Verizon Communications Inc. — 2009 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2009; unaudited. Dollar amounts are in millions except per-share data. Comparisons are with the corresponding 2008 periods. Verizon operates Domestic Wireless and Wireline; results include Alltel from its January 9, 2009 acquisition, so year-over-year comparisons reflect a significant change in business scope.
Financial performance
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Operating revenue | $26,861 | $24,124 | $53,452 | $47,957 |
| Operating income | $4,418 | $4,546 | $9,112 | $8,879 |
| Net income | $3,160 | $3,404 | $6,370 | $6,453 |
| Net income attributable to Verizon | $1,483 | $1,882 | $3,128 | $3,524 |
| Verizon diluted EPS | $0.52 | $0.66 | $1.10 | $1.23 |
| Dividends declared per share | $0.46 | $0.43 | $0.92 | $0.86 |
Q2 revenue increased 11.3%, primarily with Alltel and growth in wireless and other growth markets, while operating income fell 2.8%. Operating margin was approximately 16.4%, versus 18.8% a year earlier. First-half operating margin was approximately 17.0%, versus 18.5%. Verizon-attributable earnings and EPS declined despite higher consolidated revenue, reflecting higher expenses and interest costs, among other factors.
Segments and operating trends
- Domestic Wireless: Q2 revenue rose 27.7% to $15,480 and segment operating income rose 28.8% to $4,459, substantially reflecting Alltel. The business reported 87.7 million customers. Service ARPU slipped 0.8% to $51.10, while data ARPU grew 18.9% to $14.96. Q2 total churn increased to 1.37% from 1.12%.
- Wireline: Q2 revenue declined 5.2% to $11,488 and operating income fell 47.8% to $555. Mass Markets revenue was nearly flat as FiOS growth was offset by landline losses; Global Enterprise and Global Wholesale revenue declined. Switched access lines fell 9.9% year over year. FiOS Internet subscribers reached 3.1 million and FiOS TV subscribers 2.5 million.
Cash flow, debt and liquidity
- First-half operating cash flow was $14,137, up from $12,635. Capital expenditures, including capitalized software, were $8,094; operating cash flow less this spending was approximately $6,043.
- Investing cash outflow was $13,278, including $5,367 for acquisitions, licenses and investments. Financing cash outflow was $9,821, including $18,173 of long-term debt and lease repayments and $2,614 of dividends paid.
- Cash and equivalents declined to $820 at June 30 from $9,782 at year-end 2008, primarily due to the Alltel acquisition and related cash uses. Current assets were $21,464 versus current liabilities of $26,368; the filing notes that current liabilities typically exceed current assets and that operating cash and financing access support requirements.
- Balance-sheet debt was approximately $64,909, comprising $5,440 due within one year and $59,469 long-term, compared with approximately $51,952 at December 31, 2008. The debt-to-debt-plus-Verizon-equity ratio was 60.3%, up from 55.5%.
- Verizon Wireless repaid its $12.4 billion Alltel bridge-facility borrowing by June 30; approximately $2.3 billion of assumed Alltel debt remained outstanding to third parties. Verizon reported $5.2 billion of unused capacity on its 364-day credit facility. The companies were in compliance with debt covenants.
Material changes, outlook and risks
- Alltel: Verizon Wireless acquired Alltel for approximately $5.9 billion in cash consideration and assumed substantial debt. Purchase accounting valuations remained preliminary. Regulatory conditions require divestiture of 105 markets: agreements cover 79 markets for $2.35 billion and 26 markets for $200 million, subject to approvals.
- Unusual charges: Q2 included $181 million pretax of merger integration costs and $416 million of pension settlement losses. First-half results also included $345 million of acquisition-related charges. Management said these items affected reported operating results.
- Capital spending outlook: Management expected 2009 capital expenditures, excluding Alltel-related capital, to be at least $0.5 billion below 2008; including Alltel-related capital, the forecast range was $17.4–$17.8 billion. First-half spending was $8.1 billion.
- Operating outlook and commentary: Management expected economic and margin pressures to continue through the second half of 2009, and planned to reduce employee and contractor headcount by more than 8,000 in that half. It anticipated Alltel integration benefits and continued wireless data and FiOS growth, but cautioned that expected merger savings were not assured. No specific EPS or revenue guidance is stated in the supplied filing text.
- Planned disposition: Verizon announced a spin-off of specified landline operations followed by a merger with Frontier, expected to close in Q2 2010 subject to approvals. Verizon expected approximately $3.3 billion of value from Spinco and Verizon shareholders to receive approximately $5.3 billion of Frontier stock, subject to closing adjustments.
- Principal risks: Economic weakness, competition and technology substitution; wireline losses; labor, pension and benefit costs; Alltel integration and synergy execution; financing access, interest costs and potential ratings pressure; regulatory approvals, spectrum requirements and litigation. Verizon identified sustained leverage, weaker wireless performance, failure to achieve Alltel synergies and accelerated wireline losses as potential rating downgrade factors.
- Contingencies: Verizon stated that pending regulatory and legal matters were not expected to materially affect financial condition, though they could materially affect a particular period’s results. The filing describes environmental remediation matters and legal proceedings; the intelligence-gathering class actions were dismissed in June 2009, with the appeal period not yet expired.
Important facts for investors to verify
- How much of wireless revenue and operating-income growth is attributable to Alltel versus underlying customer, service and data growth, and whether integration savings are being realized.
- Whether rising wireless churn and declining service ARPU persist, and whether data ARPU growth offsets voice revenue pressure.
- Whether Wireline declines, particularly in enterprise, wholesale and access lines, are offset by FiOS growth and cost reductions.
- Debt reduction, refinancing needs, liquidity and credit ratings, including the effect of acquisition-related leverage and future capital spending.
- Completion, proceeds and final terms of the Alltel market divestitures and the planned Frontier transaction, including regulatory and tax conditions.
- Final Alltel purchase-price allocation, remaining integration and pension costs, and the development of tax, legal and environmental contingencies.