have resulted in access line losses,
and enable us to grow consolidated revenues.
Market Share Gains – In our wireless business, our goal is to continue to
be the market leader in providing wireless voice and data communica-
tion services in the United States. As the demand for wireless data services
grows, we continue to increase our data revenues by expanding our pen-
etration of data services as a result of increased sales of smartphone and
other data-capable devices. In 2010, we launched our fourth-generation
(4G) Long-Term Evolution technology (LTE) network in 38 major metro-
politan areas and more than 60 commercial airports in the United States.
We expect to deploy 4G LTE in an additional 140 markets by the end of
2011 and in virtually our entire current 3G network footprint by the end
of 2013. In our wireline business, our goal is to become the leading pro-
vider of communications products and services in each of the markets
in which we operate. We are focused on providing the highest network
reliability and innovative products and services. During 2010, we invested
$16.5 billion in capital expenditures.
In Domestic Wireless:
• as of December 31, 2010 compared to 2009, total customers increased
5.6% to 94.1 million; and
• during 2010 compared to 2009, total data average revenue per cus-
tomer per month (ARPU) increased by 17.3% to $17.73.
During 2010, in Wireline:
• we added 232,000 net wireline broadband connections, including
796,000 net new FiOS Internet subscribers, for a total of 8.4 million
connections, including 4.1 million FiOS Internet subscribers;
• we added 722,000 net new FiOS TV subscribers, for a total of 3.5 million
FiOS TV subscribers; and
• total broadband and video revenues were approximately $6.8 billion.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
As of December 31, 2010, we passed 15.6 million premises with our high-
capacity fiber optics network operated under the FiOS service mark.
With FiOS, we have created the opportunity to increase revenue per cus-
tomer as well as improve Wireline profitability as the traditional fixed-line
telephone business continues to decline due to customer migration to
wireless, cable and other newer technologies.
We are also focused on gaining market share in our enterprise busi-
ness through the deployment of strategic enterprise service offerings,
including expansion of our Voice over Internet Protocol (VoIP) and inter-
national Ethernet capabilities, the introduction of video and web-based
conferencing capabilities, and enhancements to our virtual private net-
work portfolio. During 2010, revenues from strategic enterprise services
grew 6.3% compared to 2009 and represent more than 42% of total
Global Enterprise revenues.
Profitability Improvement – Our goal is to increase operating income
and margins. Strong wireless data and FiOS revenue growth continue
to positively impact operating results. In addition, while revenues in the
business market continue to be affected by macro-economic pressures,
we are seeing some signs of stability. If there is a sustained economic
recovery, it should positively impact our revenue and profitability in
future quarters. However, we remain focused on cost controls with the
objective of driving efficiencies to offset business volume declines.
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. These
and other efforts, such as real estate consolidation, call center routing
improvements, a centralized shared services organization, and informa-
tion technology and marketing efforts, have led to changes in our cost
structure with a goal of maintaining and improving operating income
margins. Through our deployment of the FiOS network, we expect to
realize savings annually in our ongoing operating expenses as a result of
efficiencies gained from fiber network facilities.
Customer Service – Our goal is to be the leading company in customer
service in every market we serve. We view superior product offerings and
customer service experiences as a competitive differentiator and a cata-
lyst to growing revenues and gaining market share. We are committed
to providing high-quality customer service and continually monitor cus-
tomer satisfaction in all facets of our business. Verizon Wireless ranked
highest among wireless providers in small to mid-sized business cus-
tomer satisfaction in the J.D. Power and Associates 2010 U.S. Business
Wireless Satisfaction Study released in June. During 2010, J.D. Power and
Associates also ranked FiOS TV service with the “Highest in Residential
Television Service Satisfaction in the East Region” in the J.D. Power and
Associates 2010 Residential Television Service Satisfaction Study.
Performance and Values-Based Culture – We embrace a performance
and values-based culture that demonstrates our commitment to integ-
rity, respect, performance excellence, accountability, and putting our
customers first. Our individual and team objectives are tied to Verizon’s
strategic imperatives. Key objectives of our compensation programs are
pay-for-performance and the alignment of executives’ and stockholders’
long-term interests. We also employ a highly diverse workforce, as respect
for diversity is an integral part of Verizon’s culture and a critical element of
our competitive success.
Trends
We expect that competition will continue to intensify with traditional,
non-traditional and emerging service providers seeking increased market
share. We believe that our networks differentiate us from our competi-
tors, enabling us to provide enhanced communications experiences to
our customers. We believe our focus on the fundamentals of running a
good business, including operating excellence and financial discipline,
gives us the ability to plan and manage through changing economic
conditions. We will continue to invest for growth, which we believe is the
key to creating value for our shareowners.
Customer and Operating Trends
In our Domestic Wireless segment, we expect to continue to attract and
maintain the loyalty of high-quality retail postpaid customers, capital-
izing on customer demand for data services, and bringing our customers
new ways of using wireless services in their daily lives. We expect that
future customer growth will accelerate as a result of the introduction of
new smartphones, including the iPhone 4, internet devices, such as tab-
lets, and our suite of 4G LTE devices. We believe these devices will attract
and retain higher value customers, contribute to continued increases in
the penetration of data services and keep our device line-up competi-
tive versus other wireless carriers. We expect future growth opportunities
will be dependent on expanding the penetration of our data services,
offering innovative wireless devices for both consumer and business
customers, and increasing the number of ways that our customers can
connect with our network and services.
In recent years, we have experienced continuing access line losses in our
Wireline segment as customers have disconnected both primary and
secondary lines and switched to alternative technologies, such as wire-
less, VoIP and cable for voice and data services. We expect to continue
to experience access line losses as customers continue to switch to alter-
nate technologies.
Despite this challenging environment, we expect that key aspects of our
wireline business will continue to grow by providing superior network
reliability as we continue to offer innovative product bundles that include
high-speed Internet access, digital television and local and long distance
voice services, offering more robust IP products and services as well as
accelerating our cloud computing strategy. We will continue to focus on
cost efficiencies to attempt to offset adverse impacts from unfavorable
economic conditions and secular changes.
Operating Revenue
We expect to experience service revenue growth in our Domestic
Wireless segment, primarily as a result of the growth of our customer
base as well as continued data revenue growth driven by increased pen-
etration of data services resulting from increased sales of smartphone
and other data-capable devices. We expect that the introduction of new
smartphones, including the iPhone 4, and our suite of 4G LTE devices
will contribute to an increase in our average revenue per user (ARPU) for
data. However, we expect to continue to experience sequential declines
in our overall average voice revenue per user due to the ongoing impact
of customers seeking to optimize the value of our voice plans. We expect
that our future service revenue growth will be substantially derived from
data revenue growth as we continue to expand the penetration of our
wireless data offerings and increase our sales and usage of innovative
wireless smartphone and other data-capable devices.
Although we have experienced declines in Domestic Wireless Equipment
and other revenue as a result of a reduction in the number of wireless
devices sold, we expect that sales of newly introduced devices will
result in increased sales volume and an overall increase in revenues from
device sales.
15
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
CONSOLIDATED RESULTS OF OPERATIONS
In this section, we discuss our overall results of operations and highlight
items of a non-operational nature that are not included in our seg-
ment results. We have two reportable segments, which we operate and
manage as strategic business units and organize by products and ser-
vices. Our segments are Domestic Wireless and Wireline. In the “Segment
Results of Operations” section, we review the performance of our two
reportable segments.
Corporate, eliminations and other includes unallocated corporate
expenses, intersegment eliminations recorded in consolidation, the
results of other businesses such as our investments in unconsolidated
businesses, pension and other employee benefit related costs, lease
financing, and divested operations and other adjustments and gains and
losses that are not allocated in assessing segment performance due to
their non-operational nature. Although such transactions are excluded
from the business segment results, they are included in reported consoli-
dated earnings. Gains and losses that are not individually significant are
included in all segment results as these items are included in the chief
operating decision maker’s assessment of segment performance. We
believe that this presentation assists users of our financial statements in
better understanding our results of operations and trends from period
to period.
In the following discussion, all prior period results have been adjusted
to reflect the change in accounting for benefit plans (see Note 1 to the
consolidated financial statements). Reclassifications have also been
made primarily to reflect comparable operating results for the spin-off of
our local exchange business and related landline activities in predomi-
nantly rural areas in 14 states, completed in 2010, and in Maine, New
Hampshire and Vermont, completed in 2008, as well as sale of the Alltel
Divestiture Markets.
We expect broadband penetration to positively impact our Mass Markets
revenue and subscriber base, but we expect to continue to experience
declining revenues in our Wireline segment primarily due to access line
losses as a result of wireless substitution and current economic condi-
tions. We also expect to experience period to period declines in reported
revenue due to the transaction with Frontier described above.
We expect continued expansion of strategic services revenue as we derive
additional revenues from cloud, security and other solutions-based ser-
vices and customers continue to migrate their services to Private IP and
other strategic networking services.
Operating Costs and Expenses
We anticipate that our overall wireless operating costs will increase as a
result of the expected increase in the volume of smartphone sales, which
will result in higher equipment costs. We expect that the impact of these
increased operating costs will cause a decline in our near-term Verizon
Wireless Segment earnings before interest, taxes, depreciation and amor-
tization (EBITDA) margins. However, we expect to continue to achieve
other operating cost efficiencies through a number of cost savings initia-
tives to help control our overall operating costs. In addition, labor costs
are expected to decrease in our Wireline segment as a result of head-
count reductions, which will be partially offset by increased content costs
for video in our growth businesses.
Capital Expenditures
Our 2011 capital program includes capital to fund advanced networks
and services, including FiOS and LTE, the continued expansion of our
core networks, including our IP and wireless Evolution-Data Optimized
(EV-DO) networks, maintenance and support for our legacy voice net-
works and other expenditures. Additionally, during 2010 we substantially
completed the initial FiOS deployment program. The amount and the
timing of the Company’s capital expenditures within these broad cat-
egories can vary significantly as a result of a variety of factors outside
our control, including, for example, material weather events. We are not
subject to any agreement that would constrain our ability to control our
capital expenditures by requiring material capital expenditures on a des-
ignated schedule or upon the occurrence of designated events. Capital
expenditures declined in 2010 compared to 2009. We believe that we
have sufficient discretion over the amount and timing of our capital
expenditures on a company-wide basis that we can reasonably expect
2011 capital expenditures to be flat or lower than 2010.
Cash Flow from Operations
We create value for our shareowners by investing the cash flows gener-
ated by our business in opportunities and transactions that support our
strategic imperatives, thereby increasing customer satisfaction and usage
of our products and services. In addition, we have used our cash flows to
maintain and grow our dividend payout to shareowners. Verizon’s Board
of Directors increased the Company’s quarterly dividend by 2.6% during
2010, which was the fourth consecutive year in which we have raised our
dividend. Net cash provided by operating activities for the year ended
December 31, 2010 of $33.4 billion increased by $2.0 billion from $31.4
billion for the year ended December 31, 2009.
Other
We do not currently expect that legislative efforts relating to climate
control will have a material adverse impact on our consolidated financial
results or financial condition. We believe there may be opportunities for
companies to increase their use of communications services, including
those we provide, in order to minimize the environmental impact of
their businesses.
16
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
Consolidated Revenues
Years Ended December 31,
2010
2009
2008
2010 vs. 2009
Domestic Wireless
Service revenue
Equipment and other
Total
Wireline
Mass Markets
Global Enterprise
Global Wholesale
Other
Total
Corporate, eliminations and other
Consolidated Revenues
$
$
$
55,629
7,778
63,407
$
52,046
8,279
60,325
16,256
15,669
8,393
909
41,227
1,931
106,565
$
16,115
15,667
9,155
1,514
42,451
5,032
107,808
$
42,602
6,696
49,298
15,831
16,601
9,832
2,059
44,323
3,733
97,354
$
$
3,583
(501)
3,082
6.9 %
(6.1)
5.1
141
2
(762)
(605)
(1,224)
(3,101)
(1,243)
0.9
–
(8.3)
(40.0)
(2.9)
(61.6)
(1.2)
(dollars in millions)
Increase/(Decrease)
2009 vs. 2008
$
$
9,444
1,583
11,027
284
(934)
(677)
(545)
(1,872)
1,299
10,454
22.2 %
23.6
22.4
1.8
(5.6)
(6.9)
(26.5)
(4.2)
34.8
10.7
2010 Compared to 2009
The decrease in Consolidated revenues during 2010 compared to 2009
was primarily due to the sale of divested operations and declines in rev-
enues at our Wireline segment resulting from switched access line losses
and decreased MOUs in traditional voice products, partially offset by
higher revenues in our growth markets.
Corporate, eliminations and other during 2010 included a one-time non-
cash adjustment of $0.2 billion primarily to reduce wireless data revenues.
This adjustment was recorded to properly defer previously recognized
wireless data revenues that will be earned and recognized in future
periods. As the amounts involved were not material to the consolidated
financial statements in the current or any previous reporting period, the
adjustment was recorded during the second quarter of 2010 (see “Other
Items”). In addition, the results of operations related to the divestitures
included in Corporate, eliminations and other are as follows:
Years Ended December 31,
2010
(dollars in millions)
2008
2009
Impact of Divested Operations
Operating revenues
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
$ 2,407
574
665
413
$
5,297
1,288
1,356
884
$
4,084
1,076
895
916
The increase in Domestic Wireless’ revenues during 2010 compared to
2009 was primarily due to growth in service revenue. Service revenue
increased during 2010 compared to 2009 primarily due to an increase in
total customers since January 1, 2010, as well as continued growth in our
data ARPU, partially offset by a decline in voice ARPU.
Total wireless data revenue was $19.6 billion and accounted for 35.1%
of service revenue during 2010, compared to $15.6 billion and 29.9%
during 2009. Total data revenue continues to increase as a result of the
increased penetration of data offerings, in particular for e-mail and web
services resulting in part from increased sales of smartphone and other
data-capable devices. Voice revenue decreased as a result of continued
declines in our voice ARPU, partially offset by an increase in the number
of customers.
Equipment and other revenue decreased during 2010 compared to 2009
due to a decrease in the number of equipment units sold, which resulted
from a decrease in customer gross additions.
The decrease in Wireline’s revenues during 2010 compared to 2009 was
primarily due to lower Global Wholesale and Other revenue, partially
offset by an increase in Mass Markets revenue. The decrease in Global
Wholesale revenues during 2010 compared to 2009 was primarily due to
decreased MOUs in traditional voice products, increases in voice termina-
tion pricing on certain international routes, which negatively impacted
volume, and continued rate compression due to competition in the
marketplace. The decrease in Other revenue during 2010 compared to
2009 was primarily due to reduced business volumes, including former
MCI mass market customer losses. The increase in Mass Markets revenue
during 2010 compared to 2009 was primarily driven by the expansion of
consumer and business FiOS services (Voice, Internet and TV), which are
typically sold in bundles, partially offset by the decline of local exchange
revenues principally as a result of a decline in switched access lines.
Global Enterprise revenues during 2010 compared to 2009 were essen-
tially unchanged. Higher customer premises equipment and strategic
networking revenues, were offset by lower local services and traditional
circuit-based revenues.
17
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
2009 Compared to 2008
The increase in Consolidated revenues in 2009 compared to the similar
period in 2008 was primarily due to the inclusion of the operating results
of Alltel in our Wireless segment and higher revenues in our growth mar-
kets. These revenue increases were partially offset by declines in revenues
at our Wireline segment due to switched access line losses and decreased
MOUs in traditional voice products.
The increase in Domestic Wireless’ revenues in 2009 compared to the
similar period in 2008 was primarily due to the inclusion of the operating
results of Alltel and continued growth in service revenue. Service revenue
in 2009 increased compared to the similar period in 2008 primarily due to
an increase in net new customers, after conforming adjustments, which
we acquired in connection with the acquisition of Alltel on January 9,
2009, as well as an increase in total customers from sources other than
acquisitions. Total data revenue was $15.6 billion and accounted for
29.9% of service revenue in 2009, compared to $10.6 billion and 24.9%,
respectively, during the similar period in 2008 because of increased use
of Mobile Broadband, e-mail, and messaging.
Domestic Wireless’ equipment and other revenue increased during 2009
compared to the similar period in 2008 primarily due to an increase in
the number of units sold, partially offset by a decrease in the average rev-
enue per unit. Other revenues increased primarily due to the inclusion of
the operating results of Alltel and an increase in our cost recovery rate.
Consolidated Operating Expenses
The decrease in Wireline’s revenues in 2009 compared to 2008 was pri-
marily driven by declines in Global Enterprise, Global Wholesale and
Other revenue, partially offset by an increase in Mass Markets revenue.
The decrease in Global Enterprise revenues in 2009 compared to the
similar period in 2008 was primarily due to lower long distance and
traditional circuit-based data revenues, and lower customer premise
equipment combined with the negative effects of movements in foreign
exchange rates versus the U.S. dollar. This decrease was partially offset
by an increase in IP, managed network solutions and security solutions
revenues. The decrease in Global Wholesale revenues in 2009 compared
to the similar period in 2008 was primarily due to decreased MOUs in
traditional voice products and continued rate compression due to com-
petition in the marketplace. The decrease in revenues from other services
during 2009 compared to 2008 was mainly due to the discontinuation
of non-strategic product lines and reduced business volumes, including
former MCI mass market customer losses. The increase in Mass Markets
revenue in 2009 compared to the similar period in 2008 was primarily
driven by the expansion of FiOS services (Voice, Internet and TV), partially
offset by a decline in local exchange revenues principally due to switched
access line losses.
Years Ended December 31,
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Consolidated Operating Expenses
$
$
2010
44,149
31,366
16,405
91,920
$
$
2009
44,579
30,717
16,534
91,830
$
$
2008
38,615
41,517
14,610
94,742
2010 vs. 2009
$
$
(430)
649
(129)
90
(1.0)%
2.1
(0.8)
0.1
(dollars in millions)
Increase/(Decrease)
2009 vs. 2008
$
$
5,964
(10,800)
1,924
(2,912)
15.4 %
(26.0)
13.2
(3.1)
Consolidated operating expenses increased during 2010 compared to
2009 primarily due to increased expenses at Domestic Wireless as well as
higher severance, pension and benefit charges. Consolidated operating
expenses in 2010 were favorably impacted by the sale of divested opera-
tions and cost reduction initiatives at Wireline and Domestic Wireless.
Consolidated operating expenses decreased during 2009 compared to
2008 primarily due to lower severance, pension and benefit charges,
partially offset by increased expenses at Wireless, in part due to the acqui-
sition of Alltel.
Severance, pension and benefit charges during 2010, 2009 and 2008
included pension settlement losses and remeasurement (gains) losses of
$0.6 billion, ($1.4 billion) and $15.0 billion, respectively. See Note 1 to the
consolidated financial statements regarding the change in accounting
for benefit plans.
2010 Compared to 2009
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, wire-
less equipment costs, customer provisioning costs, computer systems
support, costs to support our outsourcing contracts and technical facili-
ties 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 administra-
tive expense.
Cost of services and sales decreased during 2010 compared to 2009 pri-
marily due to the sale of the divested operations, lower headcount and
productivity improvements at our Wireline and Domestic Wireless seg-
ments, partially offset by higher severance, pension and benefit charges
recorded during 2010 and other non-operational charges noted in the
table below as well as higher customer premise equipment and content
costs. In addition, lower access costs at Wireline were primarily driven by
management actions to reduce exposure to unprofitable international
wholesale routes. Our FiOS TV and Internet cost of acquisition per addi-
tion also decreased in 2010 compared to 2009. Wireless network costs
also increased as a result of an increase in local interconnection cost and
increases in roaming costs.
18
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 taxes; advertising and sales commis-
sion costs; customer billing; call center and information technology costs;
professional service fees; and rent and utilities for administrative space.
Selling, general and administrative expense increased during 2010 com-
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
Other Consolidated Results
Equity in Earnings of Unconsolidated Businesses
Equity in earnings of unconsolidated businesses decreased 8.1% in 2010 compared to 2009 primarily due to lower earnings at Vodafone Omnitel N.V.
(Vodafone Omnitel), which were primarily driven by the devaluation of the Euro versus the U.S. dollar.
Equity in earnings of unconsolidated businesses decreased 2.5% in 2009 compared to 2008 primarily due to higher income tax benefits recorded
at Vodafone Omnitel during 2008 and the devaluation of the Euro versus the U.S. dollar. Partially offsetting the decrease were higher earnings at
Vodafone Omnitel.
Other Income and (Expense), Net
Additional information relating to Other income and (expense), net is as follows:
Years Ended December 31,
2010
2009
Interest income
Foreign exchange gains (losses), net
Other, net
Total
nm – not meaningful
$
$
92
5
(43)
54
$
$
75
–
16
91
2008
362
(46)
(33)
283
$
$
2010 vs. 2009
$
$
17
5
(59)
(37)
22.7 %
nm
nm
(40.7)
(dollars in millions)
Increase/(Decrease)
2009 vs. 2008
$
$
(287)
46
49
(192)
(79.3) %
nm
nm
(67.8)
Other income and (expense), net decreased during 2010 compared
to 2009 primarily due to fees incurred during the third quarter of 2010
related to the early extinguishment of debt (see “Consolidated Financial
Condition”). Partially offsetting the decrease was higher distributions
from investments and foreign exchange gains at our international wire-
line operations.
Other income and (expense), net decreased during 2009 compared to
2008 primarily driven by lower interest income, in part due to lower
invested balances. The investment in $4.8 billion of Alltel debt obligations
acquired in 2008 was eliminated in consolidation beginning in January
2009, subsequent to the close of the Alltel transaction.
Interest Expense
Years Ended December 31,
2010
2009
2008
2010 vs. 2009
Total interest costs on debt balances
Less capitalized interest costs
Total
$
$
3,487
964
2,523
$
$
4,029
927
3,102
$
$
2,566
747
1,819
$
$
(542)
37
(579)
(13.5)%
4.0
(18.7)
Average debt outstanding
Effective interest rate
$ 57,278
$ 64,039
$ 41,064
6.1 %
6.3 %
6.2 %
(dollars in millions)
Increase/(Decrease)
2009 vs. 2008
$
$
1,463
180
1,283
57.0 %
24.1
70.5
Total interest costs on debt balances decreased during 2010 compared
to 2009 primarily due to a $6.8 billion decline in average debt (see
“Consolidated Financial Condition”). Interest costs during 2009 included
fees related to the bridge facility that was entered into and utilized to
complete the acquisition of Alltel, which contributed to the higher effec-
tive interest rate.
Total interest costs on debt balances increased during 2009 compared to
2008 primarily due to a $23 billion increase in the average debt levels. The
increase in average debt outstanding compared to 2008 was primarily
driven by borrowings to finance the acquisition of Alltel. The increase in
capitalized interest costs during 2009 primarily related to capitalization of
interest on wireless licenses under development for commercial service
(see “Consolidated Financial Condition”).
20
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
Provision (Benefit) for Income Taxes
2010
2009
2008
2010 vs. 2009
(dollars in millions)
Increase/(Decrease)
2009 vs. 2008
Provision (benefit) for income taxes
Effective income tax rate
$
2,467
$
1,919
19.4 %
14.2 %
$
(2,319)
nm
$
548
28.6 %
$
4,238
nm
nm – not meaningful
The effective income tax rate is calculated by dividing the provision
for income taxes by income before the provision for income taxes. Our
effective tax rate is significantly lower than the statutory federal income
tax rate for all years presented due to the inclusion of income attribut-
able to Vodafone Group Plc.’s (Vodafone) noncontrolling interest in the
Verizon Wireless partnership within our Income before the provision for
income taxes.
subsidized coverage to the extent of the subsidy received. Because future
anticipated retiree prescription drug plan liabilities and related subsi-
dies were already reflected in Verizon’s financial statements, this change
required Verizon to reduce the value of the related tax benefits recog-
nized in its financial statements in the period during which the Health
Care Act was enacted. The increase was partially offset by higher earnings
attributable to the noncontrolling interest.
The effective income tax rate in 2010 increased to 19.4% from 14.2% in
2009. The increase was primarily driven by a one-time, non-cash income
tax charge of $1.0 billion. The one-time non-cash income tax charge was
a result of the enactment of the Patient Protection and Affordable Care
Act and the Health Care and Education Reconciliation Act of 2010, both
of which became law in March 2010 (collectively the Health Care Act).
Under the Health Care Act, beginning in 2013, Verizon and other com-
panies that receive a subsidy under Medicare Part D to provide retiree
prescription drug coverage will no longer receive a federal income tax
deduction for the expenses incurred in connection with providing the
During 2008, we recorded a pension and postretirement benefit plan
remeasurement loss rendering the 2008 effective tax rate not mean-
ingful. Excluding the tax impact of this actuarial loss in 2008, the effective
income tax rate decreased in 2009 primarily driven by higher earnings
attributable to the noncontrolling interest.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate for each period is included in Note 13 to the consoli-
dated financial statements.
Net Income Attributable to Noncontrolling Interest
Years Ended December 31,
2010
2009
2008
2010 vs. 2009
(dollars in millions)
Increase/(Decrease)
2009 vs. 2008
Net income attributable to
noncontrolling interest
$
7,668
$
6,707
$
6,155
$
961
14.3 %
$
552
9.0 %
The increase in Net income attributable to noncontrolling interest during
2010 compared to 2009, and 2009 compared to 2008 was due to higher
earnings in our Domestic Wireless segment, which has a 45% noncontrol-
ling partnership interest attributable to Vodafone.
21
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
SEGMENT RESULTS OF OPERATIONS
We have two reportable segments, Domestic Wireless and Wireline, which we operate and manage as strategic business units and organize by prod-
ucts and services. We measure and evaluate our reportable segments based on segment operating income. The use of segment operating income is
consistent with the chief operating decision maker’s assessment of segment performance.
Segment earnings before interest, taxes, depreciation and amortization (Segment EBITDA), which is presented below, is a non-GAAP measure and
does not purport to be an alternative to operating income as a measure of operating performance. Management believes that this measure is useful
to investors and other users of our financial information in evaluating operating profitability on a more variable cost basis, as it excludes the depre-
ciation and amortization expenses related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating
operating performance in relation to Verizon’s competitors. Segment EBITDA is calculated by adding back depreciation and amortization expense to
segment operating income.
Verizon Wireless Segment EBITDA service margin, also presented below, is calculated by dividing Verizon Wireless Segment EBITDA by Verizon Wireless
service revenues. Verizon Wireless Segment EBITDA service margin utilizes service revenues rather than total revenues. Service revenues exclude
primarily equipment revenues in order to reflect the impact of providing service to the wireless customer base on an ongoing basis. Verizon Wireline
EBITDA margin is calculated by dividing Wireline EBITDA by total Wireline revenues.
It is management’s intent to provide non-GAAP financial information to enhance the understanding of Verizon’s GAAP financial information, and
it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-
GAAP financial measure is presented along with the corresponding GAAP measure so as not to imply that more emphasis should be placed on the
non-GAAP measure. The non-GAAP financial information presented may be determined or calculated differently by other companies. You can find
additional information about our segments in Note 14 to the consolidated financial statements.
Domestic Wireless
Our Domestic Wireless segment provides wireless voice and data services and equipment sales across the United States. This segment primarily
represents the operations of the Verizon joint venture with Vodafone, operating as Verizon Wireless. We own a 55% interest in the joint venture and
Vodafone owns the remaining 45%. All financial results included in the tables below reflect the consolidated results of Verizon Wireless excluding the
results of operations of the Alltel Divestiture Markets through the date the divestitures were completed (see “Acquisitions and Divestitures”).
Operating Revenue and Selected Operating Statistics
Years Ended December 31,
Service revenue
Equipment and other
Total Operating Revenue
Total customers ('000)
Retail customers ('000)
Total customer net additions (excluding
acquisitions and divestitures) ('000)
Retail customer net additions (excluding
acquisitions and divestitures) ('000)
Total churn rate
Retail postpaid churn rate
Service ARPU
Retail service ARPU
Total data ARPU
(dollars in millions, except ARPU)
Increase/(Decrease)
2010
2009
2008
2010 vs. 2009
2009 vs. 2008
$ 55,629
7,778
$ 63,407
94,135
87,535
$ 52,046
8,279
$ 60,325
$ 42,602
6,696
$ 49,298
$ 3,583
(501)
$ 3,082
6.9 %
(6.1)
5.1
$
9,444
1,583
$ 11,027
22.2 %
23.6
22.4
89,172
85,445
72,056
70,021
4,963
2,090
5.6
2.4
17,116
15,424
23.8
22.0
4,839
1,977
5,656
4,369
5,779
5,752
1.33 %
1.02 %
1.41 %
1.07 %
1.25 %
0.96 %
(817)
(14.4)
(123)
(2.1)
(2,392)
(54.7)
(1,383)
(24.0)
$ 50.46
51.56
17.73
$
50.53
50.89
15.11
$
51.55
51.84
12.85
$
(0.07)
0.67
2.62
(0.1)
1.3
17.3
$
(1.02)
(0.95)
2.26
(2.0)
(1.8)
17.6
2010 Compared to 2009
The increase in Domestic Wireless’ total operating revenue during 2010
compared to 2009 was primarily due to growth in service revenue.
Service revenue
Service revenue increased during 2010 compared to 2009 primarily due to
an increase in total customers since January 1, 2010, as well as continued
growth in our data ARPU, partially offset by a decline in voice ARPU.
The decline in retail customer net additions during 2010 compared to
2009 was due to a decrease in retail customer gross additions, as well
as an increase in churn for our retail prepaid base in part attributable
to a marketplace shift in customer activations during the first half of
the year toward unlimited prepaid offerings of the type being sold by a
number of resellers. Retail (non-wholesale) customers are customers who
are directly served and managed by Verizon Wireless and who buy its
branded services. However, we expect to continue to experience retail
customer growth based on the strength of our product offerings and
network service quality. Our total churn rate during 2010 compared to
2009 improved as a result of successful customer retention efforts. Churn
is the rate at which customers disconnect individual lines of service.
Total customer net additions decreased during 2010 compared to 2009
due to the decline in retail customer net additions described above par-
22
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
tially offset by the cumulative increase during the year in customer net
additions from our reseller channel as a result of the marketplace shift in
customer activations mentioned above.
Customers from acquisitions and adjustments at December 31, 2010
included approximately 106,000 net customers, after conforming adjust-
ments, that we acquired in a transaction with AT&T. Customers from
acquisitions at December 31, 2009 included approximately 11.4 million
total customer net additions, after conforming adjustments and the
impact of required divestitures, which resulted from our acquisition of
Alltel on January 9, 2009.
Total data revenue was $19.6 billion and accounted for 35.1% of service rev-
enue during 2010 compared to $15.6 billion and 29.9% during 2009. Total
data revenue continues to increase as a result of the increased penetra-
tion of data offerings, in particular for e-mail and web services resulting in
part from increased sales of smartphone and other data-capable devices.
Voice revenue decreased as a result of continued declines in our voice
ARPU, as discussed below, partially offset by an increase in the number
of customers. We expect that total service revenue and data revenue will
continue to grow as we grow our customer base, increase the penetra-
tion of our data offerings and increase the proportion of our customer
base using smartphone and other data-capable devices.
The decline in service ARPU during 2010 compared to 2009 was due to
a continued reduction in voice revenue per customer and the impact of
changes in our customer mix as a result of increased reseller customer
net additions, partially offset by an increase in data ARPU. Total voice
ARPU declined $2.69, or 7.6%, due to the ongoing impact of customers
seeking to optimize the value of our voice minute bundles. Total data
ARPU increased as a result of continued growth and penetration of our
data offerings, resulting in part from the above mentioned increase in
sales of our smartphone and other data-capable devices. Retail service
ARPU, the average revenue per user from retail customers, increased
during 2010 due to increases in our penetration of data offerings, which
more than offset declines in our voice revenues.
Equipment and Other Revenue
Equipment and other revenue decreased during 2010 compared to 2009
due to a decrease in the number of equipment units sold as a result of a
decrease in customer gross additions.
2009 Compared to 2008
Domestic Wireless’ total operating revenue increased during 2009 com-
pared to 2008 primarily due to the inclusion of the operating results of
Alltel, as well as growth in our service revenue from sources other than
the acquisition of Alltel.
Service revenue
Service revenue increased during 2009 compared to 2008 primarily due
to the inclusion of service revenue as a result of the 11.4 million net new
customers, after conforming adjustments and the impact of required
divestitures, which we acquired in connection with the acquisition of
Alltel. Since January 1, 2009, service revenue also increased as a result of
an increase in total customers from sources other than customer acquisi-
tions, as well as continued growth from data services.
The decline in retail customer net additions during 2009 compared to
2008 was due to an increase in churn partially offset by an increase in
customer gross additions due to the expansion of our sales and distri-
bution channels as a result of the acquisition of Alltel. The decrease in
total customer net additions for 2009 was due to the above mentioned
decline in retail customer net additions, partially offset by an increase
in customer gross additions from our reseller channels, primarily during
the fourth quarter of 2009. The increases in our total and retail postpaid
churn rates were primarily a result of increased disconnections of Mobile
Broadband service and business share lines, primarily attributable to eco-
nomic conditions.
Total data revenue during 2009 was $15.6 billion and accounted for
29.9% of service revenue compared to $10.6 billion and 24.9% during
2008. Total data revenue continues to increase as a result of increased use
of Mobile Broadband, e-mail and messaging.
Service ARPU and retail service ARPU declined during 2009 compared to
2008 due to the inclusion of customers acquired in connection with the
acquisition of Alltel, as well as continued reductions in voice ARPU, par-
tially offset by an increase in total data ARPU. Total voice ARPU declined
$3.28, or 8.5% during 2009 compared to 2008 due to the on-going
impact of bundled plans and increases in the proportion of customers on
our Family Share plans as customers sought to optimize the value of our
offerings. Total data ARPU increased by $2.26, or 17.6% during 2009 com-
pared to 2008 as a result of the increased usage of our data services.
Customer acquisitions during 2008 included approximately 650,000 total
customer net additions, after conforming adjustments, acquired from
Rural Cellular Corporation (Rural Cellular). As a result of an exchange with
AT&T consummated on December 22, 2008, Domestic Wireless trans-
ferred a net of approximately 122,000 total customers.
Equipment and Other Revenue
Equipment and other revenue increased during 2009 compared to 2008
primarily due to an increase in the number of both data and phone equip-
ment units sold, partially offset by a decrease in the average revenue per
unit. The increase in the number of equipment units sold was a result of
both the increase in customer gross additions as well as an increase in
the number of units sold to existing customers upgrading their wireless
devices. Other revenues increased primarily due to the inclusion of the
operating results of Alltel and an increase in our cost recovery rate.
23
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
Operating Expenses
Years Ended December 31,
2010
2009
2008
2010 vs. 2009
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total Operating Expenses
$ 19,245
18,082
7,356
$ 44,683
$ 19,348
17,309
7,030
$ 43,687
$ 15,660
14,273
5,405
$ 35,338
$
$
(103)
773
326
996
(0.5)%
4.5
4.6
2.3
(dollars in millions)
Increase/(Decrease)
2009 vs. 2008
$
$
3,688
3,036
1,625
8,349
23.6 %
21.3
30.1
23.6
Cost of Services and Sales
Cost of services and sales decreased during 2010 compared to 2009
due to a decrease in the cost of equipment sales, partially offset by an
increase in cost of services. Cost of equipment sales decreased by $0.6
billion primarily due to both a decrease in retail customer gross addi-
tions and cost reduction initiatives, partially offset by an increase in the
average cost per unit. Cost of services increased due to higher wireless
network costs driven by increases in local interconnection cost, as a result
of both higher capacity needs from increases in data usage as well as
costs incurred to transition to Ethernet facilities that will be used to sup-
port the LTE network. In addition, the increase in costs of services was
impacted by higher roaming costs as a result of increased international
roaming volumes, data roaming and roaming costs incurred in the Alltel
Divestiture Markets, partially offset by synergies from moving traffic to our
own network. Also contributing to higher wireless network costs during
2010 compared to 2009 was an increase in operating lease expense
related to our network cell sites.
Cost of services and sales increased during 2009 compared to 2008
primarily due to higher wireless network costs including the effects of
operating an expanded wireless network as a result of the acquisition of
Alltel. This increase included network usage for voice and data services,
use of data services and applications such as e-mail and messaging pro-
vided by third party vendors, operating lease expense related to a larger
number of cell sites, as well as salary and benefits as a result of an increase
in network-related headcount. These increases were partially offset by a
decrease in roaming costs that was realized primarily by moving more
traffic to our own network as a result of the acquisition of Alltel. Cost
of equipment increased by $2.1 billion primarily due to the increase in
the number of both data and phone equipment units sold as well as an
increase in the average cost per equipment unit.
Selling, General and Administrative Expense
Selling, general and administrative expense increased during 2010
compared to 2009 primarily due to an increase in sales commission
expense in our indirect channel, as well as increases in other general and
administrative expenses, partially offset by a decrease in advertising and
promotional costs. Indirect sales commission expense increased $0.8
billion during 2010 compared to 2009 as a result of increases in both
the average commission per unit, as the mix of units continues to shift
toward data devices and more customers activate data service, and in
contract renewals in connection with equipment upgrades. Other gen-
eral and administrative expenses such as billing and data processing
charges, non-income taxes, and bad debt expense increased primarily as
a result of the growth of our customer base. Advertising and promotional
costs decreased $0.2 billion during 2010 compared to 2009 primarily due
to reductions in media spending.
Selling, general and administrative expense increased during 2009
compared to 2008 primarily due to a $0.9 billion increase in salary and
benefits as a result of a larger employee base after the acquisition of
Alltel, as well as an $0.8 billion increase in sales commission expense, pri-
marily in our indirect channel as a result of increases in both equipment
upgrades leading to contract renewals and customer gross additions, as
well as an increase in the average commission per unit. We also expe-
rienced increases in other selling, general and administrative expenses
primarily as a result of supporting a larger customer base as a result of
our acquisition of Alltel.
Depreciation and Amortization Expense
Depreciation and amortization expense increased during 2010 compared
to 2009 primarily driven by growth in depreciable assets. Depreciation
and amortization expense increased during 2009 compared to 2008 pri-
marily driven by depreciable property and equipment and finite-lived
intangible assets acquired from Alltel, including its customer lists, as well
as growth in depreciable assets during 2009.
Segment Operating Income and EBITDA
Years Ended December 31,
2010
2009
2008
2010 vs. 2009
Segment Operating Income
Add Depreciation and amortization expense
Segment EBITDA
$ 18,724
7,356
$ 26,080
$ 16,638
7,030
$ 23,668
$ 13,960
5,405
$ 19,365
$ 2,086
326
$ 2,412
12.5 %
4.6
10.2
Segment operating income margin
Segment EBITDA service margin
29.5 %
46.9 %
27.6 %
45.5 %
28.3 %
45.5 %
(dollars in millions)
Increase/(Decrease)
2009 vs. 2008
$
$
2,678
1,625
4,303
19.2 %
30.1
22.2
The increases in Domestic Wireless’ Operating income and Segment
EBITDA during 2010 and 2009, were primarily as a result of the impact of
factors described above.
Non-recurring or non-operational items excluded from Domestic Wireless’
Operating income were as follows:
Years Ended December 31,
Merger integration and acquisition costs
Impact of divested operations
Deferred revenue adjustment
2010
867
(348)
235
754
$
$
(dollars in millions)
2008
2009
$
$
954
(789)
(78)
87
$
$
–
–
(34)
(34)
24
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
Wireline
The Wireline segment provides customers with communication products and services, including voice, broadband video and data, network access,
long distance, and other services, to residential and small business customers and carriers, as well as next-generation IP network services and com-
munications solutions to medium and large businesses and government customers globally.
The following discussion reflects the impact related to the change in accounting for benefit plans (see Note 1 to the consolidated financial state-
ments). Reclassifications have been made to reflect comparable operating results for the spin-off of the operations in the Frontier transaction, which
we owned through June 30, 2010, and the spin-off of the local exchange business and related landline activities in Maine, New Hampshire and
Vermont, which was completed on March 31, 2008 (see “Acquisitions and Divestitures”).
Operating Revenues and Selected Operating Statistics
Years Ended December 31,
Mass Markets
Global Enterprise
Global Wholesale
Other
Total Operating Revenues
2010
2009
2008
2010 vs. 2009
$ 16,256
15,669
8,393
909
$ 41,227
$ 16,115
15,667
9,155
1,514
$ 42,451
$ 15,831
16,601
9,832
2,059
$ 44,323
$
141
2
(762)
(605)
$ (1,224)
0.9 %
–
(8.3)
(40.0)
(2.9)
(dollars in millions)
Increase/(Decrease)
2009 vs. 2008
$
$
284
(934)
(677)
(545)
(1,872)
1.8 %
(5.6)
(6.9)
(26.5)
(4.2)
Switched access lines in service ('000)
26,001
28,323
31,370
(2,322)
(8.2)
(3,047)
(9.7)
Broadband connections ('000)
FiOS Internet subscribers ('000)
FiOS TV subscribers ('000)
8,392
4,082
3,472
8,160
3,286
2,750
7,676
2,371
1,849
232
796
722
2.8
24.2
26.3
484
915
901
6.3
38.6
48.7
Mass Markets
Mass Markets revenue includes local exchange (basic service and end-
user access), long distance (including regional toll), broadband services
(including high-speed Internet and FiOS Internet) and FiOS TV services
for residential and small business subscribers.
2010 Compared to 2009
The increase in Mass Markets revenue during 2010 compared to 2009
was primarily driven by the expansion of consumer and business FiOS
services (Voice, Internet and TV), which are typically sold in bundles,
partially offset by the decline of local exchange revenues principally as
a result of a decline in switched access lines as of December 31, 2010
compared to December 31, 2009, primarily as a result of competition and
technology substitution. The majority of the decrease was sustained in
the residential retail market, which experienced a 9.0% access line loss
primarily due to substituting traditional landline services with wireless,
VoIP, broadband and cable services. Also contributing to the decrease
was a decline of nearly 5.0% in small business retail access lines, primarily
reflecting economic conditions, competition and a shift to both IP and
high-speed circuits.
As we continue to expand the number of premises eligible to order FiOS
services and extend our sales and marketing efforts to attract new FiOS
subscribers, we have continued to grow our subscriber base and con-
sistently improved penetration rates within our FiOS service areas. Our
bundled pricing strategy allows us to provide competitive offerings to
our customers and potential customers. As of December 31, 2010, we
achieved penetration rates of 31.9% and 28.0% for FiOS Internet and FiOS
TV, respectively, compared to penetration rates of 28.3% and 24.7% for
FiOS Internet and FiOS TV, respectively, at December 31, 2009.
2009 Compared to 2008
The increase in Mass Markets revenue during 2009 compared to 2008
was primarily driven by the expansion of FiOS services (Voice, Internet
and TV), partially offset by a decline in local exchange revenues princi-
pally due to a decline in switched access lines as of December 31, 2009
compared to December 31, 2008, primarily as a result of competition and
technology substitution. The majority of the decrease was sustained in
the residential retail market, which experienced a 10.5% access line loss
primarily due to substituting traditional landline services with wireless,
VoIP, broadband and cable services. Also contributing to the decrease
was a decline of nearly 6.2% in small business retail access lines, primarily
reflecting economic conditions, competition and a shift to both IP and
high-speed circuits.
As of December 31, 2009, we achieved penetration rates of 28.3% and
24.7% for FiOS Internet and FiOS TV, respectively, compared to penetra-
tion rates of 25.1% and 21.1% for FiOS Internet and FiOS TV, respectively,
at December 31, 2008.
Global Enterprise
Global Enterprise offers voice, data and Internet communications services
to medium and large business customers, multinational corporations,
and state and federal government customers. In addition to traditional
voice and data services, Global Enterprise offers managed and advanced
products and solutions including IP services and value-added solutions
that make communications more secure, reliable and efficient. Global
Enterprise also provides managed network services for customers that
outsource all or portions of their communications and information pro-
cessing operations and data services such as private IP, private line, frame
relay and asynchronous transfer mode (ATM) services, both domestically
and internationally. In addition, Global Enterprise offers professional ser-
vices in more than 30 countries supporting a range of solutions including
network service, managing a move to IP-based unified communications
and providing application performance support.
2010 Compared to 2009
Global Enterprise revenues were essentially unchanged during 2010
compared to 2009. Higher customer premises equipment and strategic
networking revenues, were offset by lower local services and traditional
circuit-based revenues. The increase in customer premises equipment and
strategic networking revenue may indicate that companies are beginning
to increase capital expenditures. Long distance revenues declined due
to negative effects of the continuing global economic conditions and
competitive rate pressures. In addition to increased customer premise
equipment revenues, strategic enterprise services revenue increased $0.4
25
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
2009 Compared to 2008
The decrease in Global Wholesale revenues during 2009 compared to
2008 was primarily due to decreased MOUs in traditional voice products,
and continued rate compression due to competition in the marketplace.
Switched access and interexchange wholesale MOUs declined primarily
as a result of wireless substitution and access line losses. Wholesale lines
declined by 21.1% in 2009 due to the continued impact of competitors
deemphasizing their local market initiatives coupled with the impact of
technology substitution as well as the continued level of economic pres-
sure compared to a 20.1% decline in 2008. Changes in foreign exchange
rates resulted in a revenue decline of approximately 1.0% in 2009 com-
pared to 2008. Continuing demand for high-capacity, high-speed digital
services was partially offset by lower demand for older, low-speed data
products and services. As of December 31, 2009, customer demand, as
measured in DS1 and DS3 circuits, for high-capacity and digital data ser-
vices increased 2.2% compared to an increase of 5.1% in 2008.
The FCC regulates the rates charged to 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 local exchange and long dis-
tance services from former MCI mass market customers, operator
services, pay phone, card services and supply sales. The decrease in rev-
enues from other services during 2010 compared to 2009 was primarily
due to reduced business volumes, including former MCI mass market
customer losses.
The decrease in revenues from other services during 2009 compared to
2008 was mainly due to the discontinuation of non-strategic product
lines and reduced business volumes, including former MCI mass market
customer losses.
billion, or 6.3%, during 2010 compared to 2009 primarily due to higher
information technology, security solution and strategic networking rev-
enues. Strategic enterprise services continues to be Global Enterprise’s
fastest growing suite of offerings. Traditional circuit-based services such
as frame relay, private line and ATM services declined compared to the
similar period last year as our customer base continues its migration to
next generation IP services.
2009 Compared to 2008
The decrease in Global Enterprise revenues during 2009 compared to
2008 was primarily due to lower long distance and traditional circuit based
data revenues and lower customer premises equipment revenue, com-
bined with the negative effect of movements in foreign exchange rates
versus the U.S. dollar. The decline in long distance revenue was driven
by a 2.2% decline in MOUs compared to 2008, due to global economic
conditions and competitive rate pressures, which adversely impacted our
business customers. Traditional circuit based services such as frame relay,
private line and ATM services declined compared to the similar period in
2008 as our customer base continued its migration to next generation
IP services. Customer premises equipment revenue decreased approxi-
mately 6.7% compared to 2008 reflecting cautious investment decisions
in the marketplace in response to the uncertain economic environment.
Partially offsetting these declines was an increase of 14.6% in IP and secu-
rity solutions revenues. Strategic enterprise services revenue increased
4.9% in 2009 compared to 2008.
Global Wholesale
Global Wholesale revenues are primarily earned from long distance and
other carriers who use our 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, interexchange
wholesale traffic sold in the United States, as well as internationally des-
tined traffic that originates in the United States. 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 and intercon-
nection revenues from competitive local exchange carriers and wireless
carriers. A portion of Global Wholesale revenues are generated by a few
large telecommunication companies, many of whom compete directly
with us.
2010 Compared to 2009
The decrease in Global Wholesale revenues during 2010 compared to
2009 was primarily due to decreased MOUs in traditional voice prod-
ucts, increases in voice termination pricing on certain international
routes, which negatively impacted volume, and continued rate com-
pression due to competition in the marketplace. Switched access and
interexchange wholesale MOUs declined primarily as a result of wireless
substitution and access line losses. Domestic wholesale lines declined by
9.0% as of December 31, 2010 compared to December 31, 2009 due to
the continued impact of competitors deemphasizing their local market
initiatives coupled with the impact of technology substitution, as well as
the continued level of economic pressure. Voice and local loop services
declined during 2010 compared to 2009. Continuing demand for high-
capacity, high-speed digital services was partially offset by lower demand
for older, low-speed data products and services. As of December 31, 2010,
customer demand, as measured in DS1 and DS3 circuits, for high-capacity
and high-speed digital data services increased 4.6% compared to 2009.
26
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
Operating Expenses
Years Ended December 31,
2010
2009
2008
2010 vs. 2009
2009 vs. 2008
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total Operating Expenses
$ 22,618
9,372
8,469
$ 40,459
$ 22,693
9,947
8,238
$ 40,878
$ 22,890
10,169
8,174
$ 41,233
$
$
(75)
(575)
231
(419)
(0.3)%
(5.8)
2.8
(1.0)
$
$
(197)
(222)
64
(355)
(0.9) %
(2.2)
0.8
(0.9)
(dollars in millions)
Increase (Decrease)
Cost of Services and Sales
Cost of services and sales were essentially unchanged during 2010
compared to 2009. Decreases were primarily due to lower costs associ-
ated with compensation and installation expenses as a result of lower
headcount and productivity improvements, as well as lower access costs
driven mainly by management actions to reduce exposure to unprofit-
able international wholesale routes and declines in overall wholesale long
distance volumes. In addition, our FiOS TV and Internet cost of acquisition
per addition also decreased in 2010 compared to 2009. These declines
were partially offset by higher customer premise equipment costs and
content costs associated with continued FiOS subscriber growth. Our
FiOS TV and FiOS Internet cost of acquisition per addition also decreased
in 2010 compared to 2009.
Cost of services and sales in 2009 decreased compared to 2008, primarily
due to lower costs associated with compensation, installation, repair and
maintenance expenses as a result of fewer access lines, lower headcount
and productivity improvements. Also contributing to the decreases were
lower long distance MOUs and customer premise equipment costs, as
well as favorable foreign exchange movements. Partially offsetting these
decreases were higher content and customer acquisition costs associated
with continued subscriber growth. Our FiOS TV and FiOS Internet cost of
acquisition per addition also decreased in 2009 compared to 2008.
Selling, General and Administrative Expense
Selling, general and administrative expense decreased during 2010 com-
pared to 2009 primarily due to the decline in compensation expense as
a result of lower headcount and cost reduction initiatives, partially offset
by higher gains on sales of assets in 2009. Selling, general and administra-
tive expense in 2009 decreased compared to 2008 primarily due to the
decline in compensation expense as a result of lower headcount and cost
reduction initiatives, as well as favorable foreign exchange movements.
Depreciation and Amortization Expense
Depreciation and amortization expense increased during 2010 com-
pared to 2009 due to growth in depreciable telephone plant from capital
spending. Depreciation and amortization expense in 2009 increased com-
pared to 2008 primarily driven by growth in depreciable telephone plant
from capital spending, partially offset by lower rates of depreciation as a
result of changes in the estimated useful lives of certain asset classes.
Segment Operating Income and EBITDA
Years Ended December 31,
Segment Operating Income
Add Depreciation and amortization expense
Segment EBITDA
Segment operating income margin
Segment EBITDA margin
2010
$
768
8,469
$ 9,237
1.9%
22.4%
$
$
2009
1,573
8,238
9,811
3.7%
23.1%
2008
$
3,090
8,174
$ 11,264
7.0%
25.4%
2010 vs. 2009
$
$
(805)
231
(574)
(51.2)%
2.8
(5.9)
(dollars in millions)
Increase/(Decrease)
2009 vs. 2008
$ (1,517)
64
$ (1,453)
(49.1) %
0.8
(12.9)
The decreases in Wireline’s Operating income and Segment EBITDA during
2010 and 2009 were primarily a result of the impact of factors described in
connection with operating revenue and operating expenses above.
Non-recurring or non-operational items excluded from Wireline’s
Operating income were as follows:
Years Ended December 31,
Severance, pension and benefit charges
Access line spin-off and other charges
Merger integration costs
Impact of divested operations
2010
$ 2,237
79
–
(408)
$ 1,908
(dollars in millions)
2008
2009
$
$
2,253
51
–
(980)
1,324
$
$
506
34
151
(1,197)
(506)
27
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
OTHER ITEMS
Severance, Pension and Benefit Charges
During 2010, we recorded net pre-tax severance, pension and ben-
efits charges of $3.1 billion primarily in connection with an agreement
we reached with certain unions on temporary enhancements to the
separation programs contained in their existing collective bargaining
agreements. These temporary enhancements were intended to help
address a previously declared surplus of employees and to help reduce
the need for layoffs. Accordingly, during 2010, we recorded severance,
pension and benefits charges associated with the approximately 11,900
union-represented employees who volunteered for the incentive offer.
These charges included $1.2 billion for severance for the 2010 programs
mentioned above and a planned workforce reduction of approximately
2,500 employees in 2011. In addition, we recorded $1.3 billion for pension
and postretirement curtailment losses and special termination benefits
that were due to the workforce reductions, which caused the elimination
of a significant amount of future service. Also, we recorded remeasure-
ment losses of $0.6 billion for our pension and postretirement plans
in accordance with our accounting policy to recognize actuarial gains
and losses in the year in which they occur. The remeasurement losses
included $0.1 billion of pension settlement losses related to employees
that received lump sum distributions, primarily resulting from our previ-
ously announced separation plans.
During 2009, we recorded net pre-tax severance, pension and benefits
charges of $1.4 billion primarily for pension and postretirement curtail-
ment losses and special termination benefits of $1.9 billion as workforce
reductions caused the elimination of a significant amount of future ser-
vice requiring us to recognize a portion of the prior service costs. These
charges also included $0.9 billion for workforce reductions of approxi-
mately 17,600 employees; 4,200 of whom were separated during late
2009 and the remainder in 2010. Also, we recorded remeasurement gains
of $1.4 billion for our pension and postretirement plans in accordance
with our accounting policy to recognize actuarial gains and losses in the
year in which they occur.
During 2008, we recorded net pre-tax severance, pension and benefits
charges of $15.6 billion primarily due to remeasurement losses of $15.0
billion for our pension and postretirement plans in accordance with our
accounting policy to recognize actuarial gains and losses in the year in
which they occur. These remeasurement losses included $0.5 billion of
pension settlement losses related to employees that received lump sum
distributions, primarily resulting from our previously announced separa-
tion plans. These severance, pension and benefit charges also included
$0.5 billion for workforce reductions in connection with the separation
of approximately 8,600 employees and related charges; 3,500 of whom
were separated in the second half of 2008 and the remainder in 2009 and
$0.1 billion for pension and postretirement curtailment losses and special
termination benefits, that were due to the workforce reductions, which
caused the elimination of a significant amount of future service.
Merger Integration and Acquisition Costs
During 2010, we recorded pre-tax merger integration charges of $0.9
billion primarily related to the Alltel acquisition. These charges primarily
related to the decommissioning of overlapping cell sites, preacquisition
contingencies, handset conversions and trade name amortization.
During 2009, we recorded pre-tax merger integration and acquisition
charges of $1.2 billion. These charges primarily related to the Alltel acqui-
sition and were comprised of trade name amortization, re-branding
initiatives and handset conversions. The charges during 2009 were also
comprised of transaction fees and costs associated with the acquisition,
28
including fees related to the credit facility that was entered into and uti-
lized to complete the acquisition.
In 2008, we recorded pre-tax charges of $0.2 billion, primarily comprised of
systems integration activities and other costs related to re-branding initia-
tives, facility exit costs and advertising associated with the MCI acquisition.
Medicare Part D Subsidy Charges
Under the Health Care Act, beginning in 2013, Verizon and other com-
panies that receive a subsidy under Medicare Part D to provide retiree
prescription drug coverage will no longer receive a federal income tax
deduction for the expenses incurred in connection with providing the
subsidized coverage to the extent of the subsidy received. Because future
anticipated retiree prescription drug plan liabilities and related subsi-
dies were already reflected in Verizon’s financial statements, this change
required Verizon to reduce the value of the related tax benefits recog-
nized in its financial statements in the period during which the Health
Care Act was enacted. As a result, Verizon recorded a one-time, non-cash
income tax charge of $1.0 billion in the first quarter of 2010 to reflect the
impact of this change.
Dispositions
Access Line Spin-off and Other Charges
During 2010 and 2009, we recorded pre-tax charges of $0.5 billion and
$0.2 billion, respectively, primarily for costs incurred related to network,
non-network software and other activities to enable the divested mar-
kets in the transaction with Frontier to operate on a stand-alone basis
subsequent to the closing of the transaction, and professional advisory
and legal fees in connection with this transaction. Also included during
2010 are fees related to early extinguishment of debt. During 2009, we
also recorded pre-tax charges of $0.2 billion for costs incurred related to
our Wireline cost reduction initiatives.
During 2008, we recorded pre-tax charges of $0.1 billion for costs incurred
related to network, non-network software, and other activities to enable
the operations in Maine, New Hampshire and Vermont to operate on a
stand-alone basis subsequent to the spin-off of our telephone access line
operations in those states, and professional advisory and legal fees in
connection with this transaction.
Alltel Divestiture Markets
During 2010, we recorded a tax charge of approximately $0.2 billion for
the taxable gain on the excess of book over tax basis of the goodwill
associated with the Alltel Divestiture Markets.
Investment Impairment Charges
During 2008, we recorded a pre-tax charge of $48 million related to an
other-than-temporary decline in the fair value of our investments in cer-
tain marketable securities.
Other
Corporate, eliminations and other during the periods presented include
a non-cash adjustment of $0.2 billion, ($0.1) billion and ($34) million
in 2010, 2009 and 2008, respectively, primarily to adjust wireless data
revenues. This adjustment was recorded to properly defer previously
recognized wireless data revenues that will be earned and recognized
in future periods. Consolidated revenues in 2009 and 2008 were not
affected as the amounts involved were not material to the consolidated
financial statements.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
CONSOLIDATED FINANCIAL CONDITION
Years Ended December 31,
2010
(dollars in millions)
2008
2009
Cash Flows From Investing Activities
Cash Flows Provided By (Used In)
Operating activities
Investing activities
Financing activities
Increase (Decrease) In Cash and
Cash Equivalents
$ 33,363
(15,054)
(13,650)
$ 31,390
(23,156)
(16,007)
$ 27,452
(31,474)
12,651
$
4,659
$
(7,773)
$
8,629
We use the net cash generated from our operations to fund network
expansion and modernization, repay external financing, pay dividends,
repurchase Verizon common stock from time to time and invest in new
businesses. While our current liabilities typically exceed current assets, our
sources of funds, primarily from operations and, to the extent necessary,
from external financing arrangements, are sufficient to meet ongoing
operating and investing requirements. We expect that our capital
spending requirements will continue to be financed primarily through
internally generated funds. Debt or equity financing may be needed to
fund additional development activities or to maintain our capital struc-
ture to ensure our financial flexibility.
We manage our capital structure to balance our cost of capital and the
need for financial flexibility. We believe that we will continue to have the
necessary access to capital markets.
Our available external financing arrangements include the issuance of
commercial paper, credit available under credit facilities and other bank
lines of credit, vendor financing arrangements, issuances of registered
debt or equity securities and privately-placed capital market securities. We
currently have a shelf registration available for the issuance of up to $4.0
billion of additional unsecured debt or equity securities. We may also issue
short-term debt through an active commercial paper program and have a
$6.2 billion credit facility to support such commercial paper issuances.
Cash Flows From Operating Activities
Our primary source of funds continues to be cash generated from opera-
tions. Net cash provided by operating activities during 2010 increased
by $2.0 billion compared to 2009 primarily due to higher operating cash
flows at Domestic Wireless, changes in working capital related in part to
management of inventory and the timing of tax payments. Partially off-
setting these increases were lower operating cash flows at Wireline, as
well as a lower net distribution from Vodafone Omnitel.
Net cash provided by operating activities in 2009 increased by $3.9
billion compared to the similar period in 2008 primarily driven by higher
operating cash flows at Domestic Wireless resulting from the acquisition
of Alltel, as well as a higher net distribution from Vodafone Omnitel.
Partially offsetting the increase in net cash provided by operating activities
were payments totaling $0.5 billion to settle the acquired Alltel interest
rate swaps.
Capital Expenditures
Capital expenditures continue to be our primary use of capital resources
as they facilitate the introduction of new products and services, enhance
responsiveness to competitive challenges and increase the operating
efficiency and productivity of our networks. We are directing our capital
spending primarily toward higher growth markets.
Capital expenditures, including capitalized software, were as follows:
Years Ended December 31,
Domestic Wireless
Wireline
Other
Total as a percentage of total revenue
2010
$ 8,438
7,269
751
$ 16,458
15.4%
(dollars in millions)
2008
2009
$
7,152
8,892
828
$ 16,872
15.7%
$
6,510
9,797
826
$ 17,133
17.6%
During 2010, we continued to focus on increasing our return on capital
expenditures by shifting capital more towards investing in the capacity
of our wireless EV-DO networks and funding the build-out of our 4G LTE
network. Accordingly, during 2010, capital expenditures at Domestic
Wireless increased nearly $1.3 billion compared to 2009. The increase in
capital expenditures at Domestic Wireless were more than offset by the
decrease in capital expenditures at Wireline during 2010 compared to
2009 primarily due to lower capital expenditures related to FiOS.
The increase in capital expenditures at Domestic Wireless during 2009
compared to 2008 was primarily due to the incremental capital spending
on the acquired Alltel properties, continued investment in our wireless
EV-DO networks, and funding the development of our 4G LTE network.
The decrease in capital expenditures at Wireline during 2009 was primarily
due to the FiOS deployment plan, which included larger expenditures in
2008, as well as lower legacy spending requirements.
Dispositions
During 2010, we received cash proceeds of $2.6 billion in connection
with the required divestitures of overlapping properties as a result of the
acquisition of Alltel (see “Acquisitions and Divestitures”).
Acquisitions
During 2010, 2009 and 2008, we invested $1.4 billion, $6.0 billion and
$15.9 billion, respectively, in acquisitions of licenses, investments and
businesses. See “Other Consolidated Results” for the amounts of interest
paid that were capitalized during 2010, 2009 and 2008.
• On August 23, 2010, Verizon Wireless acquired the net assets and
related customers of six operating markets in Louisiana and Mississippi
in a transaction with AT&T Inc. for cash consideration of $0.2 billion.
• On January 9, 2009, Verizon Wireless paid approximately $5.9 billion
for the equity of Alltel, which was partially offset by $1.0 billion of cash
acquired at closing.
• During 2008, Verizon Wireless was the winning bidder in the Federal
Communications Commission’s (FCC) auction of spectrum in the 700
MHz band and paid the FCC $9.4 billion to acquire 109 licenses in the
700 MHz band.
• On August 7, 2008, Verizon Wireless completed its acquisition of Rural
Cellular for cash consideration of $0.9 billion, net of cash acquired and
after an exchange transaction with another carrier to complete the
required divestiture of certain markets.
• On June 10, 2008, in connection with the announcement of the Alltel
transaction, Verizon Wireless purchased approximately $5.0 billion
aggregate principal amount of debt obligations of Alltel for approxi-
mately $4.8 billion plus accrued and unpaid interest.
29
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
Cash Flows From Financing Activities
Verizon Wireless
During 2010 and 2009, net cash used in financing activities was $13.7
billion and $16.0 billion, respectively. During 2008, net cash provided by
financing activities was $12.7 billion.
2010
During July 2010, Verizon received approximately $3.1 billion in cash in
connection with the completion of the spin-off and merger of Spinco
(see “Acquisitions and Divestitures”). This special cash payment was sub-
sequently used to redeem $2.0 billion of 7.25% Verizon Communications
Notes due December 2010 at a redemption price of 102.7% of the prin-
cipal amount of the notes, plus accrued and unpaid interest through the
date of redemption, as well as other short-term borrowings. During 2010,
$0.3 billion of 6.125% and $0.2 billion of 8.625% Verizon New York Inc.
Debentures, $0.2 billion of 6.375% Verizon North Inc. Debentures and
$0.2 billion of 6.3% Verizon Northwest Inc. Debentures matured and were
repaid. In addition, during 2010, Verizon repaid $0.2 billion of floating rate
vendor financing debt.
During 2011, $0.5 billion of 5.35% Verizon Communications notes
matured and were repaid and Verizon utilized $0.3 billion of a fixed rate
vendor financing facility.
2009
During 2009, Verizon issued $1.8 billion of 6.35% Notes due 2019 and
$1.0 billion of 7.35% Notes due 2039, resulting in cash proceeds of $2.7
billion, net of discounts and issuance costs, which was used to reduce
our commercial paper borrowings, repay maturing debt and for gen-
eral corporate purposes. In January 2009, Verizon utilized a $0.2 billion
floating rate vendor financing facility. During 2009, we redeemed $0.1
billion of 6.8% Verizon New Jersey Inc. Debentures, $0.3 billion of 6.7%
and $0.2 billion of 5.5% Verizon California Inc. Debentures and $0.2 bil-
lion of 5.875% Verizon New England Inc. Debentures. In April 2009, we
redeemed $0.5 billion of 7.51% GTE Corporation Debentures. In addition,
during 2009, $0.5 billion of floating rate Notes due 2009 and $0.1 billion
of 8.23% Verizon Notes matured and were repaid.
2008
During 2008, we made debt repayments of approximately $2.6 bil-
lion which primarily included $0.2 billion of 5.55% Verizon Northwest
Debentures, $0.3 billion of 6.9% and $0.3 billion of 5.65% Verizon North
Inc. Debentures, $0.1 billion of 7.0% Verizon California Inc. Debentures,
$0.3 billion of 6.0% Verizon New York Inc. Debentures, $0.3 billion of
6.46% GTE Corporation Debentures, $0.1 billion of 6.0% Verizon South
Inc. Debentures, and $1.0 billion of 4.0% Verizon Communications Inc.
Notes. As a result of the spin-off of our local exchange business and
related activities in Maine, New Hampshire and Vermont, in March 2008,
our net debt was reduced by approximately $1.4 billion.
In November 2008, Verizon issued $2.0 billion of 8.75% Notes due 2018
and $1.3 billion of 8.95% Notes due 2039, which resulted in cash pro-
ceeds of $3.2 billion net of discount and issuance costs. In April 2008,
Verizon issued $1.3 billion of 5.25% Notes due 2013, $1.5 billion of 6.10%
Notes due 2018, and $1.3 billion of 6.90% Notes due 2038, resulting in
cash proceeds of $4.0 billion, net of discounts and issuance costs. In
February 2008, Verizon issued $0.8 billion of 4.35% Notes due 2013, $1.5
billion of 5.50% Notes due 2018, and $1.8 billion of 6.40% Notes due 2038,
resulting in cash proceeds of $4.0 billion, net of discounts and issuance
costs. In January 2008, Verizon utilized a $0.2 billion fixed rate vendor
financing facility.
30
2010
On June 28, 2010, Verizon Wireless exercised its right to redeem the out-
standing $1.0 billion of aggregate floating rate notes due June 2011 at
a redemption price of 100% of the principal amount of the notes, plus
accrued and unpaid interest through the date of redemption. In addition,
during 2010 Verizon Wireless repaid the remaining $4.0 billion of borrow-
ings that were outstanding under a $4.4 billion Three-Year Term Loan
Facility Agreement with a maturity date of September 2011 (Three-Year
Term Loan Facility). No borrowings remain outstanding under this facility
as of December 31, 2010 and this facility has been cancelled.
2009
During 2009, Verizon Wireless raised capital to fund the acquisition
of Alltel.
•
• On January 9, 2009, Verizon Wireless borrowed $12.4 billion under a
$17.0 billion credit facility (Bridge Facility) in order to complete the
acquisition of Alltel and repay a portion of the approximately $24 bil-
lion of Alltel debt assumed. Verizon Wireless used cash generated from
operations and the net proceeds from the sale of the notes in private
placements issued in February 2009, May 2009 and June 2009, which
are described below to repay the borrowings under the Bridge Facility.
The Bridge Facility and the commitments under the Bridge Facility
have been terminated.
In February 2009, Verizon Wireless and Verizon Wireless Capital LLC co-
issued $4.3 billion aggregate principal amount of three and five-year
fixed rate notes in a private placement resulting in cash proceeds of
$4.2 billion, net of discounts and issuance costs.
In May 2009, Verizon Wireless and Verizon Wireless Capital LLC co-
issued $4.0 billion aggregate principal amount of two-year fixed and
floating rate notes in a private placement resulting in cash proceeds of
approximately $4.0 billion, net of discounts and issuance costs.
In June 2009, Verizon Wireless issued $1.0 billion aggregate principal
amount of floating rate notes due 2011. As described above, during
2010 these notes were repaid.
In August 2009, Verizon Wireless repaid $0.4 billion of borrowings that
were outstanding under the Three-Year Term Loan Facility, reducing
the outstanding borrowings under this facility to $4.0 billion as of
December 31, 2009. As described above, during 2010 this facility was
repaid in full.
•
•
•
During November 2009, Verizon Wireless and Verizon Wireless Capital
LLC, completed an exchange offer to exchange the privately placed
notes issued in November 2008, and February and May 2009, for new
notes with similar terms.
2008
In December 2008, Verizon Wireless and Verizon Wireless Capital LLC co-
issued €0.7 billion of 7.625% notes due 2011, €0.5 billion of 8.750% notes
due 2015 and £0.6 billion of 8.875% notes due 2018 resulting in net cash
proceeds of $2.4 billion. In November 2008, Verizon Wireless and Verizon
Wireless Capital LLC co-issued $3.5 billion aggregate principal amount of
five-year and ten-year fixed rate notes in a private placement resulting in
cash proceeds of $3.5 billion, net of discounts and issuance costs. These
proceeds were used in connection with the acquisition of Alltel and the
repayment of the Alltel debt that was assumed.
On September 30, 2008, Verizon Wireless and Verizon Wireless Capital LLC
entered into the $4.4 billion Three-Year Term Loan Facility. On June 5, 2008,
Verizon Wireless entered into a $7.6 billion 364-Day Credit Agreement
which included a $4.8 billion term facility and a $2.8 billion delayed draw
facility. On June 10, 2008, Verizon Wireless borrowed $4.8 billion under
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
Credit Ratings
The debt securities of Verizon Communications and its subsidiaries con-
tinue to be accorded high ratings by the three primary rating agencies.
Although a one-level ratings downgrade would not be expected to sig-
nificantly impact our access to capital, it could increase both the cost
of refinancing existing debt and the cost of financing any new capital
requirements. Securities ratings assigned by rating organizations are
expressions of opinion and are not recommendations to buy, sell, or hold
securities. A securities rating is subject to revision or withdrawal at any
time by the assigning rating organization. Each rating should be evalu-
ated independently of any other rating.
Covenants
Our credit agreements contain covenants that are typical for large,
investment grade companies. These covenants include requirements to
pay interest and principal in a timely fashion, pay taxes, maintain insur-
ance with responsible and reputable insurance companies, preserve our
corporate existence, keep appropriate books and records of financial
transactions, maintain our properties, provide financial and other reports
to our lenders, limit pledging and disposition of assets and mergers and
consolidations, and other similar covenants.
We and our consolidated subsidiaries are in compliance with all debt
covenants.
Increase (Decrease) In Cash and Cash Equivalents
Our Cash and cash equivalents at December 31, 2010 totaled $6.7 bil-
lion, a $4.7 billion increase compared to Cash and cash equivalents at
December 31, 2009 for the reasons discussed above. Our Cash and cash
equivalents at December 31, 2009 totaled $2.0 billion, a $7.8 billion
decrease compared to Cash and cash equivalents at December 31, 2008
for the reasons discussed above.
Free Cash Flow
Free cash flow is a non-GAAP financial measure that management believes
is useful to investors and other users of Verizon’s financial information in
evaluating cash available to pay debt and dividends. Free cash flow is
calculated by subtracting capital expenditures from net cash provided by
operating activities. The following table reconciles net cash provided by
operating activities to free cash flow:
Years Ended December 31,
2010
(dollars in millions)
2008
2009
Net cash provided by operating activities
Less Capital expenditures (including
capitalized software)
Free cash flow
$ 33,363
$ 31,390
$ 27,452
16,458
$ 16,905
16,872
$ 14,518
17,133
$ 10,319
the 364-Day Credit Agreement in order to purchase Alltel debt obliga-
tions acquired in the second quarter of 2008 and, during the third quarter
of 2008, borrowed $2.8 billion under the delayed draw facility to com-
plete the purchase of Rural Cellular and to repay Rural Cellular’s debt and
pay fees and expenses incurred in connection therewith. During 2008,
the borrowings under the 364-Day Credit Agreement were repaid.
Other, net
The increase in Other, net financing activities during 2010 and 2009
was primarily driven by higher distributions to Vodafone, which owns a
45% noncontrolling interest in Verizon Wireless. In addition, Other, net
financing activities during 2009 included the buyout of wireless part-
nerships in which our ownership interests increased as a result of the
acquisition of Alltel.
Credit Facility and Shelf Registration
On April 14, 2010, we terminated all commitments under our previous
$5.3 billion 364-day credit facility with a syndicate of lenders and entered
into a new $6.2 billion three-year credit facility with a group of major finan-
cial institutions. As of December 31, 2010, the unused borrowing capacity
under the three-year credit facility was approximately $6.1 billion.
The credit facility does not require us to comply with financial covenants
or maintain specified credit ratings, and it permits us to borrow even if
our business has incurred a material adverse change. We use the credit
facility to support the issuance of commercial paper, for the issuance of
letters of credit and for general corporate purposes.
We have a shelf registration available for the issuance of up to $4.0 billion
of additional unsecured debt or equity securities.
Verizon’s ratio of debt to debt combined with Verizon’s equity was 57.8%
at December 31, 2010 compared to 60.1% at December 31, 2009.
Dividends Paid
During 2010, we paid $5.4 billion in dividends compared to $5.3 billion
in 2009 and $5.0 billion in 2008. As in prior periods, dividend payments
were a significant use of capital resources. The Verizon Board of Directors
determines the appropriateness of the level of our dividend payments
on a periodic basis by considering such factors as long-term growth
opportunities, internal cash requirements and the expectations of our
shareowners. During the third quarter of 2010, the Board increased our
quarterly dividend payment 2.6% to $.4875 per share from $.475 per share
in the same period of 2009. During the third quarter of 2009 and 2008,
the Board increased our dividend payments 3.3% and 7.0%, respectively.
Common Stock
Common stock has been used from time to time to satisfy some of the
funding requirements of employee and shareowner plans.
On February 3, 2011, the Board of Directors replaced the current share
buyback 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, 2014. The Board also determined that no additional shares
were to be purchased under the prior program.
During the first quarter of 2009, we entered into a privately negotiated
prepaid forward agreement for 14 million shares of Verizon common
stock at a cost of approximately $0.4 billion. We terminated the prepaid
forward agreement with respect to 5 million of the shares during the
fourth quarter of 2009 and 9 million of the shares in the first quarter of
2010, which resulted in the delivery of those shares to Verizon.
There were no repurchases of common stock during 2010 and 2009.
During 2008, we repurchased $1.4 billion of our common stock.
31
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted 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 40 years as of December 31, 2010. In addition, we lease space on
certain of our cell towers to other wireless carriers. Minimum lease pay-
ments receivable 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 prin-
cipal and interest have been offset against the minimum lease payments
receivable in accordance with generally accepted accounting principles.
All recourse debt is reflected in our consolidated balance sheets.
We operate numerous qualified and nonqualified pension plans and
other postretirement benefit plans. These plans primarily relate to our
domestic business units. During 2010, contributions to our qualified
pension plans were not significant. We contributed $0.2 billion and $0.3
billion in 2009 and 2008, respectively, to our qualified pension plans. We
also contributed $0.1 billion, $0.1 billion and $0.2 billion to our nonquali-
fied pension plans in 2010, 2009 and 2008, respectively.
During January 2011, we contributed $0.4 billion to our qualified pen-
sion plans. We do not expect to make additional qualified pension plan
contributions during the remainder of 2011. Nonqualified pension contri-
butions are estimated to be approximately $0.1 billion for 2011.
Contributions to our other postretirement benefit plans generally relate
to payments for benefits on an as-incurred basis since the other post-
retirement benefit plans do not have funding requirements similar to
the pension plans. We contributed $1.2 billion, $1.6 billion and $1.2 bil-
lion to our other postretirement benefit plans in 2010, 2009 and 2008,
respectively. Contributions to our other postretirement benefit plans are
estimated to be approximately $1.5 billion in 2011.
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, 2010. Additional detail about
these items is included in the notes to the consolidated financial statements.
Contractual Obligations
Long-term debt(1)
Capital lease obligations (see Note 8)
Total long-term debt, including current maturities
Interest on long-term debt(1)
Operating leases (see Note 8)
Purchase obligations (see Note 17)(2)
Income tax audit settlements(3)
Other long-term liabilities(4)
Total contractual obligations
Payments Due By Period
(dollars in millions)
Total
$ 52,462
332
52,794
35,194
12,633
57,277
208
3,900
$ 162,006
Less than
1 year
$
7,467
75
7,542
3,143
1,898
17,852
208
2,500
$ 33,143
1-3 years
3-5 years
$ 11,703
114
11,817
5,375
3,191
36,779
–
1,400
$ 58,562
$
4,653
77
4,730
4,265
2,267
2,132
–
–
$ 13,394
More than
5 years
$ 28,639
66
28,705
22,411
5,277
514
–
–
$ 56,907
(1) Items included in long-term debt with variable coupon rates are described in Note 9 to the consolidated financial statements.
(2) The purchase obligations reflected above are primarily commitments to purchase equipment, software, programming and network services, and marketing activities, which will be used or
sold in the ordinary course of business. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we are contractually com-
mitted. We also purchase products and services as needed with no firm commitment. For this reason, the amounts presented in this table alone do not provide a reliable indicator of our
expected future cash outflows or changes in our expected cash position (see Note 17 to the consolidated financial statements).
(3) Income tax audit settlements include gross unrecognized tax benefits of $0.1 billion and related gross interest and penalties of $0.1 billion as determined under the accounting standard
relating to the uncertainty in income taxes. We are not able to make a reliable estimate of when the unrecognized tax benefits balance of $3.1 billion and related interest and penalties will
be settled with the respective taxing authorities until issues or examinations are further developed (see Note 13 to the consolidated financial statements).
(4) Other long-term liabilities include estimated postretirement benefit and qualified pension plan contributions (see Note 12 to the consolidated financial statements).
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, 2010, letters of credit totaling approximately $0.1
billion were executed in the normal course of business, which support
several financing arrangements and payment obligations to third parties.
32
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted 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 currency
exchange rate fluctuations, changes in investment, equity and commodity
prices and changes in corporate tax rates. We employ risk management
strategies, which may include the use of a variety of derivatives including
cross currency swaps, foreign currency and prepaid forwards and collars,
interest rate and commodity swap agreements and interest rate locks. We
do not hold derivatives for trading purposes.
It is our general policy to enter into interest rate, foreign currency and
other derivative transactions only to the extent necessary to achieve our
desired objectives in limiting our exposure to various market risks. Our
objectives include maintaining a mix of fixed and variable rate debt to
lower borrowing costs within reasonable risk parameters and to protect
against earnings and cash flow volatility resulting from changes in market
conditions. We do not hedge our market risk exposure in a manner that
would completely eliminate the effect of changes in interest rates and
foreign exchange rates on our earnings. We do not expect that our net
income, liquidity and cash flows will be materially affected by these risk
management strategies.
Interest Rate Risk
We are exposed to changes in interest rates, primarily on our short-term
debt and the portion of long-term debt that carries floating interest
rates. As of December 31, 2010, more than three-fourths in aggregate
principal amount of our total debt portfolio consisted of fixed rate
indebtedness, including the effect of interest rate swap agreements des-
ignated as hedges. The impact of a 100 basis point change in interest
rates affecting our floating rate debt would result in a change in annual
interest expense, including our interest rate swap agreements that are
designated as hedges, of approximately $0.1 billion. The interest rates on
our existing long-term debt obligations are unaffected by changes to our
credit ratings.
The table that follows summarizes the fair values of our long-term debt,
including current maturities, and interest rate swap derivatives as of
December 31, 2010 and 2009. The table also provides a sensitivity anal-
ysis of the estimated fair values of these financial instruments assuming
100-basis-point upward and downward shifts in the yield curve. Our sen-
sitivity 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, 2010
Fair Values
Fair Value
assuming
+ 100 basis
point shift
(dollars in millions)
Fair Value
assuming
- 100 basis
point shift
Long-term debt and related
derivatives
At December 31, 2009
Long-term debt and related
derivatives
$
58,591
$
55,427
$
62,247
$
66,042
$
62,788
$
69,801
Interest Rate Swaps
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 London Interbank Offered Rate.
These swaps are designated as fair value hedges and hedge against
changes in the fair value of our debt portfolio. We record the interest
rate swaps at fair value on our consolidated balance sheets as assets and
liabilities. Changes in the fair value of the interest rate swaps are recorded
to Interest expense, which are offset by changes in the fair value of the
debt due to changes in interest rates. The fair value of these contracts
was $0.3 billion and $0.2 billion at December 31, 2010 and December 31,
2009, respectively, and are primarily included in Other assets and Long-
term debt. As of December 31, 2010, the total notional amount of these
interest rate swaps was $6.0 billion. During February 2011, we entered
into interest rate swaps, designated as fair value hedges, with a notional
amount of approximately $3.0 billion.
Forward Interest Rate Swaps
In order to manage our exposure to future interest rate changes, during
2010, we entered into forward interest rate swaps with a total notional
value of $1.4 billion. We have designated these contracts as cash flow
hedges. The fair value of these contracts was $0.1 billion at December
31, 2010 and the contracts are included in Other assets. On or before
February 7, 2011, Verizon terminated these forward interest rate swaps.
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. Gains and losses
on foreign currency transactions are recorded in the consolidated state-
ments of income in Other income and (expense), net. At December 31,
2010, our primary translation exposure was to the British Pound Sterling,
the Euro and the Australian Dollar.
Cross Currency Swaps
Verizon Wireless has entered into cross currency swaps designated as
cash flow hedges to exchange approximately $2.4 billion British Pound
Sterling and Euro denominated debt into U.S. dollars and to fix our future
interest and principal payments in U.S. dollars, as well as mitigate the
impact of foreign currency transaction gains or losses. The fair value of
these swaps included primarily in Other assets was approximately $0.1
billion and $0.3 billion at December 31, 2010 and December 31, 2009,
respectively. During 2010 and 2009, a pre-tax loss of $0.2 billion, and a
pre-tax gain of $0.3 billion, respectively, was recognized in Other compre-
hensive income, a portion of which was reclassified to Other income and
(expense), net to offset the related pre-tax foreign currency transaction
gain on the underlying debt obligations.
33
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
CRITICAL ACCOUNTING ESTIMATES AND RECENT ACCOUNTING STANDARDS
Goodwill
At December 31, 2010, the balance of our goodwill was approximately
$22.0 billion, of which $17.9 billion was in our Wireless segment and $4.1
billion was in our Wireline segment. Determining whether an impair-
ment has occurred requires the determination of fair value of each
respective reporting unit. Our operating segments, Domestic Wireless
and Wireline, are deemed to be our reporting units for purposes of
goodwill impairment testing. The fair value of Domestic Wireless signif-
icantly exceeded its carrying value. The fair value of Wireline exceeded
its carrying value. Accordingly, our annual impairment tests for 2010,
2009 and 2008 did not result in an impairment.
The fair value of the reporting unit is calculated using a market
approach and a discounted cash flow method. The market approach
includes the use of comparative multiples to corroborate discounted
cash flow results. The discounted cash flow method is based on the
present value of two components – projected cash flows and a ter-
minal value. The terminal value represents the expected normalized
future cash flows of the reporting unit beyond the cash flows from
the discrete projection period. The fair value of the reporting unit is
calculated based on the sum of the present value of the cash flows
from the discrete period and the present value of the terminal value.
The estimated cash flows are discounted using a rate that represents
our WACC.
With regards to the Wireline goodwill valuation, a critical assumption
includes the development of the WACC for use in our estimate of fair
value. The WACC is based on current market conditions, including the
equity-risk premium and risk-free interest rate. The projected WACC
used in the estimate of fair value in future periods may be impacted
by adverse changes in market and economic conditions, including
risk-free interest rates, and are subject to change based on the facts
and circumstances that exist at the time of the valuation, which may
increase the likelihood of a potential future impairment charge related
to Wireline goodwill. Reducing the calculated fair value of Wireline’s net
assets by more than 20 percent would not have resulted in a potential
goodwill impairment.
Critical Accounting Estimates
A summary of the critical accounting estimates used in preparing our
financial statements is as follows:
• Wireless licenses and Goodwill are a significant component of our con-
solidated assets. Both our wireless licenses and goodwill are treated as
indefinite-lived intangible assets and, therefore are not amortized, but
rather are tested for impairment annually in the fourth fiscal quarter,
unless there are events or changes in circumstances during an interim
period that indicates these assets may not be recoverable. We believe
our estimates and assumptions are reasonable and represent appro-
priate marketplace considerations as of the valuation date. We do not
believe that reasonably likely adverse changes in our assumptions and
estimates would result in an impairment charge as of our latest impair-
ment testing date. However, if there is a substantial and sustained
adverse decline in our operating profitability, we may have impairment
charges in future years. Any such impairment charge could be material
to our results of operations and financial condition.
Wireless Licenses
The carrying value of our wireless licenses was approximately $73.0
billion as of December 31, 2010. We aggregate our wireless licenses
into one single unit of accounting, as we utilize our wireless licenses
on an integrated basis as part of our nationwide wireless network. Our
wireless licenses provide us with the exclusive right to utilize certain
radio frequency spectrum to provide wireless communication services.
There are currently no legal, regulatory, contractual, competitive, eco-
nomic or other factors that limit the useful life of our wireless licenses.
Our impairment test consists of comparing the estimated fair value of
our wireless licenses to the aggregated carrying amount as of the test
date. If the estimated fair value of our wireless licenses is less than the
aggregated carrying amount of the wireless licenses then an impair-
ment charge is recognized. Our annual impairment tests for 2010, 2009
and 2008 indicated that the fair value significantly exceeded the car-
rying value and, therefore, did not result in an impairment.
We estimate the fair value of our wireless licenses using a direct income
based valuation approach. This approach uses a discounted cash flow
analysis to estimate what a marketplace participant would be willing
to pay to purchase the aggregated wireless licenses as of the valuation
date. As a result we are required to make significant estimates about
future cash flows specifically associated with our wireless licenses, an
appropriate discount rate based on the risk associated with those esti-
mated cash flows and assumed terminal value and growth rates. We
consider current and expected future economic conditions, current
and expected availability of wireless network technology and infra-
structure and related equipment and the costs thereof as well as other
relevant factors in estimating future cash flows. The discount rate repre-
sents our estimate of the weighted average cost of capital (or expected
return, “WACC”) that a marketplace participant would require as of the
valuation date. We develop the discount rate based on our consider-
ation of the cost of debt and equity of a group of guideline companies
as of the valuation date. Accordingly, our discount rate incorporates
our estimate of the expected return a marketplace participant would
require as of the valuation date, including the risk premium associated
with the current and expected economic conditions as of the valua-
tion date. The terminal value growth rate represents our estimate of
the marketplace’s long-term growth rate.
34
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
• We maintain benefit plans for most of our employees, including, for
certain employees, pension and other postretirement benefit plans.
At December 31, 2010, in the aggregate, pension plan benefit obliga-
tions exceeded the fair value of pension plan assets, which will result
in higher future pension plan expense. Other postretirement benefit
plans have larger benefit obligations than plan assets, resulting in
expense. Significant benefit plan assumptions, including the discount
rate used, the long-term rate of return on plan assets and health care
trend rates are periodically updated and impact the amount of benefit
plan income, expense, assets and obligations. A sensitivity analysis of
the impact of changes in these assumptions on the benefit obligations
and expense (income) recorded, as well as the on the funded status
due to an increase or a decrease in the actual versus expected return
on plan assets as of December 31, 2010 and for the year then ended
pertaining to Verizon’s pension and postretirement benefit plans is
provided in the table below.
(dollars in millions)
Pension plans discount rate
Rate of return on pension plan assets
Postretirement plans discount rate
Rate of return on postretirement plan assets
Health care trend rates
Percentage
point
change
Increase
(decrease) at
December 31, 2010*
+0.50
-0.50
+1.00
-1.00
+0.50
-0.50
+1.00
-1.00
+1.00
-1.00
$
(1,341)
1,472
(256)
256
(1,348)
1,494
(31)
31
2,788
(2,303)
* In determining its pension and other postretirement obligation, the Company used
a 5.75% discount rate. The rate was selected to approximate the composite interest
rates available on a selection of bonds available in the market at December 31, 2010.
The bonds selected had maturities that coincided with the time periods during which
benefits payments are expected to occur, were non-callable and available in sufficient
quantities to ensure marketability (at least $0.2 billion par outstanding).
• 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, changes in tax laws and rates, acquisitions and
dispositions of businesses and non-recurring items. As a global com-
mercial enterprise, our income tax rate and the classification of income
taxes can be affected by many factors, including estimates of the
timing and realization of deferred income tax assets and the timing
and amount of income tax payments. We account for tax benefits
taken or expected to be taken in our tax returns in accordance with the
accounting standard relating to the uncertainty in income taxes, 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. We review
and adjust our liability for unrecognized tax benefits based on our best
judgment given the facts, circumstances, and information available at
each reporting date. To the extent that the final outcome of these tax
positions is different than the amounts recorded, such differences may
impact income tax expense and actual tax payments. We recognize
any interest and penalties accrued related to unrecognized tax benefits
in income tax expense. Actual tax payments may materially differ from
estimated liabilities as a result of changes in tax laws as well as unan-
ticipated transactions impacting related income tax balances.
• Our Plant, property and equipment balance represents a significant
component of our consolidated assets. We record plant, property
and equipment at cost. Depreciation expense on our local telephone
operations is principally based on the composite group remaining life
method and straight-line composite rates, which provides for the rec-
ognition of the cost of the remaining net investment in local telephone
plant, less anticipated net salvage value, over the remaining asset lives.
An increase or decrease of 50 basis points to the composite rates of
this class of assets would result in an increase or decrease of approxi-
mately $0.6 billion to depreciation expense based on year-end plant
balances at December 31, 2010. We depreciate other plant, property
and equipment on a straight-line basis over the estimated useful life of
the assets. We expect that a one-year increase in estimated useful lives
of our plant, property and equipment that we depreciate on a straight
line basis would result in a decrease to our 2010 depreciation expense
of $1.0 billion and that a one-year decrease would result in an increase
of approximately $1.2 billion in our 2010 depreciation expense.
Recent Accounting Standards
On January 1, 2011, we prospectively adopted the accounting stan-
dard update regarding revenue recognition for multiple deliverable
arrangements. This method allows a vendor to allocate revenue in an
arrangement using its best estimate of selling price if neither vendor spe-
cific objective evidence nor third party evidence of selling price exists.
Accordingly, the residual method of revenue allocation is no longer per-
missible. The adoption of this standard update is not expected to have a
significant impact on our consolidated financial statements.
On January 1, 2011, we prospectively adopted the accounting standard
update regarding revenue recognition for arrangements that include
software elements. This update requires tangible products that contain
software and non-software elements that work together to deliver the
products’ essential functionality to be evaluated under the accounting
standard regarding multiple deliverable arrangements. The adoption of
this standard update is not expected to have a significant impact on our
consolidated financial statements.
35
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
Acquisitions and Divestitures
Terremark Worldwide, Inc.
On January 27, 2011, Verizon announced that it had entered into a
definitive agreement to acquire all of the common stock of Terremark
Worldwide, Inc., a global provider of IT infrastructure and cloud ser-
vices, for $19 per share in cash (or approximately $1.4 billion). Terremark
had approximately $0.5 billion of debt outstanding as of December 31,
2010. The acquisition, which is subject to the satisfaction of conditions,
including the receipt of a regulatory approval, is expected to close in the
first quarter of 2011. The acquisition will enhance Verizon’s offerings to
governmental and large enterprise customers.
Access Lines Spin-offs
Frontier Transaction
On May 13, 2009, we announced plans to spin off a newly formed sub-
sidiary of Verizon (Spinco) to our stockholders and for Spinco to merge
with Frontier immediately following the spin-off pursuant to a definitive
agreement with Frontier, with Frontier to be the surviving corporation.
On July 1, 2010, after receiving regulatory approval, we completed the
spin-off of the shares of Spinco to Verizon stockholders and the merger of
Spinco with Frontier, resulting in Verizon stockholders collectively owning
approximately 68 percent of Frontier’s equity which was outstanding
immediately following the merger. Frontier issued approximately 678.5
million shares of Frontier common stock in the aggregate to Verizon
stockholders in the merger, and Verizon stockholders received one share
of Frontier common stock for every 4.165977 shares of Verizon common
stock they owned as of June 7, 2010. Verizon stockholders received cash
in lieu of any fraction of a share of Frontier common stock to which they
otherwise were entitled.
At the time of the spin-off and the merger, Spinco held defined assets
and liabilities of the local exchange business and related landline activi-
ties of Verizon in Arizona, Idaho, Illinois, Indiana, Michigan, Nevada,
North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia
and Wisconsin, and in portions of California bordering Arizona, Nevada
and Oregon, including Internet access and long distance services and
broadband video provided to designated customers in those areas. The
transactions did not involve any assets or liabilities of Verizon Wireless.
The merger resulted in Frontier acquiring approximately 4 million access
lines and certain related businesses from Verizon, which collectively
generated revenues of approximately $4 billion for Verizon’s Wireline seg-
ment during 2009 and approximately $1.7 billion of revenue for Verizon’s
Wireline segment during the six months ended June 30, 2010.
Pursuant to the terms of Verizon’s equity incentive plans, shortly following
the closing of the spin-off and the merger, the number of outstanding
and unvested restricted stock units (RSUs) and performance stock units
(PSUs) held by current and former Verizon employees (including Verizon
employees who became employees of Frontier in connection with the
merger) was increased to reflect a number of additional units approxi-
mately equal to the cash value of the Frontier common stock that the
holders of the RSUs and PSUs would have received with respect to hypo-
thetical shares of Verizon common stock subject to awards under those
plans. In addition, the exercise prices and number of shares of Verizon
common stock underlying stock options to purchase shares of Verizon
common stock previously granted to employees under equity incentive
plans were adjusted pursuant to the terms of those plans to take into
account the decrease in the value of Verizon common stock immediately
following the spin-off and merger.
36
The total value of the transaction to Verizon and its stockholders was
approximately $8.6 billion. Verizon stockholders received $5.3 billion in
Frontier common stock (based on the valuation formula contained in
the merger agreement with Frontier) as described above, and Verizon
received $3.3 billion in aggregate value, comprised of $3.1 billion in the
form of a special cash payment from Spinco and $0.3 billion in a reduction
in Verizon’s consolidated indebtedness. During July 2010, Verizon used
the proceeds from the special cash payment to reduce its consolidated
indebtedness. The accompanying consolidated financial statements for
the year ended December 31, 2010 include these operations prior to
the completion of the spin-off on July 1, 2010. The spin-off decreased
Total equity and Goodwill by approximately $1.9 billion and $0.6 billion,
respectively.
On April 12, 2010, Spinco completed a financing of $3.2 billion in prin-
cipal amount of notes. The gross proceeds of the offering were deposited
into an escrow account. Immediately prior to the spin-off on July 1, 2010,
the funds in the escrow account representing the net cash proceeds
from the offering were released to Verizon. These proceeds are reflected
in the consolidated statement of cash flows as Proceeds from access line
spin-off.
FairPoint Transaction
On March 31, 2008, we completed the spin-off of the shares of Northern
New England Spinco Inc. to Verizon shareowners and the merger of
Northern New England Spinco Inc. with FairPoint Communications, Inc.
As a result of the spin-off, our net debt was reduced by approximately
$1.4 billion. The consolidated statements of income for the periods pre-
sented include the results of operations of the local exchange and related
business assets in Maine, New Hampshire and Vermont through the date
of completion of the spin-off.
Alltel Divestiture Markets
As a condition of the regulatory approvals by the DOJ and the FCC to
complete the acquisition of Alltel in January 2009, Verizon Wireless was
required to divest overlapping properties in 105 operating markets in
24 states. Total assets and total liabilities divested were $2.6 billion and
$0.1 billion, respectively, principally comprised of network assets, wire-
less licenses and customer relationships that were included in Prepaid
expenses and other current assets and Other current liabilities, respec-
tively, on the consolidated balance sheet at December 31, 2009.
On May 8, 2009, Verizon Wireless entered into a definitive agreement
with AT&T Mobility, pursuant to which AT&T Mobility agreed to acquire
79 of the 105 Alltel Divestiture Markets, including licenses and network
assets, for approximately $2.4 billion in cash. On June 9, 2009, Verizon
Wireless entered into a definitive agreement with Atlantic Tele-Network,
Inc. (ATN), pursuant to which ATN agreed to acquire the remaining 26
Alltel Divestiture Markets, including licenses and network assets, for $0.2
billion in cash. During the second quarter of 2010, Verizon Wireless com-
pleted both transactions.
Other
On August 23, 2010, Verizon Wireless acquired the net assets and related
customers of six operating markets in Louisiana and Mississippi in a trans-
action with AT&T Inc. for cash consideration of $0.2 billion. These assets
were acquired to enhance Verizon Wireless’ network coverage in these
operating markets. The preliminary purchase price allocation primarily
resulted in $0.1 billion of wireless licenses and $0.1 billion in goodwill.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
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 us.
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 services
and other matters 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 unreason-
able 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 business including: (i) use and disclosure of cus-
tomer 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) accessi-
bility of services and equipment to individuals with disabilities if readily
achievable; (vi) interconnection with the networks of other carriers; and
(vii) customers’ ability to keep (or “port”) their telephone numbers when
switching to another carrier. 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 previously adopted a series of orders that impose lesser regu-
latory requirements on broadband services and facilities than apply to
narrowband or traditional telephone services. With respect to wireline
facilities, the FCC determined that certain unbundling requirements that
apply to narrowband facilities of local exchange carriers do not apply
to broadband facilities such as fiber to the premise loops and packet
switches. With respect to services, the FCC concluded that both wireline
and wireless broadband Internet access services qualify as largely dereg-
ulated information services. Separately, certain of our wireline broadband
services sold primarily to larger business customers were largely deregu-
lated when our forbearance petition was deemed granted by operation
of law. The latter relief has been upheld on appeal, but is subject to a
continuing challenge before the FCC.
In December of 2010, the FCC adopted so-called “net neutrality” rules
governing broadband Internet access services that it describes as
intended to preserve the openness of the Internet. The rules require
providers of broadband Internet access to publicly disclose information
relating to the performance and terms of its services. For “fixed” services,
the rules prohibit blocking lawful content, applications, services or non-
harmful devices. The rules also prohibit unreasonable discrimination in
transmitting lawful traffic over a consumer’s broadband Internet access
service. For “mobile” services, the rules prohibit blocking access to lawful
websites or blocking applications that compete with the provider’s voice
or video telephony services. The restrictions are subject to “reasonable
network management.” The rules also establish a complaint process, and
state that the FCC will continue to monitor developments to determine
whether to impose further regulations. The rules are scheduled to take
effect following their review by the Office of Management and Budget,
and will be subject to appeals.
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, the Act generally requires companies that provide cable service
over a cable system to obtain a local cable franchise, and the FCC has
adopted rules that interpret and implement this requirement.
Interstate Access Charges and Intercarrier Compensation
The FCC’s current framework for interstate switched access rates was
established in the Coalition for Affordable Local and Long Distance
Services (CALLS) plan which the FCC adopted in 2000, and it has adopted
a separate framework that applies to dial-up Internet-bound traffic. The
FCC currently is conducting a broad rulemaking to determine whether
and how these existing frameworks should be modified.
An FCC rulemaking proceeding is also pending to address the regulation
of services that use IP. The issues raised in the rulemaking as well as in
several petitions currently pending before the FCC include whether, and
under what circumstances, access charges should apply to voice or other
IP services and the scope of federal and state commission authority over
these services.
The FCC’s current rules for special access services provide for pricing flex-
ibility and ultimately the removal of services from price regulation when
prescribed competitive thresholds are met. More than half of special
access revenues are now removed from price regulation. The FCC cur-
rently has a rulemaking proceeding underway to determine whether and
how these rules should be modified.
Universal Service
The FCC has adopted a body of rules implementing the universal service
provisions of the Telecommunications Act of 1996, including provisions
to support rural and non-rural high-cost areas, low income subscribers,
schools and libraries and rural health care. The FCC’s rules require tele-
communications companies including Verizon to pay into the Universal
Service Fund (USF), which then makes distributions in support of the pro-
grams. Certain of the FCC’s rules for support to high-cost areas served by
larger “non-rural” local telephone companies are the subject of a pending
appeal. Separately, in response to growth in the size of the USF, the FCC
has capped the amount of distributions competitive carriers (including
all wireless carriers) may receive from the USF. In its 2008 order approving
Verizon Wireless’ acquisition of Alltel, the FCC also required Verizon
Wireless to phase out the high-cost universal service support the merged
company receives by 20 percent during the first year following comple-
tion of the acquisition and by an additional 20 percent for each of the
following three years, after which no support will be provided. The FCC
currently is considering other changes to the rules governing contribu-
tions to, and disbursements from, the fund. Any change in the current
rules could result in a change in the contribution that Verizon and others
must make and that would have to be collected from customers, or in
the amounts that these providers receive from the USF.
37
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
Unbundling of Network Elements
Under Section 251 of the Telecommunications Act of 1996, incumbent
local exchange carriers are 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 FCC has
adopted rules defining the network elements that must be made avail-
able, including criteria for determining whether high-capacity loops,
transport or dark fiber transport must be unbundled in individual wire
centers. The Telecommunications Act of 1996 also adopted a cost-based
pricing standard for these UNEs, which the FCC interpreted as allowing
it to impose a pricing standard known as “total element long run incre-
mental cost” or “TELRIC.”
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 systems
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 cel-
lular radiotelephone service, personal communications service, wireless
communications service, and point-to-point radio service. The technical
and service rules, the specific radio frequencies and amounts of spectrum
Verizon Wireless holds, and the sizes of the geographic areas it is autho-
rized 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
utilizes those licenses to provide services to customers. Because the FCC
issues licenses for only a fixed time, generally 10 years, Verizon Wireless
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 to a state or
local public safety agency that handles 911 calls; (iv) provide roaming
services to other wireless service providers; and (v) comply with regula-
tions 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. In its November 4, 2008 order approving Verizon
Wireless’ acquisition of Alltel, the FCC adopted conditions that impose
additional requirements on Verizon Wireless in its provision of Enhanced
911 services and roaming services.
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.
38
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, and can result
in conditions on the purchaser that can impact its costs and business
plans. The Communications Act also requires the FCC to award new
licenses for most commercial wireless services through a competitive
bidding process in which spectrum is awarded to bidders in an auction.
Verizon Wireless has participated in spectrum auctions to acquire licenses
for radio spectrum in various bands. Most recently, Verizon Wireless par-
ticipated in the FCC’s auction of spectrum in the 700 MHz band, and was
the high bidder on 109 700 MHz licenses. The FCC granted all of those
licenses to Verizon Wireless on November 26, 2008.
The FCC also adopted service rules that will impose costs on licensees
that acquire the 700 MHz band spectrum either through auction or by
purchasing such spectrum from other companies. These rules include
minimum coverage mandates by specific dates during the license terms,
and, for approximately one-third of the spectrum, known as the “C Block,”
“open access” requirements, which generally require licensees of that
spectrum to allow customers to use devices and applications of their
choice on the LTE network we are deploying on that spectrum, including
those obtained from sources other than us or our distributors or dealers,
subject to certain technical limitations established by us. Verizon Wireless
holds the C Block 700 MHz licenses covering the entire United States. In
adopting its “net neutrality” rules discussed above, the FCC stated that
the new rules operate independently from the “open access” require-
ments that continue to apply to the C Block licensees.
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 regu-
lated the same as other similarly situated carriers. Our incumbent local
exchange operations are generally classified as dominant. These latter
operations (California, Connecticut, Delaware, the District of Columbia,
Florida, Maryland, Massachusetts, New Jersey, New York, North Carolina,
Pennsylvania, Rhode Island, Texas and Virginia) are subject to various
levels of pricing flexibility, deregulation, detariffing, and service quality
standards. None of the states are subject to earnings regulation.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations – As Adjusted continued
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
In this Report we have made forward-looking statements. These state-
ments are based on our estimates and assumptions and are subject to
risks and uncertainties. Forward-looking statements include the informa-
tion concerning our possible or assumed future results of operations.
Forward-looking statements also include those preceded or followed
by the words “anticipates,” “believes,” “estimates,” “hopes” or similar expres-
sions. For those statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
The following important factors, along with those discussed elsewhere
in this Report could affect future results and could cause those results to
differ materially from those expressed in the forward-looking statements:
• the effects of adverse conditions in the U.S. and international
economies;
• the effects of competition in our markets;
• materially adverse changes in labor matters, including labor negotia-
tions, and any resulting financial and/or operational impact;
• the effect of material changes in available technology;
• any disruption of our key suppliers’ provisioning of products or
services;
• significant increases in benefit plan costs or lower investment returns
on plan assets;
• the impact of natural disasters, terrorist attacks, breaches of network or
information technology security or existing or future litigation and any
resulting financial impact not covered by insurance;
• technology substitution;
• an adverse change in the ratings afforded our debt securities by
nationally accredited ratings organizations or adverse conditions in
the credit markets impacting the cost, including interest rates, and/or
availability of financing;
• any changes in the regulatory environments in which we operate,
including any increase in restrictions on our ability to operate our
networks;
• the timing, scope and financial impact of our deployment of broad-
band technology;
• changes in our accounting assumptions that regulatory agencies,
including the SEC, may require or that result from changes in the
accounting rules or their application, which could result in an impact
on earnings;
• our ability to complete acquisitions and dispositions; and
• the inability to implement our business strategies.
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 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, Florida, New Jersey, Texas and the
unincorporated areas of Delaware. We also have obtained authoriza-
tion from the state commission in Rhode Island to provide cable service
in certain areas in that state, have obtained required state commission
approvals for our local franchises in New York, and will need to obtain
additional state commission approvals in these states to provide cable
service in additional areas. Virginia law provides us the option of entering
a given franchise area using state standards if local franchise negotiations
are unsuccessful.
Wireless Services
The rapid growth of the wireless industry has led to efforts by some state
legislatures and state public utility commissions to regulate 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, wireless carriers, but
does not prohibit 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, the use of handsets while driving, reporting requirements
for system outages and the availability of broadband wireless services.
Wireless tower and antenna facilities are also subject to state and local
zoning and land use regulation, and securing approvals for new or modi-
fied tower or antenna sites is often a lengthy and expensive process.
Verizon Wireless (as well as AT&T 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’ practices at
the time it was entered into in July 2004, obligates the company to dis-
close certain rates and terms during a sales transaction, to provide maps
depicting coverage, and to comply with various requirements regarding
advertising, billing, and other practices.
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 to the reserve
may also be made based upon actual conditions discovered during the
remediation at this or any other site requiring remediation.
39
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 finan-
cial 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, 2010. Based on this
assessment, we believe that the internal control over financial reporting
of the company is effective as of December 31, 2010. 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
Francis J. Shammo
Executive Vice President and Chief Financial Officer
Robert J. Barish
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, 2010, 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.
40
Report of Independent Registered Public Accounting
Firm on Internal Control Over Financial Reporting
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, 2010, 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, 2010 and 2009, and the
related consolidated statements of income, cash flows and changes in
equity for each of the three years in the period ended December 31, 2010
of Verizon and our report dated February 28, 2011 expressed an unquali-
fied opinion thereon.
Ernst & Young LLP
New York, New York
February 28, 2011
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, 2010 and 2009, and the related consolidated statements of income,
cash flows and changes in equity for each of the three years in the period
ended December 31, 2010. These financial statements are the responsi-
bility 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, 2010 and 2009, and the consolidated results of its
operations and its cash flows for each of the three years in the period
ended December 31, 2010, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, Verizon
has elected to change its methods of accounting for actuarial gains
and losses and the calculation of expected returns on plan assets for all
pension and other postretirement benefit plans during the fourth quarter
of 2010.
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, 2010, based on cri-
teria established in Internal Control–Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 28, 2011 expressed an unqualified opinion
thereon.
Ernst & Young LLP
New York, New York
February 28, 2011
41
Consolidated Statements of Income – As Adjusted
Years Ended December 31,
Operating Revenues
Operating Expenses
Cost of services and sales (exclusive of items shown below)
Selling, general and administrative expense
Depreciation and amortization expense
Total Operating Expenses
Operating Income
Equity in earnings of unconsolidated businesses
Other income and (expense), net
Interest expense
Income Before (Provision) Benefit for Income Taxes
(Provision) benefit for income taxes
Net Income
Net income attributable to noncontrolling interest
Net income (loss) attributable to Verizon
Net Income
Basic Earnings (Loss) Per Common Share
Net income (loss) attributable to Verizon
Weighted-average shares outstanding (in millions)
Diluted Earnings (Loss) Per Common Share
Net income (loss) attributable to Verizon
Weighted-average shares outstanding (in millions)
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
2010
(dollars in millions, except per share amounts)
2008
2009
$ 106,565
$ 107,808
$
97,354
44,149
31,366
16,405
91,920
14,645
508
54
(2,523)
12,684
(2,467)
$ 10,217
$
7,668
2,549
$ 10,217
$
.90
2,830
44,579
30,717
16,534
91,830
15,978
553
91
(3,102)
13,520
(1,919)
11,601
6,707
4,894
11,601
1.72
2,841
$
$
$
$
38,615
41,517
14,610
94,742
2,612
567
283
(1,819)
1,643
2,319
3,962
6,155
(2,193)
3,962
(.77)
2,849
$
$
$
$
$
.90
2,833
$
1.72
2,841
$
(.77)
2,849
42
Consolidated Balance Sheets – As Adjusted
At December 31,
Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $876 and $976
Inventories
Prepaid expenses and other
Total current assets
Plant, property and equipment
Less accumulated depreciation
Investments in unconsolidated businesses
Wireless licenses
Goodwill
Other intangible assets, net
Other assets
Total assets
Liabilities and Equity
Current liabilities
Debt maturing within one year
Accounts payable and accrued liabilities
Other
Total current liabilities
Long-term debt
Employee benefit obligations
Deferred income taxes
Other liabilities
Equity
Series preferred stock ($.10 par value; none issued)
Common stock ($.10 par value; 2,967,610,119 shares issued in both periods)
Contributed capital
Reinvested earnings
Accumulated other comprehensive income (loss)
Common stock in treasury, at cost
Deferred compensation - employee stock ownership plans and other
Noncontrolling interest
Total equity
Total liabilities and equity
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)
2009
2010
$
6,668
545
11,781
1,131
2,223
22,348
211,655
123,944
87,711
3,497
72,996
21,988
5,830
5,635
$ 220,005
$
7,542
15,702
7,353
30,597
45,252
28,164
22,818
6,262
–
297
37,922
4,368
1,049
(5,267)
200
48,343
86,912
$ 220,005
$
2,009
490
12,573
1,426
5,247
21,745
229,743
137,758
91,985
3,118
72,067
22,472
6,764
8,756
$ 226,907
$
7,205
15,223
6,708
29,136
55,051
32,622
19,190
6,765
–
297
40,108
7,260
(1,372)
(5,000)
89
42,761
84,143
$ 226,907
43
Consolidated Statements of Cash Flows – As Adjusted
Years Ended December 31,
Cash Flows from Operating Activities
Net Income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense
Employee retirement benefits
Deferred income taxes
Provision for uncollectible accounts
Equity in earnings of unconsolidated businesses, net of dividends received
Changes in current assets and liabilities, net of effects from acquisition/disposition
of businesses:
Accounts receivable
Inventories
Other assets
Accounts payable and accrued liabilities
Other, net
Net cash provided by operating activities
Cash Flows from Investing Activities
Capital expenditures (including capitalized software)
Acquisitions of licenses, investments and businesses, net of cash acquired
Proceeds from dispositions
Net change in short-term investments
Other, net
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 access line spin-off
Proceeds from sale of common stock
Purchase of common stock for treasury
Other, net
Net cash provided by (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
2010
2009
(dollars in millions)
2008
$ 10,217
$ 11,601
$
3,962
16,405
3,988
3,233
1,246
2
(859)
299
(313)
1,075
(1,930)
33,363
(16,458)
(1,438)
2,594
(3)
251
(15,054)
–
(8,136)
(1,097)
(5,412)
3,083
–
–
(2,088)
(13,650)
16,534
2,964
2,093
1,306
389
(1,393)
235
(102)
(1,251)
(986)
31,390
(16,872)
(5,958)
–
84
(410)
(23,156)
12,040
(19,260)
(1,652)
(5,271)
–
–
–
(1,864)
(16,007)
14,610
16,077
(3,468)
1,085
212
(1,085)
(188)
(59)
(1,701)
(1,993)
27,452
(17,133)
(15,904)
–
1,677
(114)
(31,474)
21,598
(4,146)
2,389
(4,994)
–
16
(1,368)
(844)
12,651
4,659
2,009
$ 6,668
(7,773)
9,782
2,009
$
8,629
1,153
9,782
$
44
Consolidated Statements of Changes in Equity – As Adjusted
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
Balance at end of year
Contributed Capital
Balance at beginning of year
Access line spin-off
Other
Balance at end of year
Reinvested Earnings
Balance at beginning of year
Benefit plan accounting changes (Note 1)
Adjusted balance at beginning of year
Net income (loss) attributable to Verizon
Dividends declared ($1.925, $1.87 and $1.78 per share)
Balance at end of year
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of year attributable to Verizon
Spin-off of local exchange businesses and related
landline activities (Note 3)
Benefit plan accounting changes (Note 1)
Adjusted balance at beginning of year
Foreign currency translation adjustments
Unrealized gains (losses) on marketable securities
Unrealized gains (losses) on cash flow hedges
Defined benefit pension and postretirement plans
Other comprehensive income (loss)
Balance at end of year attributable to Verizon
Treasury Stock
Balance at beginning of year
Shares purchased
Other (Note 10)
Shares distributed
Employee plans
Shareowner plans
Balance at end of year
Deferred Compensation–ESOPs and Other
Balance at beginning of year
Restricted stock equity grant
Amortization
Balance at end of year
Noncontrolling Interest
Balance at beginning of year
Net income attributable to noncontrolling interest
Other comprehensive income (loss)
Total comprehensive income
Distributions and other
Balance at end of year
Total Equity
Comprehensive Income
Net income
Other comprehensive income (loss)
Total Comprehensive Income
Comprehensive income attributable to noncontrolling interest
Comprehensive income (loss) attributable to Verizon
Total Comprehensive Income
See Notes to Consolidated Financial Statements
2010
Amount
(dollars in millions, except per share amounts, and shares in thousands)
2008
Amount
2009
Amount
Shares
Shares
Shares
2,967,610
2,967,610
$
297
297
2,967,610
2,967,610
$
297
297
2,967,610
2,967,610
$
297
297
(131,942)
–
(9,000)
347
8
(140,587)
40,108
(2,184)
(2)
37,922
7,260
–
7,260
2,549
(5,441)
4,368
(1,372)
23
–
(1,349)
(171)
29
89
2,451
2,398
1,049
(5,000)
–
(280)
13
–
(5,267)
89
97
14
200
42,761
7,668
(35)
7,633
(2,051)
48,343
(127,090)
–
(5,000)
142
6
(131,942)
40,291
–
(183)
40,108
7,676
–
7,676
4,894
(5,310)
7,260
(1,912)
–
–
(1,912)
78
87
87
288
540
(1,372)
(4,839)
–
(166)
5
–
(5,000)
79
–
10
89
37,199
6,707
103
6,810
(1,248)
42,761
(90,786)
(36,779)
–
468
7
(127,090)
40,316
–
(25)
40,291
17,884
(2,953)
14,931
(2,193)
(5,062)
7,676
(4,484)
27
2,930
(1,527)
(231)
(97)
(40)
(17)
(385)
(1,912)
(3,489)
(1,368)
–
18
–
(4,839)
79
–
–
79
32,266
6,155
(30)
6,125
(1,192)
37,199
$ 86,912
$
84,143
$
78,791
$ 10,217
2,363
$ 12,580
$
7,633
4,947
$ 12,580
$
$
$
$
11,601
643
12,244
6,810
5,434
12,244
$
$
$
$
3,962
(415)
3,547
6,125
(2,578)
3,547
45
Notes to Consolidated Financial Statements
NOTE 1
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
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, Domestic Wireless and Wireline. For further infor-
mation concerning our business segments, see Note 14.
Verizon’s Domestic Wireless segment, operating as Verizon Wireless, pro-
vides wireless voice and data services and equipment across the United
States (U.S.) using one of the most extensive and reliable wireless net-
works in the nation. Verizon Wireless continues to expand its penetration
of data services and offerings of data devices for both consumer and
business customers.
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 broadband network
technology, with our fiber-to-the-premises network, operated under the
FiOS service mark, creating a platform with sufficient bandwidth and
capabilities to meet customers’ current and future needs. FiOS allows
us to offer our customers 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 continents, enabling us to provide next-generation IP network
products and information technology services to medium and large busi-
nesses and government customers worldwide.
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. For controlled subsidiaries
that are not wholly owned, the noncontrolling interest is included in Net
income and Total equity. Investments in businesses which we do not
control, but have the ability to exercise significant influence over oper-
ating 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 investments 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 accounting
standard related to debt and equity securities. All significant intercom-
pany accounts and transactions have been eliminated.
Basis of Presentation
We have reclassified certain prior year amounts to conform to the current
year presentation. Also, refer to “Employee Benefit Plans” below regarding
a change in accounting for benefit plans.
Corporate, eliminations and other during the periods presented include a
non-cash adjustment of $0.2 billion, ($0.1 billion) and ($34 million) in 2010,
2009 and 2008, respectively, primarily to adjust wireless data revenues. This
adjustment was recorded to properly defer previously recognized wireless
data revenues that will be earned and recognized in future periods. The
adjustment was recorded during 2010, which reduced Net income (loss)
attributable to Verizon by approximately $0.1 billion. Consolidated rev-
enues in 2009 and 2008 were not affected as the amounts involved were
not material to our consolidated financial statements.
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: the allowance for doubtful
accounts, the recoverability of plant, property and equipment, the recov-
erability of intangible assets and other long-lived assets, unbilled revenues,
fair values of financial instruments, unrecognized tax benefits, valuation
allowances on tax assets, accrued expenses, pension and postretirement
benefit assumptions, contingencies and allocation of purchase prices in
connection with business combinations.
Revenue Recognition
Domestic Wireless
Our Domestic Wireless segment earns revenue by providing access to
and usage of its network, which includes voice and data revenue. In
general, access revenue is billed one month in advance and recognized
when earned. Usage revenue is generally billed in arrears and recognized
when service is rendered. Equipment sales revenue associated with the
sale of wireless handsets and accessories is recognized when the prod-
ucts are delivered to and accepted by the customer, as this is considered
to be a separate earnings process from the sale of wireless services. For
agreements involving the resale of third-party services in which we are
considered the primary obligor in the arrangements, we record the rev-
enue gross at the time of the sale.
Wireline
Our Wireline segment earns revenue based upon usage of its network
and facilities and contract fees. In general, fixed monthly fees for voice,
video, data and certain other services are billed one month in advance
and recognized when earned. Revenue from services that are not fixed in
amount and are based on usage is generally billed in arrears and recog-
nized when such services are provided.
When we bundle the equipment with maintenance and monitoring ser-
vices, we recognize equipment revenue when the equipment is installed
in accordance with contractual specifications and ready for the cus-
tomer’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.
46
Notes to Consolidated Financial Statements continued
Installation related fees, along with the associated costs up to but not
exceeding these fees, are deferred and amortized over the estimated cus-
tomer relationship period.
We report taxes imposed by governmental authorities on revenue-pro-
ducing transactions between us and our customers on a net basis.
Discontinued Operations, Assets Held for Sale, and Sales of
Businesses and Investments
We classify as discontinued operations for all periods presented any com-
ponent of our business that we hold for sale that has operations and
cash flows that are clearly distinguishable operationally and for financial
reporting purposes.
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
Costs for advertising products and services as well as other promotional
and sponsorship costs are charged to Selling, general and administrative
expense in the periods in which they are incurred (see Note 16).
Earnings Per Common Share
Basic earnings per common share are based on the weighted-average
number of shares outstanding during the period. Where appropriate,
diluted earnings per common share include the dilutive effect of shares
issuable under our stock-based compensation plans.
There were a total of approximately 3 million stock options and restricted
stock units outstanding to purchase shares included in the computation
of diluted earnings per common share for the year ended December 31,
2010. Dilutive stock options outstanding to purchase shares included in
the computation of diluted earnings per common share for the years
ended December 31, 2009 and 2008 were not significant. Outstanding
options to purchase shares that were not included in the computation
of diluted earnings per common share because to do so would have
been anti-dilutive for the period, including approximately 73 million, 112
million, and 158 million weighted-average shares for the years ended
December 31, 2010, 2009 and 2008, respectively.
We are authorized to issue up to 4.25 billion and 250 million shares of
common stock and Series Preferred Stock, respectively.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of 90 days or
less when purchased to be cash equivalents. Cash equivalents are stated
at cost, which approximates quoted market value and include amounts
held in money market funds.
Marketable Securities
We have investments in marketable securities which are considered “avail-
able-for-sale” under the provisions of the accounting standard for certain
debt and equity securities. Marketable securities are included in the
accompanying consolidated balance sheets in Short-term investments,
Investments in unconsolidated businesses or Other assets. We continu-
ally 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 for the loss, and a new cost basis in the
investment is established.
Inventories
Inventory consists of wireless and wireline 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.
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 and other network equipment
Outside communications plant
Copper cable
Fiber cable (including undersea cable)
Poles, conduit and other
Furniture, vehicles and other
15 – 45
3 – 15
15
11 – 25
30 – 50
2 – 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 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 and depreciate network software purchased or developed
along with related plant assets. We also capitalize interest associated with
the acquisition or construction of network-related assets. Capitalized
interest is reported as a reduction in interest expense and depreciated as
part of the cost of the network-related assets.
In connection with our ongoing review of the estimated remaining
average useful lives of plant, property and equipment at our local tele-
phone operations, we determined that there were no changes necessary
to average useful lives for 2010. We determined effective January 1, 2009
that the average useful lives of fiber cable (not including undersea cable)
would be increased to 25 years from 20 to 25 years and the average useful
lives of copper cable would be changed to 15 years from 13 to 18 years.
The changes to average useful lives of fiber cable did not have a signifi-
cant impact on depreciation expense. In connection with our ongoing
47
Notes to Consolidated Financial Statements continued
review of the estimated remaining average useful lives of plant, property
and equipment at our wireless operations, we determined that changes
were necessary to the remaining estimated useful lives as a result of
technology upgrades, enhancements, and planned retirements. These
changes resulted in an increase in depreciation expense of $0.3 billion in
2010 and 2009, and $0.2 billion in 2008. While the timing and extent of
current deployment plans are subject to ongoing analysis and modifica-
tion, we believe the current estimates of useful lives are reasonable.
We test our wireless licenses for potential impairment annually or more
frequently if indications of impairment exist. We evaluate our licenses
on an aggregate basis using a direct value approach. The direct value
approach estimates fair value using a discounted cash flow analysis to
estimate what a marketplace participant would be willing to pay to pur-
chase the aggregated wireless licenses as of the valuation date. If the fair
value of the aggregated wireless licenses is less than the aggregated car-
rying amount of the licenses, an impairment is recognized.
Interest expense incurred while qualifying activities are performed to
ready wireless licenses for their intended use is capitalized as part of wire-
less licenses. The capitalization period ends when the development is
substantially complete and the license is ready for its intended use.
Intangible Assets Subject to Amortization
Our intangible assets that do not have indefinite lives (primarily customer
lists and non-network internal-use software) are amortized over their
useful lives and reviewed for impairment 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,
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 determinations for these intangible assets each year to determine
whether events and circumstances warrant a revision in their remaining
useful lives.
For information related to the carrying amount of goodwill by segment,
wireless licenses and other intangible assets, as well as the major com-
ponents and average useful lives of our other acquired intangible assets,
see Note 4.
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. Subsequent additions, modi-
fications or upgrades to internal-use network and non-network software
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 cap-
italize interest associated with the development of internal-use network
and non-network software. Capitalized non-network internal-use soft-
ware 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 capitalized software costs, see “Goodwill and Other Intangible Assets”
below. Also, see Note 4 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 in the fourth fiscal quarter or more
frequently if indications of potential impairment exist. 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 financial and cash flow information is regularly reviewed
by our chief operating decision maker. Step one compares the fair value
of the reporting unit (calculated using a market approach and/or a dis-
counted 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
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 implied fair value of goodwill is less than the car-
rying amount of goodwill, an impairment is recognized.
Intangible Assets Not Subject to Amortization
A significant portion of our intangible assets are wireless licenses that
provide our wireless operations with the exclusive right to utilize des-
ignated radio frequency spectrum to provide cellular communication
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. We reevaluate the useful
life determination for wireless licenses each year to determine whether
events and circumstances continue to support an indefinite useful life.
48
Notes to Consolidated Financial Statements continued
Fair Value Measurements
Fair value of financial and non-financial assets and liabilities is defined
as an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants. The three-tier hierarchy for inputs used in measuring
fair value, which prioritizes the inputs used in the methodologies of mea-
suring fair value for assets and liabilities, is as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities
Level 2 – Observable inputs other than quoted prices in active markets
for identical assets and liabilities
Level 3 – No observable pricing inputs in the market
Financial assets and financial liabilities are classified in their entirety based
on the lowest level of input that is significant to the fair value measure-
ments. Our assessment of the significance of a particular input to the fair
value measurements requires judgment, and may affect the valuation of
the assets and liabilities being measured and their placement within the
fair value hierarchy.
Income Taxes
Our effective tax rate is based on pre-tax income, statutory tax rates, tax
laws and regulations and tax planning strategies available to us in the
various jurisdictions in which we operate.
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 tax 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.
We use a two-step approach for recognizing and measuring tax benefits
taken or expected to be taken in a tax return. The first step is recognition:
we determine whether it is more likely than not that a tax position will be
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.
The accounting standard relating to income taxes generated by lever-
aged lease transactions requires that changes in the projected timing of
income tax cash flows generated by a leveraged lease transaction be rec-
ognized as a gain or loss in the year in which the change occurs.
Significant management judgment is required in evaluating our tax posi-
tions and in determining our effective tax rate.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based
compensation awards made to employees and directors based on esti-
mated fair values. See Note 11 for further details.
Foreign Currency Translation
The functional currency 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 transla-
tion adjustments in Accumulated other comprehensive income (loss), a
separate component of Equity, 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
income (loss). Other exchange gains and losses are reported in income.
Employee Benefit Plans
Pension and postretirement health care and life insurance benefits earned
during the year as well as interest on projected benefit obligations are
accrued currently. Prior service costs and credits resulting from changes in
plan benefits are generally 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 assump-
tion to the actual fair value of plan assets. Actuarial gains and losses are
recognized in operating results in the year in which they occur. These
gains and losses are measured annually as of December 31 or upon a
remeasurement event. Verizon management employees no longer earn
pension benefits or earn service towards the company retiree medical
subsidy (see Note 12).
We recognize a pension or a postretirement plan’s funded status as either
an asset or liability on the consolidated balance sheets. Also, we measure
any unrecognized prior service costs and credits that arise during the
period as a component of Accumulated other comprehensive income
(loss), net of applicable income tax.
Change in Accounting for Benefit Plans
During the fourth quarter of 2010, Verizon retrospectively changed its
method of accounting for pension and other postretirement benefits.
Historically, Verizon has recognized actuarial gains and losses as a com-
ponent of Equity in its consolidated balance sheets on an annual basis.
These gains and losses were amortized into operating results gener-
ally over the average future service period of active employees. Verizon
elected to immediately recognize actuarial gains and losses in its oper-
ating results in the year in which the gains and losses occur. This change
is intended to improve the transparency of Verizon’s operational perfor-
mance by recognizing the effects of current economic and interest rate
trends on plan investments and assumptions. Additionally, Verizon will
no longer calculate expected return on plan assets using an averaging
technique permitted under U.S. GAAP for market-related value of plan
assets but instead will use actual fair value of plan assets. Accordingly, the
financial data for all periods presented has been adjusted to reflect the
effect of these accounting changes.
49
Notes to Consolidated Financial Statements continued
The cumulative effect of the change on Reinvested earnings as of January 1, 2008 was a decrease of approximately $3.0 billion, with the corresponding
adjustment to Accumulated other comprehensive loss. The significant effects of the change in accounting for benefit plans on our consolidated state-
ments of income and consolidated balance sheet for the periods presented were as follows:
Years ended December 31,
2010
2009
2008
(dollars in millions, except per share amounts)
Income Statement Information:
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Income before (provision) benefit for income taxes
(Provision) benefit for income taxes
Net income
Net income (loss) attributable to Verizon
Basic Earnings (Loss) Per Common Share:
Net income (loss) attributable to Verizon
Diluted Earnings (Loss) Per Common Share:
Net income (loss) attributable to Verizon
Recognized
Under
Previous
Method
Recognized
Under
New
Method
$
$
45,127
31,298
16,400
11,780
(2,094)
9,686
2,018
0.71
0.71
44,149
31,366
16,405
12,684
(2,467)
10,217
2,549
0.90
0.90
Previously
Reported
Adjusted
Previously
Reported
Adjusted
$
$
44,299
32,950
16,532
11,568
(1,210)
10,358
3,651
1.29
1.29
44,579
30,717
16,534
13,520
(1,919)
11,601
4,894
1.72
1.72
$
$
39,007
26,898
14,565
15,914
(3,331)
12,583
6,428
2.26
2.26
38,615
41,517
14,610
1,643
2,319
3,962
(2,193)
(0.77)
(0.77)
At December 31,
2010
2009
Balance Sheet Information:
Reinvested earnings
Accumulated other comprehensive income (loss)
Recognized
Under
Previous
Method
Recognized
Under
New
Method
Previously
Reported
Adjusted
$
14,168
(8,443)
$
4,368
1,049
$
17,592
(11,479)
$
7,260
(1,372)
Derivative Instruments
We have entered into derivative transactions primarily to manage our
exposure to fluctuations in foreign currency exchange rates, interest rates,
equity and commodity prices. We employ risk management strategies,
which may include the use of a variety of derivatives including cross cur-
rency swaps, foreign currency and prepaid forwards and collars, interest
rate and commodity swap agreements and interest rate locks. We do not
hold derivatives for trading purposes.
We measure all derivatives, including derivatives embedded in other
financial instruments, at fair value and recognize them as either assets or
liabilities on our consolidated balance sheets. Our derivative instruments
are valued primarily using models based on readily observable market
parameters for all substantial terms of our derivative contracts and thus
are classified as Level 2. Changes in the fair values of derivative instru-
ments not qualifying as hedges or any ineffective portion of hedges are
recognized in earnings in the current period. Changes in the fair values
of derivative instruments used effectively as fair value hedges are recog-
nized in earnings, along with changes in the fair value of the hedged item.
Changes in the fair value of the effective portions of cash flow hedges are
reported in other comprehensive income (loss) and recognized in earn-
ings when the hedged item is recognized in earnings.
Recently Adopted Accounting Standards
The adoption of the following accounting standards and updates during
2010 did not result in a significant impact to our consolidated financial
statements:
In January 2010, we adopted the accounting standard regarding
consolidation accounting for variable interest entities. This standard
requires an enterprise to perform an analysis to determine whether
the entity’s variable interest or interests give it a controlling interest in a
variable interest entity.
50
In January 2010, we adopted the accounting standard update regarding
fair value measurements and disclosures, which requires additional dis-
closures regarding assets and liabilities measured at fair value.
In December 2010, we adopted the accounting standard update
regarding disclosures for finance receivables and allowances for credit
losses. This standard update requires that entities disclose information at
more disaggregated levels than previously required.
Recent Accounting Standards
On January 1, 2011, we prospectively adopted the accounting stan-
dard update regarding revenue recognition for multiple deliverable
arrangements. This method allows a vendor to allocate revenue in an
arrangement using its best estimate of selling price if neither vendor spe-
cific objective evidence nor third party evidence of selling price exists.
Accordingly, the residual method of revenue allocation is no longer per-
missible. The adoption of this standard update is not expected to have a
significant impact on our consolidated financial statements.
On January 1, 2011, we prospectively adopted the accounting standard
update regarding revenue recognition for arrangements that include
software elements. This update requires tangible products that contain
software and non-software elements that work together to deliver the
products’ essential functionality to be evaluated under the accounting
standard regarding multiple deliverable arrangements. The adoption of
this standard update is not expected to have a significant impact on our
consolidated financial statements.
Notes to Consolidated Financial Statements continued
NOTE 2
ACQUISITIONS
Acquisition of Alltel Corporation
On June 5, 2008, Verizon Wireless entered into an agreement and plan
of merger with Alltel Corporation (Alltel), a provider of wireless voice
and data services to consumer and business customers in 34 states, and
its controlling stockholder, Atlantis Holdings LLC, an affiliate of private
investment firms TPG Capital and GS Capital Partners, to acquire, in an
all-cash merger, 100% of the equity of Alltel for cash consideration of $5.9
billion and the assumption of approximately $24 billion of aggregate
principal amount of Alltel debt. Verizon Wireless closed the transaction
on January 9, 2009.
We have completed the appraisals necessary to assess the fair values of
the tangible and intangible assets acquired and liabilities assumed, the
fair value of noncontrolling interests, and the amount of goodwill recog-
nized as of the acquisition date.
The fair values of the assets acquired and liabilities assumed were deter-
mined using the income, cost, and market approaches. The fair value
measurements were primarily based on significant inputs that are not
observable in the market other than interest rate swaps (see Note 10)
and long-term debt assumed in the acquisition. The income approach
was primarily used to value the intangible assets, consisting primarily
of wireless licenses and customer relationships. The cost approach was
used, as appropriate, for plant, property and equipment. The market
approach, which indicates value for a subject asset based on available
market pricing for comparable assets, was utilized in combination with
the income approach for certain acquired investments. Additionally, Alltel
historically conducted business operations in certain markets through
non-wholly owned entities (Managed Partnerships). The fair value of the
noncontrolling interests in these Managed Partnerships as of the acquisi-
tion date of approximately $0.6 billion was estimated by using a market
approach. The fair value of the majority of the long-term debt assumed
and held was primarily valued using quoted market prices.
In December 2008, Verizon Wireless and Verizon Wireless Capital LLC, as
the borrowers, entered into a $17.0 billion credit facility (Bridge Facility).
On January 9, 2009, Verizon Wireless borrowed $12.4 billion under the
Bridge Facility in order to complete the acquisition of Alltel and repay a
portion of the approximately $24 billion of Alltel debt assumed. Verizon
Wireless used cash generated from operations and the net proceeds
from the sale of notes in private placements issued in February 2009, May
2009 and June 2009, to repay the borrowings under the Bridge Facility
(see Note 9). The Bridge Facility and the commitments under the Bridge
Facility have been terminated.
The following table summarizes the consideration paid and the allocation
of the assets acquired, including cash acquired of $1.0 billion, and liabili-
ties assumed as of the close of the acquisition, as well as the fair value at
the acquisition date of Alltel’s noncontrolling partnership interests:
(dollars in millions)
Assets acquired
Current assets
Plant, property and equipment
Wireless licenses
Goodwill
Intangible assets subject to amortization
Other assets
Total assets acquired
Liabilities assumed
Current liabilities
Long-term debt
Deferred income taxes and other liabilities
Total liabilities assumed
Net assets acquired
Noncontrolling interest
Contributed capital
Total cash consideration
$
2,760
3,513
9,444
16,353
2,391
2,444
36,905
1,833
23,929
5,032
30,794
6,111
(519)
333
5,925
$
Included in the above purchase price allocation is $2.1 billion of net
assets that were divested as a condition of the regulatory approval as
described below.
Wireless licenses have an indefinite life, and accordingly, are not sub-
ject to amortization. The weighted average period prior to renewal of
these licenses at acquisition was approximately 5.7 years. The customer
relationships included in Intangible assets subject to amortization are
being amortized using an accelerated method over 8 years, and other
intangibles are being amortized on a straight-line basis or an acceler-
ated method over a period of 2 to 3 years. At the time of the acquisition,
goodwill of approximately $1.4 billion was expected to be deductible for
tax purposes.
Alltel Divestiture Markets
As a condition of the regulatory approvals by the Department of Justice
(DOJ) and the FCC to complete the acquisition in January 2009, Verizon
Wireless was required to divest overlapping properties in 105 operating
markets in 24 states (Alltel Divestiture Markets). Total assets and total lia-
bilities divested were $2.6 billion and $0.1 billion, respectively, principally
comprised of network assets, wireless licenses and customer relation-
ships that were included in Prepaid expenses and other current assets
and Other current liabilities, respectively, on the accompanying consoli-
dated balance sheet at December 31, 2009.
On May 8, 2009, Verizon Wireless entered into a definitive agreement with
AT&T Mobility LLC (AT&T Mobility), a subsidiary of AT&T Inc., pursuant to
which AT&T Mobility agreed to acquire 79 of the 105 Alltel Divestiture
Markets, including licenses and network assets, for approximately $2.4
billion in cash. On June 9, 2009, Verizon Wireless entered into a defini-
tive agreement with Atlantic Tele-Network, Inc. (ATN), pursuant to which
ATN agreed to acquire the remaining 26 Alltel Divestiture Markets,
including licenses and network assets, for $0.2 billion in cash. During
the second quarter of 2010, Verizon Wireless completed both transac-
tions. Upon completion of the divestitures, we recorded a tax charge of
approximately $0.2 billion for the taxable gain associated with the Alltel
Divestiture Markets.
51
Notes to Consolidated Financial Statements continued
Pro Forma Information
The unaudited pro forma information presents the combined operating
results of Verizon and Alltel, with the results prior to the acquisition date
adjusted to include the pro forma impact of: the elimination of transactions
between Verizon and Alltel; the adjustment of amortization of intangible
assets and depreciation of fixed assets based on the purchase price alloca-
tion; the elimination of merger expenses and management fees incurred
by Alltel; and the adjustment of interest expense reflecting the assump-
tion and partial redemption of Alltel’s debt and incremental borrowing
incurred by Verizon Wireless to complete the acquisition of Alltel.
Terremark Worldwide, Inc.
On January 27, 2011, Verizon announced that it had entered into a
definitive agreement to acquire all of the common stock of Terremark
Worldwide, Inc., a global provider of IT infrastructure and cloud ser-
vices, for $19 per share in cash (or approximately $1.4 billion). Terremark
had approximately $0.5 billion of debt outstanding as of December 31,
2010. The acquisition, which is subject to the satisfaction of conditions,
including the receipt of a regulatory approval, is expected to close in the
first quarter of 2011. The acquisition will enhance Verizon’s offerings to
governmental and large enterprise customers.
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. These pro forma results do not purport to be
indicative of the results that would have actually been obtained if the
merger had occurred as of January 1, 2008, nor does the pro forma data
intend to be a projection of results that may be obtained in the future.
The following unaudited pro forma consolidated results of operations
assume that the acquisition of Alltel was completed as of January 1, 2008:
Year ended December 31,
Operating revenues
Net loss attributable to Verizon
(dollars in millions, except per share amounts)
2008
$ 106,509
(2,140)
Merger Integration and Acquisition Related Charges
During 2010, we recorded pre-tax merger integration charges of $0.9
billion primarily related to the Alltel acquisition. These charges primarily
related to the decommissioning of overlapping cell sites, preacquisition
contingencies, handset conversions and trade name amortization.
During 2009, we recorded pre-tax merger integration and acquisition
charges of $1.2 billion. These charges primarily related to the Alltel acqui-
sition and were comprised of trade name amortization, re-branding
initiatives and handset conversions. The charges during 2009 were also
comprised of transaction fees and costs associated with the acquisition,
including fees related to the credit facility that was entered into and uti-
lized to complete the acquisition.
Loss per common share from net loss attributable to Verizon:
Basic
Diluted
During 2008, we recorded pre-tax charges of $0.2 billion, primarily
comprised of systems integration activities and other costs related to re-
branding initiatives, facility exit costs and advertising associated with the
MCI acquisition.
(.75)
(.75)
Consolidated results of operations reported for the year ended December
31, 2009 were not significantly different than the pro forma consolidated
results of operations assuming the acquisition of Alltel was completed
on January 1, 2009.
Acquisition of Rural Cellular Corporation
On August 7, 2008, Verizon Wireless acquired 100% of the outstanding
common stock and redeemed all of the preferred stock of Rural Cellular
Corporation (Rural Cellular) in a cash transaction valued at approximately
$1.3 billion. The final purchase price allocation primarily resulted in $1.1
billion of wireless licenses and $0.9 billion in goodwill. Rural Cellular was
a wireless communications service provider operating under the trade
name of “Unicel,” focusing primarily on rural markets in the United States.
As part of its regulatory approval for the Rural Cellular acquisition, the FCC
and DOJ required the divestiture of six operating markets. On December
22, 2008, we exchanged assets acquired from Rural Cellular and an addi-
tional cellular license with AT&T for assets having a total aggregate value
of approximately $0.5 billion.
Other
On August 23, 2010, Verizon Wireless acquired the net assets and related
customers of six operating markets in Louisiana and Mississippi in a trans-
action with AT&T Inc. for cash consideration of $0.2 billion. These assets
were acquired to enhance Verizon Wireless’ network coverage in these
operating markets. The preliminary purchase price allocation primarily
resulted in $0.1 billion of wireless licenses and $0.1 billion in goodwill.
52
Notes to Consolidated Financial Statements continued
NOTE 3
DISPOSITIONS
Frontier Transaction
On May 13, 2009, we announced plans to spin off a newly formed sub-
sidiary of Verizon (Spinco) to our stockholders and for Spinco to merge
with Frontier Communications Corporation (Frontier) immediately fol-
lowing the spin-off pursuant to a definitive agreement with Frontier, with
Frontier to be the surviving corporation.
On July 1, 2010, after receiving regulatory approval, we completed the
spin-off of the shares of Spinco to Verizon stockholders and the merger of
Spinco with Frontier, resulting in Verizon stockholders collectively owning
approximately 68 percent of Frontier’s equity which was outstanding
immediately following the merger. Frontier issued approximately 678.5
million shares of Frontier common stock in the aggregate to Verizon
stockholders in the merger, and Verizon stockholders received one share
of Frontier common stock for every 4.165977 shares of Verizon common
stock they owned as of June 7, 2010. Verizon stockholders received cash
in lieu of any fraction of a share of Frontier common stock to which they
otherwise were entitled.
At the time of the spin-off and the merger, Spinco held defined assets
and liabilities of the local exchange business and related landline activi-
ties of Verizon in Arizona, Idaho, Illinois, Indiana, Michigan, Nevada,
North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia
and Wisconsin, and in portions of California bordering Arizona, Nevada
and Oregon, including Internet access and long distance services and
broadband video provided to designated customers in those areas. The
transactions did not involve any assets or liabilities of Verizon Wireless.
The merger resulted in Frontier acquiring approximately 4 million access
lines and certain related businesses from Verizon, which collectively
generated revenues of approximately $4 billion for Verizon’s Wireline seg-
ment during 2009 and approximately $1.7 billion of revenue for Verizon’s
Wireline segment during the six months ended June 30, 2010.
Pursuant to the terms of Verizon’s equity incentive plans, shortly following
the closing of the spin-off and the merger, the number of outstanding
and unvested restricted stock units (RSUs) and performance stock units
(PSUs) held by current and former Verizon employees (including Verizon
employees who became employees of Frontier in connection with the
merger) was increased to reflect a number of additional units approxi-
mately equal to the cash value of the Frontier common stock that the
holders of the RSUs and PSUs would have received with respect to hypo-
thetical shares of Verizon common stock subject to awards under those
plans. In addition, the exercise prices and number of shares of Verizon
common stock underlying stock options to purchase shares of Verizon
common stock previously granted to employees under equity incentive
plans were adjusted pursuant to the terms of those plans to take into
account the decrease in the value of Verizon common stock immediately
following the spin-off and merger.
The total value of the transaction to Verizon and its stockholders was
approximately $8.6 billion. Verizon stockholders received $5.3 billion in
Frontier common stock (based on the valuation formula contained in
the merger agreement with Frontier) as described above, and Verizon
received $3.3 billion in aggregate value, comprised of $3.1 billion in the
form of a special cash payment from Spinco and $0.3 billion in a reduc-
tion in Verizon’s consolidated indebtedness. During July 2010, Verizon
used the proceeds from the special cash payment to reduce its con-
solidated indebtedness (see Note 9). The accompanying consolidated
financial statements for the year ended December 31, 2010 include these
operations prior to the completion of the spin-off on July 1, 2010. The
spin-off decreased Goodwill and Total equity by approximately $0.6 bil-
lion and $1.9 billion, respectively.
On April 12, 2010, Spinco completed a financing of $3.2 billion in principal
amount of notes. The gross proceeds of the offering were deposited into
an escrow account. Immediately prior to the spin-off on July 1, 2010, the
funds in the escrow account representing the net cash proceeds from the
offering were released to Verizon. These proceeds are reflected in the con-
solidated statement of cash flows as Proceeds from access line spin-off.
Verizon received a ruling from the Internal Revenue Service confirming
that both the spin-off and the merger qualify as tax-free transactions for
U.S. tax purposes, except to the extent that cash is paid to Verizon share-
holders in lieu of fractional shares. In addition, Verizon received a ruling
from Canada Revenue Agency confirming that the spin-off qualifies as a
tax-free transaction for Canadian tax purposes.
During 2010 and 2009, we recorded pre-tax charges of $0.5 billion and
$0.2 billion, respectively, primarily for costs incurred related to network,
non-network software and other activities to enable the divested mar-
kets in the transaction with Frontier to operate on a stand-alone basis
subsequent to the closing of the transaction, and professional advisory
and legal fees in connection with this transaction. Also included during
2010 are fees related to early extinguishment of debt. During 2009, we
also recorded pre-tax charges of $0.2 billion for costs incurred related to
our Wireline cost reduction initiatives.
FairPoint Transaction
On March 31, 2008, we completed the spin-off of the shares of Northern
New England Spinco Inc. to Verizon shareowners and the merger of
Northern New England Spinco Inc. with FairPoint Communications, Inc.
As a result of the spin-off, our net debt was reduced by approximately
$1.4 billion. The consolidated statements of income for the periods pre-
sented include the results of operations of the local exchange and related
business assets in Maine, New Hampshire and Vermont through the date
of completion of the spin-off.
During 2008, we recorded charges of $0.1 billion for costs incurred related
to the separation of the wireline facilities and operations in Maine, New
Hampshire and Vermont from Verizon at the closing of the transaction,
as well as for professional advisory and legal fees in connection with
this transaction.
53
Notes to Consolidated Financial Statements continued
NOTE 4
WIRELESS LICENSES, GOODWILL AND OTHER INTANGIBLE ASSETS
Wireless Licenses
Changes in the carrying amount of wireless licenses are as follows:
Balance at December 31, 2008
Wireless licenses acquired (Note 2)
Capitalized interest on wireless licenses
Reclassifications, adjustments and other
Balance at December 31, 2009
Wireless licenses acquired (Note 2)
Capitalized interest on wireless licenses
Reclassifications, adjustments and other
Balance at December 31, 2010
(dollars in millions)
$
61,974
9,444
730
(81)
72,067
178
748
3
$ 72,996
$
During the years ended December 31, 2010 and 2009, approximately $12.2 billion of wireless licenses were under development for commercial service
for which we were capitalizing interest costs. In December 2010, a portion of these licenses were placed in service. Accordingly, approximately $3.3
billion of wireless licenses continue to be under development for commercial service.
During 2008, Verizon Wireless was the winning bidder in the FCC auction of spectrum in the 700 MHz band and paid the FCC $9.4 billion to acquire
109 licenses in the 700 MHz band.
The average remaining renewal period of our wireless license portfolio was 6.9 years as of December 31, 2010 (see Note 1, Goodwill and Other
Intangible Assets – Intangible Assets Not Subject to Amortization).
Goodwill
Changes in the carrying amount of goodwill are as follows:
Balance at December 31, 2008
Acquisitions (Note 2)
Reclassifications, adjustments and other
Balance at December 31, 2009
Acquisitions (Note 2)
Dispositions (Note 3)
Reclassifications, adjustments and other
Balance at December 31, 2010
Domestic
Wireless
$
$
$
1,297
16,353
88
17,738
131
–
–
17,869
(dollars in millions)
Wireline
Total
$
$
$
4,738
–
(4)
4,734
–
(614)
(1)
4,119
$
$
6,035
16,353
84
22,472
131
(614)
(1)
$ 21,988
Reclassifications, adjustments and other in Domestic Wireless during 2009 relate to the finalization of the Rural Cellular purchase accounting.
Other Intangible Assets
The following table displays the composition of other intangible assets:
Gross
Amount
At December 31, 2010
Net
Amount
Accumulated
Amortization
(dollars in millions)
At December 31, 2009
Net
Amount
Accumulated
Amortization
Gross
Amount
Other intangible assets:
Customer lists (6 to 8 years)
Non-network internal-use software (2 to 7 years)
Other (2 to 25 years)
Total
$
3,150
8,446
885
$ 12,481
$
$
(1,551)
(4,614)
(486)
(6,651)
$
$
1,599
3,832
399
5,830
$
$
3,134
8,455
865
12,454
$
$
(1,012)
(4,346)
(332)
(5,690)
$
$
2,122
4,109
533
6,764
The amortization expense for other intangible assets was as follows:
Years
2010
2009
2008
54
(dollars in millions)
$ 1,812
1,970
1,383
Estimated annual amortization expense for other intangible assets is as
follows:
Years
2011
2012
2013
2014
2015
(dollars in millions)
$
1,656
1,335
1,100
729
512
Notes to Consolidated Financial Statements continued
NOTE 5
PLANT, PROPERT Y AND EQUIPMENT
Summarized Financial Information
Summarized financial information for our equity investees is as follows:
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
Vehicles and other
Less accumulated depreciation
Total
NOTE 6
(dollars in millions)
2009
2010
$
$
865
21,064
170,086
8,301
4,375
4,816
2,148
211,655
123,944
87,711
$
$
925
21,492
184,547
9,083
4,194
4,694
4,808
229,743
137,758
91,985
INVESTMENTS IN UNCONSOLIDATED BUSINESSES
Our investments in unconsolidated businesses are comprised of the
following:
At December 31,
Ownership
(dollars in millions)
2009
2010
Balance Sheet
At December 31,
Current assets
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Equity
Total liabilities and equity
Income Statement
(dollars in millions)
2009
2010
$ 3,620
7,568
$ 11,188
$
3,588
8,179
$ 11,767
$ 5,509
8
5,671
$ 11,188
$
6,804
49
4,914
$ 11,767
Years Ended December 31,
2010
(dollars in millions)
2008
2009
Net revenue
Operating income
Net income
NOTE 7
$ 12,356
4,156
2,563
$ 12,903
4,313
2,717
$ 13,077
3,820
2,634
NONCONTROLLING INTEREST
Noncontrolling interests in equity of subsidiaries were as follows:
Equity Investees
Vodafone Omnitel
Other
Total equity investees
At December 31,
23.1%
$
Various
2,002
1,471
3,473
$
1,978
1,130
3,108
Noncontrolling interests in consolidated subsidiaries:
Verizon Wireless
Wireless partnerships
(dollars in millions)
2009
2010
$ 47,557
786
$ 48,343
$ 41,950
811
$ 42,761
Cost Investees
Total investments in
unconsolidated businesses
Various
24
10
$
3,497
$
3,118
Dividends and repatriations of foreign earnings received from these
investees amounted to $0.5 billion in 2010, $0.9 billion in 2009 and $0.8
billion in 2008.
Equity Method Investments
Vodafone Omnitel
Vodafone Omnitel N.V. (Vodafone Omnitel) is the second largest wireless
communications company in Italy. At December 31, 2010 and 2009, our
investment in Vodafone Omnitel included goodwill of $1.1 billion.
Other Equity Investees
We have limited partnership investments in entities that invest in afford-
able housing projects, for which we provide funding as a limited partner
and receive tax deductions and tax credits based on our partnership
interests. At December 31, 2010 and 2009, we had equity investments in
these partnerships of $1.2 billion and $0.9 billion, respectively. We adjust
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 Method Investments
Some of our cost investments are carried at their current market value.
Other cost investments are carried at their original cost if the current
market value is not readily determinable. We do however, adjust the car-
rying value of these securities in cases where we have determined that a
decline in their estimated market value is other-than-temporary.
Wireless Joint Venture
Our Domestic Wireless segment, Cellco Partnership doing business
as Verizon Wireless (Verizon Wireless) is a joint venture formed in April
2000 by the combination of the U.S. wireless operations and interests of
Verizon and Vodafone. Verizon owns a controlling 55% interest in Verizon
Wireless and Vodafone owns the remaining 45%.
55
Notes to Consolidated Financial Statements continued
NOTE 8
LEASING ARRANGEMENTS
As Lessor
We are the lessor in leveraged and direct financing lease agreements for commercial aircraft, power generating facilities, telecommunications equip-
ment, real estate property and other equipment. These leases have remaining terms of up to 40 years as of December 31, 2010. In addition, we lease
space on certain of our cell towers to other wireless carriers. Minimum lease payments receivable 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
accordance with GAAP. All recourse debt is reflected in our consolidated balance sheets.
At each reporting period, we monitor the credit quality of the various lessees in our portfolios. Regarding the leveraged lease portfolio, external credit
reports are used where available and where not available we use internally developed indicators. These indicators or internal credit risk grades factor
historic loss experience, the value of the underlying collateral, delinquency trends, industry and general economic conditions. The credit quality of
our lessees vary from AAA to B-. All accounts are current as of the end of this reporting period. For each reporting period the leveraged leases within
the portfolio are reviewed for indicators of impairment where it is probable the rent due according to the contractual terms of the lease will not be
collected. Currently there are no impaired leases.
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
Unearned income
Total
Allowance for doubtful accounts
Finance lease receivables, net
Prepaid expenses and other
Other assets
Leveraged
Leases
Direct Finance
Leases
$ 2,360
1,305
(1,140)
$ 2,525
$
$
155
7
(20)
142
2010
Total
$ 2,515
1,312
(1,160)
$ 2,667
(152)
$ 2,515
59
$
2,456
$ 2,515
Leveraged
Leases
Direct Finance
Leases
$
$
2,504
1,410
(1,251)
2,663
$
$
166
12
(19)
159
(dollars in millions)
2009
Total
2,670
1,422
(1,270)
2,822
(158)
2,664
72
2,592
2,664
$
$
$
$
$
Accumulated deferred taxes arising from leveraged leases, which are
included in Deferred income taxes, amounted to $2.0 billion at December
31, 2010 and $2.1 billion at December 31, 2009.
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,
2010
(dollars in millions)
2008
2009
Pretax income
Income tax expense
$
$
74
32
$
83
34
74
30
Capital leases
Less accumulated amortization
Total
(dollars in millions)
2009
2010
$
$
321
79
242
$
$
357
126
231
The aggregate minimum rental commitments under noncancelable
leases for the periods shown at December 31, 2010, are as follows:
The future minimum lease payments to be received from noncancelable
capital leases (direct financing and leveraged leases), net of nonrecourse
loan payments related to leveraged leases and allowances for doubtful
accounts, along with payments relating to operating leases for the
periods shown at December 31, 2010, are as follows:
Years
Years
2011
2012
2013
2014
2015
Thereafter
Total
(dollars in millions)
Operating
Leases
Capital
Leases
$
$
194
156
151
129
85
1,800
2,515
$
$
109
89
71
51
26
40
386
2011
2012
2013
2014
2015
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, 2010
(dollars in millions)
Operating
Leases
Capital
Leases
$
1,898
1,720
1,471
1,255
1,012
5,277
$ 12,633
$
$
97
74
70
54
42
81
418
86
332
75
257
As Lessee
We lease certain facilities and equipment for use in our operations under
both capital and operating leases. Total rent expense under operating
leases amounted to $2.5 billion in 2010 and 2009, and $2.2 billion in 2008.
56
As of December 31, 2010, the total minimum sublease rentals to be
received in the future under noncancelable operating subleases was not
significant.
Notes to Consolidated Financial Statements continued
NOTE 9
DEBT
Changes to debt during 2010 are as follows:
(dollars in millions)
Balance at January 1, 2010
Repayments of long-term borrowings and capital lease obligations
Decrease in short-term obligations, excluding current maturities
Reclassifications of long-term debt
Other
Balance at December 31, 2010
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
Debt Maturing
within One Year
$
$
7,205
(6,118)
(1,097)
7,362
190
7,542
Long-term
Debt
$
$
55,051
(2,018)
–
(7,362)
(419)
45,252
2010
7,542
–
7,542
$
$
Total
62,256
(8,136)
(1,097)
–
(229)
52,794
$
$
(dollars in millions)
2009
$
$
6,105
1,100
7,205
At December 31, 2010, there was no commercial paper outstanding. The weighted average interest rate for our commercial paper outstanding at
December 31, 2009 was 0.7%.
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.
On April 14, 2010, we terminated all commitments under our previous $5.3 billion 364-day credit facility with a syndicate of lenders and entered into
a new $6.2 billion three-year credit facility with a group of major financial institutions. As of December 31, 2010, the unused borrowing capacity under
the three-year credit facility was approximately $6.1 billion.
Long-Term Debt
Outstanding long-term debt obligations are as follows:
At December 31,
Interest Rates %
Maturities
Verizon Communications – notes payable and other
Verizon Wireless – notes payable and other
4.35 – 5.50
5.55 – 6.90
7.35 – 8.95
3.75 – 5.55
7.38 – 8.88
Floating
2011 – 2018
2012 – 2038
2012 – 2039
2011 – 2014
2011 – 2018
2011
(dollars in millions)
2009
2010
$
$
6,062
10,441
7,677
6,196
10,386
9,671
7,000
5,975
1,250
7,000
6,118
6,246
Verizon Wireless – Alltel assumed notes
6.50 – 7.88
2012 – 2032
2,315
2,334
Telephone subsidiaries – debentures
4.63 – 7.00
7.15 – 7.88
8.00 – 8.75
2011 – 2033
2012 – 2032
2011 – 2031
7,937
1,449
880
8,797
1,449
1,080
Other subsidiaries – debentures and other
6.84 – 8.75
2018 – 2028
1,700
1,700
Employee stock ownership plan loans
–
–
–
23
Capital lease obligations (average rates of 6.8% and 6.3%, respectively)
Unamortized discount, net of premium
Total long-term debt, including current maturities
Less long-term debt maturing within one year
Total long-term debt
332
(224)
52,794
7,542
$ 45,252
$
397
(241)
61,156
6,105
55,051
57
Notes to Consolidated Financial Statements continued
Telephone and Other Subsidiary Debt
During 2010, $0.3 billion of 6.125% and $0.2 billion of 8.625% Verizon New
York Inc. Debentures, $0.2 billion of 6.375% Verizon North Inc. Debentures
and $0.2 billion of 6.3% Verizon Northwest Inc. Debentures matured and
were repaid. During 2009, we redeemed $0.1 billion of 6.8% Verizon New
Jersey Inc. Debentures, $0.3 billion of 6.7% Debentures and $0.2 billion of
5.5% Verizon California Inc. Debentures and $0.2 billion of 5.875% Verizon
New England Inc. Debentures. In April 2009, we redeemed $0.5 billion of
7.51% GTE Corporation Debentures.
Guarantees
We guarantee 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. As of December 31, 2010, $1.7 billion principal
amount of these obligations remain outstanding.
Debt Covenants
We and our consolidated subsidiaries are in compliance with all debt
covenants.
Maturities of Long-Term Debt
Maturities of long-term debt outstanding at December 31, 2010 are as
follows:
Years
2011
2012
2013
2014
2015
Thereafter
(dollars in millions)
$
7,542
5,902
5,915
3,529
1,201
28,705
Notes Payable and Other
2010
During July 2010, Verizon received approximately $3.1 billion in cash in
connection with the completion of the spin-off and merger of Spinco
(see Note 3). This special cash payment was subsequently used to redeem
$2.0 billion of 7.25% Verizon Communications Notes due December 2010
at a redemption price of 102.7% of the principal amount of the notes,
plus accrued and unpaid interest through the date of redemption, as well
as other short-term borrowings. In addition, during 2010 Verizon repaid
$0.2 billion of floating rate vendor financing debt.
During 2011, $0.5 billion of 5.35% Verizon Communications notes
matured and were repaid and Verizon utilized $0.3 billion of a fixed rate
vendor financing facility.
2009
During 2009, Verizon issued $1.8 billion of 6.35% notes due 2019 and
$1.0 billion of 7.35% Notes due 2039, resulting in cash proceeds of $2.7
billion, net of discounts and issuance costs, which was used to reduce
our commercial paper borrowings, repay maturing debt and for gen-
eral corporate purposes. In January 2009, Verizon utilized a $0.2 billion
floating rate vendor financing facility. In addition, during 2009 $0.5 billion
of floating rate Notes due 2009 and $0.1 billion of 8.23% Verizon Notes
matured and were repaid.
Verizon Wireless – Notes Payable and Other
Verizon Wireless Capital LLC, a wholly owned subsidiary of Verizon
Wireless, is a limited liability company formed under the laws of Delaware
on December 7, 2001 as a special purpose finance subsidiary to facilitate
the offering of debt securities of Verizon Wireless by acting as co-issuer.
Other than the financing activities as a co-issuer of Verizon Wireless
indebtedness, Verizon Wireless Capital LLC has no material assets, opera-
tions or revenues. Verizon Wireless is jointly and severally liable with
Verizon Wireless Capital LLC for co-issued notes, as indicated below.
2010
On June 28, 2010, Verizon Wireless exercised its right to redeem the out-
standing $1.0 billion of aggregate floating rate notes due June 2011 at
a redemption price of 100% of the principal amount of the notes, plus
accrued and unpaid interest through the date of redemption. In addition,
during 2010, Verizon Wireless repaid the remaining $4.0 billion of bor-
rowings that were outstanding under a $4.4 billion Three-Year Term Loan
Facility Agreement with a maturity date of September 2011 (Three-Year
Term Loan Facility). No borrowings remain outstanding under this facility
as of December 31, 2010 and this facility has been cancelled.
2009
During November 2009, Verizon Wireless and Verizon Wireless Capital LLC
completed an exchange offer to exchange privately placed notes issued
in November 2008, and February and May 2009 for new notes with sim-
ilar terms.
In June 2009, Verizon Wireless issued $1.0 billion aggregate principal
amount of floating rate notes due 2011.
In May 2009, Verizon Wireless and Verizon Wireless Capital LLC co-issued
$4.0 billion aggregate principal amount of two-year fixed and floating
rate notes in a private placement resulting in cash proceeds of approxi-
mately $4.0 billion, net of discounts and issuance costs. In February 2009,
Verizon Wireless and Verizon Wireless Capital LLC co-issued $4.3 billion
aggregate principal amount of three and five-year fixed rate notes in a
private placement resulting in cash proceeds of $4.2 billion, net of dis-
counts and issuance costs.
In August 2009, Verizon Wireless repaid $0.4 billion of borrowings that
were outstanding under the Three-Year Term Loan Facility, reducing the
outstanding borrowings under this facility to $4.0 billion as of December
31, 2009.
58
Notes to Consolidated Financial Statements continued
NOTE 10
FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
The following table presents the balances of assets measured at fair value
on a recurring basis as of December 31, 2010:
Level 1
Level 2
(dollars in millions)
Total
Level 3
Assets:
Short-term investments:
Equity securities
Fixed income securities
Other current assets:
Interest rate swaps
Cross currency swaps
Other assets:
Equity securities
Fixed income securities
Interest rate swaps
Forward interest rate swaps
Cross currency swaps
Total
$
$
$
281
8
$
–
256
–
–
285
205
–
–
–
779
42
7
–
766
278
108
101
$ 1,558
$
–
–
–
–
–
–
–
–
–
–
$
281
264
42
7
285
971
278
108
101
$ 2,337
Equity securities consist of investments in common stock of domestic
and international corporations in a variety of industry sectors and are
generally measured using quoted prices in active markets and are clas-
sified as Level 1.
Fixed income securities consist primarily of investments in U.S. Treasuries
and agencies, as well as municipal bonds. We use quoted prices in active
markets for our U.S. Treasury securities, and therefore these securities are
classified as Level 1. For all other fixed income securities that do not have
quoted prices in active markets, we use alternative matrix pricing as a prac-
tical expedient resulting in these debt securities being classified as Level 2.
Derivative contracts are valued using models based on readily observable
market parameters for all substantial terms of our derivative contracts
and thus are classified within Level 2. We use mid-market pricing for fair
value measurements of our derivative instruments.
We recognize transfers between levels of the fair value hierarchy as of the
end of the reporting period. There were no transfers within the fair value
hierarchy during 2010.
Fair Value of Short-term and Long-term Debt
The fair value of our short-term and long-term debt, excluding capital
leases, is determined based on market quotes for similar terms and matur-
ities or future cash flows discounted at current rates. The fair value of our
short-term and long-term debt, excluding capital leases, was as follows:
At December 31,
2010
(dollars in millions)
2009
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
Short and long-term debt,
excluding capital leases
$ 52,462
$ 59,020
$ 61,859
$ 67,359
Derivatives
Interest Rate Swaps
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 London Interbank Offered Rate (LIBOR).
These swaps are designated as fair value hedges and hedge against
changes in the fair value of our debt portfolio. We record the interest
rate swaps at fair value on our consolidated balance sheets as assets and
liabilities. Changes in the fair value of the interest rate swaps are recorded
to Interest expense, which are offset by changes in the fair value of the
debt due to changes in interest rates. The fair value of these contracts
was $0.3 billion and $0.2 billion at December 31, 2010 and December 31,
2009, respectively, and are primarily included in Other assets and Long-
term debt. As of December 31, 2010, the total notional amount of these
interest rate swaps was $6.0 billion. During February 2011, we entered
into interest rate swaps, designated as fair value hedges, with a notional
amount of approximately $3.0 billion.
Forward Interest Rate Swaps
In order to manage our exposure to future interest rate changes, during
2010, we entered into forward interest rate swaps with a total notional
value of $1.4 billion. We have designated these contracts as cash flow
hedges. The fair value of these contracts was $0.1 billion at December
31, 2010 and the contracts are included in Other assets. On or before
February 7, 2011, Verizon terminated these forward interest rate swaps.
Cross Currency Swaps
Verizon Wireless has entered into cross currency swaps designated as
cash flow hedges to exchange approximately $2.4 billion British Pound
Sterling and Euro denominated debt into U.S. dollars and to fix our future
interest and principal payments in U.S. dollars, as well as mitigate the
impact of foreign currency transaction gains or losses. The fair value of
these swaps included primarily in Other assets was approximately $0.1
billion and $0.3 billion at December 31, 2010 and December 31, 2009,
respectively. During 2010 and 2009, a pre-tax loss of $0.2 billion and a
pre-tax gain of $0.3 billion, respectively, was recognized in Other compre-
hensive income, a portion of which was reclassified to Other income and
(expense), net to offset the related pre-tax foreign currency transaction
gain on the underlying debt obligations.
Prepaid Forward Agreement
During the first quarter of 2009, we entered into a privately negotiated
prepaid forward agreement for 14 million shares of Verizon common
stock at a cost of approximately $0.4 billion. We terminated the prepaid
forward agreement with respect to 5 million of the shares during the
fourth quarter of 2009 and 9 million of the shares during the first quarter
of 2010, which resulted in the delivery of those shares to Verizon.
Alltel Interest Rate Swaps
As a result of the Alltel acquisition, Verizon Wireless acquired seven interest
rate swap agreements with a notional value of $9.5 billion that paid fixed
and received variable rates based on three-month and one-month LIBOR
with maturities ranging from 2009 to 2013. During 2009, we settled all of
these agreements for a gain that was not significant. Changes in the fair
value of these swaps were recorded in earnings through settlement.
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.
59
Notes to Consolidated Financial Statements continued
NOTE 11
STOCK-BASED COMPENSATION
Verizon Communications Long-Term Incentive Plan
The 2009 Verizon Communications Inc. Long-Term Incentive Plan (the
Plan) permits the granting of stock options, stock appreciation rights,
restricted stock, restricted stock units, performance shares, performance
stock units and other awards. The maximum number of shares available
for awards from the Plan is 119.6 million shares.
Restricted Stock Units
The Plan provides for grants of Restricted Stock Units (RSUs) that generally
vest at the end of the third year after the grant. The RSUs granted prior
to January 1, 2010 are classified as liability awards because the RSUs will
be paid in cash upon vesting. The RSU award liability is measured at its
fair value at the end of each reporting period and, therefore, will fluctuate
based on the performance of Verizon common stock. The RSUs granted
subsequent to January 1, 2010 are classified as equity awards because
these RSUs will be paid in Verizon common stock upon vesting. The RSU
equity awards are measured using the grant date fair value of Verizon
common stock and are not remeasured at the end of each reporting
period. Dividend equivalent units are also paid to participants at the time
the RSU award is paid, and in the same proportion as the RSU award.
60
Performance Stock Units
The Plan also provides for grants of Performance Stock Units (PSUs) that
generally vest at the end of the third year after the grant. As defined by
the Plan, the Human Resources Committee of the Board of Directors
determines the number of PSUs a participant earns based on the extent
to which the corresponding goal has been achieved over the three-year
performance cycle. All payments are subject to approval by the Human
Resources Committee. The PSUs are classified as liability awards because
the PSU awards are paid in cash upon vesting. The PSU award liability is
measured at its fair value at the end of each reporting period and, there-
fore, will fluctuate based on the price of Verizon common stock as well
as performance relative to the targets. Dividend equivalent units are also
paid to participants at the time that the PSU award is determined and
paid, and in the same proportion as the PSU award.
The following table summarizes Verizon’s Restricted Stock Unit and
Performance Stock Unit activity:
(shares in thousands)
Outstanding January 1, 2008
Granted
Payments
Cancelled/Forfeited
Outstanding December 31, 2008
Granted
Payments
Cancelled/Forfeited
Outstanding December 31, 2009
Granted
Payments
Cancelled/Forfeited
Outstanding December 31, 2010
Restricted
Stock Units
Performance
Stock Units
21,573
7,277
(6,869)
(161)
21,820
7,101
(9,357)
(121)
19,443
8,422
(6,788)
(154)
20,923
32,135
11,194
(7,597)
(2,518)
33,214
14,079
(17,141)
(257)
29,895
17,311
(14,364)
(462)
32,380
As of December 31, 2010, unrecognized compensation expense related
to the unvested portion of Verizon’s RSUs and PSUs was approximately
$0.3 billion and is expected to be recognized over a weighted-average
period of approximately two years.
The RSUs granted in 2010, and classified as equity awards, have a weighted
average grant date fair value of $28.63. During 2010, 2009 and 2008, we
paid $0.7 billion, $0.9 billion and $0.6 billion, respectively, to settle RSUs
and PSUs classified as liability awards.
Verizon Wireless’ Long-Term Incentive Plan
The 2000 Verizon Wireless Long-Term Incentive Plan (the Wireless Plan)
provides compensation opportunities to eligible employees of Verizon
Wireless (the Partnership). The Wireless Plan provides rewards that are tied
to the long-term performance of the Partnership. Under the Wireless Plan,
Value Appreciation Rights (VARs) were granted to eligible employees. As
of December 31, 2010, all VARs were fully vested. We have not granted
new VARs since 2004.
VARs reflect the change in the value of the Partnership, as defined in the
Wireless Plan. Similar to stock options, the valuation is determined using a
Black-Scholes model. 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 exer-
cise, less applicable taxes. VARs are fully exercisable three years from the
date of grant, with a maximum term of 10 years. All VARs were 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.
Notes to Consolidated Financial Statements continued
The following table summarizes the assumptions used in the Black-
Scholes model during 2010:
Risk-free rate
Expected term (in years)
Expected volatility
Ranges
0.14% – 0.88%
0.03 – 2.00
31.05% – 47.56%
The risk-free rate is based on the U.S. Treasury yield curve in effect at the
time of the measurement date. 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.
The following table summarizes the Value Appreciation Rights activity:
(shares in thousands)
Outstanding rights, January 1, 2008
Exercised
Cancelled/Forfeited
Outstanding rights, December 31, 2008
Exercised
Cancelled/Forfeited
Outstanding rights, December 31, 2009
Exercised
Cancelled/Forfeited
Outstanding rights, December 31, 2010
VARs
60,412
(31,817)
(351)
28,244
(11,442)
(211)
16,591
(4,947)
(75)
11,569
Weighted-
Average
Grant-Date
Fair Value
$
17.58
18.47
19.01
16.54
16.53
17.63
16.54
24.47
22.72
13.11
During 2010, 2009 and 2008, we paid $0.1 billion, $0.2 billion and $0.6
billion, respectively, to settle VARs classified as liability awards.
Stock-Based Compensation Expense
After-tax compensation expense for stock-based compensation related
to RSUs, PSUs, and VARs described above included in net income attribut-
able to Verizon was $0.5 billion, $0.5 billion and $0.4 billion for 2010, 2009
and 2008, respectively.
Stock Options
The Plan provides for grants of stock options to participants at an option
price per share of 100% of the fair market value of Verizon common stock
on the date of grant. Each grant has a 10-year life, vesting equally over a
three-year period, starting at the date of the grant. We have not granted
new stock options since 2004.
The following table summarizes Verizon’s stock option activity:
(shares in thousands)
Outstanding, January 1, 2008
Exercised
Cancelled/Forfeited
Outstanding, December 31, 2008
Exercised
Cancelled/Forfeited
Outstanding, December 31, 2009
Exercised
Cancelled/Forfeited
Outstanding, December 31, 2010
Stock
Options
181,858
(227)
(41,473)
140,158
(2)
(32,391)
107,765
(372)
(50,549)
56,844
Weighted-
Average
Exercise
Price
$
45.94
36.54
46.28
45.86
25.32
50.31
44.52
34.51
44.90
44.25
All stock options outstanding at December 31, 2010, 2009 and 2008 were
exercisable.
The following table summarizes information about Verizon’s stock options
outstanding as of December 31, 2010:
Range of
Exercise Prices
Stock Options
(in thousands)
$ 20.00 – 29.99
30.00 – 39.99
40.00 – 49.99
50.00 – 59.99
Total
34
18,146
19,973
18,691
56,844
Weighted-
Average
Remaining Life
(years)
1.7
2.6
1.1
0.1
1.2
Weighted-
Average
Exercise Price
$
27.91
35.02
45.21
52.21
44.25
The total intrinsic value for stock options outstanding and stock options
exercised, and the after-tax compensation expense for stock options was
not significant as of and for the years ended December 31, 2010, 2009
and 2008, respectively.
61
Notes to Consolidated Financial Statements continued
At December 31,
Amounts recognized on the
balance sheet
Noncurrent assets
Current liabilities
Noncurrent liabilities
Total
Amounts recognized in
Accumulated Other
Comprehensive Loss
(Pretax)
Prior service cost
Total
2010
Pension
2009
(dollars in millions)
Health Care and Life
2009
2010
$
398
(146)
(3,655)
$ (3,403)
$
3,141
(139)
(6,228)
$ (3,226)
$
–
(581)
(22,192)
$ (22,773)
$
–
(542)
(23,704)
$ (24,246)
$
$
554
554
$
$
999
999
$
$
(567)
(567)
$
$
2,667
2,667
Beginning in 2013, as a result of federal health care reform, Verizon will
no longer file for the Retiree Drug Subsidy (RDS) and will instead contract
with a Medicare Part D plan on a group basis to provide prescription drug
benefits to Medicare eligible retirees. This change to our Medicare Part D
strategy, resulted in the adoption of plan amendments during the fourth
quarter of 2010, which will allow the company to be eligible for greater
Medicare Part D plan subsidies over time.
The accumulated benefit obligation for all defined benefit pension plans
was $28.5 billion and $30.8 billion at December 31, 2010 and 2009,
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)
2009
2010
$ 28,329
27,752
24,529
$ 28,719
28,128
22,352
NOTE 12
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 the 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. See Note 1 regarding the change in
accounting for benefit plans.
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. The following tables sum-
marize benefit costs, as well as the benefit obligations, plan assets, funded
status and rate assumptions associated with pension and postretirement
health care and life insurance benefit plans.
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
Curtailment (gain) loss, net
Acquisitions and
divestitures, net
Settlements paid
End of year
Change in Plan Assets
Beginning of year
Actual return on plan assets
Company contributions
Benefits paid
Settlements paid
Acquisitions and
divestitures, net
End of year
Funded Status
End of year
2010
Pension
2009
(dollars in millions)
Health Care and Life
2009
2010
$ 31,818
353
1,797
(212)
748
(1,996)
687
61
$ 30,394
384
1,924
–
2,056
(2,565)
75
1,245
$ 27,337
305
1,639
(2,580)
826
(1,675)
–
132
$ 27,096
311
1,766
(5)
(469)
(1,740)
18
352
(581)
(3,458)
$ 29,217
192
(1,887)
$ 31,818
(266)
–
$ 25,718
8
–
$ 27,337
$ 28,592
3,089
138
(1,996)
(3,458)
$ 27,791
4,793
337
(2,565)
(1,887)
$ 3,091
319
1,210
(1,675)
–
$
2,555
638
1,638
(1,740)
–
(551)
$ 25,814
123
$ 28,592
–
$ 2,945
–
3,091
$
$ (3,403)
$ (3,226)
$ (22,773)
$ (24,246)
62
Notes to Consolidated Financial Statements continued
Net Periodic Cost
The following table summarizes the benefit (income) cost related to our
pension and postretirement health care and life insurance plans:
Years Ended December 31,
Service cost
Amortization of prior service cost
Subtotal
Expected return on plan assets
Interest cost
Subtotal
Remeasurement (gain) loss, net
Net periodic benefit (income) cost
Curtailment and termination benefits
Total
2010
353
109
462
(2,176)
1,797
83
(166)
(83)
860
777
$
$
2009
384
112
496
(2,216)
1,924
204
(515)
(311)
1,371
1,060
$
$
Other pre-tax changes in plan assets and benefit obligations recognized
in other comprehensive (income) loss are as follows:
At December 31,
Prior service cost
Reversal of amortization items
Prior service cost
Total recognized in other comprehensive (income) loss (pretax)
The estimated prior service cost for the defined benefit pension plans
that will be amortized from Accumulated other comprehensive income
into net periodic benefit cost over the next fiscal year is $0.1 billion. The
estimated 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 is ($0.1 billion).
Assumptions
The weighted-average assumptions used in determining benefit obliga-
tions follow:
At December 31,
Discount rate
Rate of compensation increases
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
2010
6.25%
8.50
4.00
2009
6.75%
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 current market interest
rates and valuation levels, consensus earnings expectations, 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.
Pension
2008
$
382
62
444
(3,444)
1,966
(1,034)
13,946
12,912
32
$ 12,944
2010
305
375
680
(252)
1,639
2,067
758
2,825
386
3,211
$
$
(dollars in millions)
Health Care and Life
2008
2009
$
$
311
401
712
(205)
1,766
2,273
(901)
1,372
532
1,904
$
$
306
395
701
(331)
1,663
2,033
1,069
3,102
31
3,133
2010
Pension
2009
(dollars in millions)
Health Care and Life
2009
2010
$
(336)
$
(51)
$ (2,859)
$
(167)
(109)
(445)
$
(112)
(163)
$
(375)
$ (3,234)
(401)
(568)
$
2010
5.75%
3.00
Pension
2008
6.50%
8.50
4.00
Pension
2009
6.25%
4.00
Health Care and Life
2009
2010
5.75%
N/A
6.25%
N/A
2010
6.25%
8.25
N/A
Health Care and Life
2008
2009
6.75%
8.25
N/A
6.50%
8.25
4.00
63
Notes to Consolidated Financial Statements continued
The assumed Health Care Cost Trend Rates follow:
At December 31,
Healthcare cost trend rate assumed
for next year
Rate to which cost trend rate
gradually declines
Year the rate reaches level it is assumed to
remain thereafter
2010
Health Care and Life
2008
2009
7.75%
8.00%
9.00%
5.00
2016
5.00
2014
5.00
2014
A one-percentage-point change in the assumed health care cost trend
rate would have the following effects:
One-Percentage-Point
Effect on 2010 service and interest cost
Effect on postretirement benefit obligation as of
December 31, 2010
(dollars in millions)
Decrease
Increase
$
232
$
(191)
2,788
(2,303)
Plan Assets
Our portfolio strategy emphasizes a long-term equity orientation, signifi-
cant global diversification, the use of both public and private investments
and financial and operational risk controls. Our diversification and risk
control processes serve to minimize the concentration of risk. Assets are
allocated according to long-term risk and return estimates. Both active
and passive management approaches are used depending on perceived
market efficiencies and various other factors.
While target allocation percentages will vary over time, the company’s
overall investment strategy is to achieve a mix of assets, which allows us
to meet projected benefits payments while taking into consideration risk
and return. The target allocations for plan assets are currently 46% public
equity, 32% fixed income, 14% private equity, 6% real estate and 2% cash.
Our target policies are revisited periodically to ensure they are in line with
fund objectives. There are no significant concentrations of risk, in terms of
sector, industry, geography or company names.
Pension and healthcare and life plans assets include Verizon common
stock of $0.1 billion at December 31, 2010 and 2009.
Pension Plans
The fair values for the pension plans by asset category at December 31,
2010 are as follows:
Asset Category
Total
Level 1
(dollars in millions)
Level 3
Level 2
Cash and cash equivalents
Equity securities
Fixed income securities
U.S. Treasuries and agencies
Corporate bonds
International bonds
Other
Real estate
Other
Private equity
Hedge funds
Total
$
2,175
10,158
$
2,126
9,052
$
49
1,106
$
–
–
599
1,615
910
502
1,769
141
233
20
–
–
5,889
2,197
$ 25,814
–
–
$ 11,572
$
458
1,202
890
502
–
40
1,481
5,728
–
180
–
–
1,769
5,849
716
8,514
$
The fair values for the pension plans by asset category at December 31,
2009 are as follows:
Asset Category
Total
Level 1
(dollars in millions)
Level 3
Level 2
Cash and cash equivalents
Equity securities
Fixed income securities
U.S. Treasuries and agencies
Corporate bonds
International bonds
Other
Real estate
Other
Private equity
Hedge funds
Total
$
2,299
12,691
$
2,288
11,533
$
11
1,158
$
–
–
1,095
2,531
1,112
646
1,541
428
73
768
–
–
5,362
1,315
$ 28,592
–
–
$ 15,090
$
667
2,321
344
646
–
26
1,315
6,488
–
137
–
–
1,541
5,336
–
7,014
$
64
Notes to Consolidated Financial Statements continued
The following is a reconciliation of the beginning and ending balance of pension plan assets that are measured at fair value using significant unob-
servable inputs:
Balance at December 31, 2008
Actual gain (loss) on plan assets
Purchases and sales
Transfers in and/or out of Level 3
Balance at December 31, 2009
Actual gain (loss) on plan assets
Purchases and sales
Transfers in and/or out of Level 3
Balance at December 31, 2010
Corporate Bonds
Real Estate
Private Equity
Hedge Funds
$
$
$
23
26
84
4
137
3
37
3
180
$
$
$
1,665
(455)
331
–
1,541
(49)
294
(17)
1,769
$
$
$
5,101
(5)
263
(23)
5,336
518
(5)
–
5,849
$
$
$
–
–
–
–
–
24
109
583
716
(dollars in millions)
Total
$
$
$
6,789
(434)
678
(19)
7,014
496
435
569
8,514
Health Care and Life Plans
The fair values for the other postretirement benefit plans by asset cat-
egory at December 31, 2010 are as follows:
Asset Category
Total
Level 1
(dollars in millions)
Level 3
Level 2
Cash and cash equivalents
Equity securities
Fixed income securities
U.S. Treasuries and agencies
Corporate bonds
International bonds
Other
Other
Total
$
394
1,919
$
21
1,202
$
$
373
717
80
173
125
198
56
2,945
47
58
8
–
–
1,336
33
115
117
198
56
1,609
$
$
$
$
–
–
–
–
–
–
–
–
The fair values for the other postretirement benefit plans by asset cat-
egory at December 31, 2009 are as follows:
Asset Category
Total
Level 1
(dollars in millions)
Level 3
Level 2
Cash and cash equivalents
Equity securities
Fixed income securities
U.S. Treasuries and agencies
Corporate bonds
International bonds
Other
Other
Total
$
166
2,240
$
27
1,681
$
139
559
$
61
275
81
231
37
3,091
36
42
13
–
–
1,799
25
233
68
231
37
1,292
$
$
$
$
–
–
–
–
–
–
–
–
Plan assets are recognized and measured at fair value in accordance
with the accounting standards regarding fair value measurements. The
following are general descriptions of asset categories, as well as the valu-
ation methodologies and inputs used to determine the fair value of each
major category of assets.
Cash and cash equivalents include short-term investment funds, primarily
in diversified portfolios of investment grade money market instruments
and are valued using quoted market prices or other valuation methods,
and thus are classified within Level 1 or Level 2.
Equity securities are investments in common stock of domestic and
international corporations in a variety of industry sectors, and are valued
primarily using quoted market prices or other valuation methods, and
thus are classified within Level 1 or Level 2.
Fixed income securities include U.S. Treasuries and agencies, debt obli-
gations of foreign governments and debt obligations in corporations of
domestic and foreign issuers. Fixed income also includes investments
in asset backed securities such as collateralized mortgage obligations,
mortgage backed securities and interest rate swaps. The fair value of
fixed income securities are based on observable prices for identical or
comparable assets, adjusted using benchmark curves, sector grouping,
matrix pricing, broker/dealer quotes and issuer spreads, and thus are clas-
sified within Level 1 or Level 2.
Real estate investments include those in limited partnerships that invest
in various commercial and residential real estate projects both domesti-
cally and internationally. The fair values of real estate assets are typically
determined by using income and/or cost approaches or comparable
sales approach, taking into consideration discount and capitalization
rates, financial conditions, local market conditions and the status of the
capital markets, and thus are classified within Level 3.
Private equity investments include those in limited partnerships that
invest in operating companies that are not publicly traded on a stock
exchange. Investment strategies in private equity include leveraged buy-
outs, venture capital, distressed investments and investments in natural
resources. These investments are valued using inputs such as trading
multiples of comparable public securities, merger and acquisition activity
and pricing data from the most recent equity financing taking into con-
sideration illiquidity, and thus are classified within Level 3.
Hedge fund investments include those seeking to maximize absolute
returns using a broad range of strategies to enhance returns and provide
additional diversification. The fair values of hedge funds are estimated
using net asset value per share (NAV) of the investments. Verizon has the
ability to redeem these investments at NAV within the near term and
thus are classified within Level 2. Investments that cannot be redeemed
in the near term are classified within Level 3.
Cash Flows
In 2010, contributions to our qualified pension plans were not significant.
In 2010, we contributed $0.1 billion to our nonqualified pension plans
and $1.2 billion to our other postretirement benefit plans. During January
2011, we contributed approximately $0.4 billion to our qualified pension
plans. We do not expect to make additional qualified pension plan contri-
butions during the remainder of 2011. We anticipate approximately $0.1
billion in contributions to our non-qualified pension plans and $1.5 bil-
lion to our other postretirement benefit plans in 2011.
65
Notes to Consolidated Financial Statements continued
Estimated Future Benefit Payments
The benefit payments to retirees are expected to be paid as follows:
Year
Pension Benefits
(dollars in millions)
Health Care and Life
Prior to Medicare
Prescription
Drug Subsidy
Expected Medicare
Prescription
Drug Subsidy
2011
2012
2013
2014
2015
2016 – 2020
$
3,114
2,339
2,273
2,225
2,188
10,536
$
2,126
2,142
1,951
1,931
1,873
8,452
$
107
120
–
–
–
–
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, 2010, the
number of unallocated and allocated shares of common stock in this
ESOP were 2 million and 66 million, respectively. All leveraged ESOP
shares are included in earnings per share computations.
Total savings plan costs were $0.7 billion in 2010, 2009 and 2008.
Severance Benefits
The following table provides an analysis of our actuarially determined
severance liability recorded in accordance with the accounting standard
regarding employers’ accounting for postemployment benefits:
Beginning
of Year
Charged to
Expense
Payments
Other
End of Year
(dollars in millions)
$
1,024
1,104
1,638
$
512
950
1,217
$
(509)
(522)
(1,307)
$
77
106
21
$
1,104
1,638
1,569
Year
2008
2009
2010
Charged to expense includes the impact of the activities described below.
Other primarily includes the expense incurred related to our ongoing
severance plans.
Severance, Pension and Benefit Charges
During 2010, we recorded net pre-tax severance, pension and ben-
efits charges of $3.1 billion primarily in connection with an agreement
we reached with certain unions on temporary enhancements to the
separation programs contained in their existing collective bargaining
agreements. These temporary enhancements were intended to help
address a previously declared surplus of employees and to help reduce
the need for layoffs. Accordingly, during 2010, we recorded severance,
pension and benefits charges associated with the approximately 11,900
union-represented employees who volunteered for the incentive offer.
These charges included $1.2 billion for severance for the 2010 programs
mentioned above and a planned workforce reduction of approximately
2,500 employees in 2011. In addition, we recorded $1.3 billion for pension
and postretirement curtailment losses and special termination benefits
that were due to the workforce reductions, which caused the elimination
of a significant amount of future service. Also, we recorded remeasure-
ment losses of $0.6 billion for our pension and postretirement plans
in accordance with our accounting policy to recognize actuarial gains
and losses in the year in which they occur. The remeasurement losses
included $0.1 billion of pension settlement losses related to employees
that received lump sum distributions, primarily resulting from our previ-
ously announced separation plans.
During 2009, we recorded net pre-tax severance, pension and benefits
charges of $1.4 billion primarily for pension and postretirement curtail-
ment losses and special termination benefits of $1.9 billion as workforce
reductions caused the elimination of a significant amount of future ser-
vice requiring us to recognize a portion of the prior service costs. These
charges also included $0.9 billion for workforce reductions of approxi-
mately 17,600 employees; 4,200 of whom were separated during late
2009 and the remainder in 2010. Also, we recorded remeasurement gains
of $1.4 billion for our pension and postretirement plans in accordance
with our accounting policy to recognize actuarial gains and losses in the
year in which they occur.
During 2008, we recorded net pre-tax severance, pension and benefits
charges of $15.6 billion primarily due to remeasurement losses of $15.0
billion for our pension and postretirement plans in accordance with our
accounting policy to recognize actuarial gains and losses in the year in
which they occur. These remeasurement losses included $0.5 billion of
pension settlement losses related to employees that received lump sum
distributions, primarily resulting from our previously announced separa-
tion plans. These severance, pension and benefit charges also included
$0.5 billion for workforce reductions in connection with the separation
of approximately 8,600 employees and related charges; 3,500 of whom
were separated in the second half of 2008 and the remainder in 2009 and
$0.1 billion for pension and postretirement curtailment losses and special
termination benefits, that were due to the workforce reductions, which
caused the elimination of a significant amount of future service.
66
Notes to Consolidated Financial Statements continued
NOTE 13
INCOME TAXES
The components of income before provision (benefit) for income taxes
are as follows:
Years Ended December 31,
2010
(dollars in millions)
2008
2009
Domestic
Foreign
Total
$ 11,921
763
$ 12,684
$ 12,625
895
$ 13,520
$
$
722
921
1,643
The components of the provision (benefit) for income taxes are as follows:
Years Ended December 31,
Current
Federal
Foreign
State and Local
Total
Deferred
Federal
Foreign
State and Local
Total
Investment tax credits
Total income tax provision (benefit)
2010
(705)
(19)
(42)
(766)
2,945
(24)
316
3,237
(4)
2,467
$
$
(dollars in millions)
2008
2009
$
$
(611)
73
364
(174)
1,616
(35)
518
2,099
(6)
1,919
$
$
365
240
544
1,149
(2,411)
(91)
(960)
(3,462)
(6)
(2,319)
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,
2010
2009
2008
Statutory federal income tax rate
State and local income tax rate,
net of federal tax benefits
Distributions from foreign investments
Medicare Part D subsidy charge
Equity in earnings from
unconsolidated businesses
Noncontrolling interest
Other, net
Effective income tax rate
35.0 %
35.0 %
35.0 %
1.4
–
6.9
(1.6)
(19.5)
(2.8)
19.4 %
1.5
–
–
(1.6)
(16.0)
(4.7)
14.2 %
(16.5)
(4.3)
–
(14.0)
(119.4)
(22.0)
(141.2)%
The effective income tax rate in 2010 increased to 19.4% from 14.2% in
2009. The increase was primarily driven by a one-time, non-cash income
tax charge of $1.0 billion. The one-time non-cash income tax charge was
a result of the enactment of the Patient Protection and Affordable Care
Act and the Health Care and Education Reconciliation Act of 2010, both
of which became law in March 2010 (collectively the Health Care Act).
Under the Health Care Act, beginning in 2013, Verizon and other com-
panies that receive a subsidy under Medicare Part D to provide retiree
prescription drug coverage will no longer receive a federal income tax
deduction for the expenses incurred in connection with providing the
subsidized coverage to the extent of the subsidy received. Because future
anticipated retiree prescription drug plan liabilities and related subsi-
dies were already reflected in Verizon’s financial statements, this change
required Verizon to reduce the value of the related tax benefits recog-
nized in its financial statements in the period during which the Health
Care Act was enacted. The increase was partially offset by higher earnings
attributable to the noncontrolling interest.
During 2008, we recorded a pension and postretirement benefit plan
remeasurement loss rendering the 2008 effective tax rate not mean-
ingful. Excluding the tax impact of this actuarial loss in 2008, the effective
income tax rate decreased in 2009 primarily driven by higher earnings
attributable to the noncontrolling interest. Included within the (4.7)%
‘Other net’ above is the impact of lower federal taxes, net of higher state
taxes attributable to prior year adjustments to tax balances that were not
material to the overall effective income tax rate.
Excluding the tax impact of the actuarial loss in 2008, the state and local
income tax rate decreased due to tax benefits recognized after statutes
of limitations in multiple jurisdictions lapsed and the impact of earnings
attributable to the noncontrolling interest.
67
Notes to Consolidated Financial Statements continued
Deferred taxes arise because of differences in the book and tax bases of
certain assets and liabilities. Significant components of deferred taxes are
shown in the following table:
Unrecognized Tax Benefits
A reconciliation of the beginning and ending balance of unrecognized
tax benefits is as follows:
At December 31,
Employee benefits
Tax loss and credit carry forwards
Uncollectible accounts receivable
Other – assets
Valuation allowances
Deferred tax 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)
2009
2010
$ 11,499
3,907
248
951
16,605
(3,421)
13,184
$ 13,204
2,786
303
1,269
17,562
(2,942)
14,620
1,489
11,758
1,980
19,514
1,152
35,893
$ 22,709
1,633
10,296
2,081
18,249
1,012
33,271
$ 18,651
Balance at January 1,
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,
2010
(dollars in millions)
2008
2009
$
3,400
$
2,622
$
2,883
231
476
(569)
(256)
(40)
3,242
$
288
1,128
(477)
(27)
(134)
3,400
$
$
251
344
(651)
(126)
(79)
2,622
Included in the total unrecognized tax benefits at December 31, 2010,
2009 and 2008 is $2.1 billion, $2.1 billion and $1.6 billion, respectively,
that if recognized, would favorably affect the effective income tax rate.
We recognized the following net after tax benefits related to interest and
penalties in the provision for income taxes:
Years Ended December 31,
(dollars in millions)
At December 31, 2010, undistributed earnings of our foreign subsidiaries
indefinitely invested outside of the United States amounted to approxi-
mately $1.2 billion. 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, 2010, we had net after tax loss and credit carry forwards
for income tax purposes of approximately $4.2 billion. Of these net after
tax loss and credit carry forwards, approximately $3.5 billion will expire
between 2011 and 2030 and approximately $0.7 billion may be carried
forward indefinitely. The amount of net after tax loss and credit carry
forwards reflected as a deferred tax asset above has been reduced by
approximately $0.6 billion at December 31, 2010 and 2009, due to federal
and state tax law limitations on utilization of net operating losses.
During 2010, the valuation allowance increased approximately $0.5 bil-
lion. The balance at December 31, 2010 and the 2010 activity is primarily
related to state and foreign tax losses and credit carry forwards.
2010
2009
2008
$
29
14
55
The after-tax accrual for the payment of interest and penalties in the bal-
ance sheets are as follows:
At December 31,
2010
2009
(dollars in millions)
$
527
552
Verizon and/or its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and various state, local and foreign jurisdictions. The Internal
Revenue Service (IRS) is currently examining the Company’s U.S. income
tax returns for the years 2004 through 2006. As a large taxpayer, we are
under continual audit by the IRS and multiple state and foreign juris-
dictions on numerous open tax positions. Significant tax examinations
and litigation are ongoing in Massachusetts, New York, Canada, Australia
and Italy for tax years as early as 2002. It is reasonably possible that the
amount of the liability for unrecognized tax benefits could change by a
significant amount during the next twelve-month period. An estimate of
the range of the possible change cannot be made until issues are further
developed or examinations close.
68
Notes to Consolidated Financial Statements continued
NOTE 14
SEGMENT INFORMATION
Reportable Segments
We have two reportable segments, which we operate and manage as
strategic business units and organize by products and services. We mea-
sure and evaluate our reportable segments based on segment operating
income, consistent with the chief operating decision maker’s assessment
of segment performance.
Corporate, eliminations and other includes unallocated corporate
expenses, intersegment eliminations recorded in consolidation, the
results of other businesses, such as our investments in unconsolidated
businesses, pension and other employee benefit related costs, lease
financing, as well as the historical results of divested operations and other
adjustments and gains and losses that are not allocated in assessing seg-
ment performance due to their non-operational nature. Although such
transactions are excluded from the business segment results, they are
included in reported consolidated earnings. Gains and losses that are not
individually significant are included in all segment results as these items
are included in the chief operating decision maker’s assessment of seg-
ment performance.
The reconciliation of segment operating revenues and expenses to con-
solidated operating revenues and expenses below also includes those
items of a non-recurring or non-operational nature. We exclude from
segment results the effects of certain items that management does not
consider in assessing segment performance, primarily because of their
non-recurring non-operational nature.
During the fourth quarter of 2010, Verizon changed its method of
accounting for benefit plans as described in Note 1, as a result, all prior
periods have been adjusted. As part of this change to its method of
accounting, the service cost and the amortization of prior service costs,
which are representative of the benefits earned by active employees
during the period, will continue to be allocated to the segment in which
the employee is employed, while interest cost and expected return on
assets will now be recorded at the Corporate level. The recognition of
actuarial gains and losses will also be recorded at the Corporate level.
In order to comply with regulatory conditions related to the acquisition
of Alltel in January 2009, Verizon Wireless divested overlapping proper-
ties in 105 operating markets in 24 states during the first half of 2010.
In addition, on July 1, 2010, certain of Verizon’s local exchange business
and related landline activities in 14 states were spun off (see Note 3).
Furthermore, in 2008, we completed the spin-off of our local exchange
and related business assets in Maine, New Hampshire and Vermont.
Accordingly, the historical Domestic Wireless and Wireline results for
these operations have been reclassified to Corporate and Other to reflect
comparable segment operating results.
We have adjusted prior-period consolidated and segment information,
where applicable, to conform to current year presentation.
Our segments and their principal activities consist of the following:
Segment
Description
Domestic Wireless
Domestic Wireless’ communications products and
services include wireless voice and data services and
equipment sales across the U.S.
Wireline
Wireline’s communications products and services
include voice, Internet access, broadband video and
data, Internet protocol network services, network
access, long distance and other services. We provide
these products and services to consumers in the U.S.,
as well as to carriers, businesses and government
customers both in the U.S. and in over 150 other
countries around the world.
The following table provides operating financial information for our two reportable segments:
2010
Domestic Wireless
Wireline
External Operating Revenues
Service revenue
Equipment and other
Mass Markets
Global Enterprise
Global Wholesale
Other
Intersegment revenues
Total operating revenues
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total operating expenses
Operating income
Assets
Plant, property and equipment, net
Capital expenditures
$
$
55,588
7,753
–
–
–
–
66
63,407
19,245
18,082
7,356
44,683
18,724
$ 138,863
32,253
8,438
$
$
$
–
–
16,247
15,667
7,173
858
1,282
41,227
22,618
9,372
8,469
40,459
768
83,849
54,594
7,269
(dollars in millions)
Total Segments
$
$
55,588
7,753
16,247
15,667
7,173
858
1,348
104,634
41,863
27,454
15,825
85,142
19,492
$ 222,712
86,847
15,707
69
Notes to Consolidated Financial Statements continued
2009
Domestic Wireless
Wireline
External Operating Revenues
Service revenue
Equipment and other
Mass Markets
Global Enterprise
Global Wholesale
Other
Intersegment revenues
Total operating revenues
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total operating expenses
Operating income
Assets
Plant, property and equipment, net
Capital expenditures
$
$
$
51,975
8,250
–
–
–
–
100
60,325
19,348
17,309
7,030
43,687
16,638
135,162
30,849
7,152
$
$
$
–
–
16,109
15,666
7,958
1,443
1,275
42,451
22,693
9,947
8,238
40,878
1,573
91,778
59,373
8,892
2008
Domestic Wireless
Wireline
External Operating Revenues
Service revenue
Equipment and other
Mass Markets
Global Enterprise
Global Wholesale
Other
Intersegment revenues
Total operating revenues
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total operating expenses
Operating income
Assets
Plant, property and equipment, net
Capital expenditures
$
$
42,527
6,665
–
–
–
–
106
49,298
15,660
14,273
5,405
35,338
13,960
$ 111,979
27,136
6,510
$
$
$
–
–
15,823
16,599
8,770
1,959
1,172
44,323
22,890
10,169
8,174
41,233
3,090
90,386
58,287
9,797
(dollars in millions)
Total Segments
$
$
$
51,975
8,250
16,109
15,666
7,958
1,443
1,375
102,776
42,041
27,256
15,268
84,565
18,211
226,940
90,222
16,044
(dollars in millions)
Total Segments
$
$
42,527
6,665
15,823
16,599
8,770
1,959
1,278
93,621
38,550
24,442
13,579
76,571
17,050
$ 202,365
85,423
16,307
70
Notes to Consolidated Financial Statements continued
Reconciliation to Consolidated Financial Information
A reconciliation of the segment operating revenues to consolidated operating revenues is as follows:
Operating Revenues
Total reportable segments
Reconciling items:
Deferred revenue adjustment (see Note 1)
Impact of divested operations
Corporate, eliminations and other
Consolidated operating revenues
2010
2009
$ 104,634
(235)
2,407
(241)
$ 106,565
$ 102,776
78
5,297
(343)
$ 107,808
(dollars in millions)
2008
$
93,621
34
4,084
(385)
97,354
$
A reconciliation of the total of the reportable segments’ operating income to consolidated Income before provision for income taxes is as follows:
Operating Income
Total segment operating income
Merger integration and acquisition costs (see Note 2)
Access line spin-off and other charges (see Note 3)
Severance, pension and benefit charges (see Note 12)
Deferred revenue adjustment (see Note 1)
Impact of divested operations (see Note 3)
Corporate, eliminations and other
Consolidated operating income
Equity in earnings of unconsolidated businesses
Other income (expense), net
Interest expense
Income Before (Provision) Benefit for Income Taxes
Assets
Total reportable segments
Corporate, eliminations and other
Total consolidated
2010
$ 19,492
(867)
(407)
(3,054)
(235)
755
(1,039)
$ 14,645
508
54
(2,523)
$ 12,684
$ 222,712
(2,707)
$ 220,005
2009
18,211
(954)
(453)
(1,440)
78
1,769
(1,233)
15,978
553
91
(3,102)
13,520
$
$
$
$ 226,940
(33)
$ 226,907
(dollars in millions)
2008
$
$
$
17,050
(174)
(103)
(15,602)
34
1,197
210
2,612
567
283
(1,819)
1,643
We generally account for intersegment sales of products and services and asset transfers at current market prices. No single customer accounted for
more than 10% of our total operating revenues during the years ended December 31, 2010, 2009 and 2008. International operating revenues and
long-lived assets are not significant.
71
Notes to Consolidated Financial Statements continued
Defined Benefit Pension and Postretirement Plans
The change in Defined benefit pension and postretirement plans of $2.5
billion, net of taxes of $1.2 billion at December 31, 2010 was attribut-
able to the change in prior service cost. The change was impacted by
a change to our Medicare Part D strategy, resulting in the adoption of
plan amendments during the fourth quarter of 2010, which will allow
the company to be eligible for greater Medicare Part D plan subsidies
over time and was also impacted by the curtailment losses associated
with the voluntary incentive program for union-represented employees
recorded in the second quarter of 2010 (see Note 12). The change in
Defined benefit pension and postretirement plans of $0.3 billion, net of
taxes of $0.4 billion at December 31, 2009 was attributable to a change
in prior service cost.
Accumulated Other Comprehensive Income (Loss)
The components of Accumulated other comprehensive income (loss)
were as follows:
At December 31,
(dollars in millions)
2009
2010
Foreign currency translation adjustments
Net unrealized gain on cash flow hedges
Unrealized gain on marketable securities
Defined benefit pension and postretirement plans
Accumulated Other Comprehensive Income (Loss)
$
$
843
126
79
1
1,049
$
$
1,014
37
50
(2,473)
(1,372)
NOTE 15
COMPREHENSIVE INCOME
Comprehensive income consists of net income and other gains and losses
affecting equity that, under generally accepted accounting principles, are
excluded from net income. Significant changes in the components of
Other comprehensive income (loss), net of (provision) benefit for income
taxes are described below.
Foreign Currency Translation
The changes in Foreign currency translation adjustments were as follows:
Years Ended December 31,
Vodafone Omnitel
Other international operations
Foreign currency translation
adjustments
2010
(119)
(52)
$
(dollars in millions)
2008
2009
$
$
49
29
(119)
(112)
$
(171)
$
78
$
(231)
Net Unrealized Gains (Losses) on Cash Flow Hedges
The changes in Unrealized gains (losses) on cash flow hedges were as
follows:
Years Ended December 31,
2010
(dollars in millions)
2008
2009
Unrealized gains (losses)
Less reclassification adjustments for gains
(losses) realized in net income
Net unrealized gains (losses) on
$
38
$
112
$
(43)
(51)
25
(3)
cash flow hedges
$
89
$
87
$
(40)
Unrealized Gains (Losses) on Marketable Securities
The changes in Unrealized gains (losses) on marketable securities were
as follows:
Years Ended December 31,
2010
(dollars in millions)
2008
2009
Unrealized gains (losses)
Less reclassification adjustments for gains
(losses) realized in net income
Net unrealized gains (losses) on
$
37
$
95
$
(142)
8
8
(45)
marketable securities
$
29
$
87
$
(97)
Foreign Currency Translation Adjustments
The change in Foreign currency translation adjustments during 2010 was
primarily driven by the devaluation of the Euro versus the U.S. dollar. The
change in Foreign currency translation adjustments during 2009 was pri-
marily driven by the devaluation of the U.S. dollar versus the Euro. The
change in Foreign currency translation adjustments during 2008 was pri-
marily driven by the settlement of the foreign currency forward contracts,
which hedged a portion of our net investment in Vodafone Omnitel and
the devaluation of the Euro versus the U.S. dollar.
Net Unrealized Gains (Losses) on Cash Flow Hedges
During 2010, 2009 and 2008, Unrealized gains (losses) on cash flow
hedges included in Other comprehensive income attributable to non-
controlling interest, primarily reflects activity related to a cross currency
swap (see Note 10).
72
Notes to Consolidated Financial Statements continued
NOTE 16
ADDITIONAL FINANCIAL INFORMATION
The tables that follow provide additional financial information related to our consolidated financial statements:
Income Statement Information
Years Ended December 31,
Depreciation expense
Interest incurred
Interest capitalized
Advertising expense
Balance Sheet Information
December 31,
Accounts Payable and Accrued Liabilities
Accounts payable
Accrued expenses
Accrued vacation, salaries and wages
Interest payable
Taxes payable
Other Current Liabilities
Advance billings and customer deposits
Dividends payable
Other
Cash Flow Information
Years Ended December 31,
Cash Paid
Income taxes, net of amounts refunded
Interest, net of amounts capitalized
2010
$ 14,593
3,487
(964)
2,451
2010
$
430
2,433
$
2009
14,564
4,029
(927)
3,020
2010
$
3,936
4,110
5,686
813
1,157
$ 15,702
$
$
$
3,091
1,402
2,860
7,353
2009
158
2,573
(dollars in millions)
2008
$
13,227
2,566
(747)
2,754
(dollars in millions)
2009
$
$
$
$
4,337
3,486
5,084
872
1,444
15,223
2,644
1,372
2,692
6,708
(dollars in millions)
2008
$
1,206
1,664
73
Notes to Consolidated Financial Statements continued
NOTE 17
COMMITMENTS AND CONTINGENCIES
We are currently involved in certain legal proceedings and, as required,
have accrued estimates of the probable and estimable losses for the
resolution of these claims that, individually or in the aggregate, were
not significant. These estimates have been developed in consultation
with outside counsel and are based upon an analysis of potential results,
assuming a combination of litigation and settlement strategies. It is pos-
sible, however, that future results of operations for any particular quarterly
or annual period could be materially affected by changes in our assump-
tions or the effectiveness of our strategies related to these proceedings.
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 that, 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 made. Adjustments to the reserve
may also be made based upon actual conditions discovered during the
remediation at this or any other site requiring remediation.
In connection with the execution of agreements for the sales of busi-
nesses and investments, Verizon ordinarily provides representations and
warranties to the purchasers pertaining to a variety of nonfinancial mat-
ters, such as ownership of the securities being sold, as well as indemnity
from certain financial losses. From time to time, counterparties may make
claims under these provisions, and Verizon will seek to defend against
those claims and resolve them in the ordinary course of business.
Subsequent to the sale of Verizon Information Services Canada in 2004,
we continue to provide a guarantee to publish directories, which was
issued when the directory business was purchased in 2001 and had a
30-year term (before extensions). The preexisting guarantee continues,
without modification, despite the subsequent sale of Verizon Information
Services Canada and the spin-off of our domestic print and Internet
yellow pages directories business. The possible financial impact of the
guarantee, which is not expected to be adverse, cannot be reasonably
estimated as a variety of the potential outcomes available under the
guarantee result in costs and revenues or benefits that may offset each
other. We do not believe performance under the guarantee is likely.
As of December 31, 2010, letters of credit totaling approximately $0.1
billion were executed in the normal course of business, which support
several financing arrangements and payment obligations to third parties.
We depend on various key suppliers and vendors to provide us, directly
or through other suppliers, with equipment and services, such as switch
and network equipment, handsets and other devices and equipment,
that we need in order to operate our business and provide products
to our customers. For example, our handset and other device suppliers
often rely on one vendor for the manufacture and supply of critical com-
ponents, such as chipsets, used in their devices. If any of our key suppliers,
or other suppliers, fail to provide equipment or services on a timely basis
or fail to meet our performance expectations, we may be unable to pro-
vide services to our customers in a competitive manner or continue to
maintain and upgrade our network. Any such disruption could increase
our costs, decrease our operating efficiencies and have a material adverse
effect on our business, results of operations and financial condition.
We have several commitments primarily to purchase equipment, soft-
ware, programming and network services, and marketing activities, which
will be used or sold in the ordinary course of business, from a variety of
suppliers totaling $57.3 billion. Of this total amount, we expect to pur-
chase $17.9 billion in 2011, $36.8 billion in 2012 through 2013, $2.1 billion
in 2014 through 2015 and $0.5 billion thereafter. These amounts do not
represent our entire anticipated purchases in the future, but represent
only those items for which we are contractually committed. Our commit-
ments are generally determined based on the noncancelable quantities
or termination amounts. Since the commitments to purchase program-
ming services from television networks and broadcast stations have no
minimum volume requirement, we estimated our obligation based on
number of subscribers at December 31, 2010, and applicable rates stipu-
lated in the contracts in effect at that time. We also purchase products
and services as needed with no firm commitment.
74
Notes to Consolidated Financial Statements continued
NOTE 18
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter Ended
2010
March 31
June 30
September 30
December 31
2009
March 31
June 30
September 30
December 31
Operating
Revenues
Operating
Income
$ 26,913
26,773
26,484
26,395
$ 26,591
26,861
27,265
27,091
$
4,441
410
3,383
6,411
$
4,530
4,672
3,823
2,953
(dollars in millions, except per share amounts)
Net Income (Loss) attributable to Verizon(1)
Per Share-
Basic
Per Share-
Diluted
Amount
$
443
(1,192)
659
2,639
$
1,521
1,658
1,098
617
$
$
.16
(.42)
.23
.93
.54
.58
.39
.22
$
$
.16
(.42)
.23
.93
.54
.58
.39
.22
Net Income
$
2,318
553
2,698
4,648
$
3,086
3,335
2,809
2,371
• Results of operations for the first quarter of 2010 include after-tax charges attributable to Verizon of $1.1 billion related to Medicare Part D subsidy, access line spin-off charges, merger
integration and acquisition costs, and severance, pension and benefit charges.
• Results of operations for the second quarter of 2010 include after-tax charges attributable to Verizon of $2.8 billion related to severance, pension and benefit charges, merger integration and
acquisition costs, access line spin-off charges, and a one-time non-cash adjustment to wireless data revenues.
• Results of operations for the third quarter of 2010 include after-tax charges attributable to Verizon of $0.9 billion primarily related to severance, pension and benefit charges, access line
spin-off charges, and merger integration costs.
• Results of operations for the fourth quarter of 2010 include net after-tax gain attributable to Verizon of $1.1 billion related to severance, pension and benefit charges and merger integration
and acquisition costs.
• Results of operations for the first quarter of 2009 include after-tax charges attributable to Verizon of $0.1 billion related to acquisition related charges, and merger integration costs.
• Results of operations for the second quarter of 2009 include after-tax charges attributable to Verizon of $0.1 billion of merger integration costs, acquisition related charges, and severance,
pension and benefits charges.
• Results of operations for the third quarter of 2009 include after-tax charges attributable to Verizon of $0.5 billion primarily related to, merger integration and acquisition costs, access line
spin-off and other charges and severance, pension and benefits charges.
• Results of operations for the fourth quarter of 2009 include after-tax charges attributable to Verizon of $0.8 billion for severance, pension and benefits charges, wireline cost reduction
initiatives, access line spin-off and other charges and merger integration and acquisition costs.
(1) Net income (loss) attributable to Verizon per common share is computed independently for each quarter and the sum of the quarters may not equal the annual amount.
75
Board of Directors
Corporate Officers and
Executive Leadership
Richard L. Carrión
Chairman, President and Chief Executive Officer
Popular, Inc.
and Chairman, President and Chief Executive Officer
Banco Popular de Puerto Rico
Ivan G. Seidenberg
Chairman and Chief Executive Officer
Lowell C. McAdam
President and Chief Operating Officer
M. Frances Keeth
Retired Executive Vice President
Royal Dutch Shell plc
Robert W. Lane
Retired Chairman and Chief Executive Officer
Deere & Company
Lowell C. McAdam*
President and Chief Operating Officer
Verizon Communications Inc.
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
Visiting Professor and Lecturer
Woodrow Wilson School of Public and
International Affairs, Princeton University
and Non-Resident Senior Fellow
The Brookings Institution
Ivan G. Seidenberg
Chairman and Chief Executive Officer
Verizon Communications Inc.
Rodney E. Slater
Partner
Patton Boggs LLP
John W. Snow
President
JWS Associates, LLC
John R. Stafford**
Retired Chairman and Chief Executive Officer
Wyeth
*
Lowell C. McAdam was elected to the Board
in 2011.
Francis J. Shammo
Executive Vice President and
Chief Financial Officer
Robert J. Barish
Senior Vice President and Controller
John W. Diercksen
Executive Vice President –
Strategy, Development and Planning
John N. Doherty
Senior Vice President – Investor Relations
Roger Gurnani
Executive Vice President and
Chief Information Officer
Holyce E. Hess Groos
Senior Vice President and Treasurer
William L. Horton, Jr.
Senior Vice President, Deputy General Counsel
and Corporate Secretary
Rose M. Kirk
President – Verizon Foundation
Daniel S. Mead
Executive Vice President and
President and Chief Executive Officer –
Verizon Wireless
Anthony J. Melone
Executive Vice President and
Chief Technology Officer
Randal S. Milch
Executive Vice President and
General Counsel
Michael H. Millegan
President – Global Wholesale
W. Robert Mudge
President –
Consumer and Mass Business Markets
Marc C. Reed
Executive Vice President –
Human Resources
Virginia P. Ruesterholz
Executive Vice President and President –
Verizon Services Operations
Shane A. Sanders
Senior Vice President – Internal Auditing
Thomas J. Tauke
Executive Vice President –
Public Affairs, Policy and Communications
**
Thomas H. O’Brien and John R. Stafford will retire
from the Board in May 2011.
Robert A. Toohey
President – Global Enterprise
76
V E R I ZO N CO M M U N I C AT I O N S I N C . | 20 10 A N N UA L R E P O R T
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
Investor Services
Investor Website – Get company information and news on our
website – www.verizon.com/investor
VzMail – Get the latest investor information delivered directly to you.
Subscribe to VzMail at our investor information website.
Stock Market Information
Shareowners of record at December 31, 2010: 738,059
Verizon is listed on the New York Stock Exchange, and the NASDAQ
Global Select Market (ticker symbol: VZ) and also on the London
Stock Exchange.
Persons outside the U.S. may call: 781 575-3994
Common Stock Price and Dividend Information
Persons using a telecommunications device for the deaf (TDD) may call:
800 952-9245
Online Account Access – Registered shareowners can view account
information online at: www.computershare.com/verizon
Click on “Create login” to register. 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. 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 by mail, please contact the
Assistant Corporate Secretary:
Verizon Communications Inc.
Assistant Corporate Secretary
140 West Street, 29th Floor
New York, NY 10007
2010
Fourth Quarter
Third Quarter*
Second Quarter*
First Quarter*
2009
Fourth Quarter*
Third Quarter*
Second Quarter*
First Quarter*
Market Price
High
Low
Cash
Dividend
Declared
$ 36.00 $ 31.60
25.79
24.75
26.45
33.09
29.63
31.26
$ 0.4875
0.4875
0.4750
0.4750
$
31.89
30.55
30.90
32.48
$
26.70
26.45
26.76
24.39
$
0.4750
0.4750
0.4600
0.4600
*Prices have been adjusted to reflect the spinoff of certain of Verizon‘s local
exchange business and related landline activities in 14 states.
Form 10–K
To receive a printed copy of the 2010 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
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, military
status, citizenship status, veteran status, disability or other legally
protected classifications.
Verizon Communications Inc.
140 West Street
New York, New York 10007
212 395-1000
verizon.com
© 2011. Verizon. All Rights Reserved.
002CSI1008
Cert no. SGSNA-COC-000072
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