management’s discussion and analysis
of financial condition and results of operations

Consolidated Results of Operations (2 of 3)

Consolidated Operating Expenses

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

Increase/(Decrease)

Years Ended December 31,

 

2011

 

 

2010

 

 

2009

 

2011 vs. 2010

 

2010 vs. 2009

Cost of services and sales

$

45,875

 

$

44,149

 

$

44,579

 

$

1,726

 

3.9

 

%

 

$

(430

)

(1.0

)

%

Selling, general and administrative expense

 

35,624

 

 

31,366

 

 

30,717

 

 

4,258

 

13.6

 

 

 

 

649

 

2.1

 

 

Depreciation and amortization expense

 

16,496

 

 

16,405

 

 

16,534

 

 

91

 

0.6

 

 

 

 

(129

)

(0.8

)

 

Consolidated Operating Expenses

$

97,995

 

$

91,920

 

$

91,830

 

$

6,075

 

6.6

 

 

 

$

90

 

0.1

 

 

Consolidated operating expenses increased during 2011 and 2010 primarily due to higher severance, pension and benefit charges (see ’Other Items”) as well as increased operating expenses at Verizon Wireless. The changes in consolidated operating expenses during 2011 and 2010 were also favorably impacted by divested operations.

2011 Compared to 2010

Cost of Services and Sales

Cost of services and sales includes the following costs directly attributable to a service or product: salaries and wages, benefits, materials and supplies, contracted services, network access and transport costs, wireless equipment costs, customer provisioning costs, computer systems support, costs to support our outsourcing contracts and technical facilities and contributions to the Universal Service Fund. Aggregate customer care costs, which include billing and service provisioning, are allocated between Cost of services and sales and Selling, general and administrative expense.

Cost of services and sales increased during 2011 compared to 2010 primarily due to higher cost of equipment sales at our Verizon Wireless segment, as well as increased costs at our Wireline segment related to repair and maintenance expenses caused by storm-related events during 2011, higher content costs associated with continued FiOS subscriber growth and the acquisition of Terremark in the second quarter of 2011. Partially offsetting the increase were lower non-operational charges noted in the table below, a decrease in access costs resulting primarily from management actions to reduce exposure to unprofitable international wholesale routes and declines in overall wholesale long distance volumes.

Selling, General and Administrative Expense

Selling, general and administrative expense includes: salaries and wages and benefits not directly attributable to a service or product; bad debt charges; taxes other than income taxes; advertising and sales commission costs; customer billing; call center and information technology costs; professional service fees; and rent and utilities for administrative space.

Selling, general and administrative expense increased during 2011 compared to 2010 primarily due to higher severance, pension and benefit charges and costs caused by storm-related events as well as higher sales commission expense at our Verizon Wireless segment. Partially offsetting the increase was the absence of merger integration and acquisition related charges and access line spin-off charges during 2011 and a decrease in compensation expense at our Wireline segment.

Depreciation and Amortization Expense

Depreciation and amortization expense increased during 2011 compared to 2010 as a result of growth in depreciable assets at our Wireless segment and the acquisition of Terremark in the second quarter of 2011, partially offset by lower non-operational charges noted in the table below and amortization expense as a result of a reduction in capitalized non-network software at our Wireline segment. The change in depreciation and amortization expense was also partially attributable to the impact of divested operations.

2010 Compared to 2009

Cost of Services and Sales

Cost of services and sales decreased during 2010 compared to 2009 primarily due to the impact of divested operations, lower headcount and productivity improvements at our Wireline and Verizon Wireless segments, partially offset by higher severance, pension and benefit charges during 2010 and other non-operational charges noted in the table below as well as higher customer premise equipment and content costs. In addition, lower access costs at Wireline were primarily driven by management actions to reduce exposure to unprofitable international wholesale routes. Our FiOS Video and Internet cost of acquisition per addition also decreased in 2010 compared to 2009. Wireless network costs increased as a result of an increase in local interconnection cost and increases in roaming costs.

Selling, General and Administrative Expense

Selling, general and administrative expense increased during 2010 compared to 2009 primarily due to higher severance, pension and benefit charges, which primarily included a pension and postretirement benefit plan remeasurement loss in 2010 compared to a remeasurement gain in 2009, as well as the charges in connection with an agreement reached with certain unions on temporary enhancements. In addition, the increase in Selling, general and administrative expense reflected higher sales commission expense at our Verizon Wireless segment in our indirect channel as a result of increases in both the average commission per unit, as the mix of units continues to shift toward data devices and more customers activate data service, and contract renewals in connection with equipment upgrades. Partially offsetting the increase was the impact of divested operations and the impact of cost reduction initiatives in our Wireline segment. Selling, general and administrative expense during 2010 was also impacted by lower access line spin-off and merger integration related charges noted in the table below.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased during 2010 compared to 2009. The decrease was primarily due to the impact of divested operations, partially offset by additions to the depreciable asset base. Depreciation and amortization expense during 2010 was also impacted by lower non-operational charges noted in the table below.

Non-operational Charges

Non-operational charges included in operating expenses were as follows:

(dollars in millions)

 

Years Ended December 31,

 

2011

 

 

2010

 

 

2009

 

Severance, Pension and Benefit Charges

 

 

 

 

 

 

 

 

 

Cost of services and sales

$

 

$

1,723

 

$

1,443

 

Selling, general and administrative expense

 

5,954

 

 

1,331

 

 

(3

)

 

 

5,954

 

 

3,054

 

 

1,440

 

Merger Integration and Acquisition Related Charges

 

 

 

 

 

 

 

 

 

Cost of services and sales

 

 

 

376

 

 

195

 

Selling, general and administrative expense

 

 

 

389

 

 

442

 

Depreciation and amortization expense

 

 

 

102

 

 

317

 

 

 

 

 

867

 

 

954

 

Access Line Spin-off Related Charges

 

 

 

 

 

 

 

 

 

Cost of services and sales

 

 

 

42

 

 

38

 

Selling, general and administrative expense

 

 

 

365

 

 

415

 

 

 

 

 

407

 

 

453

 

Total non-operating charges included in operating expenses

$

5,954

 

$

4,328

 

$

2,847

 

See ’Other Items” for a description of other non-operational items.

Consolidated Operating Income and EBITDA

Consolidated earnings before interest, taxes, depreciation and amortization expenses (Consolidated EBITDA) and Consolidated Adjusted EBITDA, which are presented below, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. Management believes that these measures are useful to investors and other users of our financial information in evaluating operating profitability on a more variable cost basis as they exclude the depreciation and amortization expense related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to our competitors. Consolidated EBITDA is calculated by adding back interest, taxes, depreciation and amortization expense, equity in earnings of unconsolidated businesses and other income and (expense), net to net income. Consolidated Adjusted EBITDA is calculated by excluding the effect of non-operational items and the impact of divested operations from the calculation of Consolidated EBITDA.

It is management’s intent to provide non-GAAP financial information to enhance the understanding of Verizon’s GAAP financial information, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-GAAP financial measure is presented along with the corresponding GAAP measure so as not to imply that more emphasis should be placed on the non-GAAP measure. The non-GAAP financial information presented may be determined or calculated differently by other companies.

(dollars in millions)

 

Years Ended December 31,

 

2011

 

 

2010

 

 

2009

 

Consolidated Operating Income

$

12,880

 

$

14,645

 

$

15,978

 

Add Depreciation and amortization expense

 

16,496

 

 

16,405

 

 

16,534

 

Consolidated EBITDA

 

29,376

 

 

31,050

 

 

32,512

 

Add Non-operating charges included in operating expenses(1)

 

5,954

 

 

4,226

 

 

2,530

 

Add Deferred revenue adjustment

 

 

 

268

 

 

 

Less Impact of divested operations(1)

 

 

 

(1,168

)

 

(2,653

)

Consolidated Adjusted EBITDA

$

35,330

 

$

34,376

 

$

32,389

 

(1) Excludes non-operating charges included in Depreciation and amortization expense.