Financial Analysis of Verizon Communications Inc.: Key Insights and Trends

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Introduction

Branded as “Verizon”, Verizon Communications Corporation is an American company that specializes in providing broadband and telecommunication services. The company trades its stock on the NYSE but the incorporation was done in Delaware (Verizon, 2014).

Summary of operations

The company employs more than 176,000 people and obtains revenue exceeding $120 billion and a net income of more than $23 billion (Verizon, 2014). It operates with total assets worth more than $274 billion and an operating income exceeding $31 billion (Verizon, 2014).

Table 1: Summary of operations.

Operation	Formulae	2013	2012	2011
Net sales	Sales – returns, allowances and discounts	11,497	875	2,404
Gross margin	100 × Gross profit ÷ Operating revenues	62.76%	60.05%	58.62%
Operating margin		26.51%	11.17%	11.62%
Income before taxes	(IBT₂– IBT₁)÷ IBT1 × 100	19.58	(99.91)	12.28
Net income	Revenues – cost of doing business	23,547	10,557	10,198

Net sales

In 2011, the company recorded annual sales worth $110,875 billion, but increased to $115,846 billion in 2012 and to $120,550 billion in 2013. This means that the company’s sales have been increasing by more than 3% per annum.

Gross margin

Between 2011 and 2013, Verizon experienced a steady increase in gross profit margin, which rose from 58% to 62%, with an annual growth of about 2% due to increased sales.

Operating margin

Between 2011 and 2012, the operating margin remained relatively stagnant at 11%, but rose swiftly to more than 26% in 2013.

Income before tax

Verizon’s income prior to taxation has been experiencing unbalanced changes since 2011. In 2012, the company’s income before tax experienced a huge drop by 99% but increased again by about 19% in 2013.

Net income

The company’s net income stagnated between 2010 and 2012 but experienced a rapid increase of more than 50% in 2013.

Summary of operations

The above analysis indicates that the company’s ability to meet its expenses using its annual sales has been increasing since 2012. Nevertheless, it is evident that up to 2012, the company was previously experiencing problems, probably due to the impact of the economic recession of 2007-2010.

Financial position

Item	2013	2012	2011
Working capital	43,944	(5,721)	178
Net property, plant and equipment	88,956	88,642	88,434
Total assets	274,098	225,222	230,461
Long term assets	203,104	203,987	199,522
Stockholders’ equity	38,836	33,157	35,970

Working capital

Verizon’s working capital was fairing badly between 2010 and 2012. In 2011, the company’s WC was only $178,000 before dropping again to a negative number. This means that in 2012, the company could not use its current assets to meet its current liabilities.

Net property and equipment

It is worth noting that the value of Verizon’s plant, equipment and property remained constant, suggesting that there were no major expansions or disposals in the three consecutive fiscal years.

Long-term assets

Verizon was not involved in these initiatives because the value of long-term assets remained constant throughout the period.

Stockholder’s equity

The equity of Verizon’s stockholders increased slightly between 2011 and 2013 with an average positive change of about 0.7%. The change is plausible, given that the company had experienced huge deficits in the preceding trade periods.

Summary

The above analysis shows that Verizon’s ability to meet its liabilities increasing in 2013. In addition, it was not involved in major expansions during the period.

Financial Ratios

Liquidity ratios

Liquidity ratios are financial metrics used to determine the ability of an organization to meet the short-term debts and other obligations.

Ratio	2013	2012	2011
Current	2.62	0.79	1.01
Quick	2.46	0.60	0.84
Cash	2.00	0.13	0.45

Current ratio.

The company’ current ratio is 2.62 in 2013. However, it is worth noting that Verizon had previously performed lower, with the CR averaging at 0.8 in 2012 from 1.0 in 2011.

Leverage ratios

At Verizon, the total debt-to-equity ratios are shown below:

Leverage ratio	Formulae	2013	2012	2011
DET	Total liabilities/ equity	6.06	60.84	5.41

The company’s DET increased rapidly between 2011 and 2012 but stagnated in 2013. However, the company’s ratio is 6.0, which indicates that it’s financial health is commendable.

Profitability ratio

These metrics assess the ability of an organization to generate income using the expenditure and other costs incurred when doing business.

Ratio	Formulae	2013	2012	2011
Profit margin	Net income/ revenue	0.20	0.09	0.092

As shown above, the profit margin ratio of Verizon remained at an average level of 0.09 in 2011 and 2012 but rose to 0.2 in 2013, indicating that the company’s profits were rising.

Efficiency

Efficiency ratios show how well a firm is using its assets and liabilities in its external operations. The assets turnover ratio is a good example of efficiency ratio and is given by Asset Turnover = Sales or Revenues/Total Assets. As shown below, the asset turnover ratio for Verizon remained strong at an average of o. 495 throughout the period.

AT ratio	2013	2012	2011
AT ratio	0.49	0.51	0.48

Summary

The liquidity, leverage, efficiency and profitability ratios of Verizon were strong and improving throughout the period. This is an indication that the company’s financial health is strong and stable.

Historical financial review

Comparison with competitor

Verizon’s main competitors are AT&T and Sprint companies. Between 2011 and 2013, Verizon trailed both AT&T but performed better than Sprint in terms of revenue. In addition, the net income analysis shows that AT&T was the leader (AT&T, 2014) followed by Verizon, with Sprint is making losses instead of profits (Sprint, 2014).

	Revenue			Net income
	2013	2012	2011	2013	2012	2011
Verizon	120,550	115,846	110,875	11,497	875	2,404
AT&T	128,752	127,434	126,723	18,249	7,264	3,944
Sprint	16,891	35,345	33,679 (Sprint, 2014)	(1,860)	(4,326)	(2,890)

Comparison with industrial standards

The communication industry was performing poorly between 2008 and 2011 (AT&T, 2014). This explains why all the three companies above were performing poorly up to 2011. However, there has been a steady improvement over the last three years as shown by Verizon and AT&T, but Sprint seems to be lagging behind.

Supplemental data

The data above were obtained from the company website as well as other online sources as shown in the appendices below.

References

AT&T. (2014). 2013 annual report. Web.

Sprint Inc. (2014). Reporting. Web.

Verizon Inc. (2014). Financial reporting: Annual Report 2013. Web.

Appendices

Financial reports for Verizon

Consolidated Statements of Income.

(dollars in millions, except per share amounts)
Years Ended December 31,		2013			2012			2011
Operating Revenues	$		120,550	$		115,846	$		110,875
Operating Expenses
Cost of services and sales (exclusive of items shown below)		44,887			46,275			45,875
Selling, general and administrative expense		27,089			39,951			35,624
Depreciation and amortization expense		16,606			16,460			16,496
Total Operating Expenses		88,582			102,686			97,995
Operating Income		31,968			13,160			12,880
Equity in earnings of unconsolidated businesses		142			324			444
Other income and (expense), net		(166)			(1,016)			(14)
Interest expense		(2,667)			(2,571)			(2,827)
Income Before (Provision) Benefit For Income Taxes		29,277			9,897			10,483
(Provision) Benefit for income taxes		(5,730)			660			(285)
Net Income	$		23,547	$		10,557	$		10,198
Net income attributable to noncontrolling interests	$		12,050	$		9,682	$		7,794
Net income attributable to Verizon		11,497			875			2,404
Net Income	$		23,547	$		10,557	$		10,198
Basic Earnings Per Common Share
Net income attributable to Verizon	$		4.01	$		.31	$		.85
Weighted-average shares outstanding (in millions)		2,866			2,853			2,833
Diluted Earnings Per Common Share
Net income attributable to Verizon	$		4.00	$		.31	$		.85
Weighted-average shares outstanding (in millions)		2,874			2,862			2,839

Consolidated Statements of Comprehensive Income.

(dollars in millions)
Years Ended December 31,		2013			2012			2011
Net Income	$		23,547	$		10,557	$		10,198
Other Comprehensive Income, net of taxes
Foreign currency translation adjustments		60			69			(119)
Unrealized gain (loss) on cash flow hedges		25			(68)			30
Unrealized gain (loss) on marketable securities		16			29			(7)
Defined benefit pension and postretirement plans		22			936			316
Other comprehensive income attributable to Verizon		123			966			220
Other comprehensive income (loss) attributable to noncontrolling interests		(15)			10			1
Total Comprehensive Income	$		23,655	$		11,533	$		10,419
Comprehensive income attributable to noncontrolling interests		12,035			9,692			7,795
Comprehensive income attributable to Verizon		11,620			1,841			2,624
Total Comprehensive Income	$		23,655	$		11,533	$		10,419

Verizon Communications INC. and Subsidiaries Consolidated Balance Sheets.

(dollars in millions, except per share amounts)
At December 31,		2013				2012
Assets
Current assets
Cash and cash equivalents	$		53,528		$		3,093
Short-term investments		601				470
Accounts receivable, net of allowances of $645 and $641		12,439				12,576
Inventories		1,020				1,075
Prepaid expenses and other		3,406				4,021
Total current assets		70,994				21,235
Plant, property and equipment		220,865				209,575
Less accumulated depreciation		131,909				120,933
88,956				88,642
Investments in unconsolidated businesses		3,432				3,401
Wireless licenses		75,747				77,744
Goodwill		24,634				24,139
Other intangible assets, net		5,800				5,933
Other assets		4,535				4,128
Total assets	$		274,098		$		225,222
Liabilities and Equity
Current liabilities
Debt maturing within one year	$		3,933		$		4,369
Accounts payable and accrued liabilities		16,453				16,182
Other		6,664				6,405
Total current liabilities		27,050				26,956
Long-term debt		89,658				47,618
Employee benefit obligations		27,682				34,346
Deferred income taxes		28,639				24,677
Other liabilities		5,653				6,092
Equity
Series preferred stock ($.10 par value; none issued)		–				–
Common stock ($.10 par value; 2,967,610,119 shares issued in both periods)		297				297
Contributed capital		37,939				37,990
Reinvested earnings (Accumulated deficit)		1,782				(3,734)
Accumulated other comprehensive income		2,358				2,235
Common stock in treasury, at cost		(3,961)				(4,071)
Deferred compensation – employee stock ownership plans and other		421				440
Noncontrolling interests		56,580				52,376
Total equity		95,416				85,533
Total liabilities and equity	$		274,098		$		225,222