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Communications

2005 Annual Report

Kevin Hong

ACG2021.004

Title page

Overall, Verizon Communications, Inc. has not done as well as they have in 2004. It seems as if Verizon is trying to recover from an exogenous economic shock. From 2003 to 2004, Verizon was at peak growth and in 2005, their results have plummeted comparatively. I picked Verizon because I was interested in the financial status of the telecommunications leader. Needless to say, I’m quite disappointed at their 2005 performance.

Verizon does show a lot of investments towards upgrading their telecommunications services and it’s nice to see such a company investing much to lead the way. I’m sure in the future, Verizon will have a better result to show me because a company like Verizon which thrives on being ahead of the game, will have a better future in a nation where expectations are high for a “leading” telecommunications market.

http://investor.verizon.com/financial/quarterly/pdf/05VZ_AR.pdf

Executive Summary

Ivan G. Seidenberg

Chairman and CEO

Verizon Communications

140 West Street

New York, NY 10007

Introduction

Fiscal Year

January 1st, 2005 to December 31st, 2005

Domestic Telecom

Provider of wire line telecommunications service, including broadband

Verizon Wireless

Leading wireless services provider

Information Services

Provider of yellow pages directories

International

Operations in the Americans and Europe

Introduction2

Ernst & Young LLP

New York, New York

The audit report, in plain and simple words, states that Verizon has maintained, in all material respects, effective internal over financial reporting as of December 31st of 2005, based on the standards of the Public Company Accounting Oversight Board. This report was signed and dated February 23rd of 2006 in page 37 of Verizon Communications, Inc. Annual Report.

Audit Report

NYSE:VZ

Last trade: October 10th, 2006 3:17pm EST

$36.29 per share

Year’s range: $38.00(Sep9,06) - $29.13(Oct20,05) = $9.87

Earnings Per Share: $2.35

Opinion: HOLDThe company is growing as America’s leading telecommunications service provider. Due to the consistent and predicted growth of this company, I would personally hold the shares.

Stock Market Information

Despite the decline in earnings per share in the year 2005 compared to 20004, Verizon Communications, Inc. has added millions of new customers in all their subdivisions with Verizon Wireless leading the way. Verizon has also expanded their wireless broadband network to cover half of the United States leading the telecommunications industry additional to upgraded fiber network for super-high-speed internet. 2005 Revenues are up 5.4 percent from 2004 at a whopping 75 billion dollars with Verizon Wireless leading at a 16.8 percent growth in revenue which leads the wireless telecommunications industry.

Verizon enabled a reserve of 15.3 billion dollars from capital to invest to expand their boundaries and service coverage and reduced their debt by 300 million dollars which adds up to a 18.8 billion dollars in debt reduction over the last five years. Verizon has also paid 4.4 billion dollars in dividends to shareowners.

Company Outlook Plans

(Multi-step)

Consistent Revenue increase shows that the company is increasing.

Increased Net Income shows me that the company is becoming more productive and efficient. The jump from 2003 and 2004 is noteworthy.

Operating Income nearly doubled from 2003 and 2004. The company increased income greatly between those two years.

Income Statement

There are significant decreases in “Cash and Cash equivalents” and “Investments in unconsolidated businesses” while there are significant increases in “Debt maturing within one year”.

Total current assets have decreased while total assets show a small increase.

Balance Sheet

Revenue Recognition

Domestic Telecom segment earns revenue based upon usage. Equipment revenue is recognized as services. Activation fees are amortized over the customer relationship period.

Cash and Cash Equivalents

Highly liquid investments with a maturity of 90 days or less are considered to be cash equivalents.

Short-Term Investments

Cash equivalents held in trust to pay for certain employee benefits.

Inventories

New and reusable supplies and network equipment are stated principally at average original cost, except that specific costs are used in the case of large individual items.

Property and Equipment

Plant, property, and equipment are recorded at cost. Operations’ depreciation expense is principally based on group remaining life estimates.

Accounting Policies

(Liquidity Ratios)

Working Capital

Current Assets – Current Liabilities

2004 (in millions) 2005

-$3650 -$8615

Verizon has negative working capital. I can only assume that this means Verizon works off of assets they don’t currently own. There’s been a significant decrease in working capital between 2004 and 2005.

Financial Analysis

(Liquidity Ratios)

Current Ratio

Current Assets/Current Liabilities

2004 2005

.842 .873

Verizon has a Current Ratio of less than 1 which obviously means Verizon’s liabilities are greater than its assets. In 2005, for every 87 cents of assets, there was a dollar of liabilities.

Financial Analysis2

(Liquidity Ratios)

Receivable Turnover

Net Sales/Average Accounts Receivable

2004 2005

7.3 times 7.9 times

Verizon has a Receivable Turnover of 7.9 times. Receivable Turnover is a measure of relative size of accounts receivable and effectiveness of credit policies.

Financial Analysis3

(Liquidity Ratios)

Average days’ sales uncollected

Days in year/Receivable Turnover

2004 2005

50.3 days 46.1 days

Verizon has an average days’ sales uncollected of 46.1 days. This means Verizon took an average of 46.1 days to collect their receivables.

Financial Analysis4

(Liquidity Ratios)

Inventory Turnover

Costs of Goods Sold/Average Inventory

2004 2005

15.1 times 15.4 times

Verizon has an inventory turnover of 15.4 times. This means Verizon replaces their inventory of about 15 times a year.

Financial Analysis5

(Liquidity Ratios)

Average days’ inventory on hand

Days in year/Inventory Turnover

2004 2005

24.2 days 23.8 days

Verizon has an average days’ inventory on hand. This means Verizon takes about 24 days to replace their inventory.

Financial Analysis6

(Profitability Ratios)

Profit Margin

Net Income/Net Sales

2004 2005

11.0% 9.8%

Verizon has 11.0% profit margin for the year 2004 and 9.8% for the year 2005. This means Verizon has produced 9.8 percent income from sales.

Financial Analysis7

(Profitability Ratios)

Asset turnover

Net Sales/Average Total Assets

2004 2005

3.72 times 4.18 times

Verizon has had an asset turnover of 4.18 times

Financial Analysis8

(Profitability Ratios)

Return on Assets

Net Income/Average Total Assets

2004 2005

4.7% 4.7%

Verizon has had return on assets of 4.7% for the year 2005. Return on assets is a measure of overall earning power or profitability.

Financial Analysis9

(Profitability Ratios)

Return on Equity

Net Income/Average Stockholders’ Equity

2004 2005

22.1% 20.3%

Verizon has had return on equity of 20.3 percent for the year 2005. Return on equity is a measure of the profitability of stockholders’ investments.

Financial Analysis10

(Solvency Ratios)

Debt to Equity

Total Liabilities/Stockholders’ Equity

2004 2005

.667 times .632 times

Verizon’s debt to equity ratio shows that for the year 2005, Verizon has had about 67 cents of liabilities for every dollar of equity.

Financial Analysis11

(Market Strength Ratios)

Price/earnings ratio

Market Price/Earnings per share

2004 2005

14.31 times 11.28 times

Verizon’s price/earnings ratio has decreased a good amount between the 2004 and 2005 fiscal years. Apparently, 2005 was not too good of a year for the prospect stockholders.

Financial Analysis12

(Market Strength Ratios)

Dividends Yield

Earnings/Market price per share

2004 2005

8.86% 6.98%

Verizon’s dividend yield has dropped from 2004 to 2005. A stockholder would want the dividends yield for a company to be high.

Financial Analysis13