Business Context and Reporting Period
This Form 10-Q covers Verizon Communications Inc. for the quarterly and six-month periods ended June 30, 2001. The company, formed by the merger of Bell Atlantic and GTE in June 2000, operates four reportable segments: Domestic Telecom, Domestic Wireless, International, and Information Services. The reporting period reflects ongoing integration costs, regulatory challenges, and significant market volatility affecting investment portfolios.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2001 | Six Months Ended June 30, 2001 | Three Months Ended June 30, 2000 | Six Months Ended June 30, 2000 |
|---|---|---|---|---|
| Operating Revenues | $16,909 million | $33,175 million | $16,769 million | $31,301 million |
| Operating Income | $3,801 million | $7,408 million | $4,609 million | $8,437 million |
| Net Income (Loss) | $(1,021) million | $551 million | $4,904 million | $6,419 million |
| Diluted EPS (Reported) | $(0.38) | $0.20 | $1.79 | $2.33 |
| Adjusted Net Income | $2,101 million | $4,057 million | $1,966 million | $3,870 million |
| Adjusted Diluted EPS | $0.77 | $1.49 | $0.72 | $1.41 |
| Cash from Operations | N/A | $7,658 million | N/A | $8,329 million |
| Capital Expenditures | N/A | $(9,163) million | N/A | $(7,632) million |
| Total Debt (Current + Long-term) | $64,871 million | $64,871 million | N/A | N/A |
| Cash and Equivalents | $2,616 million | $2,616 million | N/A | N/A |
Note: Debt figures represent the sum of current debt maturing within one year ($20,591 million) and long-term debt ($44,280 million) as of June 30, 2001.
Material Changes vs. Prior Period
- Net Loss vs. Profit: The company reported a net loss of $1.021 billion for the quarter, a stark contrast to the $4.904 billion profit in the same period of 2000. This reversal is primarily driven by a $3.913 billion pretax loss on marketable securities (C&W, NTL, and MFN) deemed "other than temporary."
- Revenue Growth: Operating revenues increased slightly to $16.9 billion (Q2 2001) from $16.8 billion (Q2 2000). Adjusted revenues grew 5.0% year-over-year, driven by strong demand in data transport and long-distance services.
- Segment Performance:
- Domestic Telecom: Adjusted net income remained relatively flat ($1.361 billion vs. $1.378 billion), with revenue growth offset by regulatory price reductions of approximately $230 million.
- Domestic Wireless: Adjusted net income surged 65.9% to $151 million, fueled by a 12.7% increase in the subscriber base to 27.9 million.
- International: Adjusted net income grew 56.8% to $243 million, though reported results were heavily impacted by the loss on marketable securities.
- Accounting Changes: Adoption of SFAS No. 133 (Derivatives) resulted in a cumulative effect charge of $182 million and ongoing mark-to-market adjustments of $153 million for the six months ended June 30, 2001.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- Investment Impairment: A $3.913 billion pretax charge related to investments in Cable & Wireless, NTL, and Metromedia Fiber Network.
- Merger & Transition Costs: $279 million in transition costs incurred in Q2 2001 as part of the $2 billion total expected integration cost.
- Asset Sales: Net gains on asset sales were minimal ($5 million) in 2001 compared to $2.456 billion in 2000, as most overlap properties were sold in the prior year.
- Outlook & Guidance: Management revised 2001 earnings guidance (announced via Form 8-K in late July/August 2001). Capital expenditures for 2001 are expected to be approximately $17.5 billion.
- Key Risks:
- Verizon Wireless IPO: The planned IPO has been deferred due to market conditions. This impacts the ability to fund the $8.8 billion FCC spectrum auction purchase without issuing additional debt.
- NextWave Litigation: A federal appeals court ruled against the FCC's repossession of NextWave licenses. If the Supreme Court upholds this, Verizon may have to return the licenses, though the FCC has promised refunds.
- Regulatory Pressure: Ongoing price reductions mandated by federal and state regulators continue to pressure wireline revenues.
- Credit Rating: Moody's revised the credit outlook from stable to negative in April 2001, citing concerns over the Wireless IPO and spectrum funding.
Investor Verification Checklist
- Investment Portfolio Valuation: Verify the current status and fair value of remaining holdings in C&W, NTL, and MFN to assess further impairment risks.
- Wireless IPO Timeline: Monitor announcements regarding the Verizon Wireless IPO, as its timing is critical for funding the $7 billion remaining balance of the FCC spectrum auction.
- NextWave Litigation Outcome: Track the Supreme Court's decision on the NextWave appeal, which determines the final cost and utility of the $8.8 billion spectrum purchase.
- Regulatory Rate Filings: Review upcoming FCC and state commission filings for further mandated price reductions on network access and local services.
- Debt Maturity Profile: Assess the impact of the $5.1 billion in revolving loans reclassified to short-term debt due to the 2002 credit facility expiration.