UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark one) | ||
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) | |
| OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For the quarterly period ended March 31, 2004 | ||
| OR
| ||
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) | |
| OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For the transition period from to | ||
Commission file number 1-8606
Verizon Communications Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 23-2259884 | |
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |
| 1095 Avenue of the Americas | 10036 | |
| New York, New York | (Zip Code) | |
| (Address of principal executive offices) |
Registrant’s telephone number (212) 395-2121
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No ¨
At March 31, 2004, 2,770,311,607 shares of the registrant’s Common Stock were outstanding, after deducting 4,553,774 shares held in treasury.
| Page | ||||
| Part I. | Financial Information | |||
| Item 1. | Financial Statements (Unaudited) | |||
| Condensed Consolidated Statements of Income For the three months ended March 31, 2004 and 2003 |
1 | |||
| Condensed Consolidated Balance Sheets March 31, 2004 and December 31, 2003 |
2 | |||
| Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2004 and 2003 |
3 | |||
| 4 | ||||
| Item 2. |
Management’s Discussion and Analysis of Results of Operations and Financial Condition |
16 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 33 | ||
| Item 4. | Controls and Procedures | 34 | ||
| Part II. | Other Information | |||
| Item 6. | Exhibits and Reports on Form 8-K | 34 | ||
| Signature | 35 | |||
| Certifications | ||||
Condensed Consolidated Statements of Income
Verizon Communications Inc. and Subsidiaries
| Three Months Ended March 31, | ||||||||
| (Dollars in Millions, Except Per Share Amounts) (Unaudited) | 2004 | 2003 | ||||||
| Operating Revenues |
$ | 17,136 | $ | 16,490 | ||||
| Operating Expenses |
||||||||
| Cost of services and sales (exclusive of items shown below) |
5,510 | 5,124 | ||||||
| Selling, general and administrative expense |
5,703 | 4,292 | ||||||
| Depreciation and amortization expense |
3,428 | 3,367 | ||||||
| Total Operating Expenses |
14,641 | 12,783 | ||||||
| Operating Income |
2,495 | 3,707 | ||||||
| Equity in earnings of unconsolidated businesses |
199 | 148 | ||||||
| Income from other unconsolidated businesses |
72 | 19 | ||||||
| Other income and (expense), net |
(34 | ) | 57 | |||||
| Interest expense |
(638 | ) | (755 | ) | ||||
| Minority interest |
(477 | ) | (342 | ) | ||||
| Income Before Provision for Income Taxes, Discontinued Operations and Cumulative Effect of Accounting Change |
1,617 | 2,834 | ||||||
| Provision for income taxes |
(418 | ) | (924 | ) | ||||
| Income Before Discontinued Operations and Cumulative Effect of Accounting Change |
1,199 | 1,910 | ||||||
| Discontinued Operations |
||||||||
| Loss from operations of Iusacell |
– | (5 | ) | |||||
| Provision for income taxes |
– | (2 | ) | |||||
| Loss on discontinued operations, net of tax |
– | (7 | ) | |||||
| Cumulative Effect of Accounting Change, Net of Tax |
– | 503 | ||||||
| Net Income |
$ | 1,199 | $ | 2,406 | ||||
| Basic Earnings Per Common Share |
||||||||
| Income before discontinued operations and cumulative effect of accounting change |
$ | .43 | $ | .70 | ||||
| Loss on discontinued operations, net of tax |
– | – | ||||||
| Cumulative effect of accounting change, net of tax |
– | .18 | ||||||
| Net Income |
$ | .43 | $ | .88 | ||||
| Weighted-average shares outstanding (in millions) |
2,770 | 2,748 | ||||||
| Diluted Earnings Per Common Share |
||||||||
| Income before discontinued operations and cumulative effect of accounting change |
$ | .43 | $ | .69 | ||||
| Loss on discontinued operations, net of tax |
– | – | ||||||
| Cumulative effect of accounting change, net of tax |
– | .18 | ||||||
| Net Income |
$ | .43 | $ | .87 | ||||
| Weighted-average shares outstanding (in millions) |
2,804 | 2,780 | ||||||
| Dividends declared per common share |
$ | .385 | $ | .385 | ||||
See Notes to Condensed Consolidated Financial Statements
1
Condensed Consolidated Balance Sheets
Verizon Communications Inc. and Subsidiaries
| At March 31, | At December 31, | |||||||
| (Dollars in Millions, Except Per Share Amounts) (Unaudited) | 2004 | 2003 | ||||||
| Assets |
||||||||
| Current assets |
||||||||
| Cash and cash equivalents |
$ | 600 | $ | 699 | ||||
| Short-term investments |
1,892 | 2,172 | ||||||
| Accounts receivable, net of allowances of $2,366 and $2,387 |
9,499 | 9,905 | ||||||
| Inventories |
1,309 | 1,283 | ||||||
| Prepaid expenses and other |
3,894 | 4,234 | ||||||
| Total current assets |
17,194 | 18,293 | ||||||
| Plant, property and equipment |
181,754 | 180,975 | ||||||
| Less accumulated depreciation |
107,138 | 105,659 | ||||||
| 74,616 | 75,316 | |||||||
| Investments in unconsolidated businesses |
5,770 | 5,789 | ||||||
| Wireless licenses |
40,924 | 40,907 | ||||||
| Goodwill |
1,379 | 1,389 | ||||||
| Other intangible assets, net |
4,552 | 4,733 | ||||||
| Other assets |
18,986 | 19,541 | ||||||
| Total assets |
$ | 163,421 | $ | 165,968 | ||||
| Liabilities and Shareowners’ Investment |
||||||||
| Current liabilities |
||||||||
| Debt maturing within one year |
$ | 6,320 | $ | 5,967 | ||||
| Accounts payable and accrued liabilities |
12,701 | 14,699 | ||||||
| Other |
5,935 | 5,904 | ||||||
| Total current liabilities |
24,956 | 26,570 | ||||||
| Long-term debt |
38,132 | 39,413 | ||||||
| Employee benefit obligations |
17,184 | 16,759 | ||||||
| Deferred income taxes |
21,827 | 21,708 | ||||||
| Other liabilities |
3,643 | 3,704 | ||||||
| Minority interest |
24,184 | 24,348 | ||||||
| Shareowners’ investment |
||||||||
| Series preferred stock ($.10 par value; none issued) |
– | – | ||||||
| Common stock ($.10 par value; 2,774,865,381 shares and 2,772,313,619 shares issued) |
277 | 277 | ||||||
| Contributed capital |
25,445 | 25,363 | ||||||
| Reinvested earnings |
9,542 | 9,409 | ||||||
| Accumulated other comprehensive loss |
(1,528 | ) | (1,250 | ) | ||||
| 33,736 | 33,799 | |||||||
| Less common stock in treasury, at cost |
115 | 115 | ||||||
| Less deferred compensation – employee stock ownership plans and other |
126 | 218 | ||||||
| Total shareowners’ investment |
33,495 | 33,466 | ||||||
| Total liabilities and shareowners’ investment |
$ | 163,421 | $ | 165,968 | ||||
See Notes to Condensed Consolidated Financial Statements
2
Condensed Consolidated Statements of Cash Flows
Verizon Communications Inc. and Subsidiaries
| Three Months Ended March 31, | ||||||||
| (Dollars in Millions) (Unaudited) | 2004 | 2003 | ||||||
| Cash Flows from Operating Activities |
||||||||
| Income before discontinued operations and cumulative effect of accounting change |
$ | 1,199 | $ | 1,910 | ||||
| Adjustments to reconcile income before discontinued operations and cumulative effect of accounting change to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
3,428 | 3,367 | ||||||
| Employee retirement benefits |
1,054 | (78 | ) | |||||
| Deferred income taxes |
124 | 421 | ||||||
| Provision for uncollectible accounts |
394 | 436 | ||||||
| Income from unconsolidated businesses |
(271 | ) | (167 | ) | ||||
| Changes in current assets and liabilities, net of effects from acquisition/disposition of businesses |
(1,783 | ) | 495 | |||||
| Other, net |
(107 | ) | (582 | ) | ||||
| Net cash provided by operating activities |
4,038 | 5,802 | ||||||
| Cash Flows from Investing Activities |
||||||||
| Capital expenditures (including capitalized software) |
(2,643 | ) | (2,466 | ) | ||||
| Acquisitions, net of cash acquired, and investments |
(34 | ) | (169 | ) | ||||
| Proceeds from disposition of businesses |
117 | – | ||||||
| Net change in short-term investments |
282 | 518 | ||||||
| Other, net |
189 | 24 | ||||||
| Net cash used in investing activities |
(2,089 | ) | (2,093 | ) | ||||
| Cash Flows from Financing Activities |
||||||||
| Proceeds from long-term borrowings |
500 | 1,946 | ||||||
| Repayments of long-term borrowings and capital lease obligations |
(2,049 | ) | (3,580 | ) | ||||
| Increase in short-term obligations, excluding current maturities |
572 | 1,576 | ||||||
| Dividends paid |
(1,065 | ) | (1,056 | ) | ||||
| Proceeds from sale of common stock |
80 | 256 | ||||||
| Other, net |
(86 | ) | (142 | ) | ||||
| Net cash used in financing activities |
(2,048 | ) | (1,000 | ) | ||||
| Increase (decrease) in cash and cash equivalents |
(99 | ) | 2,709 | |||||
| Cash and cash equivalents, beginning of period |
699 | 1,422 | ||||||
| Cash and cash equivalents, end of period |
$ | 600 | $ | 4,131 | ||||
See Notes to Condensed Consolidated Financial Statements
3
Notes to Condensed Consolidated Financial Statements
Verizon Communications Inc. and Subsidiaries
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements included in the Verizon Communications Inc. (Verizon) Annual Report on Form 10-K for the year ended December 31, 2003.
2. Accounting Changes
Directory Accounting Change
During 2003, we changed our method for recognizing revenues and expenses in our directory business from the publication-date method to the amortization method. The publication-date method recognizes revenues and direct expenses when directories are published. Under the amortization method, revenues and direct expenses, primarily printing and distribution costs, are recognized over the life of the directory, which is usually 12 months. This accounting change affected the timing of the recognition of revenues and expenses. As required by generally accepted accounting principles (GAAP), the directory accounting change was recorded effective January 1, 2003. The cumulative effect of the accounting change was a one-time charge of $2,697 million ($1,647 million after-tax).
Stock-Based Compensation
Effective January 1, 2003, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” using the prospective method (as permitted under SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”) to all new awards granted, modified or settled after January 1, 2003. The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested options in each period.
| Three Months Ended March 31, | ||||||||
| (Dollars in Millions, Except Per Share Amounts) | 2004 | 2003 | ||||||
| Net Income, As Reported |
$ | 1,199 | $ | 2,406 | ||||
| Add: Stock option-related employee compensation expense included in reported net income, net of related tax effects |
13 | 8 | ||||||
| Deduct: Total stock option-related employee compensation expense determined under fair value based method for all awards, net of related tax effects |
(31 | ) | (51 | ) | ||||
| Pro Forma Net Income |
$ | 1,181 | $ | 2,363 | ||||
| Earnings Per Share |
||||||||
| Basic – as reported |
$ | |||||||