Why is there such a large gap between reported and adjusted earnings in 1998?

Reported 1998 net income of $2.97 billion includes $1.81 billion of pre-tax special items, or about $1.36 billion after tax. The largest were retirement incentive costs of $1.02 billion, Asian investment write-downs of $485 million, and merger-related costs of $196 million. Management argues the adjusted figure of $4.32 billion better reflects ongoing operations, but investors should recognize that restructuring and write-downs have recurred in several recent years.

What does the GTE merger mean for shareholders?

Bell Atlantic shareholders keep their existing shares, while GTE holders receive 1.22 Bell Atlantic shares per GTE share. The merger is structured as a pooling of interests, and management expects earnings per share to improve in the first year after closing, excluding merger charges. Targets include 8-10% revenue growth and 13-15% EPS growth (excluding charges) in the first two years. Completion depends on regulatory approvals, a tax-free opinion, and shareholder votes from both companies.

Is the company's debt load a concern?

Total long-term debt rose to $17.6 billion, and the debt-to-capital ratio increased from 60.5% to 61.3%. Much of the increase reflects exchangeable notes tied to stakes in TCNZ and Cable & Wireless Communications, which can be settled in cash or shares. Management says it has more than $4.5 billion of unused bank credit lines and that its telephone subsidiaries' debt retains high credit ratings, though some ratings were placed under review for possible downgrade after the merger announcement.

What are the main competitive and regulatory risks to the core telephone business?

Competition from CLECs is expected to intensify, with about 897 interconnection agreements in place. Local services revenue grew 4.7%, but intraLATA toll revenue has been hurt by presubscription, and long-distance revenue fell 11.9% in 1998. Access rates face continued price-cap reductions, with a 6.5% productivity offset. Management also cannot yet predict the full financial effect of the 1996 Act, and reciprocal compensation payments on internet traffic are expected to roughly double in 1999 unless state regulators follow the FCC's interpretation.

VZ 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 30, 1999. Cited figures are marked; the original filing is the authoritative source.

This 10-K is filed by Bell Atlantic Corporation, the predecessor to today's Verizon (VZ), for fiscal 1998.

Reported 1998 operating revenues rose 4.6% to $31.57 billion^a, and reported net income was $2.97 billion, or $1.86 diluted EPS. Reported results include $1.81 billion of pre-tax special items, mainly retirement incentive costs ($1.02 billion), merger-related costs ($196 million), and write-downs of Asian investments ($485 million). Excluding these items, adjusted net income was $4.32 billion, or $2.72 diluted EPS, up from $2.45 in 1997.

The core Domestic Telecom segment generated about 81% of revenue, and the company is growing its wireless business, with Bell Atlantic Mobile serving 6.2 million customers. The dominant strategic event is the pending merger of equals with GTE, under which GTE shareholders would receive 1.22 Bell Atlantic shares per GTE share. Management projects roughly $2 billion^b of annual revenue synergies, $2 billion of expense savings, and $500 million of capital savings by the third year after closing.

Combined direct and transition costs are estimated at $1.6 to $2.0 billion^c pre-tax. Investors should weigh these synergy targets against sizable integration costs and the continuing competitive and regulatory pressures from the 1996 Telecommunications Act, including reciprocal compensation payments that are expected to rise to about $350 million in 1999. Balance sheet leverage increased.

Long-term debt rose to $17.6 billion^d from $13.3 billion, largely due to $5.6 billion of exchangeable notes backed by stakes in TCNZ and Cable & Wireless Communications. Capital expenditures reached $7.4 billion in 1998, and management guides to about $8.1 billion in 1999, with a $1.6 billion Year 2000 and Domestic Telecom network investment program. Dividends were raised to $1.54 per share for 1998, and the debt-to-capital ratio edged up to 61.3%.

02—Key points

Key Highlights

Reported 1998 operating revenues of $31.57 billion (up 4.6%), with operating income of $6.63 billion, up from $5.34 billion in 1997.
Reported diluted EPS of $1.86 versus $1.56 in 1997; adjusted diluted EPS (excluding special items) of $2.72, up 11% from $2.45.
Special items of $1.81 billion pre-tax in 1998, including $1.02 billion in retirement incentive costs, $485 million in write-downs of Asian investments, and $196 million in merger-related costs.
Proposed GTE merger (1.22 Bell Atlantic shares per GTE share) targets about $2 billion each in revenue and expense synergies and $500 million in capital savings by year three, against $1.6 to $2.0 billion in integration costs.
Long-term debt increased to $17.6 billion from $13.3 billion, driven by $5.6 billion of exchangeable notes tied to TCNZ and CWC shares; debt-to-capital rose to 61.3%.
Capital spending of $7.4 billion in 1998 with $8.1 billion guided for 1999; annual dividend increased to $1.54 per share from $1.51.
Regulatory overhang remains significant: reciprocal compensation payments for internet-bound traffic may climb to about $350 million in 1999, and long-distance entry into New York is planned for a third-quarter 1999 start, pending FCC approval.

03—Questions

Frequently Asked Questions

Why is there such a large gap between reported and adjusted earnings in 1998?
Reported 1998 net income of $2.97 billion includes $1.81 billion of pre-tax special items, or about $1.36 billion after tax. The largest were retirement incentive costs of $1.02 billion, Asian investment write-downs of $485 million, and merger-related costs of $196 million. Management argues the adjusted figure of $4.32 billion better reflects ongoing operations, but investors should recognize that restructuring and write-downs have recurred in several recent years.
What does the GTE merger mean for shareholders?
Bell Atlantic shareholders keep their existing shares, while GTE holders receive 1.22 Bell Atlantic shares per GTE share. The merger is structured as a pooling of interests, and management expects earnings per share to improve in the first year after closing, excluding merger charges. Targets include 8-10% revenue growth and 13-15% EPS growth (excluding charges) in the first two years. Completion depends on regulatory approvals, a tax-free opinion, and shareholder votes from both companies.
Is the company's debt load a concern?
Total long-term debt rose to $17.6 billion, and the debt-to-capital ratio increased from 60.5% to 61.3%. Much of the increase reflects exchangeable notes tied to stakes in TCNZ and Cable & Wireless Communications, which can be settled in cash or shares. Management says it has more than $4.5 billion of unused bank credit lines and that its telephone subsidiaries' debt retains high credit ratings, though some ratings were placed under review for possible downgrade after the merger announcement.
What are the main competitive and regulatory risks to the core telephone business?
Competition from CLECs is expected to intensify, with about 897 interconnection agreements in place. Local services revenue grew 4.7%, but intraLATA toll revenue has been hurt by presubscription, and long-distance revenue fell 11.9% in 1998. Access rates face continued price-cap reductions, with a 6.5% productivity offset. Management also cannot yet predict the full financial effect of the 1996 Act, and reciprocal compensation payments on internet traffic are expected to roughly double in 1999 unless state regulators follow the FCC's interpretation.

04—Continue

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