Why did Verizon's reported earnings fall so sharply in 2001?

Reported net income available to common shareowners dropped to $389 million from $11.8 billion, mainly because of non-cash and nonrecurring special items. The largest were about $4.9 billion in pretax losses on securities (Cable & Wireless, NTL and MFN), a $1.25 billion write-down of the Genuity investment, a $1.0 billion after-tax severance and pension enhancement charge, and a $663 million after-tax charge tied to the Argentine subsidiary CTI. Excluding these items, adjusted net income was $8.19 billion, or $3.00 per diluted share.

How is the core business performing?

Consolidated revenue grew 3.8% to $67.2 billion. Domestic Wireless was the strongest segment, with 29.4 million customers and revenue up 22%. Domestic Telecom revenue fell slightly (0.6%) because of regulatory price reductions and competition from wireless, although data transport, DSL and interLATA long distance grew strongly. Information Services revenue grew about 4%.

What are the main risks to the balance sheet and cash flow?

Long-term debt rose to $45.7 billion, and total debt maturing within one year was $18.7 billion. The debt-to-equity ratio increased to 66.4%. Capital spending is expected to reach $15 to $16 billion in 2002, and the company faces an $8.8 billion FCC spectrum commitment (with a pending legal challenge), contingent Vodafone put obligations of up to $20 billion between 2003 and 2007, and up to $2 billion of financing commitments to Genuity. Moody's cited concern about completing the Verizon Wireless IPO in a timely way.

What regulatory developments could affect future results?

Key items include the pending FCC decisions on in-region long distance entry in New Jersey and Vermont, appeals of the Massachusetts and Pennsylvania approvals, FCC reviews of the CALLS access-charge plan, the triennial review of unbundled network elements, and the FCC's intercarrier compensation order on Internet-bound traffic. State actions, such as New York's sharp reduction in UNE rates (about $200 million a year in revenue impact), also pressure wireline revenue.

What asset sales and strategic moves were announced?

Verizon agreed to sell about 675,000 access lines in Alabama and Missouri to CenturyTel for $2.2 billion and about 600,000 Kentucky lines to ALLTEL for $1.9 billion, with closings expected in the second half of 2002. It agreed to combine Price Communications' wireless business with a portion of Verizon Wireless in a transaction valued at $1.7 billion, and it completed the Dobson wireless acquisition in February 2002. Verizon also increased its stake in TELPRI to 52%, which it will consolidate from 2002.

VZ 10-K FY2001 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 20, 2002. Cited figures are marked; the original filing is the authoritative source.

Verizon Communications (VZ) reported 2001 operating revenues of $67.19 billion^a, up 3.8% from $64.71 billion in 2000, but the headline earnings collapsed: net income available to common shareowners fell to $389 million, or $0.14 per diluted share, versus $11.8 billion ($4.31) in 2000.

The drop is driven almost entirely by non-operating special items, most notably a $4.86 billion^b pretax loss on securities (Cable & Wireless, NTL, MFN), a $1.25 billion write-down of the Genuity investment, a $1.0 billion after-tax severance and pension charge, and a $663 million after-tax international restructuring charge tied to Argentina's CTI. Management's adjusted net income was $8.19 billion, or $3.00 per diluted share, up from $2.91 in 2000, which signals underlying operating momentum even as the GAAP picture is distorted. Investors should separate these one-time items from the recurring business when assessing the year.

The operating story is mixed. Domestic Wireless (Verizon Wireless, 55%^c owned) was the growth engine, with 29.4 million customers, up about 10%, and revenue up 22%. Domestic Telecom revenue slipped 0.6% under regulatory price cuts, competition and wireless substitution, although data transport and long distance grew strongly.

Cash from operations rose to $19.8 billion^d, but capital spending of about $17.4 billion and dividend payments left the company reliant on external financing. Total long-term debt reached $45.7 billion, and the debt-to-equity ratio climbed to 66.4% from 62.4%. Several material forward-looking items remain: a $8.8 billion FCC spectrum purchase, the planned Verizon Wireless IPO, pending access-line sales totaling roughly $4.1 billion, and contingent Vodafone put obligations of up to $20 billion.

The filing also flags meaningful risks. Moody's moved its outlook to negative in April 2001, citing dependence on the Verizon Wireless IPO, which had not yet occurred. Regulatory uncertainty persists across state rate-setting and FCC interconnection and unbundling rules, and long distance entry depends on Section 271 approvals.

The Genuity investment and the mark-to-market exposure on exchangeable notes add earnings volatility. The 2002 capital spending guidance of $15 billion to $16 billion and the expected Genuity and CTI-related pressures will weigh on near-term free cash flow.

02—Key points

Key Highlights

Reported 2001 net income available to common shareowners fell to $389 million ($0.14 diluted EPS) from $11.8 billion ($4.31) in 2000, driven mainly by special items.
Adjusted net income (management's measure) was $8.19 billion, or $3.00 diluted EPS, up from $2.91 in 2000.
Special items totaled roughly $4.9 billion in securities losses (C&W, NTL, MFN), a $1.25 billion Genuity write-down, a $1.0 billion after-tax severance and pension charge, and a $663 million after-tax Argentina (CTI) restructuring charge.
Operating revenues rose 3.8% to $67.19 billion, while operating income fell to $11.5 billion from $16.8 billion because of special charges.
Verizon Wireless (55% owned) reached 29.4 million customers (up ~10%), with Domestic Wireless revenue up 22% to $17.4 billion.
Domestic Telecom revenue declined 0.6% amid regulatory price cuts and wireless substitution, though data transport and long distance grew strongly.
Long-term debt rose to $45.7 billion, the debt-to-equity ratio increased to 66.4%, and Moody's revised its outlook to negative in April 2001.

03—Questions

Frequently Asked Questions

Why did Verizon's reported earnings fall so sharply in 2001?
Reported net income available to common shareowners dropped to $389 million from $11.8 billion, mainly because of non-cash and nonrecurring special items. The largest were about $4.9 billion in pretax losses on securities (Cable & Wireless, NTL and MFN), a $1.25 billion write-down of the Genuity investment, a $1.0 billion after-tax severance and pension enhancement charge, and a $663 million after-tax charge tied to the Argentine subsidiary CTI. Excluding these items, adjusted net income was $8.19 billion, or $3.00 per diluted share.
How is the core business performing?
Consolidated revenue grew 3.8% to $67.2 billion. Domestic Wireless was the strongest segment, with 29.4 million customers and revenue up 22%. Domestic Telecom revenue fell slightly (0.6%) because of regulatory price reductions and competition from wireless, although data transport, DSL and interLATA long distance grew strongly. Information Services revenue grew about 4%.
What are the main risks to the balance sheet and cash flow?
Long-term debt rose to $45.7 billion, and total debt maturing within one year was $18.7 billion. The debt-to-equity ratio increased to 66.4%. Capital spending is expected to reach $15 to $16 billion in 2002, and the company faces an $8.8 billion FCC spectrum commitment (with a pending legal challenge), contingent Vodafone put obligations of up to $20 billion between 2003 and 2007, and up to $2 billion of financing commitments to Genuity. Moody's cited concern about completing the Verizon Wireless IPO in a timely way.
What regulatory developments could affect future results?
Key items include the pending FCC decisions on in-region long distance entry in New Jersey and Vermont, appeals of the Massachusetts and Pennsylvania approvals, FCC reviews of the CALLS access-charge plan, the triennial review of unbundled network elements, and the FCC's intercarrier compensation order on Internet-bound traffic. State actions, such as New York's sharp reduction in UNE rates (about $200 million a year in revenue impact), also pressure wireline revenue.
What asset sales and strategic moves were announced?
Verizon agreed to sell about 675,000 access lines in Alabama and Missouri to CenturyTel for $2.2 billion and about 600,000 Kentucky lines to ALLTEL for $1.9 billion, with closings expected in the second half of 2002. It agreed to combine Price Communications' wireless business with a portion of Verizon Wireless in a transaction valued at $1.7 billion, and it completed the Dobson wireless acquisition in February 2002. Verizon also increased its stake in TELPRI to 52%, which it will consolidate from 2002.

04—Continue

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