Verizon Communications Inc. — Q3 2009 Form 10-Q
Reporting period: Three and nine months ended September 30, 2009. Unaudited results; interim performance is not necessarily indicative of full-year results. Verizon reports Domestic Wireless and Wireline segments.
Financial performance
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Operating revenue | $27.265B | $24.752B | $80.717B | $72.709B |
| Operating income | $3.986B | $4.173B | $13.098B | $13.052B |
| Net income, consolidated | $2.887B | $3.199B | $9.257B | $9.652B |
| Net income attributable to Verizon | $1.176B | $1.669B | $4.304B | $5.193B |
| Verizon diluted EPS | $0.41 | $0.59 | $1.51 | $1.82 |
| Operating margin | 14.6% | 16.9% | 16.2% | 17.9% |
Q3 revenue rose 10.2%, largely reflecting the January 2009 Alltel acquisition and growth markets. Operating income fell 4.5%, and Verizon-attributable net income fell 29.5%; higher operating costs, acquisition-related charges, pension settlement losses and interest expense weighed on results. For nine months, revenue increased 11.0%, while Verizon-attributable net income declined 17.1%.
- Wireless: Q3 segment revenue increased 24.4% to $15.797B and operating income increased 29.1% to $4.474B. Customers reached 89.0M, up 25.7%, primarily due to Alltel. Service ARPU declined 2.2% to $51.04, while data ARPU rose 17.2% to $15.59; churn increased.
- Wireline: Q3 revenue fell 4.8% to $11.569B and operating income fell 57.6% to $444M. Traditional access-line losses and weaker voice and wholesale activity were partly offset by FiOS growth. FiOS Internet subscribers reached 3.28M and FiOS TV subscribers 2.71M.
- Cash flow: Nine-month operating cash flow was $23.118B, up from $19.934B. Capital expenditures were $12.450B, versus $12.575B. Investing activities used $17.948B; financing activities used $13.736B, including $18.966B of debt and lease repayments and $3.920B of dividends. Cash declined $8.566B to $1.216B.
- Debt and liquidity: September 30 debt was approximately $62.817B, including $5.443B maturing within one year, compared with approximately $51.952B at December 31, 2008. The company had $5.2B of unused capacity under its $5.3B credit facility and reported compliance with debt covenants. Its debt-to-debt-plus-equity ratio was 59.3%, versus 55.5% at year-end 2008. Current assets were $22.023B and current liabilities $27.305B.
- Dividends: Quarterly dividend declared was $0.475 per share, up from $0.460 a year earlier.
Material changes and unusual items
- Verizon Wireless completed the Alltel acquisition on January 9, 2009. The acquisition added 13.2M customers after conforming adjustments, and Verizon assumed about $23.9B of Alltel debt. Alltel-related integration, acquisition and other charges were $277M pretax in Q3 and $961M for nine months.
- Required Alltel divestitures cover 105 markets. Agreements to sell 79 markets to AT&T for $2.35B and 26 markets to ATN for $200M remained subject to regulatory approval, with closing targeted by year-end 2009.
- Pension settlement losses were $610M pretax in Q3 and $1.026B for nine months. Frontier separation-related charges were $62M pretax in both periods.
- Interest expense rose to $704M in Q3 from $440M and to $2.416B for nine months from $1.302B, principally reflecting higher debt balances associated with Alltel and wireless spectrum financing.
- Consolidated net income includes income attributable to noncontrolling interests, primarily Vodafone’s 45% interest in Verizon Wireless. Q3 noncontrolling-interest income was $1.711B; Verizon-attributable income was $1.176B.
Outlook, risks and contingencies
- Management targeted 2009 capital expenditures at the low end of $17.4B–$17.8B including Alltel-related spending, and expected spending excluding Alltel to be at least $0.5B below 2008. Verizon expected to complete most FiOS deployment by the end of 2010 and reduce capital spending in absolute terms beginning in 2011.
- Management cited continued economic and competitive pressure on Wireline, traditional voice substitution, and cost pressures through the remainder of 2009. It planned further Wireline cost reductions and targeted a reduction of more than 8,000 employees and contractors in the second half of 2009.
- The announced Spinco/Frontier transaction was expected to close in Q2 2010, subject to regulatory and other conditions. Verizon expected about $3.3B of value from Spinco and Verizon shareholders about $5.3B of Frontier stock, subject to transaction terms and adjustments.
- Verizon identified risks including economic weakness, competition, technology substitution, pension costs and asset returns, financing and credit-rating pressure, regulation, Alltel integration and the ability to realize synergies. Proposed FCC net-neutrality rules could adversely affect broadband services depending on their final scope and terms.
- Pending regulatory and legal matters were not expected to materially affect financial condition, but could materially affect results in an individual period. Tax authorities were examining open positions; unrecognized tax benefits were $2.908B, and the company could not estimate the range of possible changes over the next 12 months.
Important facts for investors to verify
- How much reported revenue and wireless growth reflects Alltel, and whether integration savings and operating benefits are being achieved.
- Whether rising churn, lower service ARPU and ongoing Wireline declines affect future margins and cash generation.
- Debt maturities, refinancing needs, available liquidity and the effect of leverage on credit ratings and interest costs.
- Actual capital spending against the stated 2009 target, and the timing and financial effects of Alltel divestitures and the Frontier transaction.
- The persistence of pension settlement and other unusual charges, and developments in tax, regulatory and legal contingencies.