Business Context and Reporting Period
This Form 10-Q covers Verizon Communications Inc. for the quarterly and nine-month periods ended September 30, 2001. The company, formed by the 2000 merger of Bell Atlantic and GTE, operates four primary segments: Domestic Telecom, Domestic Wireless, International, and Information Services. The reporting period was significantly impacted by the September 11, 2001 terrorist attacks, which caused substantial damage to infrastructure in New York and Washington, D.C., and exacerbated a weakening economic environment.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2001 | Nine Months Ended Sep 30, 2001 | Nine Months Ended Sep 30, 2000 |
|---|---|---|---|
| Operating Revenues | $17,004 million | $50,179 million | $47,834 million |
| Operating Income | $3,677 million | $11,085 million | $13,379 million |
| Net Income (Available to Common) | $1,875 million | $2,426 million | $9,877 million |
| Diluted EPS (Reported) | $0.69 | $0.89 | $3.60 |
| Net Cash from Operating Activities | N/A | $13,096 million | $12,045 million |
| Capital Expenditures | N/A | $12,477 million | $11,880 million |
| Total Debt (Current + Long-term) | $63,890 million | $63,890 million | $57,329 million |
| Cash and Cash Equivalents | $1,365 million | $1,365 million | $757 million |
Note: Debt figures derived from Balance Sheet current and long-term debt line items. Operating cash flow and CapEx are nine-month figures only.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 2.9% for the quarter and 4.9% year-to-date compared to 2000, driven by growth in Domestic Wireless and Data services, partially offset by declines in local wireline services due to economic slowdown and technology substitution.
- Profitability Decline: Reported Net Income dropped significantly year-over-year (down 46% for the quarter and 75% for the nine months). This decline is largely attributable to non-recurring items in 2000 (gains on asset sales, pension settlements) and significant charges in 2001 (impairment of marketable securities, 9/11 costs, transition costs).
- Adjusted Performance: On an adjusted basis (excluding special items), Net Income for the nine months ended September 30, 2001, was $6,097 million ($2.23 EPS), compared to $5,854 million ($2.13 EPS) in 2000, indicating underlying operational stability despite reported volatility.
- Investment Losses: A major factor in the 2001 decline was a $3,913 million pretax loss (June 2001) on marketable securities (C&W, NTL, MFN) deemed "other than temporary."
- 9/11 Impact: The company recorded $290 million in equipment losses and restoration costs related to the September 11 attacks, with $150 million accrued as insurance recovery, resulting in a net $140 million charge to operations.
Guidance, Outlook, and Risks
- 9/11 Outlook: Management estimates the total financial impact of the September 11 attacks to be between $1.7 billion and $1.9 billion. A refined estimate is pending further physical inspection of inaccessible plant and equipment. An additional net income impact of approximately $0.03 per diluted share is expected in Q4 2001.
- Capital Expenditures: Total capital spending for 2001 is expected to be approximately $17.0 billion to $17.2 billion, funded primarily by internal cash flows and external financing.
- Verizon Wireless IPO: The planned Initial Public Offering (IPO) of Verizon Wireless has been delayed pending favorable market conditions. This delay impacts the ability to fund the $8.8 billion FCC spectrum auction payments without issuing additional debt.
- Regulatory and Legal Risks:
- NextWave Litigation: Verizon Wireless won $8.8 billion in FCC spectrum licenses, but the licenses are subject to appeal by NextWave. If the Supreme Court rules against the FCC, licenses may be returned with a refund of payments (no interest).
- Long Distance Entry: Progress continues on entering in-region long distance markets in former Bell Atlantic states (e.g., Massachusetts, Connecticut, Pennsylvania), though some orders are under appeal.
- Asset Sales: Agreements were reached in October 2001 (subsequent to period end) to sell 1.2 million access lines in Alabama, Missouri, and Kentucky for a combined $4.1 billion, expected to close in 2002.
- Accounting Changes: The company is evaluating the impact of new FASB standards (SFAS 141, 142, 143, 144) regarding business combinations, goodwill, and asset retirement obligations, with adoption dates ranging from 2002 to 2003.
Investor Verification Checklist
- 9/11 Loss Finalization: Verify the final cost of service restoration and equipment loss as physical inspections of the World Trade Center area are completed.
- Marketable Securities Valuation: Monitor the status of investments in C&W, NTL, and MFN for further impairment charges or potential recovery.
- Verizon Wireless IPO Timing: Track the status of the Verizon Wireless IPO, as its timing is critical for funding spectrum payments and managing debt levels.
- NextWave Litigation Outcome: Follow the Supreme Court petition regarding the FCC's decision on NextWave licenses, which determines the final cost of the $8.8 billion spectrum acquisition.
- Access Line Sales Closing: Confirm regulatory approval and closing dates for the $4.1 billion sale of access lines in Alabama, Missouri, and Kentucky.
- Debt Ratings: Monitor credit rating outlooks (Moody's revised outlook to negative in April 2001) given the high debt load and delayed IPO.