Verizon Communications Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Verizon is a communications provider with Wireless and Wireline segments; Vodafone owns a 45% noncontrolling interest in Verizon Wireless.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $29.786B | $28.552B | $59.206B | $56.794B |
| Operating income | $6.555B | $5.651B | $12.777B | $10.846B |
| Net income attributable to Verizon | $2.246B | $1.825B | $4.198B | $3.511B |
| Diluted EPS | $0.78 | $0.64 | $1.46 | $1.23 |
| Operating margin | 22.0% | 19.8% | 21.6% | 19.1% |
- Q2 revenue rose 4.3%; operating income rose 16.0%. Six-month revenue rose 4.2%; operating income rose 17.8%.
- Wireless revenue grew 7.5% in Q2 to $19.976B; segment operating income increased 13.1% to $6.464B. Retail postpaid connections rose 6.1% year over year, while postpaid churn increased to 0.93% from 0.84%.
- Wireline revenue fell 2.0% in Q2 to $9.734B. Segment operating income declined to $74M from $188M; EBITDA margin was 22.2% versus 23.1%. FiOS Internet and Video subscribers increased 12.2% and 12.6%, respectively.
- Consolidated adjusted EBITDA, a non-GAAP measure excluding the pension remeasurement credit, was $10.469B in Q2 versus $9.779B; six-month amounts were $20.809B versus $19.002B.
- Quarterly dividend declared was $0.515 per share, up from $0.50.
Cash flow, debt and liquidity
- Six-month operating cash flow was $17.148B, up from $15.271B. Capital expenditures were $7.616B versus $7.430B; reported free cash flow was $9.532B versus $7.841B.
- Cash and cash equivalents were $1.788B at June 30, down $1.305B from year-end. Current assets were $21.957B and current liabilities $29.191B.
- Total debt reported on the balance sheet was $49.752B, down from $51.987B at December 31; $7.961B was classified as due within one year. The company reported compliance with debt covenants.
- Approximately $6.1B of a $6.2B credit facility was unused. Verizon also had $5.5B available under its shelf registration statement.
- Financing cash outflows included $2.946B in dividends and a $3.150B distribution to Vodafone. Verizon Wireless declared a $7.0B distribution to its owners.
Material changes and management commentary
- Wireless service revenue growth was driven by postpaid connections and smartphone, tablet and other data-device adoption. LTE covered approximately 301 million people in 500 markets, including partner-served areas.
- Wireline Mass Markets revenue benefited from FiOS and pricing changes, but traditional voice, Global Enterprise Core and Global Wholesale continued to decline. Strategic services revenue increased, while management cited delayed customer spending and purchasing decisions.
- Management raised its 2013 capital expenditure outlook to $16.4B–$16.6B, citing strong connection growth and demand associated with LTE and Share Everything plans. Previously, it expected 2013 capital spending to be consistent with 2012.
- Verizon agreed to sell certain 700 MHz spectrum licenses for $1.9B cash plus AWS licenses from AT&T, and other licenses for $0.2B cash. The transactions required FCC approval; $2.3B of licenses were classified as held for sale at quarter-end.
Unusual items, risks and contingencies
- A $237M pretax pension remeasurement credit benefited Q2 and first-half operating income. Verizon said further pension remeasurements in Q3 and Q4 could result in significant charges or credits.
- Approximately $2.2B of unrecognized tax benefits remained at June 30. Tax audits were ongoing, and the liability could change significantly within 12 months; the company could not estimate the possible range.
- Verizon described approximately 50 pending patent-infringement actions. It also disclosed an appeal in the Idearc spin-off litigation and a December 2013 trial date for the remaining FairPoint fraudulent-transfer claim. Management said pending matters were not expected to materially affect financial condition, though a matter could materially affect results in a particular period.
- Other identified risks include economic weakness, competition and technology substitution, regulatory changes, cybersecurity or network disruption, financing-market conditions, labor matters, and pension costs and investment returns.
- The 10-Q reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether Wireless connection growth and higher postpaid churn affect future service revenue and customer economics.
- Progress toward the $16.4B–$16.6B capital spending outlook and the resulting cash available for debt service and dividends.
- Whether Wireline declines in traditional and enterprise services are offset by FiOS and Strategic services growth.
- FCC approval and completion of the announced spectrum transactions, including expected cash proceeds and license transfers.
- Effects of upcoming pension remeasurements, tax examinations, and the disclosed litigation matters.