01—Abstract
Summary
Summary of the 10-K filed February 27, 2014. Cited figures are marked; the original filing is the authoritative source.
Verizon's FY2013 10-K (filed February 27, 2014) is dominated by the Wireless Transaction: Verizon acquired Vodafone's 45% interest in Verizon Wireless for approximately $130 billiona, completed February 21, 2014, giving it 100% ownership of the business that generated about 67% of 2013 revenues ($81.0B of $120.6B).
The consideration was roughly $58.9Bb cash, $60.15B in Verizon stock (about 1.27 billion new shares), $5.0B in Verizon notes, the sale of its 23.1% Vodafone Omnitel stake (valued at $3.5B), and about $2.5B of other consideration. The cash portion was funded mainly by debt, including $49.0B of notes issued in September 2013, so total debt rose from about $51.99B to $93.6B at year-end 2013, with roughly $20.3B more added after year-end. Financially, 2013 was strong on a reported basis.
Consolidated operating revenues grew 4.1% to $120.55B, operating income more than doubled to $31.97Bc, and net income attributable to Verizon reached $11.5B ($4.00 diluted EPS), helped by a $6.2B net pre-tax pension and benefit credit that is excluded from Consolidated Adjusted EBITDA. Adjusted EBITDA rose to $42.06B from $37.47B. Wireless revenue grew 6.8% on postpaid connection growth and smartphone penetration (70% of retail postpaid phones), while Wireline revenue fell 1.4% as legacy Core and Global Wholesale declines offset FiOS and Strategic services growth.
Free cash flow reached $22.2Bd, up from $15.3B. Management guided that 2014 cash flow from operations would be pressured by higher taxes, interest, and the end of distributions to Vodafone.
The main investor considerations are the sharply higher leverage, the dilution from 1.27 billion new shares, the credit ratings downgrades (Moody's to Baa1, S&P to BBB+, Fitch to A-), and the fact that the 2013 earnings figures are not fully representative of the post-transaction structure, since Verizon will absorb Vodafone's share of Wireless income and noncontrolling interest income will decline substantially in 2014. Dividends were raised 2.9% to $0.53 per quarter, the seventh consecutive annual increase, and the company disclosed material litigation, including the Idearc and FairPoint fraudulent-transfer suits, though it did not expect them to be material.
02—Key points
Key Highlights
- Wireless Transaction: Verizon paid about $130B (about $58.9B cash, $60.15B stock, $5.0B notes, Omnitel stake and other consideration) to acquire Vodafone's 45% of Verizon Wireless, closing February 21, 2014, and now owns 100% of Verizon Wireless.
- Revenue and profit: 2013 operating revenues rose 4.1% to $120.6B and operating income rose to $32.0B from $13.2B, aided by a $6.2B pension and benefit credit; net income attributable to Verizon was $11.5B ($4.00 diluted EPS) versus $0.31 in 2012.
- Adjusted EBITDA: Consolidated Adjusted EBITDA (non-GAAP, excluding non-operational items) increased to $42.1B from $37.5B.
- Wireless strength: Wireless revenue rose 6.8% to $81.0B, with 102.8M retail connections, 4G LTE covering 97% of the U.S. population, and smartphones at 70% of the retail postpaid phone base.
- Wireline pressure: Wireline revenue fell 1.4% to $39.2B as Global Wholesale (-7.3%) and Global Enterprise Core (-13.3%) declined, partly offset by FiOS growth (Mass Markets +3.7%) and Strategic services (+4.6%).
- Leverage and dilution: Total debt rose to about $93.6B at year-end 2013 (more after the closing), 1.27B new shares were issued, and Moody's, S&P and Fitch each downgraded Verizon one notch.
- Cash flow and dividend: Free cash flow rose to $22.2B from $15.3B, and the quarterly dividend was increased 2.9% to $0.53 per share, the seventh consecutive annual raise, while management expects 2014 operating cash flow to be pressured by higher taxes and interest costs.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, Verizon Communications Inc kept $0.10.
- Revenue$120.55B100.0%
- Cost of revenue−$44.89B37.2%
- Gross profit$75.66B62.8%
- Operating costs−$43.70B36.2%
- Operating income$31.97B26.5%
- Interest, other & tax−$20.47B17.0%
- Net income$11.50B9.5%
Where FY2013 revenue went
$120.55B- Cost of revenue: $44.89B, 37% of revenue
- SG&A: $27.09B, 22% of revenue
- Interest, other & tax: $20.47B, 17% of revenue
- Other operating costs: $16.61B, 14% of revenue
- Net income: $11.50B, 9.5% of revenue
Kept 9.5% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 27, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $120.55B$115.85B | +4.1% |
| Cost of Revenue | $44.89B$46.27B | −3.0% |
| Gross Profit | $75.66B$69.57B | +8.8% |
| SG&A Expenses | $27.09B$39.95B | −32.2% |
| Operating Expenses | $88.58B$102.69B | −13.7% |
| Operating Income | $31.97B$13.16B | +142.9% |
| Interest Expense | $2.67B$2.57B | +3.7% |
| Net Income | $11.50B$875.00M | +1213.9% |
| EPS (Basic) | $4.01$0.31 | +1193.5% |
| EPS (Diluted) | $4.00$0.31 | +1190.3% |
| Shares Outstanding (Basic) | 2.87B2.85B | +0.5% |
| Shares Outstanding (Diluted) | 2.87B2.86B | +0.4% |
05—Questions
Frequently Asked Questions
What did Verizon acquire, and how was it paid for?
Verizon acquired Vodafone's indirect 45% interest in Cellco Partnership (Verizon Wireless) for about $130 billion on February 21, 2014. The consideration was about $58.89B in cash, about $60.15B in Verizon common stock (roughly 1.27 billion shares), $5.0B in Verizon floating-rate notes, Verizon's 23.1% stake in Vodafone Omnitel (valued at $3.5B), and about $2.5B in other consideration, including the assumption of Class D and E preferred stock. The cash was largely financed with third-party debt, including $49.0B of notes issued in September 2013.
How did Verizon perform financially in 2013?
Operating revenues rose 4.1% to $120.55B, and operating income more than doubled to $31.97B, mainly because of a $6.2B net pension and benefit credit (compared with a $7.2B charge in 2012). Net income attributable to Verizon was $11.5B, or $4.00 per diluted share, versus $0.31 in 2012. Consolidated Adjusted EBITDA, which excludes non-operational items, rose to $42.06B from $37.47B. Operating cash flow was $38.8B and free cash flow was $22.2B.
How will the transaction change Verizon's reported earnings going forward?
Because Verizon now owns 100% of Verizon Wireless, the income that was previously attributed to Vodafone's 45% noncontrolling interest will become Verizon's income. Net income attributable to noncontrolling interests is therefore expected to decline substantially in 2014, while the provision for income taxes and cash taxes are expected to rise. Interest expense will also increase because of the debt used to fund the cash portion. Management expects cash flow from operations to be negatively affected in 2014, partly offset by the end of cash distributions to Vodafone.
What are the main risks for investors highlighted in the filing?
Key risks include: much higher debt (about $93.6B at year-end 2013 before roughly $20.3B of additional borrowing after year-end), with covenants requiring a leverage ratio of 3.50x or less until credit ratings reach a certain level; credit rating downgrades that raise borrowing costs; dilution from 1.27 billion new shares and possible selling pressure from Vodafone shareholders; intense wireless and wireline competition; declining Wireline legacy voice and wholesale revenues; pension and healthcare cost volatility; labor negotiations covering about 2,900 wireline employees; and litigation, including the Idearc and FairPoint fraudulent-transfer suits seeking about $2B or more.
Is the dividend safe, and what are the capital return plans?
The Board raised the quarterly dividend 2.9% to $0.53 per share in Q3 2013, the seventh consecutive annual increase, and dividends paid totaled $5.9B in 2013. Management said it expects to use cash to reduce debt, pay dividends and, when appropriate, repurchase shares. Verizon repurchased only 3.5 million shares in 2013, and the buyback authorization expires on February 28, 2014 with 96.5 million shares remaining. The filing does not guarantee future dividend increases, and the much higher debt load after the Wireless Transaction makes the cash allocation between debt reduction and shareholder returns a key consideration.
06—Continue