01—Abstract
Summary
Summary of the 10-K filed February 23, 2015. Cited figures are marked; the original filing is the authoritative source.
Verizon's FY2014 10-K (filed February 23, 2015) reflects a transformative year driven by the February 21, 2014 completion of the Wireless Transaction, in which Verizon acquired Vodafone's indirect 45% interest in Verizon Wireless for approximately $130 billiona (about $58.9 billion in cash, roughly 1.27 billion shares valued at $61.3 billion, $5.0 billion of floating rate notes, and other consideration).
This gave Verizon 100% ownership of Verizon Wireless, which generated $87.6 billionb of 2014 revenue (about 69% of the total) and $26.8 billion of segment operating income. Consolidated operating revenues rose 5.4% to $127.1 billion, while reported operating income fell to $19.6 billion from $32.0 billion, largely because of a $7.5 billion non-operational severance, pension and benefit charge driven by a lower discount rate (4.2% versus 5.0%). Reported net income attributable to Verizon fell to $9.6 billion ($2.42 per diluted share) from $11.5 billion, though Consolidated Adjusted EBITDA rose to $43.3 billion from $42.0 billion.
Balance sheet and cash flow changed sharply. Total debt rose to $113.3 billionc from $93.6 billion, and cash fell to $10.6 billion from $53.5 billion after the Vodafone payment. Operating cash flow was $30.6 billion, down from $38.8 billion, reflecting higher cash taxes and interest after the transaction.
Capital expenditures were $17.2 billiond, leaving free cash flow of $13.4 billion, which still covered $7.8 billion of dividends. Management said it expects to return to pre-transaction credit metrics by 2019, and the 2015 capex guidance is $17.5 to $18.0 billion. Wireline revenue declined 0.5% to $38.4 billion, with Global Enterprise and Global Wholesale declines offsetting FiOS-driven Mass Markets growth.
Subsequent events in the filing also reshape the company. Verizon won spectrum in the AWS-3 auction for about $10.4 billion.
It agreed to sell 11,300 towers to American Tower for a $5.0 billion upfront payment and to sell its California, Florida and Texas landline business to Frontier for about $10.5 billion, with that sale expected to close in the first half of 2016. Verizon also launched a $5.0 billion accelerated share repurchase in February 2015.
02—Key points
Key Highlights
- Wireless Transaction closed February 21, 2014: Verizon acquired Vodafone's 45% stake in Verizon Wireless for about $130 billion, giving 100% ownership of the largest U.S. wireless carrier (108.2 million retail connections at year-end 2014).
- Consolidated operating revenues grew 5.4% to $127.1 billion, driven by Wireless revenue up 8.2% to $87.6 billion, including equipment revenue up 25.2%.
- Reported operating income fell 38.7% to $19.6 billion, reflecting a $7.5 billion severance, pension and benefit charge; Consolidated Adjusted EBITDA rose 3.0% to $43.3 billion.
- Net income attributable to Verizon declined to $9.6 billion ($2.42 diluted EPS) from $11.5 billion ($4.00 in 2013), with the share count rising to about 3.98 billion after the 1.27 billion shares issued for the Wireless Transaction.
- Free cash flow fell to $13.4 billion from $22.2 billion as operating cash flow dropped to $30.6 billion (higher taxes and interest) and capex rose to $17.2 billion; dividends paid were $7.8 billion.
- Total debt rose to $113.3 billion from $93.6 billion, and management expects to return to pre-transaction credit metrics by 2019; the company's dividend was raised 3.8% to $0.55 per quarter.
- Strategic pipeline for 2015: $10.4 billion AWS-3 spectrum purchase, $5.0 billion American Tower tower lease deal, and $10.5 billion sale of California, Florida and Texas landline operations to Frontier, plus a $5.0 billion accelerated share repurchase.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Verizon Communications Inc kept $0.08.
- Revenue$127.08B100.0%
- Cost of revenue−$49.93B39.3%
- Gross profit$77.15B60.7%
- Operating costs−$57.55B45.3%
- Operating income$19.60B15.4%
- Interest, other & tax−$9.97B7.8%
- Net income$9.63B7.6%
Where FY2014 revenue went
$127.08B- Cost of revenue: $49.93B, 39% of revenue
- SG&A: $41.02B, 32% of revenue
- Other operating costs: $16.53B, 13% of revenue
- Net income: $9.63B, 7.6% of revenue
- Interest, other & tax: $9.97B, 7.8% of revenue
Kept 7.6% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 23, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $127.08B$120.55B | +5.4% |
| Cost of Revenue | $49.93B$44.89B | +11.2% |
| Gross Profit | $77.15B$75.66B | +2.0% |
| SG&A Expenses | $41.02B$27.09B | +51.4% |
| Operating Expenses | $107.48B$88.58B | +21.3% |
| Operating Income | $19.60B$31.97B | −38.7% |
| Interest Expense | $4.92B$2.67B | +84.3% |
| Net Income | $9.63B$11.50B | −16.3% |
| EPS (Basic) | $2.42$4.01 | −39.7% |
| EPS (Diluted) | $2.42$4.00 | −39.5% |
| Shares Outstanding (Basic) | 3.97B2.87B | +38.7% |
| Shares Outstanding (Diluted) | 3.98B2.87B | +38.5% |
05—Questions
Frequently Asked Questions
Why did Verizon's operating income drop so sharply in 2014 even though revenue grew?
The decline was mainly non-operational. Verizon recorded about $7.5 billion of net severance, pension and benefit charges in 2014, mostly from a lower pension discount rate (4.2% versus 5.0%) and updated mortality tables. In 2013 it had recorded a $6.2 billion credit, so the year-over-year swing was large. Excluding these items, Consolidated Adjusted EBITDA rose about 3% to $43.3 billion, which management views as the better measure of underlying performance.
What did Verizon give up and gain in the Wireless Transaction, and how does it affect investors?
Verizon paid about $58.9 billion in cash, issued about 1.27 billion common shares (valued at $61.3 billion), issued $5.0 billion of floating rate notes, and sold its 23.1% stake in Vodafone Omnitel. In return it took full control of Verizon Wireless, the company's largest and most profitable segment, which now generates all of the wireless cash flow. The trade-off is a much larger debt load and more shares outstanding, which lowered per-share earnings growth.
Is Verizon's balance sheet and dividend under pressure, and how is it being managed?
Debt rose to $113.3 billion and cash fell to $10.6 billion, so leverage is clearly higher. Free cash flow of $13.4 billion still covered $7.8 billion of dividends, and the company raised its quarterly dividend 3.8% in 2014. Management plans to use cash to reduce debt and return to pre-transaction credit metrics by 2019. Its credit ratings were downgraded in 2013 (Moody's to Baa1, S&P to BBB+, Fitch to A-) but did not change in 2014, and the company says it is in compliance with all debt covenants.
What are the main strategic moves Verizon announced that could change its future business mix?
Verizon agreed to sell 11,300 towers to American Tower for a $5.0 billion upfront payment and to sell its California, Florida and Texas local exchange business to Frontier for about $10.5 billion, which includes 1.5 million FiOS Internet and 1.2 million FiOS Video subscribers. The Frontier sale is expected to close in the first half of 2016 and management expects Wireline margins to decline afterward. Verizon also committed about $10.4 billion to AWS-3 spectrum to support future wireless capacity needs.
What are the key risks highlighted in the filing for investors?
The filing highlights intensifying wireless competition that management expects to raise churn in 2015, continued access line losses and voice revenue declines in Wireline, rising pension and healthcare costs, and a 2015 wireline labor contract negotiation covering about 39,000 employees. It also flags high debt levels, cyber attack exposure, reliance on key suppliers such as Apple and Samsung for devices, and regulatory risks around network neutrality and FCC spectrum licensing.
06—Continue