Verizon Communications Inc. — 2014 Form 10-K
Business context and reporting period. This is Verizon’s annual report for the fiscal year ended December 31, 2014, filed February 23, 2015; it is not a separate fourth-quarter filing. Verizon operates Wireless and Wireline segments. On February 21, 2014, it completed the acquisition of Vodafone’s 45% interest in Verizon Wireless, giving Verizon 100% ownership. Wireless had 108.2 million retail connections at year-end.
Financial performance and position
- Revenue: Wireless reported 2014 revenue of approximately $87.6 billion, about 69% of Verizon’s aggregate revenue. Wireline reported $38.4 billion, about 30%. The supplied filing text does not provide a clear consolidated revenue total or comparable prior-year revenue figures.
- Profit, margins and cash flow: The filing incorporates the financial statements and management discussion from the 2014 Annual Report to Shareowners, but those figures are not included in the supplied text. Net income, operating income, margins and cash flow therefore cannot be summarized from this text.
- Debt and liquidity: Verizon reported approximately $113.3 billion of outstanding indebtedness at December 31, 2014, and approximately $7.9 billion of unused borrowing capacity under its existing credit facility. The filing highlights debt-service, refinancing, credit-rating and interest-rate risks.
- Investment: Gross investment in plant, property and equipment was approximately $231 billion at year-end, compared with $221 billion in 2013, before accumulated depreciation. Network equipment represented 80.0% of gross investment in 2014.
- Shareholder returns: Quarterly cash dividends declared in 2014 were $0.53 per share in the first and second quarters and $0.55 in the third and fourth quarters. No shares were repurchased in the fourth quarter under the authorized buyback program.
Material changes and notable transactions
- Verizon’s full ownership of Verizon Wireless followed the February 2014 acquisition of Vodafone’s 45% stake. The filing does not provide enough included financial-statement detail to quantify the transaction’s effect on year-over-year earnings or cash flow.
- In February 2015, Verizon agreed to sell its local exchange businesses and related landline activities in California, Florida and Texas to Frontier for approximately $10.5 billion. Frontier would assume $0.6 billion of debt; closing was expected in the first half of 2016, subject to approvals and other conditions. The businesses generated approximately $5.4 billion of 2013 revenue.
- In February 2015, Verizon agreed to lease and operate more than 11,300 wireless towers to American Tower for an upfront payment of $5.0 billion and separately sell 165 towers for $0.1 billion. Closing was expected in the first half of 2015, subject to customary conditions.
- Verizon was the high bidder for 181 AWS-3 spectrum licenses for approximately $10.4 billion. It had deposited $0.9 billion in the fourth quarter of 2014 and paid a $1.2 billion down payment in February 2015; the filing said the remaining payment was due in the first quarter of 2015.
- In February 2015, Verizon authorized a $5.0 billion accelerated share repurchase. It paid $5.0 billion and received an initial 86.2 million shares; final settlement was scheduled for the second quarter of 2015.
Outlook, risks and contingencies
- Management outlook: Verizon described continued investment in wireless capacity and density, fiber, cloud, digital media and connected-device services. It expected customers to continue adopting device installment plans and discounted service pricing in 2015. Planned initiatives included LTE multicast and an IP television service in 2015. These are strategic expectations, not quantified financial guidance.
- Competition and regulation: The company cited intense competition on price, network quality, customer service and products, along with potential regulatory changes affecting broadband, network neutrality, spectrum, interconnection and wireline access.
- Other principal risks: High indebtedness and financing costs; cyberattacks, service disruption and data loss; natural disasters and other infrastructure threats; supplier dependence; labor negotiations; benefit-plan costs; economic weakness; and technology or customer-demand changes.
- Labor: Approximately 27% of employees were union-represented. Verizon expected 2015 negotiations involving unions representing approximately 39,000 Wireline employees and warned of possible work stoppages and added costs.
- Legal and environmental matters: The Idearc Litigation Trust’s appeal was rejected by the Fifth Circuit in July 2014, but the trust sought U.S. Supreme Court review. Verizon was cooperating with a California hazardous-waste investigation and did not expect any penalties ultimately incurred to be material. Environmental reserves also cover legacy remediation matters; future adjustments may depend on site conditions and cost allocations.
- Controls: Management concluded disclosure controls were effective as of December 31, 2014. The company was implementing new financial systems and centralizing transaction processing while reviewing and enhancing controls as needed.
Important facts for investors to verify
- Review the incorporated 2014 Annual Report for consolidated revenue, earnings, margins, cash flows, capital expenditures, liquidity details and year-over-year comparisons; the supplied text does not include those data.
- Assess the debt and financing implications of the Wireless Transaction, spectrum purchase and planned tower and wireline asset sales.
- Check whether the Frontier and American Tower transactions closed on the expected terms and timing, and whether required regulatory approvals were obtained.
- Monitor the 2015 labor negotiations, spectrum requirements, competitive pricing trends and regulatory developments.
- Verify subsequent developments in the Idearc matter, environmental remediation and other contingencies.