10-QPeriod: Q3 FY2003

VERIZON COMMUNICATIONS INC Quarterly Report for Q3 Ended Sep 30, 2003

Filed November 12, 2003For Securities:VZ

Summary

Verizon Communications Inc. reported relatively stable operating revenues for the third quarter of 2003 compared to the prior year, with a slight increase to $17.155 billion from $17.113 billion. However, significant changes occurred in the composition of expenses and net income. Operating expenses increased substantially due to higher cost of services and sales, driven by reduced pension income and increased overtime, while selling, general, and administrative expenses decreased, largely due to lower special charges and impairment losses compared to the prior year. Net income saw a significant decline to $1.791 billion from $4.405 billion in the prior year's quarter, primarily impacted by a substantial pretax loss of $957 million related to the sale of its stake in Iusacell and several accounting changes, including a one-time charge for the directory business accounting change and a gain from the adoption of SFAS No. 143. The company's balance sheet shows a decrease in cash and cash equivalents to $746 million from $1.422 billion year-over-year, alongside a reduction in total assets. Long-term debt also decreased, reflecting ongoing deleveraging efforts. The Domestic Wireless segment continued its strong performance, showing robust revenue and segment income growth, while the Domestic Telecom segment experienced a revenue decline. Investors should note the ongoing strategic adjustments, including divestitures and accounting standard adoptions, which are significantly influencing the reported financial results.

Key Highlights

  • 1Total operating revenues remained relatively flat year-over-year for the quarter, at $17.155 billion in Q3 2003 versus $17.113 billion in Q3 2002.
  • 2Net income significantly decreased to $1.791 billion in Q3 2003 from $4.405 billion in Q3 2002, impacted by a substantial loss from discontinued operations (Iusacell) and accounting changes.
  • 3Operating expenses rose by 25.7% in Q3 2003 compared to Q3 2002, primarily due to an increase in the 'Cost of services and sales' line item.
  • 4The Domestic Wireless segment demonstrated strong growth, with operating revenues increasing by 18.2% and segment income rising by 12.3% year-over-year.
  • 5The Domestic Telecom segment experienced a revenue decline of 4.1% year-over-year, attributed to falling local service and network access revenues.
  • 6Significant accounting changes were implemented, including a $2.697 billion charge related to the directory business revenue recognition change and a $3.499 billion gain from the adoption of SFAS No. 143.
  • 7Cash and cash equivalents decreased to $746 million at September 30, 2003, from $1.422 billion at December 31, 2002.

Frequently Asked Questions

The substantial decrease in net income was primarily due to a pretax loss of $957 million related to the sale of Verizon's interest in Grupo Iusacell S.A. de C.V. (Iusacell). Additionally, the adoption of new accounting standards, such as the directory accounting change which resulted in a one-time charge, also impacted the reported net income.

The Domestic Wireless segment showed strong performance, with operating revenues increasing by 18.2% to $5.942 billion and segment income growing by 12.3% to $301 million in Q3 2003 compared to Q3 2002. This growth is driven by a 14.3% increase in subscribers and a rise in average service revenue per subscriber, coupled with a decrease in average monthly churn rate.

Two significant accounting changes were adopted: 1) A change in the directory business revenue and expense recognition method from the publication-date method to the amortization method, which resulted in a $2.697 billion pre-tax charge (cumulative effect). 2) The adoption of SFAS No. 143 regarding asset retirement obligations, which resulted in a $3.499 billion pre-tax gain (cumulative effect) from reversing accrued removal costs in excess of salvage value.

The company is actively reducing its debt. Total debt as a percentage of debt plus equity decreased from 64.0% at September 30, 2002 to 56.4% at September 30, 2003. Cash and cash equivalents decreased by $676 million during the first nine months of 2003, ending at $746 million. However, the company has substantial unused bank lines of credit, indicating sufficient liquidity for ongoing operations.