01—Abstract
Summary
Summary of the 10-K filed February 26, 2013. Cited figures are marked; the original filing is the authoritative source.
Verizon's 2012 Form 10-K (filed February 26, 2013) shows a company with strong top-line growth driven by its wireless business, offset by heavy non-operating pension charges that depressed reported earnings.
Consolidated operating revenues rose 4.5% to $115.8 billiona, led by Verizon Wireless service and equipment revenue growth of 8.1% to $75.9 billion, while Wireline revenues declined 2.2% to $39.8 billion as legacy voice, wholesale and enterprise lines eroded. Net income attributable to Verizon fell to $875 million, or $0.31 per diluted share, from $2.4 billion in 2011, primarily because of $7.2 billion of severance, pension and benefit charges and roughly $1.1 billion of early debt redemption costs. Excluding these items, Consolidated Adjusted EBITDA rose 6.0% to $37.5 billion.
Cash generation and balance sheet metrics remained solid. Operating cash flow was $31.5 billionb and free cash flow was $15.3 billion, up from $13.5 billion, while capital expenditures were roughly flat at $16.2 billion. Net debt to Consolidated Adjusted EBITDA was 1.3x, and the dividend was raised 3% to $0.515 per quarter, the sixth consecutive annual increase.
Verizon also spent about $3.9 billionc on AWS spectrum and $0.6 billion on HUGHES Telematics, and it is selling lower 700 MHz B block licenses to AT&T for $1.9 billion. Investors should weigh the pension remeasurement losses, the Wireline revenue decline and the Idearc and FairPoint litigation against the wireless growth and LTE build-out.
02—Key points
Key Highlights
- Consolidated operating revenues grew 4.5% to $115.8 billion, with Verizon Wireless up 8.1% to $75.9 billion (about 66% of revenue) and Wireline down 2.2% to $39.8 billion.
- Verizon Wireless ended 2012 with 98.2 million retail connections and 4G LTE deployed in 476 markets covering about 273 million people; retail postpaid ARPA rose 7.1% to $144.04.
- Net income attributable to Verizon fell to $875 million ($0.31 per share) from $2.4 billion, driven by $7.2 billion of pre-tax severance, pension and benefit charges (including a 4.2% discount rate reset) and debt redemption costs.
- Consolidated Adjusted EBITDA (non-GAAP) increased 6.0% to $37.5 billion; Segment EBITDA for Verizon Wireless rose 12.2% to $29.7 billion.
- Free cash flow rose to $15.3 billion from $13.5 billion, supported by $31.5 billion of operating cash flow against $16.2 billion of capital expenditures.
- Verizon paid $8.5 billion in special distributions to Verizon Wireless partners (Vodafone received $3.8 billion) and continued to raise the dividend 3% to $0.515 per quarter.
- Net debt to Consolidated Adjusted EBITDA was 1.3x at year-end, and Verizon is selling 700 MHz B block spectrum to AT&T for $1.9 billion pending FCC and DOJ approval.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Verizon Communications Inc kept $0.01.
- Revenue$115.85B100.0%
- Cost of revenue−$46.27B39.9%
- Gross profit$69.57B60.1%
- Operating costs−$56.41B48.7%
- Operating income$13.16B11.4%
- Interest, other & tax−$12.29B10.6%
- Net income$875.0M0.8%
Where FY2012 revenue went
$115.85B- Cost of revenue: $46.27B, 40% of revenue
- SG&A: $39.95B, 34% of revenue
- Other operating costs: $16.46B, 14% of revenue
- Net income: $875.0M, 0.8% of revenue
- Interest, other & tax: $12.29B, 11% of revenue
Kept 0.8% as net incomeNet income $875.0M · 0.8%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 26, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $115.85B$110.88B | +4.5% |
| Cost of Revenue | $46.27B$45.88B | +0.9% |
| Gross Profit | $69.57B$65.00B | +7.0% |
| SG&A Expenses | $39.95B$35.62B | +12.1% |
| Operating Expenses | $102.69B$98.00B | +4.8% |
| Operating Income | $13.16B$12.88B | +2.2% |
| Interest Expense | $2.57B$2.83B | −9.1% |
| Net Income | $875.00M$2.40B | −63.6% |
| EPS (Basic) | $0.31$0.85 | −63.5% |
| EPS (Diluted) | $0.31$0.85 | −63.5% |
| Shares Outstanding (Basic) | 2.85B2.83B | +0.7% |
| Shares Outstanding (Diluted) | 2.86B2.84B | +0.8% |
05—Questions
Frequently Asked Questions
Why did Verizon's reported net income drop so sharply in 2012 even though revenue grew?
The decline was mainly due to non-operating items rather than core operations. Verizon recorded $7.2 billion of pre-tax severance, pension and benefit charges, largely from lowering the pension discount rate to 4.2%, and about $1.1 billion of early debt redemption costs. The company also had a negative effective tax rate of -6.7%. Adjusted EBITDA, which excludes these items, rose 6%.
How is the Verizon Wireless business performing?
Verizon Wireless is the largest U.S. wireless carrier, with 98.2 million retail connections and revenue of $75.9 billion, up 8.1%. Growth came from smartphone penetration (58.1% of retail postpaid phones), Share Everything plans and tablets/Jetpacks. Segment EBITDA margin on service revenue improved to 46.6%. Churn fell to 1.19%, and capital spending was roughly flat at $8.9 billion as the 4G LTE build-out continued.
What are the main risks to the Wireline segment?
Wireline revenue fell 2.2% to $39.8 billion, and its segment operating income was only $60 million after heavy non-operating charges. Retail voice connections continue to decline from wireless and cable substitution, and Global Wholesale revenue is expected to fall roughly 10% per quarter. Growth areas are FiOS (65% of Consumer retail revenue), Strategic services (up 6.3%) and cloud and data center offerings.
What material legal exposures does the filing disclose?
Two Litigation Trust suits are significant. The Idearc Litigation Trust seeks over $9 billion, but a January 2013 court ruling found Idearc was worth at least $12 billion at the spin-off, which may undercut the claims. The FairPoint Litigation Trust seeks about $2 billion, with trial set for May 2013. Verizon also faces roughly 50 patent suits. Management states that none of the pending matters has a material accrual.
How is Verizon's balance sheet and shareholder return positioned?
Total assets were $225.2 billion, with $77.7 billion of wireless licenses and $24.1 billion of goodwill. Long-term debt fell to $47.6 billion, and cash dropped to $3.1 billion after the $21.3 billion of financing outflows, which included debt paydown and the special distribution to Vodafone. Dividends paid totaled $5.2 billion, and no shares were repurchased in 2012, although a 100 million share authorization remains through February 2014.
06—Continue